ARTRA GROUP Incorporated
Supplement dated September 7, 1999 to Prospectus dated October 23, 1997,
as supplemented by Supplements dated March 9, 1999, June 10, 1999
and August 30, 1999.
Set forth in this Supplement is certain information included in the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999 of ARTRA GROUP
Incorporated ("ARTRA" or the "Company")and certain financial information and
risks factors relating the prosposed merger of the Company with Entrade Inc.
As discussed in Note 8 to the Company's condensed consolidated financial
statements for the quarter ended June 30, 1999 and in Form 8-K dated 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. 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 parties had extended the expiration date of the letter
of intent to August 12, 1999 and are negotiating to further extend the
expiration date. 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.
<PAGE>
SUPPLEMENT INDEX
Page
Information included in the Quarterly Report on Form 10-Q
of ARTRA GROUP Incorporated ("ARTRA" or the "Company")
for the quarter ended June 30, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations 1
Index to Financial Statements 6
Financial information relating to the proposed merger
of the Company and Entrade Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
as of June 30, 1999* 20
Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended June 30, 1999** 21
Index to Financial Statements for Entrade Inc. 22
Risk factors relating to the proposed merger of the Company
and Entrade Inc. 35
Capitalized terms not defined herein shall have the meanings set forth in the
Prospectus, as supplemented to date.
_____________________________
* Presented as if the proposed merger of ARTRA with a subsidiary of
Entrade Inc. and the exchange of ARTRA common stock and ARTRA
preferred stock for Entrade Inc. common stock had been approved
by ARTRA's shareholders and was effective as of June 30, 1999.
** Presented as if the proposed merger of ARTRA with a subsidiary of
Entrade Inc. and the exchange of ARTRA common stock and ARTRA
preferred stock for Entrade Inc. common stock had been approved
by ARTRA's shareholders and was effective as of January 1, 1999.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion supplements the information found in Artra's financial
statements and related notes.
Results of Operations
Artra changed significantly during the fourth quarter of fiscal year 1998. It
exited its one industry segment, the packaging products business, conducted by
its discontinued Bagcraft subsidiary, and is actively investigating new business
opportunities. Artra's consolidated financial statements for the three and six
months ended June 30, 1998 have been reclassified to report separately the
results of operations of the Bagcraft subsidiary in discontinued operations.
Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998
Continuing Operations
Selling, general and administrative expenses from continuing operations were
$3,174,000 for the three months ended June 30, 1999 as compared to $530,000 for
the three months ended June 30, 1998. Artra incurred a compensation charge of
$900,000 during the three months ended June 30, 1999 relating to stock options
granted in February 1999 to four individuals employed to manage Artra's entry
into the Internet business-to-business e-commerce and on-line auction business.
Artra also incurred a compensation charge of $575,000 during the three months
ended June 30, 1999 relating to stock options granted under the terms of an
employment agreement with Artra's newly appointed president and chief executive
officer. Selling, general and administrative expenses from continuing operations
included $867,000 of losses incurred by Entrade, Inc. ("Entrade") during the
three months ended June 30, 1999. The Entrade losses include business
development costs of $67,000, depreciation and amortization of $240,000, payroll
and related costs of $357,000 and other administrative costs of $203,000.
During the three months ended June 30, 1999, Artra had net interest income of
$121,000 as compared to net interest expense of $853,000 during the three months
ended June 30, 1998. Artra used cash proceeds received from the November 1998
sale of the assets of the discontinued Bagcraft subsidiary to pay off
approximately $15,200,000 of borrowings on various loan agreements. Artra has
invested approximately $10,000,000 as of June 30, 1999 of the remaining net
proceeds in interest bearing cash equivalents.
Artra was unable to recognize an income tax benefit in connection with its 1999
and 1998 pre-tax losses due to its tax loss carryforwards and the uncertainty of
future taxable income.
Discontinued Operations
During the three months ended June 30, 1998, Artra had earnings of $948,000 at
the discontinued Bagcraft subsidiary. No income or loss relating to discontinued
operations was incurred during 1999.
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
Continuing Operations
Selling, general and administrative expenses from continuing operations were
$4,528,000 for the six months ended June 30, 1999 as compared to $1,152,000 for
the six months ended June 30, 1998. Artra incurred a compensation charge of
approximately $1,200,000 during the six months ended June 30, 1999 relating to
stock options granted in February 1999 to certain individuals employed to manage
Artra's entry into the Internet business-to-business e-commerce and on-line
auction business. Artra also incurred a compensation charge of $575,000 during
the six months ended June 30, 1999 relating to stock options granted under terms
of an employment agreement with Artra's newly appointed president and chief
executive officer. Selling general and administrative expenses from continuing
operations included $1,300,000 of losses by Entrade during the six months ended
June 30, 1999. The Entrade losses include business development costs of
$290,000, depreciation and amortization of $310,000, payroll and related costs
of $438,000 and other administrative costs of $262,000.
1
<PAGE>
During the six months ended June 30, 1999, Artra had net interest income of
$207,000 as compared to net interest expense of $1,987,000 during the six months
ended June 30, 1998. Artra used cash proceeds received from the November 1998
sale of the assets of the discontinued Bagcraft subsidiary to pay off
approximately $15,200,000 of borrowings on various loan agreements.
Artra was unable to recognize an income tax benefit in connection with its 1999
and 1998 pre-tax losses due to its tax loss carryforwards and the uncertainty of
future taxable income.
Discontinued Operations
During the six months ended June 30, 1998, Artra had earnings of $810,000 at the
discontinued Bagcraft subsidiary. No income or loss relating to discontinued
operations was incurred during 1999.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Artra's cash and cash equivalents decreased $1,258,000 during the six months
ended June 30, 1999. Cash flows used by operating activities of $3,781,000 and
cash flows used by investing activities of $1,883,000 exceeded cash flows from
financing activities of $4,406,000. Operating activities used cash flows to fund
Artra's net loss for the six months ended June 30, 1999 and to pay approximately
$1,864,000 of liabilities of the discontinued Bagcraft subsidiary. Investing
activities used cash flows of approximately $2,728,000 for Artra's investment in
and advances to Entrade. Financing activities provided cash flows from the
exercise of stock options and warrants.
Artra's consolidated working capital decreased by $2,088,000 to $4,725,000 at
June 30, 1999 as compared to consolidated working capital of $6,813,000 at
December 31, 1998. Artra used working capital to pay off $1,864,000 of
liabilities of the discontinued Bagcraft subsidiary and for its investment in
and advances of $2,728,000 to Entrade.
Operating Plan
On February 23, 1999, Artra entered into a merger agreement with WorldWide Web
NetworX Corporation ("WorldWide") and Entrade, a 90% owned subsidiary of
WorldWide. As a result of the merger agreement, Artra will become a wholly owned
subsidiary of Entrade, and the shareholders of Artra will become shareholders of
Entrade. Under the terms of the merger agreement, Artra's shareholders will
receive one share of Entrade common stock in exchange for each share of Artra
common stock. Additionally, the Artra preferred stock shareholders will receive
329 shares of Entrade common stock in exchange for each share of Artra preferred
stock. All stock options and warrants issued by Artra and outstanding on the
closing date of the merger will be converted into Entrade stock options and
warrants.
On February 23, 1999, Entrade acquired software and intellectual property and
25% of the shares of Class A Voting Common Stock of asseTrade.com from
WorldWide, in exchange for 1,800,000 shares of Entrade common stock, $800,000 in
cash and a note for $500,000, payable upon the closing of the merger or the
earlier termination of the merger agreement.
On February 16, 1999, Entrade had agreed with Energy Trading Company, a wholly
owned subsidiary of Peco Energy, to issue to Energy Trading Company 200,000
shares of Entrade common stock and to pay Energy Trading Company $100,000 in
exchange for retained rights Energy Trading Company held in the purchased
assets. Entrade also agreed with both WorldWide and Energy Trading Company that
it would provide a minimum of $4,000,000 in funding for entrade.com.
2
<PAGE>
Under separate loan agreements, Artra agreed to lend Entrade up to $2,000,000
and advance an additional $250,000 to fund the $800,000 cash payment to
WorldWide and to provide funding for entrade.com until the closing of the merger
or the earlier termination of the merger agreement. Under the merger agreement,
Artra agreed to guaranty the $4,000,000 funding for entrade.com if the merger
closes.
If the merger agreement terminates solely because the Artra shareholders have
not approved the merger agreement and the merger, all obligations of WorldWide
and Entrade to repay the amounts loaned to either or both of them by Artra under
the loan agreement and an additional $250,000 advanced to Entrade by Artra will
terminate and the loans made by Artra to WorldWide and to Entrade under the loan
agreement will be forgiven as a "break-up" fee to WorldWide and Entrade equal to
the aggregate amount of the loan as defined in the loan agreement and the
additional $250,000 advance.
Artra believes that it 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.
Artra does not intend to be considered an "investment company" as defined by the
Investment Company Act of 1940 and, accordingly, is actively investigating new
business opportunities, including the merger. In order to finance new business
opportunities, Artra could use sources such as its cash and cash equivalents,
its available-for-sale securities, borrowings from various potential sources and
issuances of Artra's equity securities.
Redeemable Preferred Stock
Artra has outstanding redeemable Series A preferred stock with a carrying value
of $3,051,000 at June 30, 1999. Redeemable preferred stock issues of the BCA
Holdings, Inc. and Bagcraft subsidiaries are included in liabilities of
discontinued operations at June 30, 1999. Under the merger agreement, holders of
Artra Series A preferred stock will receive 329 shares of Entrade common stock
for each share of Artra Series A preferred stock.
Investment in Comforce Corporation
Artra, along with its wholly owned Fill-Mor subsidiary, owns a significant
minority interest in Comforce, consisting of 1,525,500 shares, or approximately
9%, of the outstanding common stock of Comforce as of December 31, 1998 and June
30, 1999 with an aggregate value $8,200,000 as of December 31, 1998 and of
$4,577,000 as of June 30, 1999.
The Comforce shares constitute unregistered securities under the Securities 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 Securities
Act. Because of this status, the number of shares that Artra could sell without
registration under the Securities Act within any three-month period was limited.
For the reasons set forth below, Artra believes that an exemption from
registration under Rule 144(k) promulgated under the Securities Act is now
available to it. 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.
3
<PAGE>
The Commission might not agree with Artra's position. Notwithstanding this,
Artra does not believe that its ability to sell Comforce shares, or eventually
to realize on the value of its Comforce shares, will be affected in a material
adverse way, although it may not be able to sell its Comforce shares as quickly
as it could if it were to use Rule 144(k). In any event, an attempt to sell a
large number of its Comforce shares over a limited period could be expected to
result in a reduction in the value of those shares.
In January 1996, Artra's Board of Directors approved the sale of 200,000 of
Artra's Comforce common shares to some of the 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, Artra had concluded that, for reporting
purposes, it had effectively granted options to those 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 Artra's
portfolio of "available-for-sale securities" and were classified in Artra'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 Artra's financial statements until
the options to purchase these 200,000 Comforce common shares are exercised.
Prior to the fourth quarter of 1997, no options to acquire any of the 200,000
Comforce common shares had been exercised. During the fourth quarter of 1997,
options to acquire 59,500 of these Comforce common shares were exercised
resulting in a realized gain of $225,000. During 1998, options to acquire 84,750
of these Comforce common shares were exercised resulting in a realized gain of
$320,000.
At June 30, 1999 and December 31, 1998, options to acquire 55,750 Comforce
common shares remained unexercised and were classified in Artra's 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.
Net Operating Loss Carryforwards
At December 31, 1998, Artra and its subsidiaries had federal income tax loss
carryforwards of approximately $10,000,000 expiring principally in the years
2010 to 2012, available to be applied against future taxable income, if any. In
recent years, Artra issued shares of Artra common stock to repay various debt
obligations, as consideration for acquisitions, to fund working capital
obligations and as consideration for various other transactions. Section 382 of
the Internal Revenue Code limits a corporation's utilization of its federal
income tax loss carryforwards when changes in the ownership of a corporation's
common stock described in the Code occurs.
In the opinion of management, Artra is not currently subject to the limitations
regarding the utilization of its federal income tax loss carryforwards. Should
Artra continue to issue a significant number of shares of Artra common stock, it
could trigger a limitation that would prevent it from utilizing a substantial
portion of its federal income tax loss carryforwards. The merger will not affect
Artra's net operating loss carryforwards.
4
<PAGE>
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in our economy and currently is
not a significant factor to Artra.
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, 2000. Management has not determined what impact this
standard, when adopted, will have on Artra's financial statements.
Year 2000 Compliance
The Year 2000 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. The Artra corporate entity has limited data
processing requirements which are handled by personal computers running generic
software applications. We believe that our internal systems are Year 2000
compliant. If these systems are not Year 2000 compliant, they can be quickly
updated with new equipment without requiring us to incur significant costs.
5
<PAGE>
ARTRA GROUP INCORPORATED
INDEX TO FINANCIAL STATEMENTS
Page
Number
------
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 7
Condensed Consolidated Statements of Operations
Three and Six Months Ended
June 30, 1999 and June 30, 1998 8
Condensed Consolidated Statement of
Changes in Shareholders' Equity
Six Months Ended June 30, 1999 9
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and June 30, 1998 10
Notes to Condensed Consolidated Financial Statements 11
6
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share data)
June 30, December 31,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 10,495 $ 11,753
Restricted cash and equivalents 111 1,045
Available-for-sale securities 4,577 8,200
Other 221 270
-------- --------
Total current assets 15,404 21,268
Other assets:
Advances to Entrade Inc. 1,428 --
Other 89 --
-------- --------
$ 16,921 $ 21,268
======== ========
LIABILITIES
Current liabilities:
Accrued expenses $ 590 $ 568
Income taxes 1,114 1,854
Common stock put warrants 511 1,705
Liabilities of discontinued operations 8,464 10,328
-------- --------
Total current liabilities 10,679 14,455
-------- --------
Commitments and contingencies
Redeemable preferred stock 3,051 2,857
SHAREHOLDERS' EQUITY
Common stock, no par value;
authorized 20,000,000 shares;
issued 9,318,105 shares in 1999
and 8,302,110 shares in 1998 6,989 6,227
Additional paid-in capital 53,047 42,734
Deferred stock compensation (3,702) --
Unrealized appreciation of investments 7,297 10,920
Accumulated deficit (58,815) (54,300)
-------- --------
4,816 5,581
Less treasury stock, 437,882 shares, at cost 1,625 1,625
-------- --------
3,191 3,956
-------- --------
$ 16,921 $ 21,268
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998* 1999 1998*
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $ --
------- ------- ------- -------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization -- -- -- --
Selling, general and administrative 3,174 530 4,528 1,152
------- ------- ------- -------
3,174 530 4,528 1,152
------- ------- ------- -------
Operating loss (3,174) (530) (4,528) (1,152)
------- ------- ------- -------
Other income (expense):
Interest income (expense), net 121 (853) 207 (1,987)
Realized gain on disposal
of available-for-sale securities -- 267 -- 320
Other income (expense), net -- 2 -- (74)
------- ------- ------- -------
121 (584) 207 (1,741)
------- ------- ------- -------
Loss from continuing operations before income taxes (3,053) (1,114) (4,321) (2,893)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Loss from continuing operations (3,053) (1,114) (4,321) (2,893)
Earnings from discontinued operations -- 948 -- 810
------- ------- ------- -------
Net loss (3,053) (166) (4,321) (2,083)
Dividends applicable to redeemable preferred stock (130) (95) (194) (219)
------- ------- ------- -------
Loss applicable to common shares ($3,183) ($ 261) ($4,515) ($2,302)
======= ======= ======= =======
Earnings (loss) per share applicable to common shares:
Basic
Continuing operations ($ 0.37) ($ 0.15) ($ 0.54) ($ 0.39)
Discontinued operations -- 0.12 -- 0.10
------- ------- ------- -------
Net loss ($ 0.37) ($ 0.03) ($ 0.54) ($ 0.29)
======= ======= ======= =======
Weighted average number of shares
of common stock outstanding 8,655 7,864 8,331 7,914
======= ======= ======= =======
Diluted
Continuing operations ($ 0.37) ($ 0.15) ($ 0.54) ($ 0.39)
Discontinued operations -- 0.12 -- 0.10
------- ------- ------- -------
Net loss ($ 0.37) ($ 0.03) ($ 0.54) ($ 0.29)
======= ======= ======= =======
Weighted average number of shares of common stock
and common stock equivalents outstanding 8,655 7,864 8,331 7,914
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- ---------------------------
* As reclassified for discontinued operations.
8
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred Other Treasury Stock Total
----------------- Paid-in Stock Comprehensive Accumulated --------------- Shareholders'
Shares Dollars Capital Compensation Income (Deficit) Shares Dollars Equity
--------- ------- --------- ------------ ------------ ---------- ------- ------- ------------
<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 - - - - (4,321) - - (4,321)
Net decrease in unrealized
appreciation of investments - - - (3,623) - - - (3,623)
------------
Comprehensive income (loss) (7,944)
------------
Other changes in
shareholders' equity:
Exercise of warrants to
purchase common stock 978,598 734 3,520 - - - - 4,254
Exercise of options to
purchase common stock 37,397 28 124 - - - - 152
Stock options issued
and deferred
stock-based compensation - - 4,900 (4,900) - - - - -
Compensation expense recognized - - - 1,198 - - - - 1,198
Outstanding stock options - - 575 - - - - - 575
Reverse put liability
for warrants exercised - - 1,194 - - - - - 1,194
Redeemable preferred
stock dividends - - - - (194) - - (194)
------------
Other changes in
shareholders' equity 7,179
------------
--------- ------- --------- ----------- ----------- --------- ------- ------- ------------
Balance at June 30, 1999 9,318,105 $6,989 $53,047 ($3,702) $7,297 ($58,815) 437,882 ($1,625) $3,191
========= ======= ========= =========== =========== ========= ======= ======= ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
9
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
Net cash flows from (used by) operating activities ($ 3,781) $ 701
-------- --------
Cash flows from investing activities:
Advances to Entrade Inc. (2,728) --
Decrease in restricted cash 934 --
Additions to property, plant and equipment -- (1,105)
Proceeds from sale of COMFORCE common stock -- 170
Other (89) --
-------- --------
Net cash flows used by investing activities (1,883) (935)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 4,406 17
Net decrease in short-term debt -- (379)
Proceeds from long-term borrowings -- 70,186
Reduction of long-term debt -- (72,625)
Repurchase of common stock previously issued
to pay down short-term notes -- (1,518)
Redemption of detachable put warrants -- (1,410)
Other -- (1)
-------- --------
Net cash flows from (used by) financing activities 4,406 (5,730)
-------- --------
Decrease in cash and cash equivalents (1,258) (5,964)
Cash and equivalents, beginning of period 11,753 5,991
-------- --------
Cash and equivalents, end of period $ 10,495 $ 27
======== ========
Supplemental schedule of noncash
investing and financing activities:
ARTRA/BCA redeemable preferred
stock received as payment of
Peter Harvey advances -- 12,787
The accompanying notes are an integral part of the condensed consolidated
financial statements.
10
<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 Entrade Inc. ("Entrade"), formerly NA Acquisition Corp., and WorldWide Web
NetworX Corporation ("WorldWide") providing for the merger of a subsidiary of
Entrade with ARTRA. Entrade, a 90% owned subsidiary of WorldWide, 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").
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 June 30, 1999, and the results of operations and
changes in cash flows for the three month periods ended June 30, 1999 and June
30, 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
Entrade Inc.
On February 23, 1999, ARTRA entered into an Agreement and Plan of Merger (the
"Merger Agreement") with WorldWide, Entrade, a 90% owned subsidiary of
WorldWide, and WWWX Merger Subsidiary, Inc. ("Merger Sub"), a wholly owned
subsidiary of Entrade, 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 Entrade, and
the shareholders of the Company will become shareholders of Entrade. Under the
terms of the Merger Agreement, the Company's shareholders will receive one share
of Entrade Common Stock in exchange for each share of the Company's Common
Stock. Additionally, holders of ARTRA Series A preferred stock will receive 329
shares of Entrade common stock for each share of ARTRA Series A preferred stock.
All stock options and warrants issued by the Company and outstanding on the
closing date of the Merger will be converted into Entrade stock options and
warrants.
11
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Entrade owns all of the outstanding capital stock of entrade.com and 25% of the
Class A Common Stock of 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.
In connection with the execution of the Merger Agreement, on February 23, 1999,
Entrade 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 WorldWide, in exchange for 1,800,000 shares of Entrade
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 16, 1999, Entrade had agreed with Energy Trading Company, a wholly
owned subsidiary of Peco Energy Company, to issue to Energy Trading Company
200,000 shares of Entrade common stock, and to pay Energy Trading Company
$100,000 in exchange for certain retained rights Energy Trading Company held in
the Purchased Assets. Entrade also agreed with both WorldWide and Energy Trading
Company that it would provide a minimum of $4,000,000 in funding for
entrade.com. Under separate loan agreements, ARTRA agreed to loan Entrade up to
$2,000,000 and advance an additional $250,000 to fund the $800,000 cash payment
to WorldWide 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.
In August 1999, WorldWide agreed to loan Entrade up to $500,000 to fund
Entrade's operations for the period from the date of the loan to the closing
date under the Merger Agreement. This amount will be repaid to WorldWide as a
condition to closing the Merger.
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.
If the Merger Agreement terminates solely because the ARTRA shareholders have
not approved the Merger Agreement and the Merger, all obligations of WorldWide
and Entrade to repay the amounts loaned to either or both of them by ARTRA under
the loan agreement and an additional $250,000 advanced to Entrade by ARTRA will
terminate and the loans made by ARTRA to WorldWide and to Entrade under the loan
agreement will be forgiven as a "break-up" fee to WorldWide and Entrade equal to
the aggregate amount of the loan as defined in the loan agreement and the
additional $250,000 advance.
Bagcraft
Effective August 26, 1998, ARTRA and its wholly-owned BCA Holdings, Inc. ("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.
12
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 the six months ended June 30, 1998 of the discontinued
Bagcraft subsidiary consist of:
Net sales $ 63,265
========
Earnings from operations before income taxes
and minority interest $ 1,154
Provision for income taxes (44)
Minority interest (300)
--------
Earnings from discontinued operations $ 810
========
Earnings per share from discontinued operations $ .10
========
Liabilities of discontinued operations at June 30, 1999 and December 31, 1998 of
$8,464,000 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.
3. INVESTMENT IN COMFORCE CORPORATION
At June 30, 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 June 30, 1999 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $7,297,000. The investment in
COMFORCE common stock, which represents a significant portion of the Company's
assets at June 30, 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 granted 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 three and six months ended June 30, 1998, options to acquire 70,750
and 84,750 of these COMFORCE common shares were exercised resulting in realized
gains of $267,000 and $320,000, respectively. At June 30, 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.
13
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 June 30, 1999 and December 31, 1998, 1,849.34 shares of Series A Preferred
Stock were outstanding with carrying values of $3,051,000 and $2,857,000,
respectively, including accumulated dividends, net of unamortized discount of
$102,000 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 $1,338,000 ($724 per share) and $1,246,000 ($674 per share) were
accrued at June 30, 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 June 30, 1999 and December 31, 1998, liabilities of
discontinued operations included 1,036.39 and 1,672.18 BCA Series A redeemable
preferred shares with accumulated dividends of $318,000 ($307 per share) and
$514,000 ($307 per share), respectively.
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 June 30, 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
($388 per share).
Both the BCA Series A preferred stock and the BCA Series B preferred stock are
redeemable at the option of the issuer for an amount equal to face value plus
accumulated dividends. The BCA Series B preferred stock was redeemable on June
1, 1997.
At June 30, 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 June 30, 1999 and December 31, 1998 ($152 per share).
14
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Proposed Exchange Under Merger Agreement
On February 23, 1999, ARTRA entered into a Merger Agreement with WorldWide and
Entrade (see Note 2). As a result of the Merger, the Company will become a
wholly owned subsidiary of Entrade, and the shareholders of the Company will
become shareholders of Entrade. Under the terms of the Merger Agreement, if
approved by the Company's shareholders, the holders of ARTRA Series A preferred
stock will receive 329 shares of Entrade Common Stock in exchange for each share
of their ARTRA Series A preferred stock.
The Merger Agreement as amended as of August 9, 1999, does not provide for the
issuance of shares of Entrade common stock in exchange for any outstanding
shares of BCA Series A preferred stock or BCA Series B preferred stock.
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. The pending Merger with
Entrade will not affect ARTRA's 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.
15
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Earnings (loss) per share for the three and six months ended June 30, 1999 and
1998 was computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
AVERAGE SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 8,655 8,655 7,864 7,864
Common stock equivalents (options/warrants) -- -- -- --
------- ------- ------- -------
8,655 8,655 7,864 7,864
======= ======= ======= =======
EARNINGS (LOSS):
Loss from continuing operations $(3,053) $(3,053) $(1,114) $(1,114)
Dividends applicable to
redeemable preferred stock (130) (130) (95) (95)
------- ------- ------- -------
Loss from continuing operations
applicable to common shareholders (3,183) (3,183) (1,209) (1,209)
Earnings from discontinued operations -- -- 948 948
------- ------- ------- -------
Net loss $(3,183) $(3,183) $ (261) $ (261)
======= ======= ======= =======
PER SHARE AMOUNTS:
Loss from continuing operations
applicable to common shares $ (.37) $ (.37) $ (.15) $ (.15)
Earnings from discontinued operations -- -- .12 .12
------- ------- ------- -------
Net loss applicable to common shares $ (.37) $ (.37) $ (.03) $ (.03)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
AVERAGE SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 8,331 8,331 7,914 7,914
Common stock equivalents (options/warrants) -- -- -- --
------- ------- ------- -------
8,331 8,331 7,914 7,914
======= ======= ======= =======
EARNINGS (LOSS):
Loss from continuing operations $(4,321) $(4,321) $(2,893) $(2,893)
Dividends applicable to
redeemable preferred stock (194) (194) (219) (219)
------- ------- ------- -------
Loss from continuing operations
applicable to common shareholders (4,515) (4,515) (3,112) (3,112)
Earnings from discontinued operations -- -- 810 810
------- ------- ------- -------
Net loss $(4,515) $(4,515) $(2,302) $(2,302)
======= ======= ======= =======
PER SHARE AMOUNTS:
Loss from continuing operations
applicable to common shares $ (.54) $ (.54) $ (.39) $ (.39)
Earnings from discontinued operations -- -- .10 .10
------- ------- ------- -------
Net loss applicable to common shares $ (.54) $ (.54) $ (.29) $ (.29)
======= ======= ======= =======
</TABLE>
16
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At June 30, 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.
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.
17
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Since 1983, Artra has been a party to product liability asbestos claims relating
to the manufacture of products by The Synkoloid Company, a former operating
subsidiary. As of September 1998, Artra's primary insurance carriers had paid
approximately $13 million in claims related to Synkoloid products, at which
point the primary carriers asserted that primary insurance coverage had been
exhausted. Since that date, some of Artra's excess insurance carriers have
assumed the defense and indemnity costs related to the defense and settlement of
all Synkoloid product liability claims under a temporary agreement.
From September 1998 through August 1, 1999, these carriers had paid
approximately $8.5 million to settle claims. Artra believes that the remaining
excess coverage totals approximately $200 million. Under the temporary
agreement, these carriers could either individually or collectively cease making
indemnity or defense payments at any time or refuse to renew the temporary
agreement, which was due to expire on August 16, 1999. Artra has received an
oral representation from the carriers' lead counsel that the temporary agreement
has been extended to September 30, 1999.
While ARTRA is currently negotiating a permanent agreement with these carriers,
there is no assurance that any permanent agreement will be reached or that the
carriers will continue to make payments on the same terms as under the temporary
agreement. If the terms of the new agreement are less favorable or the temporary
agreement expires without the execution of a new agreement, ARTRA could become
obligated to assume a percentage of the indemnity payments and defense costs.
ARTRA is not able to quantify the potential costs of claims that remain
outstanding or unasserted. If claims exceed the insurance coverage, ARTRA's
financial position could be materially and adversely affected and ARTRA's
ability to fund its operations would be impaired.
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 June 28, 1999, the Company's board of directors entered into a three-year
employment agreement with Mark F. Santacrose, under which, Mr. Santacrose agreed
to become the President and Chief Executive Officer of ARTRA. In connection with
such employment, Mr. Santacrose received an option to purchase 200,000 shares of
ARTRA common stock at an exercise price of $10.00 per share (exercisable
immediately) and 100,000 shares of ARTRA common stock at an exercise price of
$12.875 per share (exercisable commencing June 28, 2000). The market value of
ARTRA common stock on the date of grant of the options was $12.875 per share.
Accordingly, at June 30, 1999, ARTRA recognized compensation expense of $575,000
related to these stock options.
18
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On February 23, 1999, the Company entered into three-year employment agreements
with four 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 received nonqualified stock options for
the purchase of 1,600,000 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 six months ended June 30, 1999, the
Company recognized compensation expense of approximately $1,200,000 related to
these stock options.
ARTRA had fallen below the New York Stock Exchange's quantitative and other
continued listing criteria. These criteria included the New York Stock
Exchange's net tangible assets and average three-year net income requirements.
Also, after the sale of ARTRA 's Bagcraft subsidiary, ARTRA has lacked an
ongoing operating business as required under the New York Stock Exchange's
rules. At the New York Stock Exchange's request, ARTRA has provided a definitive
action plan demonstrating ARTRA 's ability to achieve compliance with the
Exchange's listing standards, including the succession of Entrade common stock
to this 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 and, after the Merger, Entrade 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 and, after the Merger, Entrade common stock.
ARTRA 's plan is dependent upon the closing of the Merger during the third
quarter of 1999. If the Merger is not completed, 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.
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 parties had extended the
expiration date of the letter of intent to August 12, 1999 and are negotiating
to further extend the expiration date. 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.
19
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1999
(Unaudited in Thousands)
<TABLE>
<CAPTION>
ARTRA Pro Forma
Historical Entrade Inc. Adjustments Pro Forma
------------- ------------ ------------- -------------
CURRENT ASSETS
<S> <C> <C> <C>
Cash and equivalents $10,495 $176 $10,671
Restricted cash and equivalents 111 111
Available-for-sale securities 4,577 4,577
Other 221 65 286
------------- ------------ -------------
Total current assets 15,404 241 15,645
------------- ------------ -------------
Advances to Entrade Inc. 1,428 ($2,100)(A) -
1,300 (B)
(628)(F)
Property,plant & equipment, net 304 304
Intangibles, net 3,510 4,625 (C) 9,763
1,000 (E)
628 (F)
Investment in asseTrade.com 3,500 3,500
Other 89 89
------------- ------------ ------------- -------------
16,921 7,555 4,825 29,301
============= ============ ============= =============
CURRENT LIABILITIES
Accrued liabilities 590 12 506 (E) 1,108
Common stock put warrants 511 511
Accounts payable, including amounts
due related parties 383 383
Income taxes payable 1,114 1,114
Note payable 500 500
Due to ARTRA 2,100 (2,100)(A) -
Liabilities of discontinued operations 8,464 8,464
------------- ------------ -------------
10,679 2,995 12,080
------------- ------------ -------------
Redeemable preferred stock 3,051 (3,051)(D) -
Shareholders' Equity 3,191 4,560 1,300 (B) 17,221
4,625 (C)
3,051 (D)
494 (E)
------------- ------------ ------------- -------------
$16,921 $7,555 4,825 $29,301
============= ============ ============= =============
Notes to the pro forma condensed combined balance sheet:
<FN>
(A) Eliminate ARTRA advances to Entrade Inc.
(B) Reverse Entrade Inc. expenses reported in ARTRA's historical financial
statements.
(C) Reflects the market value of Entrade Inc. common shares to be issued as
consideration for the Entrade Inc. transaction. No readily ascertainable
market exists to value the Entrade Inc. common shares. Accordingly, the
valuation of Entrade Inc. common shares is based upon the market price of
ARTRA common stock, as discounted, as of February 23, 1999, the date of the
merger agreement.
Number of common shares to be issued 2,000
Market value of ARTRA common stock
at February 23, 1999 $5.812500
Less 15% blockage discount (.871875)
---------
$4.940625
---------
Fair market value of common shares to be issued 9,881
Less Entrade equity at February 23, 1999 (5,256)
---------
Adjustment to equity $ 4,625
=========
(D) Exchange ARTRA preferred stock for Entrade Inc. common stock at the rate of
329 Entrade Inc. common shares for each share of ARTRA preferred stock. The
fair value of Entrade Inc. common stock issued will be used as the basis to
account for the exchange of ARTRA preferred stock. The excess of fair value
of the Entrade Inc. common stock over the book value of the preferred
shares will be accounted for like a preferred stock dividend. Due to its
non-recurring nature, this transaction was not reflected in the pro forma
condensed combined financial statements.
(E) Accrue finders fee and other acquisition related costs.
(F) Reclass acquisition costs and fees paid by ARTRA.
</FN>
</TABLE>
20
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited in Thousands)
<TABLE>
<CAPTION>
ARTRA Pro Forma
Historical Entrade Inc. Adjustments Pro Forma
---------- ------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ - $ 111 $111
---------- ------------ ------------
Costs and expenses:
Selling, general and administrative 4,528 1,102 5,630
Depreciation and amortization 310 700 (A) 1,010
---------- ------------ ------------
4,528 1,412 6,640
---------- ------------ ------------
Operating loss (4,528) (1,301) (6,529)
---------- ------------ ------------
Other income (expense):
Interest income, net 207 1 208
---------- ------------ ------------
207 1 208
---------- ------------ ------------
Loss from continuing operations before income taxes (4,321) (1,300) (6,321)
Provision for income taxes - -
---------- ------------ ------------ ------------
Loss from continuing operations ($4,321) $ (1,300) $700 ($6,321)
========== ============ ============ ============
Per share loss from continuing operations
applicable to common shares:
Basic ($0.54) ($0.59)
========== ============
Diluted ($0.54) ($0.59)
========== ============
Weighted average number of shares of
common stock outstanding:
Basic 8,331 11,039 (B)
========== ============
Diluted 8,331 11,039 (B)
========== ============
Notes to the pro forma condensed combined statement of operations:
<FN>
(A) Additional amortization of intangible assets, assumes a 5 year life.
(B) Pro forma weighted average shares outstanding
Historical 8,331
Shares issed for Entrade Inc. transaction 2,000
Finder's fee for Entrade Inc. transaction 100
Entrade Inc. common shares exchanged for
ARTRA preferred shares 608
----------
11,039
==========
(C) The fair value of Entrade Inc. common stock issued will be used as the
basis to account for the exchange of ARTRA preferred stock. The excess of
fair value of the Entrade Inc. common stock over the book value of the
preferred shares will be accounted for like a preferred stock dividend. Due
to its non-recurring nature, this transaction was not reflected in the pro
forma condensed combined financial statements. Had the transaction been
reflected in the pro forma condensed combined financial statements, the
effect on pro forma loss per share had the exchange been made on February
23, 1999 would have been as follows:
Pro forma loss per share from continuing operations
as presented above ($0.59)
Effect of the excess of fair value of the
Entrade Inc. common stock over the book
value of the ARTRA preferred exchanged ($0.04)
------
Adjusted pro forma loss per share
from continuing operations ($0.63)
======
</FN>
</TABLE>
21
<PAGE>
Entrade Inc. and subsidiary
Index to Financial Statements
Page(s)
Report of Independent Accountants 23
Consolidated Balance Sheet as of February 23, 1999* 24
Notes to Consolidated Balance Sheet 25
Consolidated Balance Sheet as of June 30, 1999 (Unaudited) 28
Consolidated Statement of Operations for the period
February 23, 1999 (inception) to June 30, 1999 (Unaudited) 29
Consolidated Statement of Cash Flows for the period
February 23, 1999 (inception) to June 30, 1999 (Unaudited) 30
Notes to Consolidated Financial Statements 31
- -------------------------------------
* The date of the proposed merger.
22
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Entrade Inc.
In our opinion, the accompanying consolidated balance sheet presents fairly, in
all material respects, the financial position of Entrade Inc. (formerly NA
Acquisition Corp.) and subsidiary at February 23, 1999 (inception), in
conformity with generally accepted accounting principles. This financial
statement is the responsibility of the Company's management; our responsibility
is to express an opinion on this financial statement based on our audit. We
conducted our audit of this statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERCOOPERS LLP
Chicago, Illinois
May 13, 1999
23
<PAGE>
Entrade Inc. and subsidiary
Consolidated Balance Sheet
as of February 23, 1999
ASSETS
Cash $ 600,000
----------
Total current assets 600,000
----------
Investment in asseTrade 3,500,000
Intangible asset 3,156,224
----------
Total assets $7,256,224
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 100,000
Promissory note payable 500,000
Loan payable 1,400,000
----------
Total current liabilities 2,000,000
Shareholders' equity:
Preferred stock, $1,000 par value, 4,000,000 shares
authorized, no shares issued or outstanding --
Common stock, no par value, 40,000,000 shares authorized,
2,000,000 issued and outstanding 5,256,224
----------
Total liabilities and shareholders' equity $7,256,224
==========
The accompanying notes are integral part of this balance sheet.
24
<PAGE>
Entrade Inc. and subsidiary
Notes to Consolidated Balance Sheet
1. Formation of the Company and Acquisitions
Entrade Inc., formerly NA Acquisition Corp., ("Entrade" or "the
Company"), a Pennsylvania corporation, was incorporated in February of
1999 as a 90% owned subsidiary of WorldWide Web NetworX Corporation
("WWWX"). Entrade, through its wholly owned subsidiary, entrade.com, Inc.
("entrade.com") intends to operate as a business-to-business internet
electronic commerce ("e-commerce") service provider.
Upon incorporation, Entrade acquired from WWWX all of the assets of
BarterOne LLC. In addition, the Company also acquired from WWWX a 25%
interest in asseTrade.com, Inc. ("asseTrade"), a company that intends to
provide business to business internet e-commerce services. WWWX had
acquired all of the membership interests in BarterOne LLC in January and
February of 1999, under separate agreements with Global Trade Group, Ltd.
and Energy Trading Company, a subsidiary of PECO Energy Corporation.
Following those acquisitions, BarterOne LLC was dissolved and WWWX took
direct title to its assets.
BarterOne LLC had been formed in December 1996 by Energy Trading Company
and Global Trade Group, Ltd., to develop software and related products
and services that would enable users, primarily in the electric and gas
utility industry, to effect barter transactions via an e-commerce system.
Energy Trading Company provided the initial capital and executive
support, while Global Trade Group, Ltd. provided software development.
In October 1998, Positive Asset Remarketing, Inc. (an affiliate of Global
Trade Group) forged an alliance with a joint venture entity, Butcher Fox
LLC, formed by Henry Butcher USA, Inc. ("Butcher") and Michael Fox
International, Inc. ("Fox"), to provide BarterOne LLC's on-line
technologies and business methodologies to the Butcher and Fox industrial
clients. In December 1998, these parties formed asseTrade. Positive Asset
Remarketing, Inc. transferred a 25% voting interest in asseTrade to WWWX
in January 1999.
Entrade purchased BarterOne LLC and the 25% interest in asseTrade
(collectively the "acquired assets") from WWWX in exchange for 2,000,000
shares of Entrade common stock, of which 200,000 were received by Energy
Trading Company pursuant to a tri-party agreement between WWWX, Energy
Trading Company and Entrade, $800,000 in cash and a note for $500,000. As
WWWX and Entrade are under common control, Entrade recorded the value of
the net assets and interest acquired in these transactions at WWWX's
carrying value. The amount of purchase price paid to WWWX by Entrade in
excess of WWWX's carrying value for the assets of entrade and interest in
asseTrade has been recorded by Entrade as a reduction in common stock.
25
<PAGE>
Entrade Inc. and subsidiary
Notes to Consolidated Balance Sheet, Continued
1. Formation of the Company and Acquisitions, continued
Proposed Merger
Entrade, WWWX, and WWWX Merger Subsidiary, Inc. a wholly owned subsidiary
of Entrade ("Merger Sub"), have entered into an agreement to merge ("the
merger agreement") the Merger Sub into ARTRA Group Incorporated, a
publicly traded Pennsylvania corporation ("ARTRA"). The agreement is
subject to ARTRA shareholder approval. Entrade and WWWX have provided for
certain changes in capital structure of Entrade if the merger is not
consummated. The merger agreement provides that all shares of ARTRA
common stock shall be converted into shares of Entrade common stock on a
one for one basis and that ARTRA will guarantee funding of at least
$4,000,000 for the working capital needs of Entrade. In addition, each
share of the outstanding redeemable preferred stock of ARTRA shall be
exchanged for 329 shares of Entrade common stock. Concurrently with the
merger closing, Entrade is required to make a cash payment to Energy
Trading Company ("ETCO") in the amount of $100,000. If for any reason,
the merger is not consummated on or before September 30, 1999, then
Entrade is required to issue to ETCO sufficient additional shares of its
common stock so that ETCO will hold a 33 1/3% interest in all of the
issued and outstanding capital stock of Entrade. In such event, WWWX and
Entrade will amend the articles of incorporation and by-laws of Entrade
so that ETCO will have all of the same protections as a minority
shareholder of Entrade as were accorded to Global Trade Group, Ltd. under
the terms of a prior operating agreement for BarterOne LLC. Any dilution
of ownership of Entrade shall be on a pari passu basis.
Upon the completion of the proposed merger ARTRA will continue as the
surviving corporation. ARTRA will be a wholly owned subsidiary of
Entrade.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and equivalents represent cash and short-term, highly liquid
investments with original maturities three months or less.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, entrade.com Intercompany transactions
and accounts have been eliminated in consolidation.
Use of Estimates
The financial statements are prepared in conformity with generally
accepted accounting principles and, accordingly, include amounts that are
based on management's best estimates and judgments. Actual results could
differ from these estimates.
26
<PAGE>
Entrade Inc. and subsidiary
Notes to Consolidated Balance Sheet, Continued
2. Summary of Significant Accounting Policies, continued
Intangible Assets
Intangible assets represent principally intellectual property which will
be amortized over a period of five years on a straight line basis. The
Company reviews intangibles for impairment by comparing future cash flows
(undiscounted and without interest) expected to result from the use of
the assets and their eventual disposition, to the carrying amount of the
assets.
Equity interest
The Company has a 25% interest in asseTrade.com. This investment has been
recorded based upon the fair value of the consideration paid for the
investment by WWWX. The Company periodically reviews the carrying value
of this investment for impairment. Upon commencement of operations of
asseTrade, Entrade will reflect 25% of asseTrade results on an equity
basis.
3. Loan Agreement
In February 1999 the Company entered into a loan agreement with ARTRA
under which the Company may borrow up to a maximum of $2,000,000. The
proceeds of the loan are to be used for the following purposes: (a)
$800,000 to fund the cash purchase price for the assets acquired from
WWWX and (b) the balance to fund the working capital needs of
entrade.com. The initial loan of $1,400,000 can be increased by three
additional $200,000 increments subject to certain conditions related to
timing of closing under the merger agreement. Advances under the merger
agreement are collateralized by a perfected first priority lien and
security interest in all of the assets of the Company. The loan bears
interest at the applicable Federal rate, which accrues monthly and is
added to the principal balance. The entire outstanding principal balance
of the loan is due and payable in one lump sum on the date that is the
earlier of the closing date, as defined in the merger agreement, or the
date on which the merger agreement is otherwise terminated and the merger
abandoned. At February 23, 1999 the balance due on the loan was
$1,400,000.
4. Promissory Note
As part of the purchase of the assets of entrade.com from WWWX, the
Company entered into a non-interest-bearing promissory note with WWWX in
the amount of $500,000. The principal amount of the note is payable on
the earlier of the closing date of the merger, as defined in the merger
agreement, or the date on which the merger agreement is otherwise
terminated and the merger abandoned.
5. Related Party Transactions
Certain shareholders of WWWX, the parent company of Entrade, and certain
officers of Entrade and entrade.com have, or have had, a direct or
beneficial ownership interest in BarterOne LLC, asseTrade, Global Trade
Group Ltd, and Positive Asset Remarketing, Inc.
Certain officers of Entrade and entrade.com have entered into employment
agreements with ARTRA.
27
<PAGE>
Entrade Inc. and subsidiary
Consolidated Balance Sheet
as of June 30, 1999
(Unaudited in Thousands)
CURRENT ASSETS
Cash $ 176
Other 65
-------
Total current assets 241
-------
Property,plant and equipment, net 304
Intangibles, net 3,510
Investment in asseTrade.com 3,500
-------
TOTAL ASSETS $ 7,555
=======
CURRENT LIABILITIES
Accrued liabilities 12
Accounts payable, including amounts due related parties 383
Note payable 500
Due to ARTRA 2,100
-------
2,995
-------
Shareholders' Equity
Preferred stock, $1,000 par value, 4,000,000 shares
authorized, no shares issued or outstanding --
Common stock, no par value, 40,000,000 shares authorized,
2,000,000 issued and outstanding 5,256
Additional paid-in capital 604
Accumulated loss from inception (Februray 23, 1999) (1,300)
-------
4,560
-------
-------
TOTAL LIABILITIES AND EQUITY $ 7,555
=======
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
Entrade Inc. and subsidiary
Consolidated Statement of Operations
For the period February 23, 1999 (inception)
to June 30, 1999
(Unaudited in Thousands)
Net sales $ 111
-------
Costs and expenses:
Selling, general and administrative
Business development costs 290
Payroll and related costs 438
Other 373
-------
1,101
Depreciation and amortization 310
-------
Total costs and expenses 1,411
-------
Loss from operations before income taxes (1,300)
Provision for income taxes -
-------
Net loss $(1,300)
=======
Per share loss:
Basic ($0.65)
=======
Weighted average number of shares
of common stock outstanding 2,000
=======
Diluted
Basic ($0.65)
=======
Weighted average number of shares
of common stock outstanding 2,000
=======
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
Entrade Inc. and subsidiary
Consolidated Statement of Cash Flows
For the period February 23, 1999 (inception)
to June 30, 1999
(Unaudited in thousands)
Net cash flows used by operating activities ($ 760)
-------
Cash flows from investing activities:
Assets purchased from WWWX (800)
Additions to property, plant and equipment (364)
-------
Net cash flows used by investing activities (1,164)
-------
Cash flows from financing activities:
ARTRA loan and advances 2,100
-------
Net cash flows used by financing activities 2,100
-------
Increase in cash and cash equivalents 176
Cash and equivalents, beginning of period --
-------
Cash and equivalents, end of period $ 176
=======
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
Entrade Inc. and subsidiary
Notes to Consolidated Financial Statements
1. Formation of the Company and Acquisitions
Entrade Inc., formerly NA Acquisition Corp., ("Entrade" or "the
Company"), a Pennsylvania corporation, was incorporated in February of
1999 as a 90% owned subsidiary of WorldWide Web NetworX Corporation
("WWWX"). Entrade, through its wholly owned subsidiary, entrade.com, Inc.
("entrade.com") intends to operate as a business-to-business internet
electronic commerce ("e-commerce") service provider. Entrade is currently
a development stage company and expects to exit its development stage
during the second half of 1999.
Upon incorporation, Entrade acquired from WWWX all of the assets of
BarterOne LLC. In addition, the Company also acquired from WWWX a 25%
interest in asseTrade.com, Inc. ("asseTrade"), a company that intends to
provide business to business internet e-commerce services. WWWX had
acquired all of the membership interests in BarterOne LLC in January and
February of 1999, under separate agreements with Global Trade Group, Ltd.
and Energy Trading Company, a subsidiary of PECO Energy Corporation.
Following those acquisitions, BarterOne LLC was dissolved and WWWX took
direct title to its assets.
BarterOne LLC had been formed in December 1996 by Energy Trading Company
and Global Trade Group, Ltd., to develop software and related products
and services that would enable users, primarily in the electric and gas
utility industry, to effect barter transactions via an e-commerce system.
Energy Trading Company provided the initial capital and executive
support, while Global Trade Group, Ltd. provided software development.
In October 1998, Positive Asset Remarketing, Inc. (an affiliate of Global
Trade Group) forged an alliance with a joint venture entity, Butcher Fox
LLC, formed by Henry Butcher USA, Inc. ("Butcher") and Michael Fox
International, Inc. ("Fox"), to provide BarterOne LLC's on-line
technologies and business methodologies to the Butcher and Fox industrial
clients. In December 1998, these parties formed asseTrade. Positive Asset
Remarketing, Inc. transferred a 25% voting interest in asseTrade to WWWX
in January 1999.
Entrade purchased BarterOne LLC and the 25% interest in asseTrade
(collectively the "acquired assets") from WWWX in exchange for 2,000,000
shares of Entrade common stock, of which 200,000 were received by Energy
Trading Company pursuant to a tri-party agreement between WWWX, Energy
Trading Company and Entrade, $800,000 in cash and a note for $500,000. As
WWWX and Entrade are under common control, Entrade recorded the value of
the net assets and interest acquired in these transactions at WWWX's
carrying value. The amount of purchase price paid to WWWX by Entrade in
excess of WWWX's carrying value for the assets of entrade and interest in
asseTrade has been recorded by Entrade as a reduction in common stock.
31
<PAGE>
Entrade Inc. and subsidiary
Notes to Consolidated Balance Sheet, Continued
1. Formation of the Company and Acquisitions, continued
Proposed Merger
Entrade, WWWX, and WWWX Merger Subsidiary, Inc. a wholly owned subsidiary
of Entrade ("Merger Sub"), have entered into an agreement to merge ("the
merger agreement") the Merger Sub into ARTRA Group Incorporated, a
publicly traded Pennsylvania corporation ("ARTRA"). The agreement is
subject to ARTRA shareholder approval. Entrade and WWWX have provided for
certain changes in capital structure of Entrade if the merger is not
consummated. The merger agreement provides that all shares of ARTRA
common stock shall be converted into shares of Entrade common stock on a
one for one basis and that ARTRA will guarantee funding of at least
$4,000,000 for the working capital needs of Entrade. In addition, each
share of the outstanding redeemable preferred stock of ARTRA shall be
exchanged for 329 shares of Entrade common stock. Concurrently with the
merger closing, Entrade is required to make a cash payment to Energy
Trading Company ("ETCO") in the amount of $100,000. If for any reason,
the merger is not consummated on or before September 30, 1999, then
Entrade is required to issue to ETCO sufficient additional shares of its
common stock so that ETCO will hold a 33 1/3% interest in all of the
issued and outstanding capital stock of Entrade. In such event, WWWX and
Entrade will amend the articles of incorporation and by-laws of Entrade
so that ETCO will have all of the same protections as a minority
shareholder of Entrade as were accorded to Global Trade Group, Ltd. under
the terms of a prior operating agreement for BarterOne LLC. Any dilution
of ownership of Entrade shall be on a pari passu basis.
Upon the completion of the proposed merger ARTRA will continue as the
surviving corporation. ARTRA will be a wholly owned subsidiary of
Entrade.
2. Loan Agreement
In February 1999 the Company entered into a loan agreement with ARTRA
under which the Company may borrow up to a maximum of $2,000,000. The
proceeds of the loan are to be used for the following purposes: (a)
$800,000 to fund the cash purchase price for the assets acquired from
WWWX and (b) the balance to fund the working capital needs of
entrade.com. The initial loan of $1,400,000 can be increased by three
additional $200,000 increments subject to certain conditions related to
timing of closing under the merger agreement. ARTRA subsequently agreed
to advance the Company an additional $250,000. Advances under the merger
agreement are collateralized by a perfected first priority lien and
security interest in all of the assets of the Company. The loan bears
interest at the applicable Federal rate, which accrues monthly and is
added to the principal balance. The entire outstanding principal balance
of the loan is due and payable in one lump sum on the date that is the
earlier of the closing date, as defined in the merger agreement, or the
date on which the merger agreement is otherwise terminated and the merger
abandoned. If the merger agreement terminates solely because the ARTRA
shareholders have not approved the Merger Agreement and the Merger, all
obligations of WorldWide and Entrade to repay the amounts loaned to
either or both of them by ARTRA under the loan agreement and an
additional $250,000 advanced to Entrade by ARTRA will terminate and the
loans made by ARTRA to WorldWide and to Entrade under the loan agreement
will be forgiven as a "break-up" fee to WorldWide and Entrade equal to
the aggregate amount of the loan as defined in the loan agreement and the
additional $250,000 advance. At June 30, 1999 the balance due on the loan
and the advance was $2,100,000.
In August 1999, WWWX agreed to loan the Company up to $500,000 to fund
its operations for the period from the date of the loan to the closing
date under the merger agreement. This amount will be repaid to Worldwide
as a condition to closing the merger.
32
<PAGE>
Entrade Inc. and subsidiary
Notes to Consolidated Balance Sheet, Continued
3. Promissory Note
As part of the purchase of the assets of entrade.com from WWWX, the
Company entered into a non-interest-bearing promissory note with WWWX in
the amount of $500,000. The principal amount of the note is payable on
the earlier of the closing date of the merger, as defined in the merger
agreement, or the date on which the merger agreement is otherwise
terminated and the merger abandoned.
4. Related Party Transactions
Certain shareholders of WWWX, the parent company of Entrade, and certain
officers of Entrade and entrade.com have, or have had, a direct or
beneficial ownership interest in BarterOne LLC, asseTrade, Global Trade
Group Ltd, and Positive Asset Remarketing, Inc.
Certain officers of Entrade and entrade.com have entered into employment
agreements with ARTRA.
5. Earnings Per Share
The Company reports earnings (loss) per share under the guidelines of
SFAS No. 128, "Earnings per Share". Basic earnings (loss) per share is
computed by dividing net earnings (loss) by the weighted average number
of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of shares of common stock and
common stock equivalents, unless anti-dilutive, during the period. There
were no common stock equivalents outstanding during the period.
33
<PAGE>
Entrade Inc. and subsidiary
Notes to Consolidated Balance Sheet, Continued
Earnings (loss) per share for the period February 23, 1999 (inception) to
June 30, 1999 was computed as follows (in thousands, except per share
amounts):
Basic Diluted
-------- --------
AVERAGE SHARES OUTSTANDING:
Weighted average shares outstanding 2,000 2,000
Common stock equivalents -- --
-------- --------
2,000 2,000
======== ========
EARNINGS (LOSS):
Net loss $ (1,300) $ (1,300)
======== ========
PER SHARE AMOUNTS:
Net loss $ ($0.65) $ ($0.65)
======== ========
34
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this Proxy Statement/Prospectus before deciding how to vote. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of the Entrade common stock could decline due
to any of these risks, and you may lose all or part of your investment.
Risk Factors Relating to Entrade and Its entrade.com Operations.
The following risk factors relate to the business and operations of
Entrade and its entrade.com operations:
Entrade is an early stage company. We have no operating history upon
which you may evaluate us.
We formed Entrade in February 1999 at which time it acquired the
intellectual property of entrade.com and 25% of the voting common stock of
asseTrade.com. These entities had virtually no operating history prior to that
time. Accordingly, we have no operating history upon which you may evaluate us.
Because our management team as a unit is relatively new, it has a limited track
record upon which you can evaluate them. In addition, our revenue model is
evolving and we have only a limited number of customers to date. Our lack of
operating history, new management unit and evolving revenue model make it
difficult to evaluate our future prospects and evaluate our business strategy.
This means that you will have only limited information upon which to
base an investment and voting decision on the merger agreement and the merger.
Because of our lack of operating history, we also believe that period-to-period
comparisons of our results of operations will not be meaningful in the short
term and should not be relied upon as indicators of future performance.
We will encounter risks and difficulties frequently encountered by
early-stage companies in new and rapidly evolving markets. Many of these risks
are described in more detail in this "Risk Factors" section. We may not
successfully address any of these risks. If we do not successfully address these
risks, our business would be seriously harmed.
We anticipate we will incur continued losses for the foreseeable
future.
We expect to incur significant losses for the foreseeable future. To
date, we have generated only minimal revenues and have not been profitable. Our
revenues may not grow. We are relying upon our utiliparts.com website to
generate revenues, which it might not do because it is based on an unproven
business model. We may never be profitable or, if we become profitable, we may
be unable to sustain profitability.
The anticipated losses may result from our plan to increase our
operating expenses to:
35
<PAGE>
o launch additional on-line websites where clients from specific
industries can purchase and sell equipment, inventory and other
assets;
o increase our sales and marketing operations;
o broaden our customer support and software capabilities; and
o pursue strategic marketing and distribution alliances.
Some of our expenses are or will be fixed, including non-cancelable
agreements, equipment leases and real estate leases. If our revenues do not
increase, we may not be able to compensate by reducing expenses in a timely
manner. Expenses may also increase due to the potential impact of goodwill and
other charges from any future acquisitions. Continued losses may result in our
inability to develop additional strategic alliances and business-specific
websites, which is important to our plan to generate and grow future revenues.
We may have difficulty obtaining future funding sources, if needed, and
we might have to accept terms that would adversely affect shareholders.
If revenues from entrade.com's operations are less than anticipated in
1999 and 2000, we may need to raise funds from additional financings. We have no
commitments for any financing other than from Artra, and any financing
commitments may result in dilution to our existing shareholders after the
merger.
We may have difficulty obtaining additional funding, and we may have to
accept terms that would adversely affect our shareholders. For example, the
terms of any future financings may impose restrictions on our right to declare
dividends or on the manner in which we conduct our business. Also, lending
institutions or private investors may impose restrictions on a future decision
by us to make capital expenditures, acquisitions or significant asset sales.
We may not be able to locate additional funding sources at all.
If we cannot raise funds on acceptable terms, if and when needed, we
may not be able to develop or enhance our services to customers, launch
additional websites, take advantage of future opportunities for strategic
alliances within a particular industry, grow our business or respond to
competitive pressures or unanticipated requirements, which could seriously harm
our business.
Fluctuations in our quarterly results may adversely affect our stock
price.
Our quarterly operating results will likely vary significantly in the
future. Our operating results will likely fall below the expectations of
securities analysts or investors in some future quarter or quarters. Our failure
to meet these expectations would likely adversely affect the market price of our
common stock.
36
<PAGE>
Our quarterly operating results may vary depending on a number of
factors, including:
o demand of buyers and sellers to use our websites to list and
purchase equipment, inventory and parts;
o our ability in both the short and long term to overcome reluctance
of companies to use the Internet to buy and sell equipment,
inventory, parts and other assets;
o actions taken by our competitors, including new product
introductions and enhancements;
o size and timing of sales of our services;
o our ability to control costs;
o budget cycles of buyers and sellers of equipment, inventory and
parts and changes in these budget cycles; and
o general economic factors.
For example, our quarterly revenues are subject to fluctuation because
the potential for the listing and selling of large expensive equipment, such as
multiple sales of steam generators, could be significantly greater in some time
periods than others. As a result, our quarterly operating results may fluctuate
significantly. Also, launching one or more additional websites in one or more
consecutive quarters might increase our costs significantly compared to other
quarters.
We intend to rely initially on revenues from the utilities and large
industrial companies, and if we do not generate revenues from these two
markets, or the revenues are lower than we anticipate, we might not
have the resources to launch additional websites or form new strategic
alliances.
We intend to rely on revenues generated from technology licenses fees,
commission fees from our websites and maintenance and service fees. Our
principal initial targeted markets will be the utility industry and large
industrial manufacturing companies. If we do not generate revenue from these two
markets or they are lower than we anticipate, we may not be able to successfully
create other industry-specific websites that will generate additional license
and commission fees.
Our inability to generate and increase revenues in these initial
markets may depend on factors stated in other risk factors and other factors,
including:
o buyers might not accept purchasing "new" third party equipment and
parts without associated original equipment warranties or
aftermarket services programs; and
37
<PAGE>
o export/import regulations and fees could hamper or halt the
international shipment and transfer of electric generation
equipment, particularly nuclear generation equipment.
We may not develop additional revenue sources.
We plan to generate revenues through revenue sharing relationships with
strategic partners with whom we would form websites for the sale of assets and
services to particular industries. To generate significant revenues from
Internet business-to-business e-commerce, we will have to continue to build
these business relationships through our contacts within that industry and the
expertise of our current or future personnel in that industry. We may not be
able to form new strategic alliances due to a lack of sufficient financial
resources or expertise in the newly targeted industry. If we are not able to
build these relationships with strategic partners, we will have difficulty
developing additional business specific websites in order to generate revenues.
Marketing and distribution alliances may not generate the expected
number of new customers or may be terminated.
We intend to use marketing, distribution and strategic trade-group
alliances with other Internet companies, including our existing alliances with
asseTrade and Butcher Fox, to create traffic on our on-line business communities
and, consequently, to generate revenues. These marketing and distribution
alliances will allow us to link our on-line websites to Internet search engines
and other websites. The success of these relationships depends on the amount of
increased traffic we receive from the alliance partners' websites.
We may have difficulty entering into marketing and distribution
alliances. Also, these arrangements may not generate the number of new customers
we expect. We also cannot assure you that we will be able to enter into these
marketing and distribution alliances or renew any marketing and distribution
alliance agreements that we can establish. If we are unable to establish these
alliances or if any of these agreements are terminated, the traffic on other
on-line websites might not grow and could decrease.
We may not be able to compete effectively with other providers of
e-commerce services.
We believe that the strongest potential competition does not come from
traditional service groups but rather the evolution of the Internet and the
types of business-to-business service providers that evolution will create. As
applications for business-to-business e- commerce begin to proliferate and
mature, entrade.com will compete with other technology companies and traditional
service providers that seek to integrate on-line business technologies with
their traditional service mix.
Competition for Internet products and services and electronic business
commerce is intense. We expect that competition will continue to intensify.
Barriers to entry are minimal,
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and competitors can launch new websites at a relatively low cost. We expect that
additional companies will establish competing on-line business communities on a
stand-alone basis.
E-commerce applications are in the early stages of development.
Currently, the principal focus of e-commerce business-to-business groups is to
provide information and generate revenues from advertisement. As e-commerce
evolves, however, we expect that other entrepreneurs and large, well-known
leaders in specific industries will create other niche business-to-business
services that may compete with our services.
These large industry leaders, particularly major original equipment
manufacturers of utility and industrial equipment, would have better name
recognition in the market that we may target. We also expect competition from
large consulting firms and software solutions providers, which have begun
developing e-commerce applications for their existing clients. The larger
financial resources of these competitors may enable them to market to potential
buyers and sellers of equipment, inventory, parts and other assets and launch
more widespread marketing campaigns that would make it more difficult for us to
compete.
We may not be able to protect our proprietary rights, and we may
infringe the proprietary rights of others.
Trademarks and service marks risks.
Proprietary rights are important to our success and our competitive
position. Our ORBIT System is a federally registered trademark for use on
specified software. We have also applied for federal registration of
"utiliparts.com" and "entrade.com" as service marks for use in connection with
our electronic commerce services.
Although we seek to protect our proprietary rights, our actions may be
inadequate to protect any trademarks and other proprietary rights or to prevent
others from claiming violations of their trademarks and other proprietary
rights. We may not be able to protect our domain names for our on-line
industry-specific websites as trademarks because those names may be too generic
or perceived as describing a product or service or its attributes rather than
serving a trademark function.
If we are unable to protect our proprietary rights in trademarks,
service marks, trade dress and other indications of origin, competitors will be
able to use names and marks that are identical to ours or sufficiently similar
to ours to cause confusion among potential customers between us and our services
and our competitors and their services. This confusion may result in the
diversion of business to our competitors or the loss of potential or existing
customers. Also, to the extent these competitors have problems with the quality
of their services, this confusion may injure our reputation for quality.
Litigation against infringers of our service marks, trademarks and
similar rights may be expensive. Because of the difficulty in proving damages in
trademark litigation, it may be very difficult to recover damages.
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We have not conducted searches to determine whether our service marks,
trademarks and similar items may infringe on the rights of third parties. If
third parties successfully assert claims of trademark, service mark or other
infringement, the third party or a court or other administrative body may
require us to change our service marks, trademarks, company names, the design of
our sites and materials and our Internet domain names, as well as to pay damages
for any infringement. A change in service marks, trademarks, company names and
Internet domain names may cause difficulties for our customers in locating us or
not connecting our new names and marks with our prior names and marks, resulting
in loss of business.
Copyrights risks; software license risks.
While we seek to protect our software, text, designs and other works of
authorship by copyright, it is not possible to detect all possible
infringements. Also, copyright protection does not extend to functional features
of software and will not be effective to prevent third parties from duplicating
our software's capabilities through engineering research and development.
We may under limited circumstances grant access to the source code for
our software to some of our licensees. We believe that whenever we grant access
to source code, it is easier for those receiving access to the software to
improperly use and modify the software. This access increases the risk of
infringement to our software and may prevent us from receiving royalties from
unauthorized users of the software.
We have not conducted searches to determine if our software infringes
on any patents of third parties. If our software is found to infringe on the
copyrights or patents of a third party, the third party or a court or other
administrative body could require us to pay royalties for past use and for
continued use, or to modify or replace the software to avoid infringement. We
cannot assure you that we will be able to modify or replace the software.
Any of these claims, with or without merit, could subject us to costly
litigation and the diversion of our technical and management personnel.
Difficulty of protecting proprietary rights in other countries.
In addition, effective copyright and trademark protection may be
unenforceable or limited in some countries, and the global nature of the
Internet makes it impossible to control the ultimate destination of our work.
Our business depends on the effective development of the Internet as an
effective e-commerce business and marketing forum.
The Internet poses risks that are applicable to many on-line
businesses, including ours. The following present a description of these risks:
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Our success depends on our ability to use an effective Internet
marketing strategy which depends on Internet governance and regulation
which is uncertain.
The future success of our business is dependent on our ability to use
an effective Internet marketing strategy. Because the original role of the
Internet was to link the government's computers with academic institutions'
computers, the Internet was historically administered by organizations that were
involved in sponsoring research. Private parties have assumed larger roles in
the enhancement and maintenance of the Internet infrastructure. Therefore, it is
unclear what organization, if any, will govern the administration of the
Internet in the future, including the authorization of domain names.
The lack of an appropriate organization to govern the administration of
the Internet infrastructure and the legal uncertainties that may follow, pose
risks to the commercial Internet industry and our specific website business. In
addition, the effective operation of the Internet and our business is also
dependent on the continued mutual cooperation among several organizations that
have widely divergent interests, including the government, Internet service
providers and developers of system software and software language. These
organizations may find that achieving a consensus may become difficult,
impossible, time-consuming and costly.
Although we are not subject to direct regulation in the United States
other than federal and state business regulations generally, changes in the
regulatory environment could result in the Federal Communications Commission or
other United States regulatory agencies directly regulating our business.
Additionally, as Internet use becomes more internationally widespread, there is
an increased likelihood of international regulation. For example, import/export
regulations and related costs may limit the growth of our utiliparts.com
business.
We cannot predict whether or to what extent any new regulation
affecting e-commerce will occur. New regulation could increase our costs. For
example, we do not collect sales or other similar taxes with respect to the
equipment, inventory and other products sold through our on-line communities.
One or more states may seek to impose sales tax collection obligations on
out-of-state companies like us that engage in or facilitate e-commerce. States
and local governments have made proposals that would impose additional taxes on
the sale of goods and services over the Internet. A successful assertion by one
or more states or any foreign country that we should collect sales and other
taxes on the exchange of equipment, inventory and other goods on our system
could increase costs that we could have difficulty recovering from users of our
website.
Governmental agencies and their designees regulate the acquisition and
maintenance of web addresses generally. For example, in the United States, the
National Science Foundation had appointed Network Solutions, Inc. as the
exclusive registrar for the ".com," ".net" and ".org" generic top-level
addresses. Although Network Solutions no longer has exclusivity, it remains the
dominant registrar. The regulation of web addresses in the United States and in
foreign countries is subject to change. As a result, we may not be able to
acquire or maintain relevant web addresses in all countries where we conduct
business that are consistent with our
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brand names and marketing strategy. Furthermore, the relationship between
regulations governing website addresses and laws protecting trademarks is
unclear.
Adoption of the Internet as a medium for utilities and large
manufacturing industry asset trading and distribution is uncertain.
The growth of the Internet for trading and distribution of assets and
equipment for utilities and large manufacturing companies requires validation of
the Internet as an effective medium for this purpose. This validation has yet to
fully occur. For example, critical issues concerning use of the Internet
including security, reliability, cost, ease of use and quality of service remain
unresolved and could adversely affect the growth of and the degree to which
business is conducted over the Internet and our websites.
We may face increased access costs from browser providers and Internet
distribution channels.
Leading web site, browser providers and other Internet distribution
channels may begin to charge us to provide access to our products and services.
If any of these expenses are not accompanied by increased revenues, our losses
may increase.
Concerns regarding security of transactions and transmitting
confidential information over the Internet may negatively impact our
e-commerce business.
We believe that concern regarding the security of confidential
information transmitted over the Internet, including, for example, business and
supply requirements, credit card numbers and other forms of payment methods,
prevents many potential customers from engaging in online transactions. If we do
not add sufficient security features to future product releases, our services
may not gain market acceptance or we may face additional legal exposure.
Despite the measures we have taken in the areas of encryption and
password or other authentication software devices, our infrastructure is
potentially vulnerable to physical or electronic break-ins, computer viruses,
hackers or similar problems caused by employees, customers or other Internet
users. If a person circumvents our security measures, that person could
misappropriate proprietary information or cause interruptions in our operations.
Security breaches that result in access to confidential information could damage
our reputation and expose us to a risk of loss or liability. These risks may
require us to make significant investments and efforts to protect against or
remedy security breaches, which would increase the costs of maintaining our
websites.
Our computers and telecommunications equipment are maintained by a
third party server hosting company. Any system interruptions may cause our
on-line websites to be unavailable to web browsers and may reduce their
attractiveness to our customers and potential customers.
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Also, we could experience delays in switching to a new service
provider. Any delays in response time or performance problems would cause users
of our system to perceive our service as not functioning properly and cause them
to use other methods to sell or procure equipment, excess inventory and other
assets.
We may be subject to legal liability for publishing or distributing
content over the Internet.
We may be subject to legal claims relating to the content in our
industry-specific on-line websites, or the downloading and distribution of
content. Claims could also involve matters such as defamation, invasion of
privacy, disclosure of confidential information and copyright infringement.
Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content of material. The representations as
to the origin and ownership of licensed content that we generally obtain may not
adequately protect us.
In addition, we draw some of the content provided in our on-line
business communities from data compiled by other parties, including governmental
and commercial sources, and we re-key the data. This data may have errors. If
our content is improperly used or if we supply incorrect information, it could
result in unexpected liability. Our insurance may not cover claims of this type,
or may not provide sufficient coverage. Costs from these claims that are not
covered by our insurance or exceed our coverage would damage our business and
limit our financial resources.
We depend on the continual introduction of enhanced software
capabilities and expansion of our software systems for our services to
handle increases in traffic on our websites, which we may not be able
to accurately project.
As traffic in our on-line websites increases, we must expand and
upgrade our technology, transaction processing systems and network hardware and
software. We may not be able to accurately project the rate of increase in our
on-line websites. In addition, we may not be able to expand and upgrade our
systems and network hardware and software capabilities to accommodate increased
use of our on-line websites. If we do not appropriately upgrade our systems,
network hardware and software on an ongoing basis, we may have difficulty
retaining our customers and competing effectively.
The life cycles of the software used to support our e-commerce services
are difficult to predict because the market for our e-commerce websites for
sales and procurement of equipment, inventory and assets is new and emerging and
is characterized by changing customer needs and industry standards. The
introduction of on-line products employing new technologies and industry
standards could render our existing system obsolete and unmarketable. For
example, entrade.com's new software system that we intend to launch in the third
quarter of 1999 is written in the Microsoft's SLQ7.0 computer language. If a new
software language becomes the industry standard, we may need to rewrite the
software to remain competitive. We may not be able to respond in a
cost-effective way and lose business as a result.
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Acquisitions and new strategic alliances may disrupt or otherwise have
a negative impact on our business.
We plan to make investments in complementary companies, technologies
and assets. Future acquisitions are subject to the following risks:
o acquisitions may cause a disruption in our ongoing business,
distract our relatively new management team and other resources
and make it difficult to maintain our standards, controls and
procedures;
o we may acquire companies or make strategic alliances in markets in
which we have little experience;
o we may not be able to successfully integrate the services,
products and personnel of any acquisition or new alliance into our
operations;
o we may be required to incur debt or issue equity securities, which
may be dilutive to existing shareholders, to pay for acquisitions;
and
o our acquisitions may not result in any return on our investment
and we may lose our entire investment.
Our success is dependent on retaining our current key personnel and
attracting additional key personnel, particularly in the areas of
sales, technical services and customer support.
We believe that our success will depend on continued employment of our
senior management team and key technical personnel for the development of our
on-line services and the attraction of large businesses to use our on-line
websites for the purchase and sale of equipment, inventory and assets. Their
experience in e-commerce asset sales and procurement is important to the
establishment of our on-line websites in various industries.
We do not maintain key-man life insurance on our key personnel. The
loss of the services of one or more of our management personnel could seriously
harm our business.
Our success also depends on having a highly trained sales force,
telesales group and technical and customer support personnel. We will need to
continue to hire additional personnel as our business grows. We have perceived a
shortage in the number of trained sales, technical and customer support
personnel in the on-line service industry. This shortage could limit our ability
to increase sales in our on-line websites and to sell services as we launch
additional websites. Competition for personnel, particularly for employees with
technical expertise, is intense. New hires also frequently require extensive
training before they achieve desired levels of productivity. If we cannot hire
and retain suitable personnel, we may not be able to effectively expand and
develop new business communities or support those that are developed, resulting
in loss of customers and revenues.
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Our systems may not be Year 2000 compliant.
We may realize exposure and risk if the systems on which we are
dependent to conduct our operations are not Year 2000 compliant. We are in the
process of completing the testing of our internal computer systems and our
internal computer software and our non-IT systems for year 2000 compliance and
anticipate that we will complete all testing by the end of September 1999.
We are in the process of confirming Year 2000 compliance by our third
party service providers through surveys circulated to them. We expect to
complete this survey process by the end of September 1999. Our potential areas
of exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. Also, if clients,
distributors, suppliers and other third parties with which we conduct business
do not successfully address these issues, our business, operating results and
financial position could be materially and adversely affected.
In the event that our web-hosting facilities provided by a third party
are not Year 2000 compliant, our production web sites would be unavailable and
we would not be able to deliver services to our users. In the event that the
production and operational facilities that support our web sites are not Year
2000 compliant, some portions of our websites may become unavailable. Our
contingency plans include hosting the production websites directly from our
office or from a development or staging server that is Year 2000 compliant.
While we believe that we will be able to transfer our servers to another service
provider within a two to three- day period if it is necessary to implement this
plan, we cannot assure you that we can complete that transfer without
significant disruption.
The interests of our significant shareholders after the merger may
conflict with our interests and the interests of our other
shareholders.
As a result of its stock ownership, WorldWide may be in a position to
affect significantly our corporate actions, including, for example, mergers or
takeover attempts, in a manner that could conflict with the interests of our
public shareholders. WorldWide will own 1,800,000 shares or approximately 15.5%
of the outstanding shares of Entrade common stock after the merger. Principals
of entrade.com, who will resign from their positions with WorldWide after the
merger, also hold stock options to purchase an aggregate of 1,600,000 shares of
Artra common stock. Although this may not necessarily constitute a controlling
block, the significant block represented could impact significant corporate
transactions and delay or prevent a third party from acquiring control over us.
Our minority interest in asseTrade.com and the potential for deadlock
in stockholder and board actions may impede the growth and development
of asseTrade.com's operations.
Due to our minority interest in asseTrade.com, we may experience a
reduction or loss in the value we derive from asseTrade.com both as an
investment and as a potential source of
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business, customers and services for our websites. We currently hold 25% of the
voting common stock of asseTrade.com. Positive Asset Remarketing, Inc. holds a
25% voting interest, and the remaining 50% is held by Butcher Fox LLC. Our
minority interest could reduce our ability to direct the management and
operations of asseTrade.com. Furthermore, voting interests by the stockholders
and board members could become deadlocked. Any deadlock would impede or prevent
the growth and development of asseTrade.com's operations.
Shares eligible for future sales by our current shareholders may
adversely affect our stock price.
If our existing shareholders sell substantial amounts of Entrade common
stock, including shares issued on the exercise of outstanding options and
warrants, in the public market following the merger, then the market price of
our common stock could fall. Our current shareholders are:
Name of Number of Shares
Entrade Shareholder Of Entrade Common Stock
------------------- -----------------------
WorldWide 1,800,000 shares
Energy Trading Company 200,000 shares
WorldWide is subject to a lockup under the merger agreement for sales
or transfers of its Entrade shares until the first anniversary after the closing
of the merger, subject to exceptions for pledges or the distribution of up to
25% of the Entrade shares to WorldWide's shareholders. Subject to the lock-up
provision applicable to WorldWide, these shareholders may be able to utilize
Rule 144 to sell shares.
We also may file one or more registration statements to register all
shares of Entrade common stock under our stock option plans and warrants that we
will assume from Artra in the merger. After such registration statements are
effective, shares issued upon exercise of stock options and the warrants will be
eligible for sale in the public market without restriction, except that
affiliates of Entrade after the merger must comply with the registration
requirements under the Securities Act or an exemption from the registration
requirements, such as Rule 144.
Anti-takeover provisions and our right to issue preferred stock could
make a third party acquisition of us difficult.
Entrade is a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a third party to acquire
control of us, even if a change in control would be beneficial to shareholders.
For a discussion of these anti-takeover provisions, see "Description of Entrade
Capital Stock -- Anti-Takeover Provisions" on page 66.
Our articles of incorporation provide that our board of directors may
issue preferred stock without shareholder approval. The issuance of preferred
stock could make it more
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difficult for a third party to acquire us. Our board of directors may issue
preferred stock with voting or conversion rights that may have the effect of
delaying, deferring or preventing a change of control of us and would adversely
affect the market price of the Entrade common stock and voting and other rights
of holders of Entrade common stock. We currently have no plans to issue any
preferred stock.
The Entrade common stock price is likely to be highly volatile.
The market price of Entrade common stock is likely to be highly
volatile as the stock market in general, and the market for Internet-related and
technology companies in particular, has been highly volatile. Our shareholders
may not be able to resell their shares of Entrade common stock following periods
of volatility because of the market's adverse reaction to this volatility. The
trading prices of many technology and Internet-related companies' stocks have
reached historical highs within the 18 months and have reflected relative
valuations substantially above historical levels. During the same period, these
companies' stocks have also been highly volatile and have recorded lows well
below those historical highs. We cannot assure you that our stock will trade at
the same levels of other Internet stocks or that Internet stocks in general will
sustain their current market prices.
Factors that could cause this volatility may include, among other
things:
o actual or anticipated variations in quarterly operating results;
o announcements of technological innovations;
o new sales formats or new products or services;
o changes in financial estimates by securities analysts;
o conditions or trends in the utilities and large manufacturing
industries;
o conditions or trends in the Internet industry;
o changes in the market valuations of other Internet companies;
o announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
o changes in capital commitments;
o additions or departures of key personnel; and
o sales of Entrade common stock.
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Many of these factors are beyond our control. These factors may
materially adversely affect the market price of our common stock, regardless of
our operating performance.
Risk Factors Relating to Artra
Lack of compliance with New York Stock Exchange listing criteria may
result in delisting of Artra common stock or, after the merger, Entrade
common stock.
Artra had fallen below the New York Stock Exchange's quantitative and
other continued listing criteria. These criteria included the New York Stock
Exchange's net tangible assets and average three-year net income requirements.
Also, after the sale of Artra's Bagcraft subsidiary, Artra has lacked an ongoing
operating business as required under the New York Stock Exchange's rules. At the
New York Stock Exchange's request, Artra has provided a definitive action plan
demonstrating Artra's ability to achieve compliance with the Exchange's listing
standards, including the succession of Entrade common stock to this 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 and, after the merger, Entrade 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 and, after the merger, Entrade common
stock. Artra's plan is dependent upon the closing of the merger during the third
quarter of 1999. If the merger is not completed, 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.
If the New York Stock Exchange suspends trading in and delists the
Artra common stock, or after the merger the Entrade common stock, Artra or
Entrade would attempt to list the shares on another exchange or quotation system
such as the Nasdaq National Market System. We cannot assure you that we can
successfully effect this new listing. As a result, if we are not able to effect
this listing, you might not be able to sell your shares at all, and if you were
able to sell your shares, you may face lower share prices.
Artra's potential environmental liabilities and other potential
liabilities from other claims may result in future costs to Artra that
are difficult to estimate.
Former operations of Artra and its subsidiaries have been subject to
requirements imposed under federal, state and local environmental and health and
safety laws and regulations, including the Clean Water Act, the Clean Air Act,
the Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act and the Occupational Safety and Health
Act and comparable state laws, relating to waste water discharges, air
emissions, solid waste management and disposal practices, work place safety and
real property use and ownership.
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Liability under CERCLA is, in most instances, strict, joint and
several, meaning that Artra could be liable for all response costs incurred. As
a result of these environmental matters, Artra and its subsidiaries have, from
time to time, been and currently are involved in administrative and judicial
proceedings and inquiries. The currently pending proceedings relate primarily to
claims for damages with respect to sites and facilities of Baltimore Paint and
Chemical Company, Harvel Industries, Inc., Dutch Boy Paints and Bagcraft. Artra
has provided accruals for these claims. Various uncertainties, however, with
respect to these and other sites and facilities make it difficult to assess the
likelihood and scope of further investigation or remediation activities or to
estimate the future costs of these activities if undertaken. See "Information
About Artra -- Legal Proceedings" on page 91.
Since 1983, Artra has been a party to product liability asbestos claims
relating to the manufacture of products by The Synkoloid Company, a former
operating subsidiary. As of September 1998, Artra's primary insurance carriers
had paid approximately $13 million in claims related to Synkoloid products, at
which point the primary carriers asserted that primary insurance coverage had
been exhausted. Since that date, some of Artra's excess insurance carriers have
assumed the defense and indemnity costs related to the defense and settlement of
all Synkoloid product liability claims under a temporary agreement.
From September 1998 through August 1, 1999, these carriers had paid
approximately $8.5 million to settle claims. Artra believes that the remaining
excess coverage totals approximately $200 million. Under the temporary
agreement, these carriers could either individually or collectively cease making
indemnity or defense payments at any time or refuse to renew the temporary
agreement, which was due to expire on August 16, 1999. Artra has received an
oral representation from the carriers' lead counsel that the temporary agreement
has been extended to September 30, 1999.
While Artra is currently negotiating a permanent agreement with these
carriers, we cannot assure you that any permanent agreement will be reached or
that the carriers will continue to make payments on the same terms as under the
existing temporary agreement. If the terms of the new agreement are less
favorable than the existing agreement or the temporary agreement expires without
the execution of a new agreement, Artra could become obligated to assume a
percentage of the indemnity payments and defense costs. Artra is not able to
quantify the potential costs of claims that remain outstanding or unasserted. If
claims exceed the insurance coverage, Artra's financial position could be
materially and adversely affected and Artra's ability to fund its operations or
those of its current or future affiliates would be impaired.
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EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Supplement to Form S-1 of ARTRA Group
Incorporated of our report dated May 13, 1999 relating to the consolidated
balance sheet of Entrade Inc. (formerly NA Acquisition Corp.). We also consent
to the references to us under the headings "Experts" in such Registration
Statement.
Chicago, Illinois
September 7, 1999
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