ARTRA GROUP Incorporated
Supplement dated June 10, 1999 to Prospectus dated October 23, 1997,
as supplemented by Supplement dated March 9, 1999
Set forth in this Supplement is certain information included in the Quarterly
Report on Form 10-Q for the quarter ended March 31, 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 9 to the Company's condensed consolidated financial
statements for the quarter ended March 31, 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 letter of intent, as extended, expires on June 11, 1999.
This potential acquisition is not as yet deemed probable as no assurance can be
given that the parties will complete their due diligence or enter into a
definitive agreement by that date.
<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 March 31, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations 1
Index to Financial Statements 5
Financial information relating to the proposed merger
of the Company and Entrade Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
as of March 31, 1999* 17
Unaudited Pro Forma Condensed Combined Statement of
Operations for the three months ended March 31, 1999** 18
Index to Consolidated Balance Sheet
as of February 23, 1999 for Entrade Inc. *** 19
Risk factors relating to the proposed merger of the Company
and Entrade Inc. 25
Consent of Independent Accountants 40
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 March 31, 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.
*** The date of the proposed 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion supplements the information found in the financial
statements and related notes:
Results of Operations
We significantly changed the business focus of the company during the fourth
quarter of fiscal year 1998. We exited our then one industry segment, the
packaging products business, conducted by the discontinued Bagcraft subsidiary.
We are actively investigating new business opportunities starting with the
Entrade transaction discussed below. Our consolidated financial statements for
the three months ended March 31, 1998 have been reclassified to report
separately the results of operations of the Bagcraft subsidiary in discontinued
operations.
Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998
Continuing Operations
Selling, general and administrative expenses from continuing operations were
$1,354,000 for the three months ended March 31, 1999 as compared to $622,000 for
the three months ended March 31, 1998. We incurred a compensation charge of
$300,000 during the first quarter of 1999 relating to stock options granted to
certain individuals employed to manage our entry into the Internet
business-to-business e-commerce and on-line auction business and also had
$433,000 of losses incurred by Entrade.
During the three months ended March 31, 1999, we had net interest income of
$86,000 as compared to net interest expense of $1,134,000 during the three
months ended March 31, 1998. We used a significant portion of the cash proceeds
received from the November 1998 sale of the assets of the discontinued Bagcraft
subsidiary to pay off borrowings on our various loan agreements. We have
invested a substantial portion of the remaining net proceeds in interest bearing
cash equivalents.
We were unable to recognize an income tax benefit in connection with the
company's 1999 and 1998 pre-tax losses due to the company's tax loss
carryforwards and the uncertainty of future taxable income.
Discontinued Operations
During the three months ended March 31, 1998, we incurred a loss of $138,000 at
the discontinued Bagcraft subsidiary.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Our cash and cash equivalents decreased $2,436,000 during the three months ended
March 31, 1999. Cash flows used by operating activities of $2,074,000 and cash
flows used by investing activities of $1,652,000 exceeded cash flows from
financing activities of $1,290,000. Operating activities used cash flows to fund
the Company's net loss for the quarter ended March 31, 1999 and to pay
liabilities of the discontinued Bagcraft subsidiary. Investing activities used
cash flows for our investment in and advances to Entrade. Financing activities
provided cash flows from the exercise of stock options and warrants.
Our consolidated working capital decreased to $3,760,000 at March 31, 1999 as
compared to consolidated working capital of $6,813,000 at December 31, 1998. We
used working capital to pay of liabilities of the discontinued Bagcraft
subsidiary and for our investment in and advances to Entrade.
1
<PAGE>
Operating Plan
On February 23, 1999, we entered into a merger agreement with WWWX and Entrade
Inc. ("Entrade", formerly NA Acquisition Corp.), a 90% owned subsidiary of WWWX.
As a result of the merger agreement, we 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, the ARTRA preferred stock shareholders,
which shall include persons who elect to exchange their BCA preferred stock
prior to the merger, will receive shares of Entrade common stock in exchange for
shares of their respective preferred stock issuances. All stock options and
warrants issued by the company and outstanding on the closing date of the Merger
will be converted into Entrade stock options and warrants.
Entrade owns all of the outstanding capital stock of entrade.com, Inc.
("entrade.com") and 25% of the Class A Common Stock of asseTrade.com, Inc.
("asseTrade.com").
entrade.com is an Internet business-to-business e-commerce company seeking to
provide asset disposition solutions for the utility and large industrial
manufacturing sectors. asseTrade.com proposes to develop and implement
comprehensive asset/inventory recovery, disposal, remarketing and management
solutions for corporate clients through advanced Internet electronic business
applications, including on-line auctions.
In connection with the execution of the Merger Agreement, on February 23, 1999,
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 WWWX, 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 19, 1999, Entrade had agreed with Energy Trading Company ("ETCO"), a
wholly owned subsidiary of Peco Energy Company, to issue to ETCO 200,000 shares
of Entrade Common Stock, and to pay ETCO $100,000 in exchange for certain
retained rights ETCO held in the Purchased Assets. Entrade also agreed with both
WWWX and ETCO that it would provide a minimum of $4,000,000 in funding for
entrade.com. Under separate loan agreements, ARTRA agreed to loan Entrade up to
$2,000,000 to fund the $800,000 cash payment to WWWX and to provide funding for
entrade.com until the consummation of the Merger or the earlier termination of
the Merger Agreement. Under the Merger Agreement, the Company agreed to guaranty
the $4,000,000 funding for entrade.com if the Merger is consummated.
Consummation of the merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
The company has adequate funds available to fund its obligations under the
merger agreement and to fund entrade.com's operations for the remainder of 1999.
Capital Expenditures
ARTRA's corporate entity has no material commitments for capital expenditures.
Investment in COMFORCE Corporation
ARTRA, along with its wholly owned Fill-Mor subsidiary, owns a significant
minority interest in COMFORCE Corporation ("COMFORCE"), consisting of 1,525,500
shares or approximately 9% of the outstanding common stock of COMFORCE as of
December 31, 1998 with an aggregate value as of that date of $8,200,000.
The COMFORCE shares constitute unregistered securities under the Securities Act
of 1933 (the "Act"). As a result of ARTRA's former involvement in the operations
and management of COMFORCE, ARTRA was considered an "affiliate" of COMFORCE
under the Act, and because of this, the number of shares that ARTRA could sell
without registration under the Act within any three-month period was limited.
For the reasons set forth below, the Company believes that an exemption from
registration under Rule 144(k) promulgated under the Act is now available to it,
and therefore the limitations under Rule 144 on the number of restricted shares
that ARTRA could sell within any three-month period without registrations are no
longer applicable to it.
2
<PAGE>
There can be no assurance that the Securities and Exchange Commission would
concur with our position. Notwithstanding this, we do not believe that our
ability to sell COMFORCE shares, or eventually to realize on the value of our
COMFORCE shares, will be affected in a material adverse way, although we may not
be able to sell our COMFORCE shares as quickly as we could if we were to use
Rule 144(k), and in any event, an attempt to sell a large number of our COMFORCE
shares over a limited period could be expected to result in a reduction in the
value of such shares.
In January 1996, our Board of Directors approved the sale of 200,000 of ARTRA's
COMFORCE common shares to certain officers, directors and key employees of ARTRA
for non-interest bearing notes totaling $400,000. The notes are collateralized
by the related COMFORCE common shares. Additionally, the noteholders have the
right to put their COMFORCE shares back to ARTRA in full payment of the balance
of their notes. Based upon the preceding factors, we have concluded that, for
reporting purposes, we have effectively sold options to certain officers,
directors and key employees to acquire 200,000 of our COMFORCE common shares.
Accordingly, in January 1996 these 200,000 COMFORCE common shares were removed
from the our portfolio of "Available-for-sale securities" and were classified in
the our condensed consolidated balance sheet as other receivables with an
aggregate value of $400,000, based upon the value of proceeds to be received
upon future exercise of the options. The disposition of these 200,000 COMFORCE
common shares resulted in a gain that was deferred and will not be recognized in
the our financial statements until the options to purchase these 200,000
COMFORCE common shares are exercised. During the first quarter of 1998, options
to acquire 14,000 of these COMFORCE common shares were exercised resulting in a
realized gain of $53,000. At March 31, 1999, options to acquire 55,750 COMFORCE
common shares remained unexercised and were classified in our condensed
consolidated balance sheet as other receivables with an aggregate value of
$112,000, based upon the value of proceeds to be received upon future exercise
of the options.
Redeemable Preferred Stock
As discussed in Note 4 to our condensed consolidated financial statements, we
have outstanding redeemable preferred stock with a carrying value of $2,921,000
at March 31, 1999. Certain redeemable preferred stock issues of the BCA and
Bagcraft subsidiaries are included in liabilities of discontinued operations at
March 31, 1999.
Under the terms of the Merger Agreement with WWWX and Entrade (See Note 2 to our
condensed consolidated financial statements), if approved by the Company's
shareholders, the ARTRA preferred stock shareholders, which shall include
persons who elect to exchange their BCA preferred stock for ARTRA preferred
stock prior to the merger, will receive shares of Entrade Common Stock in
exchange for shares of their respective preferred stock issuances.
Litigation
We are the defendants in various business-related litigation and environmental
matters. See Note 7 to our condensed consolidated financial statements. At March
31, 1999 and December 31, 1998, we had accrued current liabilities of $1,500,000
for potential business-related litigation and environmental liabilities. While
these litigation and environmental matters involve wide ranges of potential
liability, we do not believe the outcome of these matters will have a material
adverse effect on the our financial statements.
Net Operating Loss Carryforwards
At December 31, 1998, we had Federal income tax loss carryforwards of
approximately $10,000,000 expiring principally in 2010 - 2012, available to be
applied against future taxable income, if any. In recent years, we have issued
shares of our common stock to repay various debt obligations, upon exercise of
stock options and warrants, as consideration for acquisitions, to fund working
capital obligations and as consideration for various other transactions. Section
382 of the Internal Revenue Code of 1986 limits a corporation's utilization of
its Federal income tax loss carryforwards when certain changes in the ownership
of a corporation's common stock occurs. In our opinion, we not currently subject
to such limitations regarding the utilization of its Federal income tax loss
carryforwards. Should we continue to issue a significant number of shares of our
common stock, it could trigger a limitation on our ability to utilize our
Federal income tax loss carryforwards.
3
<PAGE>
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in our economy; however, to the
extent permitted by competition, we have generally passed increased costs to our
customers by increasing sales prices over time.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet and measurement of
those instruments at fair value. The statement is effective for fiscal years
beginning after June 15, 1999. We have not determined what impact this standard,
when adopted, will have on the our financial statements.
Year 2000 Compliance
The Year 2000 ("Y2K") issue refers to the inability of many computer programs
and systems to process accurately dates later than December 31, 1999. Unless
these programs are modified to handle the century change, they will likely
interpret the Year 2000 as the year 1900. We anticipate that the Year 2000 Issue
will not have a material adverse effect on our financial position or results of
operations. We have not incurred any significant costs for Y2K compliance to
date and do not expect to incur any significant additional costs to complete
such compliance. Additionally, we believe the technology and internal computer
systems of entrade.com are Y2K compliant.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by the
Registrant since December 31, 1998. The Company's investment in COMFORCE common
stock is subject to liquidity and market price risks.
4
<PAGE>
ARTRA GROUP INCORPORATED
INDEX TO FINANCIAL STATEMENTS
Page
Number
------
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 6
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1999 and March 31, 1998 7
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Three Months Ended March 31, 1999 8
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998 9
Notes to Condensed Consolidated Financial Statements 10
5
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share data)
March 31, December 31,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 9,317 $ 11,753
Restricted cash and equivalents 962 1,045
Available-for-sale securities 5,816 8,200
Other 154 270
-------- --------
Total current assets 16,249 21,268
Other assets:
Advances to NA Acquisition Corp. 967 --
Other 335 --
-------- --------
$ 17,551 $ 21,268
======== ========
LIABILITIES
Current liabilities:
Accrued expenses $ 574 $ 568
Income taxes 1,123 1,854
Common stock put warrants 1,394 1,705
Liabilities of discontinued operations 9,398 10,328
-------- --------
Total current liabilities 12,489 14,455
-------- --------
Commitments and contingencies
Redeemable preferred stock 2,921 2,857
SHAREHOLDERS' EQUITY
Common stock, no par value;
authorized 20,000,000 shares;
issued 8,603,348 shares in 1999
and 8,302,110 shares in 1998 6,453 6,227
Additional paid-in capital 44,409 42,734
Unrealized appreciation of investments 8,536 10,920
Accumulated deficit (55,632) (54,300)
-------- --------
3,766 5,581
Less treasury stock, 437,882 shares, at cost 1,625 1,625
-------- --------
2,141 3,956
-------- --------
$ 17,551 $ 21,268
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1999 1998*
------- -------
<S> <C> <C>
Net sales $ -- $ --
------- -------
Costs and expenses:
Cost of goods sold, exclusive of depreciation and amortization -- --
Selling, general and administrative 1,354 622
------- -------
1,354 622
------- -------
Operating loss (1,354) (622)
------- -------
Other income (expense):
Interest income (expense), net 86 (1,134)
Realized gain on disposal of available-for-sale securities -- 53
Other income (expense), net -- (76)
------- -------
86 (1,157)
------- -------
Loss from continuing operations before income taxes (1,268) (1,779)
Provision for income taxes -- --
------- -------
Loss from continuing operations (1,268) (1,779)
Loss from discontinued operations -- (138)
------- -------
Net loss (1,268) (1,917)
Dividends applicable to redeemable preferred stock (64) (124)
------- -------
Loss applicable to common shares ($1,332) ($2,041)
======= =======
Per share loss applicable to common shares:
Basic
Continuing operations ($ 0.17) ($ 0.24)
Discontinued operations -- (0.02)
------- -------
Net loss ($ 0.17) ($ 0.26)
======= =======
Weighted average number of shares of common stock outstanding 7,965 7,952
======= =======
Diluted
Continuing operations ($ 0.17) ($ 0.24)
Discontinued operations -- (0.02)
------- -------
Net loss ($ 0.17) ($ 0.26)
======= =======
Weighted average number of shares of common stock and
common stock equivalents outstanding 7,965 7,952
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- ---------------------------
* As reclassified for discontinued operations.
7
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Total
Common Stock Additional Other Treasury Stock Shareholders'
------------------ Paid-in Comprehensive Accumulated ----------------- Equity
Shares Dollars Capital Income (Deficit) Shares Dollars (Deficit)
--------- ------- --------- ------------ ------------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 8,302,110 $6,227 $42,734 $10,920 ($54,300) 437,882 ($1,625) $3,956
----------
Comprehensive income (loss):
Net loss - - - (1,268) - - (1,268)
Net decrease in unrealized
appreciation of investments - - - (2,384) - - - (2,384)
----------
Comprehensive income (loss) (3,652)
----------
Other changes in
shareholders' equity:
Exercise of warrants to
purchase common stock 263,841 198 940 - - - - 1,138
Exercise of options to
purchase common stock 37,397 28 124 - - - - 152
Outstanding stock optons - - 300 - - - - 300
Reverse put liability
for warrants exercised - - 311 - - - - 311
Redeemable preferred
stock dividends - - - - (64) - - (64)
----------
Other changes in
shareholders' equity 1,837
----------
--------- ------- ---------- ----------- ----------- ------- ------- ----------
Balance at March 31, 1999 8,603,348 $6,453 $44,409 $8,536 ($55,632) 437,882 ($1,625) $2,141
========= ======= ========== =========== =========== ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
8
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Three Months Ended
---------------------
March 31, March 31,
1999 1998
-------- --------
Net cash flows used by operating activities ($ 2,074) ($ 2,492)
-------- --------
Cash flows from investing activities:
Advances to NA Acqusition Corp. (1,400) --
Decrease in restricted cash 83 --
Additions to property, plant and equipment -- (449)
Proceeds from sale of COMFORCE common stock -- 28
Other (335) --
-------- --------
Net cash flows used by investing activities (1,652) (421)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 1,290 17
Net decrease in short-term debt -- (1,850)
Proceeds from long-term borrowings -- 36,514
Reduction of long-term debt -- (35,788)
Repurchase of common stock previously issued
to pay down short-term notes -- (1,518)
Redeem detachable put warrant -- (400)
Other -- 18
-------- --------
Net cash flows used by financing activities 1,290 (3,007)
-------- --------
Decrease in cash and cash equivalents (2,436) (5,920)
Cash and equivalents, beginning of period 11,753 5,991
-------- --------
Cash and equivalents, end of period $ 9,317 $ 71
======== ========
Supplemental schedule of noncash
investing and financing activities:
ARTRA/BCA redeemable preferred stock
received as payment ofPeter Harvey advances -- 12,787
The accompanying notes are an integral part of the condensed consolidated
financial statements.
9
<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 ("WWWX") providing for the merger of a subsidiary of Entrade
with ARTRA. Entrade, a 90% owned subsidiary of WWWX, owns all of the outstanding
capital stock of entrade.com, Inc. ("entrade.com") and 25% of the Class A Common
Stock of asseTrade.com, Inc. ("asseTrade.com").
entrade.com is an Internet business-to-business electronic commerce
("e-commerce") company seeking to provide asset disposition solutions for the
utility and large industrial manufacturing sectors. asseTrade.com proposes to
develop and implement comprehensive asset/inventory recovery, disposal,
remarketing and management solutions for corporate clients through advanced
Internet electronic business applications, including on-line auctions.
Consummation of the merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's annual report on Form 10-K for the fiscal year ended December 31,
1998, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 31, 1998 was derived from
the audited consolidated financial statements in the Company's annual report on
Form 10-K.
In the opinion of the Company, the accompanying condensed consolidated financial
statements reflect all normal recurring adjustments necessary to present fairly
the financial position as of March 31, 1999, and the results of operations and
changes in cash flows for the three month periods ended March 31, 1999 and March
31, 1998. Reported interim results of operations are based in part on estimates
that may be subject to year-end adjustments. In addition, these quarterly
results of operations are not necessarily indicative of those expected for the
year.
2. CHANGE OF BUSINESS
Entrade Inc.
On February 23, 1999, ARTRA entered into an Agreement and Plan of Merger (the
"Merger Agreement") with WWWX, Entrade, a 90% owned subsidiary of WWWX, 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, the ARTRA preferred stock shareholders, which shall include
persons who elect to exchange their BCA Holdings, Inc. ("BCA", a wholly-owned
subsidiary and parent of Bagcraft) preferred stock prior to the merger, will
receive shares of Entrade Common Stock in exchange for shares of their
respective preferred stock issuances (see Note 4 for a further discussion of
preferred stock issuances). All stock options and warrants issued by the Company
and outstanding on the closing date of the Merger will be converted into Entrade
stock options and warrants. Entrade owns all of the outstanding capital stock of
entrade.com and 25% of the Class A Common Stock of asseTrade.com.
10
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In connection with the execution of the Merger Agreement, on February 23, 1999,
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 WWWX, 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 19, 1999, Entrade had agreed with Energy Trading Company ("ETCO"), a
wholly owned subsidiary of Peco Energy Company, to issue to ETCO 200,000 shares
of Entrade Common Stock, and to pay ETCO $100,000 in exchange for certain
retained rights ETCO held in the Purchased Assets. Entrade also agreed with both
WWWX and ETCO that it would provide a minimum of $4,000,000 in funding for
entrade.com. Under separate loan agreements, ARTRA agreed to loan Entrade up to
$2,000,000 to fund the $800,000 cash payment to WWWX and to provide funding for
entrade.com until the consummation of the Merger or the earlier termination of
the Merger Agreement. Under the Merger Agreement, the Company agreed to guaranty
the $4,000,000 funding for entrade.com if the Merger is consummated.
Consummation of the merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
Bagcraft
Effective August 26, 1998, ARTRA and its wholly-owned BCA subsidiary, the parent
of Bagcraft, agreed to sell the business assets of Bagcraft. Additionally, the
buyer agreed to assume certain Bagcraft liabilities. The disposition of the
Bagcraft business resulted in a net gain of $35,985,000.
The Company's 1998 consolidated financial statements have been reclassified to
report separately the results of operations of Bagcraft. The operating results
(in thousands) for three months ended March 31, 1998 of the discontinued
Bagcraft subsidiary consist of:
Net sales $ 30,839
==========
Earnings from operations before income taxes
and minority interest $ 63
Provision for income taxes (12)
Minority interest (189)
----------
Loss from discontinued operations $ (138)
==========
Liabilities of discontinued operations at March 31, 1999 and December 31, 1998
of $9,398,000 and $10,328,000, respectively, include BCA/Bagcraft redeemable
preferred stock issues (see Note 4), contractual obligations, environmental
matters and other future estimated costs for various discontinued operations.
11
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
3. INVESTMENT IN COMFORCE CORPORATION
At March 31, 1999 ARTRA's investment in COMFORCE Corporation ("COMFORCE"),
1,525,500 shares, currently a common stock ownership interest of approximately
9%, was classified in the Company's condensed consolidated balance sheet in
current assets as "Available-for-sale securities." At March 31, 1999 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $8,536,000. The investment in
COMFORCE common stock, which represents a significant portion of the Company's
assets at March 31, 1999 and December 31, 1998, is subject to liquidity and
market price risks.
In January 1996, the Company's Board of Directors approved the sale of 200,000
of ARTRA's COMFORCE common shares to certain officers, directors and key
employees of ARTRA for non-interest bearing notes totaling $400,000. The notes
are collateralized by the related COMFORCE common shares. Additionally, the
noteholders have the right to put their COMFORCE shares back to ARTRA in full
payment of the balance of their notes. Based upon the preceding factors, the
Company had concluded that, for reporting purposes, it had effectively sold
options to certain officers, directors and key employees to acquire 200,000 of
ARTRA's COMFORCE common shares. Accordingly, in January 1996 these 200,000
COMFORCE common shares were removed from the Company's portfolio of
"Available-for-sale securities" and were classified in the Company's condensed
consolidated balance sheet as other receivables with an aggregate value of
$400,000, based upon the value of proceeds to be received upon future exercise
of the options. The disposition of these 200,000 COMFORCE common shares resulted
in a gain that was deferred and will not be recognized in the Company's
financial statements until the options to purchase these 200,000 COMFORCE common
shares are exercised. During the first quarter of 1998, options to acquire
14,000 of these COMFORCE common shares were exercised resulting in a realized
gain of $53,000. At March 31, 1999, options to acquire 55,750 COMFORCE common
shares remained unexercised and were classified in the Company's condensed
consolidated balance sheet as other current assets with an aggregate value of
$112,000, based upon the value of proceeds to be received upon future exercise
of the options.
4. REDEEMABLE PREFERRED STOCK
ARTRA
In March 1990, ARTRA issued 3,750 shares of $1,000 par value junior
non-convertible payment-in-kind redeemable Series A Preferred Stock with an
estimated fair value of $1,012,000, net of unamortized discount of $2,738,000 as
partial consideration for the acquisition of the discontinued Bagcraft
subsidiary.
At March 31, 1999 and December 31, 1998, 1,849.34 shares of Series A Preferred
Stock were outstanding with carrying values of $2,921,000 and $2,857,000,
respectively, including accumulated dividends, net of unamortized discount of
$205,000 and $239,000, respectively. The Series A Preferred Stock accrues
dividends at the rate of 6% per annum and is redeemable by ARTRA on March 1,
2000 at a price of $1,000 per share plus accrued dividends. Accumulated
dividends of $1,276,000 and $1,246,000 were accrued at March 31, 1999 and
December 31, 1998, respectively.
BCA Holdings/ Bagcraft
During 1992 and 1993, in exchange for cash consideration of $3,675,000, a former
related party received 3,675 shares of BCA Series A preferred stock (6%
cumulative, redeemable preferred stock with a liquidation preference equal to
$1,000 per share). At March 31, 1999 and December 31, 1998, liabilities of
discontinued operations included 1,672.18 BCA Series A redeemable preferred
shares with accumulated dividends of $514,000.
12
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Effective February 15, 1996, BCA, Bagcraft and a former related party entered
into an agreement to exchange certain preferred stock between the Companies. Per
terms of the exchange agreement BCA issued 8,135 shares of BCA Series B
preferred stock (13.5% cumulative, redeemable preferred stock with a liquidation
preference equal to $1,000 per share) to the former related party in exchange
for 41,350 shares of Bagcraft redeemable preferred stock. At March 31, 1999 and
December 31, 1998, liabilities of discontinued operations included 1,675.79 BCA
Series B redeemable preferred shares with accumulated dividends of $650,000.
At March 31, 1999 and December 31, 1998, liabilities of discontinued operations
included 8,650 shares of Bagcraft 13.5% cumulative, redeemable preferred stock
(liquidation preference equal to $100 per share). Accumulated dividends of
$1,315,000 were accrued at March 31, 1999 and December 31, 1998.
On February 23, 1999, ARTRA entered into a Merger Agreement with WWWX and
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 ARTRA preferred stock shareholders,
which shall include persons who elect to exchange their BCA preferred stock for
ARTRA preferred stock prior to the merger, will receive shares of Entrade Common
Stock in exchange for shares of their respective preferred stock issuances.
5. INCOME TAXES
No income tax benefit was recognized in connection with the Company's 1998 and
1997 pre-tax losses due to the Company's tax loss carryforwards and the
uncertainty of future taxable income.
At December 31, 1998, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $10,000,000 expiring principally in 2010 -
2012, available to be applied against future taxable income, if any. In recent
years, the Company has issued shares of its common stock to repay various debt
obligations, upon exercise of stock options and warrants, as consideration for
acquisitions, to fund working capital obligations and as consideration for
various other transactions. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its Federal income tax loss carryforwards
when certain changes in the ownership of a corporation's common stock occurs. In
the opinion of management, the Company is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should the Company continue to issue a significant number of
shares of its common stock, it could trigger a limitation on its ability to
utilize its Federal income tax loss carryforwards.
6. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". Basic earnings (loss) per share is computed by dividing the income
available to common shareholders, net earnings (loss), less redeemable preferred
stock dividends and redeemable common stock accretion, by the weighted average
number of shares of common stock outstanding during each period.
Diluted earnings (loss) per share is computed by dividing the income available
to common shareholders, net earnings (loss), less redeemable preferred stock
dividends and redeemable common stock accretion, by the weighted average number
of shares of common stock and common stock equivalents (stock options and
warrants), unless anti-dilutive, during each period.
13
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Earnings (loss) per share for the three months ended March 31, 1999 and 1998 was
computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------------- ------------------
Basic Diluted Basic Diluted
-------- -------- -------- -------
AVERAGE SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 7,965 7,965 7,952 7,952
Common stock equivalents
(options/warrants) -- -- -- --
======== ======== ======== =======
7,965 7,965 7,952 7,952
======== ======== ======== =======
EARNINGS (LOSS):
Net loss $ (1,268) $ (1,268) $ (1,917) $(1,917)
Dividends applicable to
redeemable preferred stock (64) (64) (124) (124)
======== ======== ======== =======
Loss applicable to common shareholders $ (1,322) $ (1,332) $ (2,041) $(2,041)
======== ======== ======== =======
PER SHARE AMOUNTS:
Net loss applicable to common shares $ (0.17) $ (0.17) $ (0.26) $ (0.26)
======== ======== ======== =======
</TABLE>
7. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At March 31, 1999 and December 31, 1998,
the Company had accrued current liabilities of $1,500,000 for potential
business-related litigation and environmental liabilities. While these
litigation and environmental matters involve wide ranges of potential liability,
management does not believe the outcome of these matters will have a material
adverse effect on the Company's financial statements.
The discontinued Bagcraft subsidiary's Chicago facility has been the subject of
allegations that it violated laws and regulations associated with the Clean Air
Act. The facility has numerous sources of air emissions of volatile organic
materials ("VOMs") associated with its printing operations and was required to
maintain and comply with permits and emissions regulations with regard to each
of these emission sources.
In November of 1995, the EPA issued a Notice of Violation ("NOV") against
Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act
and related regulations. In May 1998 Bagcraft paid $170,000 to formally
extinguish this claim.
In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.
14
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of hazardous substances which were stored, disposed
of or otherwise released at this manufacturing facility. This facility was owned
by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from
1969 to 1980. Sherwin-William's current projection of the cost of clean-up is
approximately $5 to $6 million. The Company has filed counterclaims against
Sherwin-Williams and cross claims against other former owners of the property.
The Company also is vigorously defending this action and has raised numerous
defenses. Currently, the case is in its early stages of discovery and the
Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process. ARTRA entered into a
consent decree with the EPA in which it agreed to pay $85,000 for one phase of
the clean-up costs for this site; however, ARTRA defaulted on its payment
obligation. ARTRA is presently unable to estimate the total potential liability
for clean-up costs at this site, which clean-up is expected to continue for a
number of years. The consent decree, even if it had been honored by ARTRA, was
not intended to release ARTRA from liability for costs associated with other
phases of the clean-up at this site. The Company is presently unable determine
what, if any, additional liability it may incur in this matter.
In recent years, the Company has been a party to certain product liability
claims relating to the former Synkoloid subsidiary. The Company's product
liability insurance has covered all such claims settled to date. As of March 31,
1999, the Company anticipates that its product liability insurance is adequate
to cover any additional pending claims.
Several cases have arisen from ARTRA's purchase of Dutch Boy Paints which owned
a facility in Chicago which it purchased from NL Industries. In a case titled
City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in
the Circuit Court of Cook County, Illinois, the City of Chicago brought a
nuisance action and alleged that ARTRA (and NL Industries, Inc.) had improperly
stored, discarded and disposed of hazardous substances at the Dutch Boy site,
and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up
costs. At the time the suit was filed, the City of Chicago claimed that it would
cost $1,000,000 to remediate the site. The Company is currently negotiating with
the City of Chicago to settle this claim.
ARTRA and NL Industries, Inc. have counter sued each other and have filed third
party actions against the subsequent owners of the property. The Company is
presently unable to determine its liability, if any, in connection with this
case. The parties were conducting discovery but the case was stayed pending the
resolution of the EPA action described below.
On November 17, 1995, the EPA issued letters to ARTRA, NL Industries and others
alleging that they were potentially responsible parties with respect to releases
at the Dutch Boy facility in Chicago and demanding that they remediate the site.
NL Industries entered into a consent decree with EPA in which it agreed to
remediate the site. The Company is presently unable to determine its liability,
if any, in connection with this case.
8. OTHER INFORMATION
On February 23, 1999, the Company entered into three-year employment agreements
with three individuals to manage the Company's entry into the Internet
business-to-business e-commerce and on-line auction business. In connection with
such employment, the three individuals will receive nonqualified stock options
for the purchase of 1,800,000 shares of the Company's Common Stock at an
exercise price of $2.75 per share. The options vest in three equal installments
over a period ending February 18, 2001. During the three months ended March 31,
1999, the Company recognized compensation expense of $300,000 related to these
stock options.
15
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA has fallen below certain of the New York Stock Exchange's quantitative and
other continued listing criteria. Pursuant to the New York Stock Exchange's
request, ARTRA has provided a definitive action plan demonstrating ARTRA's
ability to achieve compliance with the New York Stock Exchange's listing
standards, including the succession of Entrade common stock to such listing
after the merger. Based upon a review of that plan, the New York Stock Exchange
is continuing the listing of ARTRA common stock. ARTRA will be subject to
ongoing quarterly monitoring for compliance with the plan. Failure to meet any
of the quarterly plan projections could result in the suspension from trading
and subsequent delisting of ARTRA common stock. ARTRA's plan is dependent upon
consummation of the merger during the third quarter of 1999. If the merger is
not consummated, ARTRA may not be able to satisfy the listing requirements of
the New York Stock Exchange, and ARTRA common stock may be delisted from the New
York Stock Exchange.
9. SUBSEQUENT EVENTS
On April 19, 1999, ARTRA entered into a letter of intent to purchase all of the
issued and outstanding common stock of Public Liquidations Systems, Inc. and
Asset Liquidation Group, Inc., d/b/a as Nationwide Auction Systems Corp. The
purchase price shall consist of cash of $10,800,000 payable at closing,
1,570,000 shares of ARTRA common stock and a $14,000,000 note, subject to
adjustment, payable over a two year period subsequent to the closing of the
transaction. Consummation of the transaction is subject to certain conditions,
including performance of the buyer's and seller's due diligence and negotiation
of a definitive asset purchase agreement. The letter of intent, as extended,
expires on June 1, 1999. This potential acquisition is not as yet deemed
probable as no assurance can be given that the parties will complete their due
diligence or enter into a definitive agreement by that date.
During April 1999, warrants were exercised to purchase approximately 560,000
shares of ARTRA common stock, resulting in proceeds to the Company of
approximately $2,400,000. These warrants were issued principally as additional
compensation for various short-terms loans, all of which were repaid before the
end of 1998.
16
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as
of March 31, 1999 presents the financial position of Entrade as if the proposed
merger of ARTRA with a subsidiary of Entrade and the exchange of ARTRA common
stock and ARTRA preferred stock for Entrade common stock had been approved by
ARTRA's shareholders and was effective as of March 31, 1999. The Company expects
to complete the transaction during the third quarter of 1999.
ENTRADE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 1999
(Unaudited in Thousands)
<TABLE>
<CAPTION>
ARTRA Pro Forma
Historical Entrade Inc Adjustments Pro Forma
--------------- --------------- ---------------- ----------------
CURRENT ASSETS
<S> <C> <C> <C>
Cash and equivalents $9,317 $167 $9,484
Restricted cash and equivalents 962 962
Available-for-sale securities 5,816 5,816
Other 154 19 173
--------------- --------------- ----------------
Total current assets 16,249 186 16,435
--------------- --------------- ----------------
Advances to Entrade Inc. 967 $(1,400)(A) -
433 (B)
Property,plant & equipment, net 294 294
Intangibles, net 2,998 4,625 (C) 8,623
1.000 (E)
Investment in asseTrade.com 3,500 3,500
Other 335 335
--------------- --------------- ---------------- ----------------
$17,551 $6,978 $4,658 $29,187
=============== =============== ================ ================
CURRENT LIABILITIES
Accrued liabilities 574 8 506 (E) 1,088
Common stock put warrants 1,394 1,394
Accounts payable, including amounts
due related parties 339 339
Income taxes payable 1,123 1,123
Note payable 500 500
Due to ARTRA 1,400 (1,400)(A) -
Liabilities of discontinued operations 9,398 (3,933)(D) 5,465
--------------- --------------- ----------------
12,489 2,247 9,909
--------------- --------------- ----------------
Redeemable preferred stock 2,921 (2,921)(D) -
Shareholders' Equity 2,141 4,731 433 (B) 19,278
4,625 (C)
6,854 (D)
494 (E)
--------------- --------------- ---------------- ----------------
$17,551 $6,978 $4,658 $29,187
=============== =============== ================ ================
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 ARTRA common shares issued as consideration
for the Entrade Inc. transaction, net.
Number of ARTRA common shares to be issued 2,000
Market value at February 23, 1999
(less 15% blockage discount) $4.940625
---------
Fair market value of ARTRA 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.
(E) Record finder's fee (100,000 Entrade Inc. common shares valued at $4.94 per
share) and other acquisition related costs.
</FN>
</TABLE>
17
<PAGE>
The following unaudited pro forma condensed combined statement of
operations for the three months ended March 31, 1999 is presented as if the
proposed merger of ARTRA with a subsidiary of Entrade and the exchange of ARTRA
common stock and ARTRA preferred stock for Entrade common stock had been
approved by ARTRA's shareholders and was effective as of January 1, 1999. The
Company expects to complete the transaction during the third quarter of
1999.Entrade Inc. had no operations and no revenues related to the assets
acquired. asseTrade had no operations and no revenues when the 25% interest was
acquired by Entrade. Accordingly, no pro forma results of operations are
presented for the three months ended March 31, 1998 and the twelve months ended
December 31, 1998 as in the opinion of management such information would not be
meaningful.
ENTRADE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited in Thousands)
<TABLE>
<CAPTION>
ARTRA Pro Forma
Historical Entrade Inc Adjustments Pro Forma
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ - $13 $13
---------------- --------------- ----------------
Costs and expenses:
Selling, general and administrative 1,354 376 $600 (A) 2,330
Depreciation and amortization 162 300 (B) 462
---------------- --------------- ----------------
1,354 538 2,792
---------------- --------------- ----------------
Operating loss (1,354) (525) (2,779)
---------------- --------------- ----------------
Other income (expense):
Interest income, net 86 86
---------------- --------------- ----------------
86 - 86
---------------- --------------- ----------------
Loss from continuing operations before income taxes (1,268) (525) (2,693)
Provision for income taxes - -
---------------- --------------- ---------------- ----------------
Loss from continuing operations ($1,268) (525) $900 ($2,693)
================ =============== ================ ================
Per share loss from continuing operations
applicable to common shares:
Basic ($0.17) ($0.24)
========== ==========
Diluted ($0.17) ($0.24)
========== ==========
Weighted average number of shares
of common stock outstanding:
Basic 7,965 11,400
========== ==========
Diluted 7,965 11,400
========== ==========
Notes to the pro forma condensed combined statement of operations:
<FN>
(A) Reflect compensation charge for stock options granted to individuals
employed by ARTRA to manage Entrade's entry into the Internet business
e-commerce and on-line auction business.
(B) Additional amortization of intangible assets, assumes a 5 year life.
(C) Pro form weighted average shares outstanding
Historical 7,965
Shares issed for Entrade Inc. transaction 2,000
Finder's fee for Entrade Inc. transaction 100
ARTRA common shares exchanged for
ARTRA preferred shares 1,335
----------
11,400
==========
</FN>
</TABLE>
18
<PAGE>
Entrade Inc. and subsidiary
(formerly NA Acquisition Corp.)
CONSOLIDATED BALANCE SHEET
FEBRUARY 23, 1999
<PAGE>
Entrade Inc. and subsidiary
Index to Financial Statements
Page
Report of Independent Accountants 20
Consolidated Balance Sheet as of February 23, 1999 21
Notes to Consolidated Balance Sheet 22
19
<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
20
<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.
21
<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.
22
<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.
23
<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.
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RISK FACTORS
This Prospectus Supplement contains certain forward-looking statements
that involve risks and uncertainties. These statements relate to future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "expects," "believes," "anticipates," "intends,"
"plans" and similar expressions. Actual results could differ materially from
those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this Prospectus Supplement.
As discussed in Note 2 the Company's condensed consolidated financial
statements for the quarter ended March 31, 1999, on February 23, 1999, ARTRA
entered into an agreement with Entrade Inc. ("Entrade", formerly NA Acquisition
Corp.) and WorldWide Web NetworX Corporation ("WWWX") providing for the merger
of a subsidiary of Entrade with ARTRA. Entrade, a 90% owned subsidiary of WWWX,
owns all of the outstanding capital stock of entrade.com, Inc. ("entrade.com")
and 25% of the Class A Common Stock of asseTrade.com, Inc. ("asseTrade.com").
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:
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.
In addition, our revenue model is evolving. Initially, our revenues will be
primarily generated from technology license fees, transaction fees from our
asset disposi tion business community sites, transaction fees associated with
on-line auctions and other listing, maintenance and service fees. Our principal
initial targeted markets will be the utilities industry and large industrial
manufacturing sectors. In the future, we expect to generate revenue from
multiple sources, including e-commerce transaction fees and business services.
We may not be able to successfully create industry-specific on-line business
communities that will generate significant license and transaction fees. If we
do not generate such revenue, our business, financial condition and operating
results will be materially adversely affected.
We anticipate we will incur continued losses for the foreseeable
future.
Our lack of any operating history makes predicting our future operating
results, including operating expenses, difficult. Our revenues may not grow. To
date, we have not generated revenues and have not been profitable. We may never
be profitable or, if we become profitable, we may be unable to sustain
profitability. We expect to incur significant losses for the foreseeable future.
Some of our expenses are or will be fixed, including non-cancelable
agreements, equip ment 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. In addition, we plan to increase our operating expenses to:
o launch industry-specific on-line business communities;
o increase our sales and marketing operations;
o broaden our customer support and operating software capabilities;
and
o pursue strategic marketing and distribution alliances.
Expenses may also increase due to the potential impact of goodwill and
other charges resulting from any future acquisitions.
We may need to seek future funding sources.
We believe that the license fee revenues and other funding by Artra of
Entrade's operations after the merger will enable Entrade to maintain its
planned operations through 1999. No assurance exists that we will attain
profitability. If revenues from entrade.com's operations are less than
anticipated in 1999 and 2000, funds may have to be raised from additional
financings. We have no commitments for any financing other than from Artra, and
any financing commit ments may result in dilution to our existing shareholders
after the merger. 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.
Fluctuations in our quarterly results may adversely affect our stock
price.
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It is probable that our quarterly operating results will fluctuate
significantly due to many factors, including:
o the uncertain adoption of the Internet as a commercial medium;
o potential dependence on the general development of the e-commerce
market;
o reluctance of corporate information technology groups to
transition from existing internal corporate computer networks to
Internet-based e-commerce systems;
o the pace of deregulation in the utility industry;
o uncertainties relating to the pace of consolidation within the
electric utility industry;
o the effect of deregulation and industry consolidation on the
decision-making processes of management within the utility
industry relating to capital expenditures and client acquisition;
o market competition;
o management of our growth; and
o risks associated with potential acquisitions.
Many of these factors are beyond our control. If our operating results
in one or more quarters do not meet the securities analysts' or your
expectations, the price of Entrade common stock could be materially adversely
affected.
We intend to rely heavily on revenues from the utilities and large
industrial manufac turing sectors, and if these revenues decline our
business would be adversely affected.
We intend to rely on revenues generated from technology licenses fees,
transaction fees from our asset disposition business community sites,
transaction fees associated with on-line auctions and other listing, maintenance
and service fees. Our principal initial targeted markets will be the utility
industry and large industrial manufacturing sectors. Our ability to increase our
revenues may depend, among other things on many factors, including:
o the development of a large base of global buyers and sellers of
assets through our industry-specific on-line business communities;
o the acceptance by utilities and large industrial manufacturing
sectors of the Internet as a legitimate medium for asset transfers
and distribution;
o uncertain acceptance of our e-commerce related methodologies and
service applications by internal corporate information technology
groups;
o the transition of traditional methodologies based on internal
corporate computer networks to Internet-based e-commerce systems;
o the acceptance of our fee structures within the utility industry;
and
o current and future competitors offering similar services.
We may not develop additional revenue sources.
If we do not generate increased revenue from on-line business
communities, our business, financial condition and operating results could be
materially adversely affected. We plan to generate revenues through revenue
sharing relationships with strategic marketing partners with whom we form
industry-specific business communities. To generate significant revenues from
Internet business-to-business e-commerce, we will have to continue to build
these relationships.
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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 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 business
communities to Internet search engines and web sites. The success of these
relationships depends on the amount of increased traffic we receive from the
alliance partners' web sites. These arrangements may not generate the expected
number of new customers. We also cannot assure you that we will be able to renew
these marketing and distribution alliance agreements. If any of these agreements
are terminated, the traffic on on-line business communities could decrease. We
plan to enter into partnerships with strategic industry-related partners to
build industry-specific business communities in addition to our primary initial
focus on the utility and large manufacturing sectors, but we cannot assure you
that we will be able to enter into any new partnerships.
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 tradi tional 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, and competitors can launch new Web sites at a
relatively low cost. We expect that additional compa nies will offer competing
on-line business communities on a stand-alone or portfolio basis.
Currently, a number of software developers specialize in transaction
software. These software developers, however, do not specifically focus on
either asset recovery applications or our target industrial and utility markets.
Other companies offer asset recovery services and/or asset evaluation and
auction systems. Most of these groups, however, either specialize in certain
industries that we currently do not target or focus on our target markets but
have neither Internet- based e-commerce transaction technologies nor on-line
auction capabilities. Other competitors operate e-commerce transaction and
auction technologies through the Internet, but do not, for the most part,
concentrate on asset recovery services and/or large industrial groups. The
current focus of these groups is principally the business-to-consumer retail
market.
A few groups provide asset recovery for the utility industry. Most
notably, the National Materials Logistic Group, a membership of nuclear
generation facilities, contracts to provide parts and equipment, listing
available assets for sale by and on behalf of member utilities through a
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listing service called RAPID. That group specializes in nuclear generation
equipment rather than the broad spectrum of energy generation assets. Similarly,
a few auction groups offer a strong off-line presence and fulfillment
capabilities with large industrial companies.
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 industry leaders
in specific industry sectors will create other niche business-to-business
services that may compete with our services.
Other competitors may develop Internet products or services that are
superior to, or have greater market acceptance than, our solutions. If we are
unable to compete successfully against our competitors, our business, financial
condition and operating results will be adversely affected.
Some of our competitors have greater financial, marketing and other
resources than ours. Also, other established e-commerce companies with greater
financial, marketing and other resources that currently do not provide on-line
business-to business may decide to add this type of service and compete with us
in the future. This may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances, strategic partnerships
and other initiatives.
We may not be able to protect our proprietary rights and we may
infringe the propri etary rights of others.
Proprietary rights are important to our success and our competitive
position. Our ORBIT System has been federally registered as a 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. Generally, our domain names for our on-line industry-specific business
communities may not be protectible as trademarks because those names may be
deemed descriptive or generic. 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 potential customers to become
confused between us and our services and our competitors and their services.
This confusion may result in the diversion of business to our competitors. Also,
to the extent these competitors have problems with the quality of their
services, our reputation for quality may be injured.
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. We have not
conducted searches to determine if our service marks,
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trademarks and similar items may infringe on the rights of third parties. If
third parties success fully assert claims of trademark, service mark or other
infringement, we may be required 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 customers
to be unable to locate us or not connect our new names and marks with our prior
names and marks, resulting in loss of business.
While our software, text, designs and other works of authorship are
protected by copy right, it is not possible to detect all possible
infringements. Also, copyright protection does not extend to functional features
of software, and so will not be effective to prevent third parties from reverse
engineering the functionality of our software. Our business strategy includes
granting access to the source code for our software to certain licensees;
whenever access to source code is granted, the difficulty associated with
improperly using and modifying software is lessened.
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 third parties, we may be required to pay royalties for
past use and for continued use, or to modify or replace the software to avoid
infringement. There can be no assurance that we would be able to modify or
replace the software. In addition, effective copyright and trademark protection
may be unenforce able or limited in certain countries, and the global nature of
the Internet makes it impossible to control the ultimate destination of our
work. We also license content from third parties and it is possible that we
could become subject to infringement actions based upon the content licensed
from those third parties. We generally obtain representations as to the origin
and ownership of such licensed content; however, this may not adequately protect
us. Any of these claims, with or without merit, could subject us to costly
litigation and the diversion of our technical and management personnel.
Our technology rights constitute ownership of copyrights and trade
secrets embodied in certain unique portions of the software now known as the
ORBIT System software and a license, substantially exclusive, to certain other
components of that software. We are now developing a new version of the ORBIT
System software. We have entered into a contract with a software developer
pursuant to which we are to obtain all rights in the software created by the
developer. While we attempt to determine that the developer is taking
appropriate steps to remain in compli ance with this agreement, there can be no
assurance that the developer will do so.
We may not be able to acquire or maintain effective web addresses.
We currently hold various Internet web addresses relating to our
services and products. These web addresses include entrade.com and
utiliparts.com as well as asseTrade.com through our interest in asseTrade.com.
We may not be able to prevent third parties from acquiring web addresses that
are similar to our addresses, which could materially adversely affect our
business, financial condition and operating results. The acquisition and
maintenance of web addresses generally is regulated by governmental agencies and
their designees. For example, in the United
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States, the National Science Foundation has appointed Network Solutions, Inc. as
the exclusive registrar for the ".com," ".net" and ".org" generic top-level
addresses. 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 brand names and marketing strategy. Furthermore, the
relationship between regulations governing such addresses and laws protecting
trademarks is unclear.
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 such risks:
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 comput ers with academic institutions'
computers, the Internet was historically administered by organiza tions 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 administra tion of the Internet
infrastructure and the legal uncertainties that may follow, pose risks to the
commercial Internet industry and could have a material adverse effect on our
business, financial condition and operating results. 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. These organizations may find that achieving a consensus may become
difficult, impossible, time-consuming and costly. As a result, the following
risks would have a material adverse effect on our business, financial condition
and operating results:
o uncertainty as to the legality of any action we may take, making
business planning and operations difficult;
o the taking of harmful or disruptive actions with respect to the
Internet by other organi zations and individuals;
o a disruption of Internet administration, effective operations and
maintenance, including the inability of users to communicate with
other users or otherwise use the Internet; and
o a delay in infrastructure improvements necessary to the
maintenance and expansion of the Internet.
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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 our business being subject to direct
regulation by the Federal Communications Commission or other United States
regulatory agencies. Additionally, as Internet use becomes more internationally
widespread, there is an increased likelihood of international regulation. We
cannot predict whether or to what extent any such new regulation will occur;
however, such regulation could have a material adverse effect on our business,
financial condition and operating results. For example, costs incurred and
decisions rendered as a result of the enactment of new laws or adoption of new
regulations, or investigations and lawsuits based upon new laws or regulations
could have a material adverse effect on our business, financial condition and
operating results.
Our business depends on the growth of the Internet, which is uncertain.
Our market is new and rapidly evolving. Our business would be adversely
affected if Internet usage does not continue to grow. Internet usage may be
inhibited by a number of reasons, such as:
o infrastructure;
o security concerns;
o inconsistent quality of service; and
o lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline. In addition, web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our on-line
business communi ties, could be adversely affected.
Adoption of the Internet as a medium for utilities and large
manufacturing industry asset trading and distribution is uncertain.
The growth of the Internet as a service and solutions provider for
trading and distribution of assets in the utilities and large manufacturing
sectors requires validation of the Internet as an effective medium for this
purpose. This validation has yet to fully occur. Acceptance of the Internet
among utilities and large manufacturing industry managers will also depend on
growth in the virtual business use of the Internet. If widespread virtual
business use of the Internet for those sectors does not develop, or if the
Internet does not develop as an effective and measurable medium for such
services, our business, financial condition and operating results could be
materially adversely affected. For example, critical issues concerning use of
the Internet including
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security, reliability, cost, ease of use and quality of service remain
unresolved and may affect the growth of and the degree to which business is
conducted over the Internet.
No standards have been widely accepted to measure the effectiveness of
Internet business solutions. If such standards do not develop, managers may not
use the Internet and or may be reluctant to do so. Our business, financial
condition and operating results would be adversely affected if the market for
Internet asset trading and distribution for these sectors fails to develop or
develops slower than expected.
Our long-term success depends on the development of the on-line
business market which is uncertain.
If Internet business-to-business electronic business commerce does not
grow or grows slower than expected, our business will suffer. Our long-term
success depends on widespread market acceptance of electronic business commerce
within the utilities and large manufacturing sectors.
A number of factors could prevent such acceptance, including the
following:
o Internet business-to-business e-commerce is at an early stage and
managers may be unwilling to shift their purchasing from
traditional vendors to online vendors;
o the necessary network infrastructure for substantial growth in
usage of Internet may not be adequately developed;
o increased government regulation or taxation may adversely affect
the viability of electronic business commerce;
o insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response
times; and
o adverse publicity and industry concern about the security of
electronic commerce transactions could discourage its acceptance
and growth.
Additionally, 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 business, financial condition and operating results would be
materially adversely affected.
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, such as business and supply
requirements, credit card numbers and other forms of
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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 there may be additional
legal exposure to us. We intend to include basic security features in some of
our products and services to protect the privacy and integrity of customer data,
such as password requirements for access to portions of our on-line business
communities. We currently use authentication technology, which requires
passwords and other information to prevent unauthorized persons from accessing a
customer's information, or encryption, which transforms information into a
"code" designed to be unreadable by third parties, to protect confidential
information.
Despite the measures we have taken, 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. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as electronic commerce becomes more prevalent, our
customers will become more concerned about security. If we do not ade quately
address these concerns, this could materially adversely affect our business,
financial condition and operating results.
Our computers and telecommunications equipment are maintained by a
third party server hosting company. Any system interruptions that cause our
on-line business communities to be unavailable to web browsers may reduce their
attractiveness to customers and potential customers and could materially
adversely affect our business, financial condition and operating results. If the
server hosting company does not reasonably maintain these computers and
telecommunications equipment in effective working order and reasonably protect
these systems against the following interruptions, our business, financial
condition and operating results could be materially adversely affected:
o fire;
o natural disaster;
o sabotage;
o power loss;
o telecommunication failure; and
o human error or other disruptive events.
We may be subject to legal liability for publishing or distributing
content over the Internet.
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We may be subject to legal claims relating to the content in
industry-specific on-line business communities, or the downloading and
distribution of such 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. In
addition, some of the content provided in our on-line business communities is
drawn 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. Our business, financial condition and operating
results could suffer a material adverse effect if costs resulting from these
claims are not covered by our insurance or exceed our coverage.
Capacity constraints on our technology, transaction processing system
and network hardware and software may be difficult to project.
As traffic in our industry-specific on-line business communities
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 business communities. 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 business
communities. If we do not appropriately upgrade our systems, network hardware
and software, our business, financial condition and operating results will be
materially adversely affected.
Our market is characterized by rapid technological change.
Our market is characterized by rapid technological change and frequent
new product announcements. To be successful, we must adapt to the changing
market by continually improv ing the responsiveness, services and features of
our on-line, industry-specific business communi ties and by developing new
features to meet customer needs. Our existing technology, transaction processing
systems and network software are currently being upgraded for proprietary
reasons and to address the evolving needs of our clients. While we believe these
upgrades will be effective, there can be no assurance that significant
technological changes will not render our technology obsolete. If we are unable
to successfully respond to these developments or do not respond in a
cost-effective way, our business, financial condition and operating results will
be materially adversely affected.
Effectively managing our growth may be difficult.
We expect to grow rapidly both by adding new products and hiring new
employees. This growth is likely to place a significant strain on our resources
and systems. To manage our growth, we must implement systems and train and
manage our employees. Many of our senior management have only recently joined
us. We cannot assure you that our management will be able to effectively or
successfully manage our growth.
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Acquisitions 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 management and other resources and make it difficult
to maintain our standards, controls and procedures;
o we may acquire companies 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 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.
We may not be able to consummate future acquisitions.
Regardless of whether we can identify acceptable acquisition
candidates, we may not be able to consummate future acquisitions for other
reasons such as the availability of capital. If we are unable to consummate
future acquisitions, our business, financial condition and operating results
could be adversely affected.
Our success is dependent on our key personnel.
We believe that our success will depend on continued employment of our
senior manage ment team and key technical personnel. If one or more members of
our senior management team were unable or unwilling to continue in their present
positions, our business, financial condition and operating results could be
materially adversely affected. Most of our senior management have employment
agreements with Artra, which will be assumed by Entrade upon consummation of the
merger, and there can be no assurance of continued employment of such persons
after the terms of these agreements expire.
Our success also depends on having a highly trained sales force and
telesales group. Our telesales group is being formed. We will need to continue
to hire additional personnel as our business grows. A shortage in the number of
trained salespeople could limit our ability to increase sales in our on-line
business communities and to sell services as we launch these on-line business
communities.
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We plan to expand our employee base to manage our anticipated growth.
Competition for personnel, particularly for employees with technical expertise,
is intense. Our business, financial condition and operating results will be
materially adversely affected if we cannot hire and retain suitable personnel.
Our systems may not be Year 2000 compliant.
We believe that our ORBIT System technology and our internal computer
systems are Year 2000 compliant. We may realize exposure and risk, however, if
the systems on which we are dependent to conduct our operations are not Year
2000 compliant. We are in the process of confirming Year 2000 compliance by our
third party service providers. 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 such
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 web sites may become unavailable.
The interests of our controlling shareholders after the merger may
conflict with our interests and the interests of our other
shareholders.
As a result of its stock ownership, WWWX may be in a position to affect
significantly our corporate actions such as mergers or takeover attempts in a
manner that could conflict with the interests of our public shareholders. WWWX
will own 1,800,000 shares or approximately 14.8% of the outstanding shares of
Entrade common stock after the merger. Principals of WWWX also hold stock
options to purchase an aggregate of 1,600,000 shares of Artra common stock.
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.
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, which would adversely affect our financial position and operations.
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Shares eligible for future sales by our current shareholders may
adversely affect our stock price.
If our shareholders sell substantial amounts of Entrade common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market following the merger, then the market price of our common
stock could fall. 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 be assuming from Artra in the merger. After such
registration state ments 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 will be required to 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 such change in control would be beneficial to
shareholders. 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 difficult for a third party to acquire us.
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 such volatility. The
trading prices of many technology and Internet-related companies' stocks have
reached historical highs within the last 52 weeks and have reflected relative
valuations substantially above historical levels. During the same period, such
companies' stocks have also been highly volatile and have recorded lows well
below such 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 such 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;
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o conditions or trends in the utilities and large manufacturing
industry sectors;
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 partner ships or joint ventures;
o changes in capital commitments;
o additions or departures of key personnel; and
o sales of Entrade common stock.
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 has fallen below certain of the New York Stock Exchange's
quantitative and other continued listing criteria. Pursuant to the New York
Stock Exchange's request, Artra has provided a definitive action plan
demonstrating Artra's ability to achieve compliance with the New York Stock
Exchange's listing standards, including the succession of Entrade common stock
to such listing after the merger. Based upon a review of that plan, the New York
Stock Exchange is continuing the listing of Artra common stock. Artra 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 consummation of the merger during the third quarter of 1999. If
the merger is not consummated, Artra may not be able to satisfy the listing
requirements of the New York Stock Exchange, and Artra common stock may be
delisted from the New York Stock Exchange.
Artra's potential environmental liabilities and other potential
liabilities from other claims may result in future costs to Artra that
are difficult to estimate.
Certain of the former operations of Artra and its subsidiaries have
been subject to require ments imposed under certain 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 ("CERCLA")
and the Occupational Safety and Health Act and comparable state laws, relating
to
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waste water discharges, air emissions, solid waste management and disposal
practices, work place safety and real property use and ownership. 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 Corporation of
America. Artra has provided accruals for certain of 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 such activities if
undertaken. See "Information About Artra -- Legal Proceedings" on page __.
In recent years, Artra has been a party to certain product liability
claims relating to the former The Synkoloid Company subsidiary. Artra's product
liability insurance has covered all such claims settled or adjudicated to date.
Artra currently anticipates that its product liability insurance is adequate to
cover any additional pending claims. If claims exceed the insurance coverage,
however, Artra's financial position could be materially and adversely affected.
Artra preferred stock may impact Artra's ability to obtain additional
financing in the future.
Artra has significant indebtedness, liabilities and obligations arising
from certain outstand ing issues of redeemable Artra preferred stock of Artra
and its subsidiaries. The Artra preferred stock, however, will be converted into
Entrade common stock upon consummation of the merger. The degree to which Artra
is encumbered could have important consequences if the merger is not
consummated, including Artra's ability to obtain additional financing in the
future for working capital, capital expenditures, product development,
acquisitions and general corporate purposes.
Merger-Related Risk Factors
Difficulties of integrating the new holding company structure after the
merger could direct management's attention from operating the new
business.
The anticipated benefits of the proposed merger will depend in part on
the integration of the new operating business of Entrade into the new holding
company structure in which Entrade will be the holding company for Artra,
entrade.com and 25% of the outstanding voting common stock of asseTrade.com. If
serious difficulties are encountered during this integration, manage ment will
have to divert its attention to address these issues, which could have an
adverse effect on Entrade's consolidated operations and financial condition.
Also, because Entrade currently has a minority interest in asseTrade.com,
Entrade will not have the power to direct the management of asseTrade.com which
could adversely impact the ability of Entrade to integrate the new operating
business into the holding company structure.
Substantial expenses resulting from the merger may affect quarterly
results for the quarter in which the merger is consummated.
Artra and Entrade estimate that they will incur aggregate pre-tax costs
of approximately $600,000 associated with the merger and related transactions.
These costs and expenses will affect results of operations in the quarter in
which the merger is consummated.
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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
June 10, 1999
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