UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 23, 1999
ENTRADE INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 1-15303 52-2153008
--------------------------- ---------- -----------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
500 Central Avenue, Northfield, Illinois 60093
- ---------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 441-6650
521 Fellowship Road
Mount Laurel, New Jersey 08054
-----------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
- ------- -------------------------------------
On September 23, 1999, the merger (the "Merger") of a wholly owned
subsidiary of Entrade Inc. ("Entrade") with and into Artra Group Incorporated
("Artra") was completed. As a result of the Merger, Artra has become a wholly
owned subsidiary of Entrade, and Entrade's Common Stock became listed and
commenced trading on the New York Stock Exchange under the symbol "ETA" on
September 24, 1999.
As a result of the Merger, each share of Artra Common Stock was
converted and exchanged into one share of Entrade Common Stock, and each share
of Artra Series A Preferred Stock was converted and exchanged into 329 shares of
Entrade Common Stock. Therefore, upon consummation of the Merger, the former
Artra shareholders became the holders of approximately 83% of the outstanding
shares of Entrade Common Stock. Entrade's existing shareholders prior to the
Merger, WorldWide Web NetworX Corporation ("WorldWide") and Energy Trading
Company, continued to hold 1,800,000 shares and 200,000 shares of Entrade Common
Stock, respectively, upon consummation of the Merger.
Entrade is the parent company of entrade.com and Artra. Entrade also
holds an equity interest of the Class A Common Stock of asseTrade.com, Inc.
("asseTrade.com") as described in the following paragraph.
In September 1999, asseTrade.com entered into an agreement with an
investor providing for an initial purchase of shares of assTrade.com Series A
Preferred Stock. Upon completion of the transaction, subject to certain
performance criteria on the part of asseTrade.com, the investor will purchase
additional shares of asseTrade.com Series A Preferred Stock. Upon completion of
the transaction and assuming the conversion of the asseTrade.com Series A
Preferred Stock, the investor will hold a 31.1% interest in the Class A Common
Stock of asseTrade.com and Entrade's interest in the Class A Common Stock will
be approximatley 17.5%, or 14.65% on a fully diluted basis.
entrade.com provides business-to-business technologies and related
services to facilitate the purchase and sale of clients' products and services,
including inventory, equipment and other assets. entrade.com creates and manages
industry-specific websites or "vertical portals" for marketing, sales and
procurement of products and services. entrade.com generates commissions based
upon these transactions as well as license fees for its software. entrade.com is
directing its initial marketing efforts to utilities through its utiliparts.com
operating unit and the heavy equipment industry through its strategic alliance
with asseTrade.com.
Determination of Exchange Ratios
In determining the one-to-one exchange ratio of Entrade Common Stock
for Artra Common Stock, the Artra board of directors considered the Merger
transaction as though it would first be creating a mirror-image holding company
that would then acquire the Entrade business and assets. Under this analysis,
holders of Artra Common Stock would receive the number of shares of the common
stock of the new holding company equal to the number of shares of Artra Common
Stock held by them, and the holding company would then issue shares of holding
company common stock to WorldWide and Energy Trading Company based upon the
value of the business and assets of Entrade that were acquired by the holding
company at the time the parties entered into the merger agreement.
The value of the business and assets of Entrade to be acquired was
determined by arms-length negotiations among the parties to the merger
agreement. These included a series of discussions between Robert Kohn and Peter
Harvey during December 1998 and January 1999 and considerations by the Artra
board of directors during February 1999.
The Artra board of directors recognized the difficulty of valuing a
business with no operating history and that there is no conventional manner in
which to value a new Internet company. It considered, however, the anticipated
value of the Entrade business on an ongoing basis based upon the experience of
the members of Entrade's management team and the potential for revenue growth of
utiliparts.com and entrade.com's business-to-business e-commerce Internet
solutions.
<PAGE>
Based upon these considerations, the Artra board of directors
determined that Entrade's assets and business had a relative value of
approximately 20% of Artra's value as a separate entity. Therefore, based upon
these relative values, the board determined that the issuance to WorldWide and
Energy Trading Company of an aggregate of 2,000,000 shares of the holding
company would be appropriate. In making this determination, the Artra board of
directors also considered that the relative dilution of approximately 17% to
Artra's existing shareholders provided by this structure would not result in a
change of control. Furthermore, the issuance of shares rather than cash would
enable the application of Artra's cash resources to the working capital
development of the Entrade business rather than as cash compensation to the
sellers.
The Artra board of directors determined the exchange rate of 329 shares
of Entrade Common Stock for each share of Artra preferred stock as follows: the
Artra board of directors had approved a proposed issuance of 1,500,000 shares of
Artra Common Stock for all shares of Artra preferred stock and all outstanding
shares of preferred stock issued by Artra's subsidiaries on January 6, 1999. The
exchange ratio was based upon a formula using the total principal and
accumulated dividends on those shares of preferred stock and the then market
price per share of Artra Common Stock. The Artra board of directors determined
to fix this exchange ratio at that time notwithstanding any future accumulations
of dividends on the preferred shares after February 28, 1999.
The Artra shareholders approved the merger agreement and the Merger at
its Annual Meeting on September 22, 1999.
Related Agreements
Concurrently with the execution of the merger agreement in February
1999, Entrade acquired intellectual property necessary for the conduct of
entrade.com's e-commerce business and its interest in the voting common stock of
asseTrade.com from WorldWide in exchange for 1,800,000 shares of Entrade Common
Stock, $800,000 in cash and a note for $500,000. Entrade paid the $500,000 due
to WorldWide under that note upon the closing of the Merger. The cash portion of
the consideration was provided by Artra.
Pursuant to an agreement dated February 16, 1999 with Energy Trading
Company, a wholly owned subsidiary of PECO Energy, Entrade issued to Energy
Trading Company 200,000 shares of Entrade Common Stock, and upon closing of the
Merger paid Energy Trading Company $100,000 in exchange for retained rights
Energy Trading Company held in entrade.com's e-commerce business. The cash
portion of the consideration was provided by Artra.
Interests of Artra Officers and Directors
After the closing of the Merger, the directors of Artra and most of the
officers of Artra became directors and officers of Entrade.
Entrade assumed options and warrants to purchase shares of Common Stock
held by officers and directors of Artra upon closing of the Merger.
Also, Artra officers and directors held an aggregate of approximately
3.8% of the outstanding shares of Artra preferred stock, which were converted in
the merger to 329 shares of Entrade Common Stock for each share of Artra
preferred stock held. Therefore, directors and executive officers of Artra
received an aggregate of approximately 23,363 shares of Entrade Common Stock in
the merger for outstanding shares of Artra Series A preferred stock. Also,
trusts whose beneficiaries include adult children of John Harvey, which held
approximately 50.4% of the outstanding shares of Artra preferred stock, received
an aggregate of approximately 306,644 shares of Entrade Common Stock for
outstanding shares of Artra preferred stock.
<PAGE>
Interests of Entrade Officers and Director
On February 23, 1999, Artra entered into employment agreements with
Robert D. Kohn, Benjamin R. Kafka, Gary Lerman and Mark L.M. Quinn, providing
for the employment of those individuals for three-year terms, which Entrade
assumed after the merger. Each of these persons is currently an officer of
entrade.com. Robert D. Kohn continues to serve as a director of Entrade and
serves as the President and Chief Executive Officer of entrade.com.
In connection with these employment agreements, these persons received
nonqualified stock options for the purchase of an aggregate of 1,600,000 shares
of Artra Common Stock, which were assumed by Entrade upon the closing of the
merger.
Name of Option Holder Number of Shares Exercise Price
--------------------- ---------------- --------------
Robert D. Kohn 1,000,000 $2.75
Benjamin R. Kafka 200,000 $2.75
Gary Lerman 200,000 $2.75
Mark L.M. Quinn 200,000 $2.75
Prior to the Merger, WorldWide held 90% of the outstanding shares of
Entrade Common Stock. Robert D. Kohn, Benjamin R. Kafka, Gary Lerman and Mark
L.M. Quinn also own shares of common stock of WorldWide.
Item 7. Financial Statements and Exhibits.
- ------ ----------------------------------
(a) Financial Statements.
(b) Pro Forma Financial Information
(c) Exhibits:
Exhibit No. Exhibit Description
----------- -------------------
2.1 Agreement and Plan of Merger dated as of
February 23, 1999 among Artra, WorldWide Web
NetworX Corporation, NA Acquisition Corp.
(now known as Entrade Inc.) and WWWX Merger
Subsidiary, Inc.; Amendment to Agreement and
Plan of Merger dated as of April 30, 1999;
and Consent and Amendment to Agreement and
Plan of Merger dated as of August 9, 1999
(incorporated by reference to Appendix A to
the Proxy Statement/Prospectus filed with
the Commission on August 20, 1999).
23.1 Consent Of Independent Accountants
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENTRADE INC.
By:/s/Mark F. Santacrose
----------------------------------
Mark F. Santacrose, President
and Chief Executive Officer
Date: October 6, 1999
<PAGE>
Item 7. (a) Financial Statements of Business Acquired
INDEX TO FINANCIAL STATEMENTS
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants ................................................F-2
Consolidated Balance Sheets as of
December 31, 1998 and December 31, 1997..................................F-3
Consolidated Statements of Operations
for each of the three fiscal years in the period
ended December 31, 1998..................................................F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for each of the three fiscal years in the period
ended December 31, 1998..................................................F-6
Consolidated Statements of Cash Flows
for each of the three fiscal years in the period
ended December 31, 1998..................................................F-8
Notes to Consolidated Financial Statements........................................F-10
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 (Unaudited)..........................F-31
Condensed Consolidated Statements of Operations
for periods ended June 30, 1999 and
June 30, 1998 (Unaudited)................................................F-32
Condensed Consolidated Statement of Changes
in Shareholders's Equity (Deficit) for the
periods ended June 30, 1999 and
June 30, 1998 (Unaudited)................................................F-33
Condensed Consolidated Statements of Cash flows
for the periods ended June 30, 1999 and
June 30, 1998 (Unaudited)................................................F-34
Notes to Condensed Consolidated Financial Statements .............................F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
ARTRA GROUP Incorporated
Northfield, Illinois
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
ARTRA GROUP Incorporated and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
In our report on the 1997 financial statements, dated March 26, 1998, we
expressed an opinion that indicated substantial doubt as to the ability of the
Company to continue as a going concern. This was the result of the Company
suffering recurring losses and experiencing difficulty in obtaining adequate
financing to replace its existing credit arrangements and satisfy liquidity
requirements. As described in Note 3, as a result of the disposition of the
business assets of Bagcraft Corporation of America, the Company has been able to
retire a significant portion of its obligations. Accordingly, our present
opinion on the 1997 financial statements as presented herein is different from
that expressed in our previous report.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 1, 1999
F-2
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and equivalents $11,753 $5,991
Restricted cash and equivalents 1,045 -
Receivables, less allowance for
doubtful accounts of $275 in 1997 171 10,004
Inventories, less valuation allowance
of $277 in 1997 - 15,749
Available-for-sale securities 8,200 12,013
Other 99 774
------------ ------------
Total current assets 21,268 44,531
------------ ------------
Property, plant and equipment
Land - 417
Buildings - 12,742
Machinery and equipment - 35,657
Construction in progress - 675
------------ ------------
- 49,491
Less accumulated depreciation and amortization - 24,397
------------ ------------
- 25,094
------------ ------------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization
of $2,388 in 1997 - 2,729
Other - 852
------------ ------------
- 3,581
------------ ------------
$21,268 $73,206
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 31,
1998 1997
------------ ------------
LIABILITIES
Current liabilities:
Notes payable, including amounts due to
related parties of $2,000 in 1997 $ - $ 10,726
Current maturities of long-term debt - 4,462
Accounts payable - 5,841
Accrued expenses 568 8,692
Income taxes 1,854 324
Common stock put warrants 1,705 2,966
Redeemable preferred stock - 11,955
Liabilities of discontinued operations 10,328 -
------------ ------------
Total current liabilities 14,455 44,966
------------ ------------
Long-term debt - 50,619
Other noncurrent liabilities - 4,675
Commitments and contingencies
Redeemable preferred stock 2,857 9,110
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value;
authorized 20,000,000 shares;
issued 8,302,110 shares in 1998
and 8,297,810 shares in 1997 6,227 6,223
Additional paid-in capital 42,734 42,721
Unrealized appreciation of investments 10,920 14,733
Receivable from related party,
including accrued interest - (12,621)
Accumulated deficit (54,300) (87,113)
------------ ------------
5,581 (36,057)
Less treasury stock, 437,882 shares in 1998
and 80,612 shares in 1997, at cost 1,625 107
------------ ------------
3,956 (36,164)
------------ ------------
$21,268 $73,206
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $ -- $ -- $ --
-------- -------- --------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization -- -- --
Selling, general and administrative 2,660 5,708 2,042
Depreciation and amortization -- 7 19
-------- -------- --------
2,660 5,715 2,061
-------- -------- --------
Operating loss (2,660) (5,715) (2,061)
-------- -------- --------
Other income (expense):
Interest expense (3,392) (6,178) (4,201)
Realized gain on disposal of
available-for-sale securities 320 2,531 5,818
Litigation settlement, net -- 10,416 --
Other income (expense), net 25 12 (1)
-------- -------- --------
(3,047) 6,781 1,616
-------- -------- --------
Earnings (loss) from continuing operations
before income taxes (5,707) 1,066 (445)
Provision for income taxes -- -- --
-------- -------- --------
Earnings (loss) from continuing operations (5,707) 1,066 (445)
Earnings (loss) from discontinued operations 38,930 (293) 3,994
-------- -------- --------
Earnings before extraordinary credit 33,223 773 3,549
Extraordinary credit, net discharge of indebtedness -- -- 9,424
-------- -------- --------
Net earnings 33,223 773 12,973
Dividends applicable to
redeemable preferred stock (410) (693) (621)
Reduction of retained earnings
applicable to redeemable common stock -- (400) (390)
-------- -------- --------
Earnings (loss) applicable to common shares $ 32,813 $ (320) $ 11,962
======== ======== ========
Per share earnings (loss)
applicable to common shares:
Basic
Continuing operations ($ 0.78) $ -- ($ 0.19)
Discontinued operations 4.94 (0.04) 0.53
-------- -------- --------
Earnings (loss)
before extraordinary credit 4.16 (0.04) 0.34
Extraordinary credit -- -- 1.25
-------- -------- --------
Net earnings (loss) $ 4.16 ($ 0.04) $ 1.59
======== ======== ========
Weighted average number of shares
of common stock outstanding 7,891 7,970 7,525
======== ======== ========
Diluted
Continuing operations ($ 0.78) $ -- ($ 0.19)
Discontinued operations 4.94 (0.04) 0.53
-------- -------- --------
Earnings (loss) before
extraordinary credit 4.16 (0.04) 0.34
Extraordinary credit -- -- 1.25
-------- -------- --------
Net earnings (loss) $ 4.16 ($ 0.04) $ 1.59
======== ======== ========
Weighted average number of shares
of common stock and common
stock equivalents outstanding 7,891 7,970 7,525
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Total
Receivable Other Share-
Common Stock Additional From Comphre- Treasury Stock holders'
------------------ Paid-in Related hensive Accumulated --------------- Equity
Shares Dollars Capital Party Income (Deficit) Shares Dollars Deficit)
---------- ------- -------- -------- --------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1995 7,102,979 $5,540 $38,526 ($4,318) $21,047 ($98,755) 57,038 ($805) ($38,765)
Comprehensive income (loss):
Net earnings - - - - - 12,973 - - 12,973
Net increase in unrealized
appreciation of investments - - - - 4,672 - - - 4,672
---------
Comprehensive income 17,645
---------
Other changes in shareholders' equity:
Common stock issued
to pay liabilities 125,012 94 362 - - - (120,554) 818 1,274
Common stock issued as
additional consideration
for short-term borrowings 50,544 38 (398) - - - (99,456) 1,021 661
Net increase in receivable
from related party,
including accrued interest - - - (2,150) - - - - (2,150)
Common stock loaned
by related party - - - 587 - - 100,000 (587) -
Repay common stock
loaned by related party 100,000 75 512 (587) - - - - -
Exercise of stock options
and warrants 61,000 46 213 - - - (16,900) 109 368
Common stock received as
consideration for
short-term note - - - - - - 87,500 (608) (608)
Reclassification of
redeemable common stock 185,231 - 996 - - - - - 996
Redeemable preferred
stock dividends - - - - - (621) - - (621)
Redeemable common stock accretion - - - - - (390) - - (390)
---------
Other changes in shareholders' equity (470)
---------
---------- ------- -------- -------- --------- --------- --------- -------- ---------
Balance at December 26, 1996 7,624,766 5,793 40,211 (6,468) 25,719 (86,793) 7,628 (52) (21,590)
Comprehensive income (loss):
Net earnings - - - - - 773 - - 773
Net decrease in unrealized
appreciation of investments - - - - (10,986) - - - (10,986)
---------
Comprehensive (loss) (10,213)
---------
Other changes in shareholders' equity:
Common stock issued
to pay liabilities 444,717 333 1,606 - - - - - 1,939
Net increase in receivable
from related party,
including accrued interest - - - (6,153) - - - - (6,153)
Exercise of stock options
and warrants 39,800 30 148 - - - - - 178
Redeemable common stock
obligation paid by the issuance
of additional common shares 115,543 67 612 - - - - - 679
Exercise of redeemable
common stock put option 72,984 - 55 - - - 72,984 (55) -
Purchase of
redeemable preferred stock - - 89 - - - - - 89
Redeemable preferred stock dividends - - - - - (693) - - (693)
Redeemable common stock accretion - - - - - (400) - - (400)
---------
Other changes in shareholders' equity (4,361)
---------
---------- ------- -------- -------- --------- --------- --------- -------- ---------
Balance at December 31, 1997 8,297,810 6,223 42,721 (12,621) 14,733 (87,113) 80,612 (107) (36,164)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Total
Receivable Other Share-
Common Stock Additional From Comphre- Treasury Stock holders'
------------------ Paid-in Related hensive Accumulated --------------- Equity
Shares Dollars Capital Party Income (Deficit) Shares Dollars Deficit)
---------- ------- -------- -------- --------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 8,297,810 6,223 42,721 (12,621) 14,733 (87,113) 80,612 (107) (36,164)
Comprehensive income (loss):
Net earnings - - - - 33,223 - - 33,223
Net decrease in unrealized
appreciation of investments - - - - (3,813) - - - (3,813)
----------
Comprehensive income 29,410
----------
Other changes in shareholders' equity:
Repurchase of common stock
previously issued to pay
down short-term notes - - - - - - 357,270 (1,518) (1,518)
Net decrease in receivable
from related party,
including accrued interest - - - 12,621 - - - - 12,621
Exercise of stock options 4,300 4 13 - - - - - 17
Redeemable preferred
stock dividends - - - - - (410) - - (410)
----------
Other changes in shareholders' equity 10,710
----------
---------- -------- --------- --------- ---------- ---------- -------- -------- ----------
Balance at December 31, 1998 8,302,110 $6,227 $42,734 $0 $10,920 ($54,300) 437,882 ($1,625) $3,956
========== ======== ========= ========= ========== ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
ARTRA GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 33,223 $ 773 $ 12,973
Adjustments to reconcile net earnings
to cash flows from operating activities:
Depreciation of property, plant and equipment 2,446 4,059 3,622
Amortization of excess of cost over net assets acquired 272 305 305
Decrease in receivable from related party 400 2,816 --
Extraordinary gain from net discharge of indebtedness -- -- (9,424)
Gain on disposal of discontinued operations (35,585) -- --
Amortization of other assets, principally financing costs 1,121 4,754 548
Inventory valuation reserve 21 172 191
Gain on sale of property, plant and equipment -- (70) 78
Gain on sale of idle machinery and equipment -- (932) --
Litigation settlement, net -- (10,416) --
Gain on sale of COMFORCE common stock (320) (2,531) (5,818)
Minority interest 509 1,109 526
Other, principally common stock issued as compensation -- 454 220
Changes in assets and liabilities, net of effects of
businesses acquired and discontinued:
(Increase) decrease in receivables (35) (1,631) 2,630
(Increase) decrease in inventories (2,010) 132 1,476
(Increase) decrease in other current and noncurrent assets (456) 517 (169)
Increase (decrease) in payables and accrued expenses (8,771) 321 (5,980)
Decrease in other current and noncurrent liabilities (1,745) (119) (4,497)
-------- -------- --------
Net cash flows used by operating activities (10,930) (287) (3,319)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of COMFORCE common stock 170 1,821 3,717
Proceeds from sale of Bagcraft assets 89,000 -- --
Increase in restricted cash (1,045) -- --
Net proceeds from litigation settlement -- 9,761 --
Proceeds from sale of property, plant and equipment -- 537 132
Additions to property, plant and equipment (2,177) (3,066) (2,645)
(Increase) decrease in receivable from related party -- (8,969) (1,061)
Proceeds from collection of notes receivable -- -- 342
Decrease in restricted cash -- -- 552
Acquistion of AB Specialty, net of deposit -- (1,131) --
AB Specialty acquisition deposit -- -- (1,183)
Proceeds from sale of idle machinery and equipment -- 932 --
-------- -------- --------
Net cash flows from (used by) investing activities 85,948 (115) (146)
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
ARTRA GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from financing activities:
<S> <C> <C> <C>
Net increase (decrease) in short-term debt ($ 15,451) ($ 1,508) $ 286
Proceeds from long-term borrowings 124,077 146,891 141,896
Reduction of long-term debt (175,019) (133,781) (140,850)
Proceeds from exercise of stock options and warrants 17 178 369
Repurchase of common stock previously issued
to pay down short-term notes (1,518) -- --
Exercise of redeemable common stock put options -- (3,379) (510)
Redemption of detachable put warrants (1,440) (1,728) --
Purchase of redeemable preferred stock -- (426) --
Other 78 (25) 98
--------- --------- ---------
Net cash flows from (used by) financing activities (69,256) 6,222 1,289
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 5,762 5,820 (2,176)
Cash and equivalents, beginning of year 5,991 171 2,347
--------- --------- ---------
Cash and equivalents, end of year $ 11,753 $ 5,991 $ 171
========= ========= =========
Supplemental cash flow information: Cash paid during the year for:
Interest $ 6,087 $ 7,058 $ 5,320
Income taxes paid (refunded), net 189 177 157
Supplemental schedule of noncash investing and financing activities:
ARTRA/BCA redeemable preferred stock received as payment of
Peter Harvey advances $ 12,787 -- --
Issue common stock and redeemable common stock
to pay down current liabilities -- $ 1,939 $ 1,274
Issue common stock to pay
redeemable common stock put obligation -- 679 --
Issue common stock as additional consideration
for short-term borrowings -- -- 661
COMFORCE common stock given to lenders
as additional consideration for short-term borrowings -- 169 1,511
BCA Holdings redeemable preferred stock issued in exchange for
Bagcraft redeemable preferred stock -- -- 8,135
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO 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. The Company
does not intend to be deemed an "Investment Company" as defined by the
Investment Company Act of 1940 and, accordingly, is actively investigating new
business opportunities.
In 1997, the Company changed its fiscal year end to December 31. The Company had
operated on a 52/53 week fiscal year ending the last Thursday of December.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. Intercompany accounts and transactions are
eliminated.
B. Cash Equivalents/Restricted Cash
Short-term investments with an initial maturity of less than ninety days are
considered cash equivalents.
At December 31, 1998, restricted cash represents amounts deposited in escrow
accounts to pay certain Bagcraft liabilities retained by ARTRA. These accounts
were established in accordance with provisions of the agreement to sell the
assets of the discontinued Bagcraft subsidiary discussed in Note 3.
C. Financial Instruments
The fair value of cash and cash equivalents is assumed to approximate the
carrying value of these assets due to the short duration of these assets. The
fair value of the Company's debt was estimated to be the carrying value of these
liabilities based upon borrowing rates currently available to the Company for
borrowings with similar terms.
D. Inventories
Inventories reflected in the Company's consolidated financial statements at
December 31, 1997 were stated at the lower of cost or market. Cost was
determined by the first-in, first-out (FIFO) method.
E. Property, Plant and Equipment
Property, plant and equipment reflected in the Company's consolidated financial
statements at December 31, 1997 were stated at cost. Expenditures for
maintenance and repairs were charged to operations as incurred and expenditures
for major renovations were capitalized. Depreciation was computed on the basis
of estimated useful lives principally by the straight-line method for financial
statement purposes and principally by accelerated methods for tax purposes.
Leasehold improvements were amortized over the shorter of the estimated useful
life of the asset or the period covered by the lease.
The costs of property retired or otherwise disposed of were applied against the
related accumulated depreciation to the extent thereof, and any profit or loss
on the disposition was recognized in earnings.
F. Investments in Equity Securities
The Company's investment in COMFORCE Corporation ("COMFORCE", see Note 5) common
stock is classified in current assets as available-for-sale securities and
stated at fair value in accordance with the provisions of
F-10
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". Unrealized holding gains and
losses are included in a separate component of shareholders' equity (deficit)
until realized. The investment in COMFORCE common stock, which represents a
significant portion of the Company's assets at December 31, 1998, is subject to
liquidity and market price risks.
G. Intangible Assets
The net assets of a purchased business were recorded at their fair value at the
date of acquisition. The excess of purchase price over the fair value of net
assets acquired (goodwill) was reflected as intangible assets and amortized on a
straight-line basis principally over 40 years.
Effective for the fiscal year ending December 26, 1996 the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ". The pronouncement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment is
evaluated by comparing future cash flows (undiscounted and without interest
charges) expected to result from the use or sale of the asset and its eventual
disposition, to the carrying amount of the asset. The adoption of SFAS No. 121
did not have a material impact on the Company's financial statements.
H. Revenue Recognition
Sales to customers of the Company's discontinued Bagcraft subsidiary were
recorded at the time of shipment.
I. Income Taxes
Income taxes are accounted for as prescribed in SFAS No. 109 - Accounting for
Income Taxes. Under the asset and liability method of Statement No. 109, the
Company recognizes the amount of income taxes payable. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years those temporary differences are expected to be recovered or
settled.
J. Use of Estimates In Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
K. Stock-Based Compensation
Effective for the fiscal year ending December 26, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation". The pronouncement
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on new fair value accounting rules. The Company did not adopt the new fair
value accounting, but instead chose to comply with the disclosure requirements
of SFAS No. 123. Accordingly, the adoption of SFAS No. 123 did not have a
material impact on the Company's financial statements.
L. Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share" for the year ended
December 31, 1997. The pronouncement,
F-11
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
which specifies the computation, presentation, and disclosure requirements for
earnings per share, did not have a material impact on the Company's financial
statements.
M. Recently Issued Accounting Pronouncements
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting
comprehensive income to present a measure of all changes in equity that result
from renegotiated transactions and other economic events of the period other
than transactions with owners in their capacity as owners. Comprehensive income
is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources and
includes net income. Required changes are reported in the consolidated statement
of operations.
During 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information". In
February 1998 the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and other Postretirement Benefits. SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. This standard requires that management
identify operating segments based on the way that management disaggregates the
entity for making internal operating decisions. SFAS No. 132 standardizes the
disclosure requirements for pension and other postretirement benefits.
As a result of the November 1998 sale of the assets of the discontinued Bagcraft
subsidiary, the Company exited its only industry segment, a manufacturer of
packaging products principally serving the food industry. Accordingly, the
guidelines of SFAS No. 131 - Disclosures About Segments of an Enterprise and
Related Information are not applicable to the Company's financial statements as
of December 31, 1998. The Company typically does not offer the types of benefit
programs that fall under the guidelines of Statement of Financial Accounting
Standards No. 132 - Employers' Disclosures about Pensions and other
Postretirement Benefits.
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. Management has not determined what impact this
standard, when adopted, will have on the Company's financial statements.
3. CHANGE OF BUSINESS
Bagcraft
Effective August 26, 1998, ARTRA and its wholly-owned subsidiary BCA Holdings,
Inc. ("BCA", the parent of Bagcraft), agreed to sell the business assets of
Bagcraft. Additionally, the buyer agreed to assume certain Bagcraft liabilities.
The transaction was completed on November 20, 1998 and ARTRA received gross
consideration of approximately $88,100,000 in cash. The disposition of the
Bagcraft business resulted in a net gain of $35,985,000.
A substantial portion of the cash proceeds received from the Bagcraft
disposition was used to retire or otherwise settle certain Bagcraft debt
obligations, including, but not limited to Bagcraft's credit agreement as
discussed in Note 8. After the disposition of certain Bagcraft obligations noted
above, ARTRA received net proceeds of approximately $28,000,000 from the sale of
Bagcraft. Approximately $15,200,000 of these net proceeds was used to retire
F-12
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
ARTRA debt obligations. The Company plans to use the remainder of the proceeds
principally to acquire or participate in new business opportunities.
AB Specialty
Effective January 2, 1997, Bagcraft purchased the business assets, subject to
buyer's assumption of certain liabilities, of AB Specialty Holding Company, Inc.
("AB") for consideration consisting of cash of approximately $2.3 million. The
purchased assets consisted principally of plant and equipment of approximately
$1.3 million and inventory of approximately $1.1 million. The acquisition of AB,
funded through borrowings under Bagcraft's Credit Agreement, was accounted for
by the purchase method and, accordingly, the assets and liabilities of AB were
included in the Company's financial statements at their estimated fair market
value at the date of acquisition. The business and related assets of AB were
part of the Bagcraft disposition.
The Company's consolidated financial statements have been reclassified to report
separately the results of operations of Bagcraft. The operating results (in
thousands) for fiscal years 1996 - 1998 of the discontinued Bagcraft subsidiary
and net gain on disposal consist of:
1998 1997 1996
--------- --------- ---------
Net sales $ 111,342 $ 125,027 $ 120,699
========= ========= =========
Earnings from operations before
minority interest and income taxes $ 3,534 $ 797 $ 4,672
(Provision) credit for income taxes (80) 19 (152)
Minority interest (509) (1,109) (526)
--------- --------- ---------
Earnings (loss) from operations 2,945 (293) 3,994
--------- --------- ---------
Gain on sale of Bagcraft subsidiary 37,505
Provision for income taxes (1,520)
---------
Gain on disposal of business 35,985
--------- --------- ---------
Earnings(loss)from discontinued operations $ 38,930 $ (293) $ 3,994
========= ========= =========
Per share earnings (loss):
Earnings (loss) from operations $ .38 $ (.04) $ .53
Gain on disposal of business 4.56 - -
--------- --------- ---------
Earnings(loss)from
discontinued operations $ 4.94 $ (.04) $ .53
========= ========= =========
Liabilities of discontinued operations at December 31, 1998 of $10,328,000
include BCA/Bagcraft redeemable preferred stock issues (see Note 9), contractual
obligations, environmental matters and other future estimated costs for various
discontinued operations. Additionally, liabilities of discontinued operations at
December 31, 1998 includes an adjustment to the sales price of the Bagcraft
business of approximately $900,000.
F-13
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. INVENTORIES
Inventories of the discontinued Bagcraft at December 31, 1997 (in thousands)
consisted of:
Raw materials and supplies $5,901
Work in process 274
Finished goods 9,574
-------
$15,749
=======
5. INVESTMENT IN COMFORCE CORPORATION
At December 31, 1998 and 1997 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 consolidated balance sheet in
current assets as "Available-for-sale securities." At December 31, 1998 the
gross unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $10,920,000. The investment in
COMFORCE common stock, which represents a significant portion of the Company's
assets at December 31, 1998, is subject to liquidity and market price risks.
In January 1996, the Company's Board of Directors approved the sale of 200,000
of ARTRA's COMFORCE common shares to certain officers, directors and key
employees of ARTRA for non-interest bearing notes totaling $400,000. The notes
are collateralized by the related COMFORCE common shares. Additionally, the
noteholders have the right to put their COMFORCE shares back to ARTRA in full
payment of the balance of their notes. Based upon the preceding factors, the
Company had concluded that, for reporting purposes, it had effectively granted
options to certain officers, directors and key employees to acquire 200,000 of
ARTRA's COMFORCE common shares. Accordingly, in January 1996 these 200,000
COMFORCE common shares were removed from the Company's portfolio of
"Available-for-sale securities" and were classified in the Company's condensed
consolidated balance sheet as other receivables with an aggregate value of
$400,000, based upon the value of proceeds to be received upon future exercise
of the options. The disposition of these 200,000 COMFORCE common shares resulted
in a gain that was deferred and will not be recognized in the Company's
financial statements until the options to purchase these 200,000 COMFORCE common
shares are exercised. During the fourth quarter of 1997, options to acquire
59,500 of these COMFORCE common shares were exercised resulting in a realized
gain of $225,000. During 1998, options to acquire 84,750 of these COMFORCE
common shares were exercised resulting in a realized gain of $320,000. At
December 31, 1998, options to acquire 55,750 COMFORCE common shares remained
unexercised and were classified in the Company's consolidated balance sheet as
other receivables with an aggregate value of $112,000, based upon the value of
proceeds to be received upon future exercise of the options.
During 1997 ARTRA sold 219,203 COMFORCE common shares in the market, with the
net proceeds of approximately $1,700,000 used for working capital. During 1997 a
lender received 25,000 COMFORCE common shares held by the Company as additional
consideration for a short-term loan. The disposition of these 244,703 COMFORCE
common shares resulted in realized gains of $2,306,000 during the year ended
December 31, 1997, with cost determined by average cost.
During 1996 ARTRA sold 193,000 COMFORCE common shares in the market, with the
net proceeds of approximately $3,700,000 used for working capital. During 1996
certain lenders received 105,000 COMFORCE common shares held by the Company as
additional consideration for short-term loans. In October 1996, a lender
exercised the conversion rights of a short-term loan and received 33,333
COMFORCE common shares in settlement of the Company's obligation. The
disposition of these 331,333 COMFORCE common shares resulted in realized gains
of $5,818,000 during the year ended December 26, 1996, with cost determined by
average cost.
F-14
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. EXTRAORDINARY GAIN
ARTRA Debt Restructuring
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note. ARTRA then discharged $2,150,000 of Mr. Harvey's
prior advances in exchange for its $2,150,000 interest in Mr. Harvey's
$3,000,000 note payable to the bank. The amount of the $5,050,000 cash payment
to the bank applicable to Peter R. Harvey ($1,089,000) was charged to amounts
due from Peter R. Harvey. ARTRA recognized a gain on the discharge of this
indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996. The
cash payment due the bank was funded principally with proceeds received from the
Bagcraft subsidiary in conjunction with the issuance of BCA (the parent of
Bagcraft) preferred stock along with proceeds received from a short-term loan
agreement with an unaffiliated company that was subsequently repaid. As
additional compensation for its loan and for participating in the above
discharge of indebtedness the unaffiliated company received 150,000 shares of
ARTRA common stock (with a then fair market value of $661,000 after a discount
for restricted marketability) and 25,000 shares of COMFORCE common stock held by
ARTRA (with a then fair market value of $200,000).
The extraordinary gain resulting from the discharge of bank debt is calculated
(in thousands) as follows. No income tax expense is reflected in the Company's
financial statements resulting from the extraordinary credit due to the
utilization of tax loss carryforwards, except for Federal alternative minimum
tax:
Amounts due the bank:
ARTRA notes $ 12,063
Accrued interest 2,656
--------
14,719
Cash payment to the bank $ 5,050
Less amount applicable to
Peter R. Harvey indebtedness (1,089)
--------
(3,961)
--------
Bank debt discharged 10,758
Less fair market value of ARTRA
common stock issued as consideration
for a loan used in part to fund
the discharge of bank debt (661)
Less fair market value of COMFORCE
common stock issued as consideration
for a loan used in part to fund
the discharge of bank debt (200)
Other fees and expenses (273)
--------
Extraordinary gain before income taxes 9,624
Income tax provision (200)
--------
Net extraordinary gain $ 9,424
========
7. NOTES PAYABLE
Notes payable at December 31, 1997 (in thousands) consisted of:
ARTRA 12% promissory notes - 1997 private placements $12,850
Amounts due to related parties, interest at10% 2,000
Other, interest from 10% to 12% 601
-------
15,451
Less ARTRA 12% promissory notes refinanced in January 1998 (4,725)
-------
$10,726
=======
F-15
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Promissory Notes
1998 Private Placement
In January 1998, ARTRA completed a private placement of $5,975,000 of 12%
promissory notes due January 14, 1999. As additional consideration the
noteholders received warrants to purchase an aggregate of 119,500 ARTRA common
shares at a price of $3.00 per share. The warrants expire January 14, 2000. The
warrantholders have the right to put these warrants back to ARTRA at any time
during a six-month period commencing in January 1999 and ending in July 1999, at
a price of $1.50 per share. The cost of this obligation ($179,250 if all
warrants are put back to the Company) was accrued in the Company's financial
statements as a charge to interest expense. The proceeds from the private
placement were used principally to pay down other debt obligations. These notes
were repaid in November 1998 with net proceeds from the sale of assets of the
discontinued Bagcraft subsidiary.
1997 Private Placements
In December 1997, ARTRA completed private placements of $5,375,000 of 12%
promissory notes due in December 1998. As additional consideration the
noteholders received warrants to purchase an aggregate of 107,500 ARTRA common
shares at a price of $3.00 per share. The warrants expire in November and
December 1999. The warrantholders have the right to put these warrants back to
ARTRA at any time during a period commencing in December 1998 and ending in May
1999, at a price of $1.50 per share. The cost of this obligation ($161,250 if
all warrants are put back to the Company) was accrued in the Company's financial
statements as a charge to interest expense. These notes were repaid in November
1998 with net proceeds from the sale of assets of the discontinued Bagcraft
subsidiary.
In July 1997, ARTRA completed private placements of $7,475,000 of 12% promissory
notes due in January 1998. As additional consideration the noteholders received
warrants to purchase an aggregate of 199,311 ARTRA common shares at a price of
$3.75 per share. The warrants expire in August 1999. The warrantholders have the
right to put these warrants back to ARTRA at any time during a period commencing
in January 1998 and ending in August 1999, at a price of $3.00 per share. The
cost of this obligation ($598,000 if all warrants are put back to the Company)
was amortized in the Company's financial statements as a charge to interest
expense over the period July 1997 (the date of the private placement) through
January 1998 (the scheduled maturity date of the notes). The proceeds from the
July 1997 private placement were advanced to Peter R. Harvey. See discussion and
disposition of Mr. Harvey's advances in Note 16.
The July 1997 private placement notes were repaid and /or refinanced with
proceeds of the January 1998 private placement of 12% notes and with proceeds
from the litigation settlement discussed in Note 11 to the consolidated
financial statements.
Amounts Due To Related Parties
At December 26, 1996, ARTRA had outstanding borrowings of $500,000 from an
outside director of the Company evidenced by a short-term note bearing interest
at 10%. As additional compensation for the loan and a December 1996 extension,
the director received five year warrants to purchase an aggregate of 50,000
ARTRA common shares at a prices ranging from $5.00 to $5.875 per share. The
proceeds of the loan were used for working capital.
In January 1997, ARTRA borrowed an additional $300,000 from this director
evidenced by a short-term note, due December 23, 1997, bearing interest at 8%.
As additional compensation for the loan, the director received a warrant,
expiring in 2002, to purchase 25,000 ARTRA common shares at a price of $5.75 per
share.
In March 1997, ARTRA borrowed an additional $1,000,000 from this director
evidenced by a short-term note, due May 26, 1997, bearing interest at 12%. As
additional compensation, the lender received an option to purchase 25,000 shares
F-16
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
of COMFORCE common stock, owned by the Company's Fill-Mor subsidiary, at a price
of $4.00 per share. The proceeds from this loan were used in part to repay
certain ARTRA debt obligations.
In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by a
note, due April 20, 1998, bearing interest at 10%. The proceeds from this loan
were used to repay $1,800,000 of prior borrowings from this director and pay
down other ARTRA debt obligations. As additional compensation, the director
received a warrant to purchase 333,333 ARTRA common shares at a price of $5.00
per share. In May 1998, the director exercised the option and put the warrant
back to ARTRA for a total purchased price of $1,000,000. The cost of this
obligation was amortized in the Company's financial statements as a charge to
interest expense over the period April 1997 (the date of the loan) through April
1998 (the date the warrantholder first had the right to put the warrant back to
ARTRA).
In June 1997, ARTRA borrowed an additional $1,000,000 from the above director
evidenced by a note, due December 10, 1997, bearing interest at 12%. As
additional compensation, the director received a warrant to purchase 40,000
ARTRA common shares at a price of $5.00 per share. The warrantholder has the
right to put this warrant back to ARTRA at any time during the period December
10, 1997 to June 10, 1999, for a total purchase price of $80,000. The cost of
this obligation was amortized in the Company's financial statements as a charge
to interest expense over the period June 10, 1997 (the date of the loan) through
December 10, 1997 (the date the warrantholder has the right to put the warrant
back to ARTRA).
The proceeds from this loan were used to pay down other ARTRA debt obligations.
In July 1997, borrowings from this lender were reduced to $3,000,000 with
proceeds advanced to ARTRA from a Bagcraft term loan. In December 1997
borrowings from this lender were reduced to $2,000,000 with proceeds from other
short-term borrowings.
In April 1998, the $2,000,000 in outstanding borrowings from the above director
was extended by a demand note bearing interest at 10%. As additional
compensation, the director received a warrant to purchase 50,000 ARTRA common
shares at a price of $3.25 per share.
In August 1998, ARTRA borrowed an additional $500,000 from the above director
evidenced by a note, due December 20, 1998, bearing interest at 15%. As
additional compensation, the director received a warrant to purchase 20,000
ARTRA common shares at a price of $3.94 per share.
The borrowings from this director were collateralized by a secondary interest in
all of the common stock of BCA (the parent of Bagcraft).
In November 1998, the borrowings from this director were repaid with proceeds
received from the sale of the discontinued Bagcraft subsidiary.
Other
At December 31, 1997, ARTRA also had outstanding short-term borrowings from
other unrelated parties aggregating $601,000, with interest rates varying
between 10 % and 12%.
In April 1998 the Company and its Fill-Mor subsidiary entered into a margin loan
agreement with a financial institution which provided for borrowings of
$1,000,000, with interest at 8.5%. Borrowings under the loan agreement were
collateralized by 490,000 shares of COMFORCE common stock owned by the Company's
Fill-Mor subsidiary. The proceeds of the loan were used for working capital.
This loan was repaid in December 1998 with proceeds received from the sale of
the discontinued Bagcraft subsidiary.
F-17
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In October 1997 a lender agreed to accept 357,270 ARTRA common shares in payment
of the principal amount of approximately $1,500,000 due on certain demand notes.
In January 1998 the lender returned the 357,270 ARTRA common shares to the
Company for cash consideration of approximately $1,500,000.
The weighted average interest rate on all short-term borrowings at December 31,
1997 was 11.5%.
8. LONG-TERM DEBT
Long-term debt at December 31, 1997 (in thousands) consisted of:
Bagcraft:
Credit Agreement:
Term Loan A, interest at the lender's index rate plus .25% $ 20,000
Term Loan B, interest at the lender's index rate plus .75% 5,000
Term Loan C, interest at the lender's index rate plus 1% 7,500
Revolving credit loan, interest at the lender's indexrate 9,313
Unamortized discount (1,425)
City of Baxter Springs, Kansas loan agreements,
interest at varying rates 9,968
-------
50,356
ARTRA 12% promissory notes refinanced in January 1998 4,725
-------
55,081
Current scheduled maturities (4,462)
-------
$50,619
=======
Bagcraft
At December 31, 1997, the discontinued Bagcraft subsidiary had outstanding
borrowings under its credit agreement ("Credit Agreement") totaling $40,388,000.
The Credit Agreement, amended and restated February 27, 1998, provided for a
revolving loan agreement and three term loans. Amounts due under the Credit
Agreement were repaid with proceeds from the sale of assets of the discontinued
Bagcraft subsidiary.
In March 1994 Bagcraft and the City of Baxter Springs, Kansas completed a
$12,500,000 financing package associated with the construction of a new 265,000
sq. ft. production facility in Baxter Springs, Kansas. The financing package
funded by a combination of Federal, state and local funds, consisted of certain
loan agreements payable by Bagcraft directly to the City of Baxter Springs. At
December 31, 1997, the outstanding borrowings under these loans totaled
$9,968,000. Obligations due under these loans were assumed by the buyer of the
assets of the discontinued Bagcraft subsidiary.
F-18
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA
As discussed in Note 7, $7,475,000 of ARTRA 12% promissory notes due in January
1998 were repaid and /or refinanced principally with proceeds of a January 1998
private placement of 12% notes payable in January 1999. Private placement notes
in the principal amount of $4,725,000 refinanced by the January 1998 private
placement notes were classified as long-term debt at December 31, 1997.
9. REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
Currently payable:
<S> <C> <C>
BCA Holdings preferred stock, Series B,
$1.00 par value, 6% cumulative,
including accumulated dividends;
redeemable on demand with a liquidation preference
of $1,000 per share; authorized 8,135 shares;
issued and outstanding 1,675.79 shares in 1998
and 7,847.79 shares in 1997 $ * 9,831
Bagcraft redeemable preferred stock originally issued
to a related party, $.01 par value, 13.5% cumulative;
including accumulated dividends; redeemable on demand
with a liquidation preference equal to $100 per share;
issued 8,650 shares * $ 2,124
------- -------
$ - $11,955
======= =======
Noncurrent:
ARTRA redeemable preferred stock, Series A,
$1,000 par value, 6% cumulative payment-in-kind,
including accumulated dividends, net of
unamortized discount of $239 in 1998 and $859 in 1997;
redeemable March 1, 2000 at $1,000 per share
plus accrued dividends;
authorized 2,000,000 shares all series;
issued and outstanding 1,849.34 shares in
1998 and 3,583.62 shares in 1997 $ 2,857 $ 4,799
BCA Holdings preferred stock, Series A,
$1.00 par value, 6% cumulative,
including accumulated dividends;
liquidation preference of $1,000 per share;
10,000 shares authorized; issued and outstanding
1,672.15 shares in 1998 and 3,456.18 shares in 1997 * 4,311
------- -------
$ 2,857 $ 9,110
======= =======
</TABLE>
- --------------------------------
* Included in liabilities of discontinued operations at December 31, 1998, see
discussion below.
F-19
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
In August and September 1997 ARTRA repurchased 166.38 shares of ARTRA Series A
redeemable preferred stock with a carrying value of $209,000 for cash of
$120,000. The redeemable preferred stock purchase resulted in a gain of $89,000,
which was reflected in the Company's consolidated financial statements as a
credit to additional paid-in capital. 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 $1,246,000 ($674 per share) and $2,074,000 ($579 per share) were
accrued at December 31, 1998 and December 31, 1997, 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 December 31, 1998, liabilities of discontinued operations
included 1,672.18 BCA Series A redeemable preferred shares. Accumulated
dividends were $514,000 ($307 per share) and $854,000 ($247 per share) at
December 31, 1998 and December 31, 1997, respectively.
Effective February 15, 1996, BCA, Bagcraft and a former related party entered
into an agreement to exchange certain preferred stock between the Companies. Per
terms of the exchange agreement BCA issued 8,135 shares of BCA Series B
preferred stock (13.5% cumulative, redeemable preferred stock with a liquidation
preference equal to $1,000 per share) to the former related party in exchange
for 41,350 shares of Bagcraft redeemable preferred stock. At December 31, 1998,
liabilities of discontinued operations included 1,675.79 BCA Series B redeemable
preferred shares. Accumulated dividends were $650,000 ($388 per share) and
$1,984,000 ($253 per share) at December 31, 1998 and December 31, 1997,
respectively.
Both the BCA Series A preferred stock and the BCA Series B preferred stock are
redeemable at the option of the issuer for an amount equal to face value plus
accumulated dividends. The BCA Series B preferred stock was redeemable on June
1, 1997.
At 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
Accumulated dividends were $1,315,000 ($152 per share) and ($145 per share) were
accrued at December 31, 1998 and December 31, 1997, respectively.
As discussed in Note 16, effective January 31, 1998, Peter R. Harvey exchanged
certain ARTRA/BCA preferred stock to retire advances from ARTRA totaling
$12,787,000.
10. STOCK OPTIONS AND WARRANTS
Stock Option Plans
In August, 1996, ARTRA's shareholders approved a stock option plan (the "1996
Plan") for certain officers, key employees and others who render services to the
Company or its subsidiaries. The 1996 Plan reserves 2,000,000 shares of the
Company's common stock for the granting of options on or before August 29, 2006.
Options granted under the Plan shall be in the form of incentive stock options
("ISOs"), as defined under the Internal Revenue Code of 1986, as amended (the
"Code") or non-statutory options which do not qualify under the Code ("NSOs"),
or both, at the discretion of the Company. The purchase price of options granted
under the 1996 Plan shall be not less than fair market value at the date of
grant for ISOs, not less than 110% of fair market value on the date of grant for
an ISO granted to a shareholder possessing 10% more of the voting stock of the
Company and the fair market value per share on the date of grant in the case of
NSOs. Effective October 4, 1996, the Company issued certain officers and key
employees of ARTRA options to purchase 532,750 shares of ARTRA common stock at
$5.25 per share, the fair market value on the date of grant. The options vested
immediately and expire ten years from the date of grant.
In August 1996, ARTRA's shareholders also approved a 1996 Disinterested
Directors Stock Option Plan (the "1996 Director Plan") for directors of the
Company who are not employees or officers. The 1996 Director Plan reserves
200,000 shares of
F-20
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
the Company's common stock for the granting of NSOs on or before August 29, 2006
at a price equal to fair market value per share on the date of grant. In May
1998 the Company issued its outside directors options to purchase an aggregate
of 62,500 ARTRA common shares at $3.75 per share, the fair market value on the
date of grant. The options vested immediately and expire ten years from the date
of grant.
In July 1985, ARTRA's shareholders approved a stock option plan (the "1985
Plan") for certain officers and key employees of the Company and its
subsidiaries. The 1985 Plan, as amended, reserved 1,000,000 shares of the
Company's common stock and authorized the granting of options on or before
February 1, 1995. The purchase price of such options granted under the 1985 Plan
was not less than the market value at the date of grant for ISOs and not less
than 110% of the market value on the date of grant for an ISO granted to a
shareholder possessing 10% more of the voting stock of the Company.
Effective for the fiscal year ending December 26, 1996, the Company has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". In 1998 and 1996 all stock options were granted at an exercise
price equal to fair market value at the date of grant and, accordingly, no
compensation expense has been recognized in connection with the Company's stock
option plans. Had compensation cost for the Company's stock option plan been
determined based on the fair value on the date of grant for awards in 1998 and
1996 consistent with the provisions of SFAS No. 123, the Company's earnings
applicable to common shares would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 26, 1996
---------------------------- ----------------------------
As Reported Pro forma As Reported Pro forma
---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Earnings (loss) applicable to common shares:
Continuing operations $ (6,117) $ (6,216) $ (1,456) $ (2,906)
Discontinued operations 38,930 38,930 3,994 3,994
---------- ---------- ---------- ----------
Earnings before
extraordinary credit 32,813 32,714 2,538 1,088
Extraordinary credit -- -- 9,424 9,424
---------- ---------- ---------- ----------
Net earnings $ 32,813 $ 32,714 $ 11,962 $ 10,512
========== ========== ========== ==========
Earnings (loss) per share:
Basic
Continuing operations $ (.78) $ (.79) $ (.19) $ (.39)
Discontinued operations 4.94 4.94 .53 .53
---------- ---------- ---------- ----------
Earnings before
extraordinary credit 4.16 4.15 .34 .14
Extraordinary credit -- -- 1.25 1.25
---------- ---------- ---------- ----------
Net earnings $ 4.16 $ 4.15 $ 1.59 $ 1.39
========== ========== ========== ==========
Diluted
Continuing operations $ (.78) $ (.79) $ (.19) $ (.39)
Discontinued operations 4.94 4.94 .53 .53
---------- ---------- ---------- ----------
Earnings before
extraordinary credit 4.16 4.15 .34 .14
Extraordinary credit -- -- 1.25 1.25
---------- ---------- ---------- ----------
Net earnings $ 4.16 $ 4.15 $ 1.59 $ 1.39
========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The fair value of stock options granted in 1998 and 1996 was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1998 1996
---- ----
Expected life (years) 5 5
Interest rate 5.0% 6.5%
Volatility 50.0% 50.0%
Dividend yield - -
Information regarding all stock option plans for the three years in the period
ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Options outstanding at beginning of year 913,050 917,850 431,500
Options granted 62,500 -- 532,750
Options exercised (4,300) (4,800) (40,400)
Options canceled -- -- (6,000)
---------- ---------- -----------
Options outstanding at end of year 971,250 913,050 917,850
========== ========== ===========
Options exercisable at end of year 971,250 913,050 917,850
========== ========== ===========
Options available for grant at end of year 1,604,750 1,667,250 1,667,250
========== ========== ===========
Weighted average option prices:
Outstanding at beginning of year $ 4.61 $ 4.61 $ 3.89
Options granted $ 3.125 -- $ 5.25
Options exercised $ 3.70 $ 3.70 $ 5.01
Options canceled -- -- $ 10.00
Outstanding at end of year $ 4.52 $ 4.61 $ 4.61
Exercisable at end of year $ 4.52 $ 4.61 $ 4.61
</TABLE>
Significant option groups outstanding at December 31, 1998 and related weighted
average price and remaining life information are as follows:
Options Options Exercise Remaining
Grant Date Outstanding Exercisable Price Life (Years)
---------- ----------- ----------- ----- ------------
05-27-98 62,500 62,500 $3.125 9
10-04-96 532,750 532,750 $5.25 7
01-08-93 143,500 143,500 $3.75 4
06-22-92 6,000 6,000 $5.25 3
09-19-91 51,667 51,667 $3.65 2
12-19-90 174,833 174,833 $3.65 1
F-22
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Effective January 6, 1999, the Company issued certain officers and key employees
of ARTRA options to purchase 413,250 shares of ARTRA common stock at $4.75 per
share, the fair market value on the date of grant. The options vested
immediately and expire ten years from the date of grant. Additionally, effective
January 6, 1999, the Company issued its outside directors options to purchase an
aggregate of 20,000 ARTRA common shares at $4.75 per share, the fair market
value on the date of grant, to certain outside directors. The options vested
immediately and expire ten years from the date of grant. These outside directors
were not board members at the time of the May 1998 disinterested director option
grants.
Warrants
Information regarding warrants to purchase shares of the Company's common stock
for the three years in the period ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Warrants outstanding at beginning of year 2,592,350 1,711,032 1,148,549
Warrants granted 192,500 1,196,894 632,583
Warrants exercised -- (35,000) (37,500)
Warrants put back (500,000) (114,000) --
Warrants expired (214,850) (166,576) (32,600)
---------- ---------- ----------
Warrants outstanding at end of year 2,070,000 2,592,350 1,711,032
========== ========== ==========
$3.00 $3.50 $3.50
Exercise prices per share to to to
$8.00 $8.00 $9.875
</TABLE>
The warrants, exercisable from the date of issue, expire at various dates
through 2003. These warrants were issued principally as additional compensation
for various short-terms loans. At December 31, 1998, warrantholders had the
right to put warrants to purchase 833,144 shares of ARTRA common stock back to
the Company for total consideration of $1,705,000. During 1998 warrants to
purchase 500,000 shares of ARTRA common stock at prices ranging from $3.75 per
share to $5.00 per share were put back to ARTRA for total consideration of
$1,440,000. During 1997 warrants to purchase 114,000 shares of ARTRA common
stock at prices ranging from $5.00 per share to $6.00 per share were put back to
ARTRA for total consideration of $228,000.
11. COMMITMENTS AND CONTINGENCIES
Rental expense from continuing operations was $138,000, $134,000 and $134,000 in
fiscal years 1998, 1997 and 1996, respectively. Effective December 1995, John
Harvey, the Company's Chairman of the board of directors purchased the building
in which the Company leases office for its corporate headquarters. The lease
expired in December 1998 and has been extended on a month-to-month basis. Rental
expense for this lease was $126,000 annually for fiscal years 1998, 1997 and
1996.
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. Capital expenditures for ongoing
environmental compliance measures are recorded in the consolidated balance
sheets and related expenses are included in the normal operating expenses of
conducting business. The Company is involved with environmental compliance and
remediation activities at some of its former sites and at a number of
third-party sites. The Company accrues for certain environmental
remediation-related activities for which commitments or clean-up plans have been
developed or for which costs or minimum costs can be reasonably estimated. All
accrued amounts are recorded on an undiscounted basis. At December 31, 1998 and
December 31, 1997, the Company had accrued current liabilities of $1,500,000 and
$1,800,000, respectively, 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.
F-23
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 is required to
maintain and comply with permits and emissions regulations with regard to each
of these emission sources.
In November of 1995, the EPA issued a Notice of Violation ("NOV") against
Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act
and related regulations. In May 1998 Bagcraft paid $170,000 to formally
extinguish this claim.
In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of hazardous substances which were stored, disposed
of or otherwise released at this manufacturing facility. This facility was owned
by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from
1969 to 1980. Sherwin-William's current projection of the cost of clean-up is
approximately $5 to $6 million. The Company has filed counterclaims against
Sherwin-Williams and cross claims against other former owners of the property.
The Company also is vigorously defending this action and has raised numerous
defenses. Currently, the case is in its early stages of discovery and the
Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process. ARTRA entered into a
consent decree with the EPA in which it agreed to pay $85,000 for one phase of
the clean-up costs for this site; however, ARTRA defaulted on its payment
obligation. ARTRA is presently unable to estimate the total potential liability
for clean-up costs at this site, which clean-up is expected to continue for a
number of years. The consent decree, even if it had been honored by ARTRA, was
not intended to release ARTRA from liability for costs associated with other
phases of the clean-up at this site. The Company is presently unable determine
what, if any, additional liability it may incur in this matter.
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 December
31, 1998, 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,
F-24
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
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.
In 1986, in a case titled People of the State of Illinois v. NL Industries,
Inc., ARTRA GROUP Incorporated, et al., the Cook County State's attorney filed
suit seeking response costs in excess of $2,000,000 and treble punitive damages
for costs expended by IEPA in remediating contamination at the Dutch Boy site,
alleging that all former owners contributed to the contamination. In 1989, the
Circuit Court dismissed the action, holding that the state had failed to exhaust
its administrative procedures. In 1992, this holding was reversed by the
Illinois Supreme Court. In 1996, the Illinois Appellate Court affirmed the
District Court's decision to dismiss the case based on lack of due diligence on
the part of the State of Illinois. The State of Illinois has filed a Petition
for Rehearing which was granted. The Company is presently unable to determine
ARTRA's liability, if any, in connection with this case.
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.
12. INCOME TAXES
The provision (credit) for income taxes (in thousands) is included in the
statements of operations as follows:
1998 1997 1996
------- ------- -------
Continuing operations $ -- $ -- $ --
Extraordinary credit -- -- 200
Discontinued operations 1,600 (19) 152
------- ------- -------
$ 1,600 $ (19) $ 352
======= ======= =======
A summary of the provision (credit) for income taxes (in thousands) is as
follows:
1998 1997 1996
------- ------- -------
Current:
Federal $ 700 $ -- $ 200
State 900 (19) 152
------- ------- -------
$ 1,600 $ (19) $ 352
======= ======= =======
Due to the utilization of tax loss carryforwards, no Federal income tax expense
is reflected in the Company's financial statements resulting from the 1998
earnings from discontinued operations or the 1996 extraordinary credit, except
for Federal alternative minimum tax. The 1996 extraordinary credit represents a
net gain from discharge of indebtedness.
F-25
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. INCOME TAXES, continued
In 1998, 1997 and 1996, the effective tax rates from operations, including
discontinued operations were 4.5%, (1.0)% and 2.5%, respectively, as compared to
the statutory Federal rate, which are reconciled (in thousands) as follows:
1998 1997 1996
-------- -------- --------
Provision (credit) for income taxes
using statutory rate $ 12,013 $ 633 $ 4,709
State and local taxes,
net of Federal benefit 900 (19) 152
Current year tax loss not utilized -- (1,680) --
Deferred finance fee -- 919 127
Amortization of goodwill -- 104 104
Previously unrecognized benefit
from utilizing tax loss carryforwards (12,035) -- (4,767)
Alternative minimum tax 700 -- --
Other 22 24 27
-------- -------- --------
$ 1,600 $ (19) $ 352
======== ======== ========
F-26
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. INCOME TAXES, continued
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax liabilities and deferred tax assets at December 31, 1998 and December 31,
1997 and their approximate tax effects (in thousands) are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------
Temporary Tax Temporary Tax
Difference Difference Difference Difference
<S> <C> <C> <C> <C>
Investment in COMFORCE Corporation $ 36,000 $ 14,000 $ 36,000 $ 14,000
Accrued personnel costs -- -- 1,200 500
Restructuring reserve -- -- 600 200
Environmental reserve -- -- 300 100
Other 2,500 1,000 3,400 1,300
Capital loss carryforward -- -- 3,500 1,400
Net operating loss 10,200 4,000 40,000 15,600
-------- --------
Total deferred tax assets 19,000 33,100
-------- --------
Inventories -- -- (1,900) (700)
Accumulated depreciation -- -- (5,100) (2,000)
Other (800) (300) (800) (300)
-------- --------
Total deferred tax liabilities (300) 3,000
-------- --------
Valuation allowance (18,700) (30,100)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
</TABLE>
The Company has recorded a valuation allowance with respect to the future tax
benefits and the net operating loss reflected in deferred tax assets as a result
of the uncertainty of their ultimate realization.
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, 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
that would prevent it from utilizing a substantial portion of its Federal income
tax loss carryforwards.
F-27
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401 (k) plan covering substantially
all employees. Both employee and employer contributions are generally determined
as a percentage of the covered employee's annual compensation. The total expense
charged to operations relating to this plan amounted to $45,000, $38,000 and
$28,000 in 1998, 1997 and 1996, respectively.
The Company typically does not offer the types of benefit programs that fall
under the guidelines of Statement of Financial Accounting Standards No. 132 -
Employers' Disclosures about Pensions and Other Postretirement Benefits.
14. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share," for the year ended
December 31, 1998. Adoption of this pronouncement, which was applied to prior
periods presented, did not have a material impact on the Company's financial
statements.
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 (redeemable common stock,
stock options and warrants), unless anti-dilutive, during each period. During
the years ended December 31, 1998, 1997 and 1996, the number of anti-dultive
common stock equivalents outstanding during each period totaled 77,000, 123,000
and 414,000 shares, respectively.
Earnings (loss) per share for each of the three fiscal years in the period ended
December 31, 1998 was computed as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 26, 1996
--------------------- --------------------- ------------------------
Basic Diluted Basic Diluted Basic Diluted
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE SHARES OUTSTANDING:
Weighted average shares outstanding 7,891 7,891 7,970 7,970 7,525 7,525
Common stock equivalents
(options/warrants) -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
7,891 7,891 7,970 7,970 7,525 7,525
======== ======== ======== ======== ======== ========
EARNINGS (LOSS):
Earnings (loss) from
continuing operations $ (5,707) $ (5,707) $ 1,066 $ 1,066 $ (445) $ (445)
Dividends applicable to
redeemable preferred stock (410) (410) (693) (693) (621) (621)
Redeemable common stock accretion -- -- (400) (400) (390) (390)
-------- -------- -------- -------- -------- --------
Loss from continuing operations
applicable to common shareholders (6,117) (6,117) (27) (27) (1,456) (1,456)
Earnings (loss) from
discontinued operations 38,930 38,930 (293) (293) 3,994 3,994
-------- -------- -------- -------- -------- --------
Earnings (loss) before
extraordinary credit 32,813 32,813 (320) (320) 2,538 2,538
Extraordinary credit -- -- -- -- 9,424 9,424
-------- -------- -------- -------- -------- --------
Net earnings (loss) $ 32,813 $ 32,813 $ (320) $ (320) $ 11,962 $ 11,962
======== ======== ======== ======== ======== ========
</TABLE>
F-28
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. EARNINGS PER SHARE, continued
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 26, 1996
-------------------- ------------------ -------------------
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
PER SHARE AMOUNTS:
Loss from continuing operations
applicable to common shares $ (.78) $ (.78) $ -- $ -- $ (.19) $ (.19)
Earnings (loss) from
discontinued operations 4.94 4.94 (.04) (.04) .53 .53
-------- -------- ------- ------- -------- --------
Earnings (loss) before
extraordinary credit 4.16 4.16 (.04) (.04) .34 .34
Extraordinary credit -- -- -- -- 1.25 1.25
-------- -------- ------- ------- -------- --------
Net earnings (loss) applicable
to common shares $ 4.16 $ 4.16 $ (.04) $ (.04) $ 1.59 $ 1.59
======== ======== ======= ======= ======== ========
</TABLE>
15. LITIGATION
In November, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth
Judicial Circuit for the state of Illinois against Salomon Brothers, Inc.,
Salomon Brothers Holding Company, Inc., Charles K. Bobrinskoy, Michael J.
Zimmerman (collectively, "Salomon Defendants"), D.P. Kelly & Associates, L.P.,
("DPK"), Donald P. Kelly ("Kelly Defendants" along with DPK), James F. Massey
and William Rifkind relating to the acquisition of Envirodyne Industries, Inc.
in 1989 by Emerald Acquisition Corp.
Effective December 31, 1997, the above parties reached a settlement agreement
and all pending litigation was dismissed. ARTRA recognized a gain from the
settlement agreement of $10,416,000 ($1.31 per share), net of related legal fees
and other expenses.
The Company and its subsidiaries are the defendants in various other
business-related litigation and environmental matters (see Note 11). Management
does not believe the outcome of these matters will have a material adverse
effect on the Company's financial statements.
16. RELATED PARTY TRANSACTIONS
At December 31, 1997, advances to Peter R. Harvey, ARTRA's president, classified
in the consolidated balance sheet as a reduction of common shareholders' equity,
(in thousands) consisted of:
Total advances, including accrued interest $18,226
Less interest for the period January 1,
1993 to date, accrued and fully reserved (2,789)
-------
15,437
Less compensation/expense reimbursement (2,816)
-------
Net advances $12,621
=======
ARTRA had total advances due from its president, Peter R. Harvey, of which
$18,226,000, including accrued interest, remained outstanding at December 31,
1997. These advances provided for interest at varying rate from 10.5% to 12%.
This receivable from Peter R. Harvey had been classified as a reduction of
common shareholders' equity.
Commencing January 1, 1993 to date, interest on the advances to Peter R. Harvey
had been accrued and fully reserved.
F-29
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In March 1998, ARTRA's Board of Directors ratified a proposal to settle Mr.
Harvey's advances as follows:
Effective December 31, 1997, Mr. Harvey's net advances from ARTRA were
offset by $2,816,000 ($5,605,000 net of interest accrued and reserved
for the period 1993 - 1997) to $12,621,000. This offset of Mr.
Harvey's advances represented a combination of compensation for prior
year guarantees of ARTRA obligations to private and institutional
lenders, compensation in excess of the nominal amounts Mr. Harvey
received for the years 1995 - 1997 and reimbursement for expenses
incurred to defend ARTRA against certain litigation.
Effective January 31, 1998, Mr. Harvey's remaining advances totaling
$12,787,000 were paid with consideration consisting of the following
ARTRA/BCA preferred stock held by Mr. Harvey:
Face Value Plus
Security Accrued Dividends
------------------------------------------------------ -----------------
ARTRA redeemable preferred stock, 1,734.28 shares $ 2,751,000
BCA Holdings Series A preferred stock, 1,784.029 shares 2,234,000
BCA Holdings Series B preferred stock, 6,172 shares 7,802,000
-------------
$ 12,787,000
=============
For a discussion of certain other related party debt obligations see Note 7.
17. SUBSQUENT EVENT - APPROVAL OF MERGER (UNAUDITED)
On February 23, 1999, ARTRA entered into an agreement with Entrade Inc.
("Entrade"), formerly NA Acquisition Corp., and WorldWide Web NetworX
Corporation ("WorldWide") providing for the merger of a subsidiary of Entrade
with ARTRA. Entrade owns all of the outstanding capital stock of entrade.com and
25% of the Class A Common Stock of asseTrade.com.
entrade.com is an Internet business-to-business electronic commerce
("e-commerce") company seeking to provide asset disposition solutions for the
utility and large industrial manufacturing sectors. asseTrade.com proposes to
develop and implement comprehensive asset/inventory recovery, disposal,
remarketing and management solutions for corporate clients through advanced
Internet electronic business applications, including on-line auctions.
In connection with the execution of the Merger Agreement, on February 23, 1999,
Entrade acquired certain software and intellectual property and 25% of the
shares of Class A Voting Common Stock of asseTrade.com (collectively, the
"Purchased Assets") from WorldWide, in exchange for 1,800,000 shares of Entrade
common stock, $800,000 in cash and a note for $500,000, payable upon the
consummation of the Merger or the earlier termination of the Merger Agreement.
On February 16, 1999, Entrade had agreed with Energy Trading Company, a wholly
owned subsidiary of Peco Energy Company, to issue to Energy Trading Company
200,000 shares of Entrade common stock, and to pay Energy Trading Company
$100,000 in exchange for certain retained rights Energy Trading Company held in
the Purchased Assets. Entrade also agreed with both WorldWide and Energy Trading
Company that it would provide a minimum of $4,000,000 in funding for
entrade.com. Under separate loan agreements, ARTRA agreed to loan Entrade up to
$2,000,000 and advance an additional $250,000 to fund the $800,000 cash payment
to WorldWide and to provide funding for entrade.com until the consummation of
the Merger or the earlier termination of the Merger Agreement. Under the Merger
Agreement, the Company agreed to guaranty the $4,000,000 funding for entrade.com
if the Merger is consummated.
On September 22, 1999, the shareholders of ARTRA approved the agreement and,
effective September 23, 1999, the merger was completed. The former ARTRA
shareholders received one share of Entrade common Stock in exchange for each
share of ARTRA common stock. Additionally, holders of ARTRA Series A preferred
stock receive 329 shares of Entrade common stock for each share of ARTRA Series
A preferred stock.
Entrade had no operations and no revenues related to the assets it acquired
prior to commencing limited operations in February 1999. Accordingly, the
historical financial statements of ARTRA are presented as the precessor
financial statements of Entrade.
In September 1999, asseTrade.com entered into an agreement with an investor
providing for an initial purchase of shares asseTrade.com Series A Preferred
stock. Upon completion of the transaction, subject to certain performance
criteria on the part of asseTrade.com, the investor will purchase additional
shares of asseTrade.com Series A Preferred stock. Upon certain conditions, the
asseTrade.com Series A Preferred stock is convertible into shares of
asseTrade.com Class A common stock. Assuming completion of the transaction and
conversion of the asseTrade.com Series A Preferred stock into shares of
asseTrade.com Class A common stock, the investor will hold a 30.1% interest in
the Class A Common Stock of asseTrade.com. and Entrade's interest in the Class A
Common Stock of asseTrade.com. will be reduced to 17.5%.
F-30
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share data)
June 30, December 31,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 10,495 $ 11,753
Restricted cash and equivalents 111 1,045
Available-for-sale securities 4,577 8,200
Other 221 270
-------- --------
Total current assets 15,404 21,268
Other assets:
Advances to Entrade Inc. 1,428 --
Other 89 --
-------- --------
$ 16,921 $ 21,268
======== ========
LIABILITIES
Current liabilities:
Accrued expenses $ 590 $ 568
Income taxes 1,114 1,854
Common stock put warrants 511 1,705
Liabilities of discontinued operations 8,464 10,328
-------- --------
Total current liabilities 10,679 14,455
-------- --------
Commitments and contingencies
Redeemable preferred stock 3,051 2,857
SHAREHOLDERS' EQUITY
Common stock, no par value;
authorized 20,000,000 shares;
issued 9,318,105 shares in 1999
and 8,302,110 shares in 1998 6,989 6,227
Additional paid-in capital 53,047 42,734
Deferred stock compensation (3,702) --
Unrealized appreciation of investments 7,297 10,920
Accumulated deficit (58,815) (54,300)
-------- --------
4,816 5,581
Less treasury stock, 437,882 shares, at cost 1,625 1,625
-------- --------
3,191 3,956
-------- --------
$ 16,921 $ 21,268
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-31
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998* 1999 1998*
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $ --
------- ------- ------- -------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization -- -- -- --
Selling, general and administrative 3,174 530 4,528 1,152
------- ------- ------- -------
3,174 530 4,528 1,152
------- ------- ------- -------
Operating loss (3,174) (530) (4,528) (1,152)
------- ------- ------- -------
Other income (expense):
Interest income (expense), net 121 (853) 207 (1,987)
Realized gain on disposal
of available-for-sale securities -- 267 -- 320
Other income (expense), net -- 2 -- (74)
------- ------- ------- -------
121 (584) 207 (1,741)
------- ------- ------- -------
Loss from continuing operations before income taxes (3,053) (1,114) (4,321) (2,893)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Loss from continuing operations (3,053) (1,114) (4,321) (2,893)
Earnings from discontinued operations -- 948 -- 810
------- ------- ------- -------
Net loss (3,053) (166) (4,321) (2,083)
Dividends applicable to redeemable preferred stock (130) (95) (194) (219)
------- ------- ------- -------
Loss applicable to common shares ($3,183) ($ 261) ($4,515) ($2,302)
======= ======= ======= =======
Earnings (loss) per share applicable to common shares:
Basic
Continuing operations ($ 0.37) ($ 0.15) ($ 0.54) ($ 0.39)
Discontinued operations -- 0.12 -- 0.10
------- ------- ------- -------
Net loss ($ 0.37) ($ 0.03) ($ 0.54) ($ 0.29)
======= ======= ======= =======
Weighted average number of shares
of common stock outstanding 8,655 7,864 8,331 7,914
======= ======= ======= =======
Diluted
Continuing operations ($ 0.37) ($ 0.15) ($ 0.54) ($ 0.39)
Discontinued operations -- 0.12 -- 0.10
------- ------- ------- -------
Net loss ($ 0.37) ($ 0.03) ($ 0.54) ($ 0.29)
======= ======= ======= =======
Weighted average number of shares of common stock
and common stock equivalents outstanding 8,655 7,864 8,331 7,914
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- ---------------------------
* As reclassified for discontinued operations.
F-32
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred Other Treasury Stock Total
----------------- Paid-in Stock Comprehensive Accumulated --------------- Shareholders'
Shares Dollars Capital Compensation Income (Deficit) Shares Dollars Equity
--------- ------- --------- ------------ ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 8,302,110 $6,227 $42,734 $10,920 ($54,300) 437,882 ($1,625) $3,956
------------
Comprehensive income (loss):
Net loss - - - - (4,321) - - (4,321)
Net decrease in unrealized
appreciation of investments - - - (3,623) - - - (3,623)
------------
Comprehensive income (loss) (7,944)
------------
Other changes in
shareholders' equity:
Exercise of warrants to
purchase common stock 978,598 734 3,520 - - - - 4,254
Exercise of options to
purchase common stock 37,397 28 124 - - - - 152
Stock options issued
and deferred
stock-based compensation - - 4,900 (4,900) - - - - -
Compensation expense recognized - - - 1,198 - - - - 1,198
Outstanding stock options - - 575 - - - - - 575
Reverse put liability
for warrants exercised - - 1,194 - - - - - 1,194
Redeemable preferred
stock dividends - - - - (194) - - (194)
------------
Other changes in
shareholders' equity 7,179
------------
--------- ------- --------- ----------- ----------- --------- ------- ------- ------------
Balance at June 30, 1999 9,318,105 $6,989 $53,047 ($3,702) $7,297 ($58,815) 437,882 ($1,625) $3,191
========= ======= ========= =========== =========== ========= ======= ======= ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-33
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
Net cash flows from (used by) operating activities ($ 3,781) $ 701
-------- --------
Cash flows from investing activities:
Advances to Entrade Inc. (2,728) --
Decrease in restricted cash 934 --
Additions to property, plant and equipment -- (1,105)
Proceeds from sale of COMFORCE common stock -- 170
Other (89) --
-------- --------
Net cash flows used by investing activities (1,883) (935)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 4,406 17
Net decrease in short-term debt -- (379)
Proceeds from long-term borrowings -- 70,186
Reduction of long-term debt -- (72,625)
Repurchase of common stock previously issued
to pay down short-term notes -- (1,518)
Redemption of detachable put warrants -- (1,410)
Other -- (1)
-------- --------
Net cash flows from (used by) financing activities 4,406 (5,730)
-------- --------
Decrease in cash and cash equivalents (1,258) (5,964)
Cash and equivalents, beginning of period 11,753 5,991
-------- --------
Cash and equivalents, end of period $ 10,495 $ 27
======== ========
Supplemental schedule of noncash
investing and financing activities:
ARTRA/BCA redeemable preferred
stock received as payment of
Peter Harvey advances -- 12,787
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-34
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ARTRA Group Incorporated, (hereinafter "ARTRA" or the "Company"), is a
Pennsylvania corporation incorporated in 1933. Through November 20, 1998, ARTRA
operated in one industry segment as a manufacturer of packaging products
principally serving the food industry. The packaging products business was
conducted by the Company's wholly-owned subsidiary, Bagcraft Corporation of
America ("Bagcraft"), which business was sold on November 20, 1998.
As discussed in Note 2, on February 23, 1999, ARTRA entered into an agreement
with Entrade Inc. ("Entrade"), formerly NA Acquisition Corp., and WorldWide Web
NetworX Corporation ("WorldWide") providing for the merger of a subsidiary of
Entrade with ARTRA. Entrade, a 90% owned subsidiary of WorldWide, owns all of
the outstanding capital stock of entrade.com, Inc. ("entrade.com") and 25% of
the Class A Common Stock of asseTrade.com, Inc. ("asseTrade.com").
Consummation of the merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's annual report on Form 10-K for the fiscal year ended December 31,
1998, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 31, 1998 was derived from
the audited consolidated financial statements in the Company's annual report on
Form 10-K.
In the opinion of the Company, the accompanying condensed consolidated financial
statements reflect all normal recurring adjustments necessary to present fairly
the financial position as of June 30, 1999, and the results of operations and
changes in cash flows for the three month periods ended June 30, 1999 and June
30, 1998. Reported interim results of operations are based in part on estimates
that may be subject to year-end adjustments. In addition, these quarterly
results of operations are not necessarily indicative of those expected for the
year.
2. CHANGE OF BUSINESS
Entrade Inc.
On February 23, 1999, ARTRA entered into an Agreement and Plan of Merger (the
"Merger Agreement") with WorldWide, Entrade, a 90% owned subsidiary of
WorldWide, and WWWX Merger Subsidiary, Inc. ("Merger Sub"), a wholly owned
subsidiary of Entrade, pursuant to which Merger Sub will merge into the Company
(the "Merger"), with the Company being the surviving corporation. As a result of
the Merger, the Company will become a wholly owned subsidiary of Entrade, and
the shareholders of the Company will become shareholders of Entrade. Under the
terms of the Merger Agreement, the Company's shareholders will receive one share
of Entrade Common Stock in exchange for each share of the Company's Common
Stock. Additionally, holders of ARTRA Series A preferred stock will receive 329
shares of Entrade common stock for each share of ARTRA Series A preferred stock.
All stock options and warrants issued by the Company and outstanding on the
closing date of the Merger will be converted into Entrade stock options and
warrants.
Entrade owns all of the outstanding capital stock of entrade.com and 25% of the
Class A Common Stock of asseTrade.com.
entrade.com is an Internet business-to-business electronic commerce
("e-commerce") company seeking to provide asset disposition solutions for the
utility and large industrial manufacturing sectors. asseTrade.com proposes to
develop and implement comprehensive asset/inventory recovery, disposal,
remarketing and management solutions for corporate clients through advanced
Internet electronic business applications, including on-line auctions.
In connection with the execution of the Merger Agreement, on February 23, 1999,
Entrade acquired certain software and intellectual property and 25% of the
shares of Class A Voting Common Stock of asseTrade.com (collectively, the
"Purchased Assets") from WorldWide, in exchange for 1,800,000 shares of Entrade
common stock, $800,000 in cash and a note for $500,000, payable upon the
consummation of the Merger or the earlier termination of the Merger
F-35
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Agreement. On February 16, 1999, Entrade had agreed with Energy Trading Company,
a wholly owned subsidiary of Peco Energy Company, to issue to Energy Trading
Company 200,000 shares of Entrade common stock, and to pay Energy Trading
Company $100,000 in exchange for certain retained rights Energy Trading Company
held in the Purchased Assets. Entrade also agreed with both WorldWide and Energy
Trading Company that it would provide a minimum of $4,000,000 in funding for
entrade.com. Under separate loan agreements, ARTRA agreed to loan Entrade up to
$2,000,000 and advance an additional $250,000 to fund the $800,000 cash payment
to WorldWide and to provide funding for entrade.com until the consummation of
the Merger or the earlier termination of the Merger Agreement. Under the Merger
Agreement, the Company agreed to guaranty the $4,000,000 funding for entrade.com
if the Merger is consummated.
In August 1999, WorldWide agreed to loan Entrade up to $500,000 to fund
Entrade's operations for the period from the date of the loan to the closing
date under the Merger Agreement. This amount will be repaid to WorldWide as a
condition to closing the Merger.
Consummation of the Merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
If the Merger Agreement terminates solely because the ARTRA shareholders have
not approved the Merger Agreement and the Merger, all obligations of WorldWide
and Entrade to repay the amounts loaned to either or both of them by ARTRA under
the loan agreement and an additional $250,000 advanced to Entrade by ARTRA will
terminate and the loans made by ARTRA to WorldWide and to Entrade under the loan
agreement will be forgiven as a "break-up" fee to WorldWide and Entrade equal to
the aggregate amount of the loan as defined in the loan agreement and the
additional $250,000 advance.
Bagcraft
Effective August 26, 1998, ARTRA and its wholly-owned BCA Holdings, Inc. ("BCA")
subsidiary, the parent of Bagcraft, agreed to sell the business assets of
Bagcraft. Additionally, the buyer agreed to assume certain Bagcraft liabilities.
The disposition of the Bagcraft business resulted in a net gain of $35,985,000.
The Company's 1998 consolidated financial statements have been reclassified to
report separately the results of operations of Bagcraft. The operating results
(in thousands) for the six months ended June 30, 1998 of the discontinued
Bagcraft subsidiary consist of:
Net sales $ 63,265
========
Earnings from operations before income taxes
and minority interest $ 1,154
Provision for income taxes (44)
Minority interest (300)
--------
Earnings from discontinued operations $ 810
========
Earnings per share from discontinued operations $ .10
========
Liabilities of discontinued operations at June 30, 1999 and December 31, 1998 of
$8,464,000 and $10,328,000, respectively, include BCA/Bagcraft redeemable
preferred stock issues (see Note 4), contractual obligations, environmental
matters and other future estimated costs for various discontinued operations.
F-36
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
3. INVESTMENT IN COMFORCE CORPORATION
At June 30, 1999 ARTRA's investment in COMFORCE Corporation ("COMFORCE"),
1,525,500 shares, currently a common stock ownership interest of approximately
9%, was classified in the Company's condensed consolidated balance sheet in
current assets as "Available-for-sale securities." At June 30, 1999 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $7,297,000. The investment in
COMFORCE common stock, which represents a significant portion of the Company's
assets at June 30, 1999 and December 31, 1998, is subject to liquidity and
market price risks.
In January 1996, the Company's Board of Directors approved the sale of 200,000
of ARTRA's COMFORCE common shares to certain officers, directors and key
employees of ARTRA for non-interest bearing notes totaling $400,000. The notes
are collateralized by the related COMFORCE common shares. Additionally, the
noteholders have the right to put their COMFORCE shares back to ARTRA in full
payment of the balance of their notes.
Based upon the preceding factors, the Company had concluded that, for reporting
purposes, it had effectively granted options to certain officers, directors and
key employees to acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly,
in January 1996 these 200,000 COMFORCE common shares were removed from the
Company's portfolio of "Available-for-sale securities" and were classified in
the Company's condensed consolidated balance sheet as other receivables with an
aggregate value of $400,000, based upon the value of proceeds to be received
upon future exercise of the options. The disposition of these 200,000 COMFORCE
common shares resulted in a gain that was deferred and will not be recognized in
the Company's financial statements until the options to purchase these 200,000
COMFORCE common shares are exercised.
During the three and six months ended June 30, 1998, options to acquire 70,750
and 84,750 of these COMFORCE common shares were exercised resulting in realized
gains of $267,000 and $320,000, respectively. At June 30, 1999, options to
acquire 55,750 COMFORCE common shares remained unexercised and were classified
in the Company's condensed consolidated balance sheet as other current assets
with an aggregate value of $112,000, based upon the value of proceeds to be
received upon future exercise of the options.
4. REDEEMABLE PREFERRED STOCK
ARTRA
In March 1990, ARTRA issued 3,750 shares of $1,000 par value junior
non-convertible payment-in-kind redeemable Series A Preferred Stock with an
estimated fair value of $1,012,000, net of unamortized discount of $2,738,000 as
partial consideration for the acquisition of the discontinued Bagcraft
subsidiary.
At June 30, 1999 and December 31, 1998, 1,849.34 shares of Series A Preferred
Stock were outstanding with carrying values of $3,051,000 and $2,857,000,
respectively, including accumulated dividends, net of unamortized discount of
$102,000 and $239,000, respectively. The Series A Preferred Stock accrues
dividends at the rate of 6% per annum and is redeemable by ARTRA on March 1,
2000 at a price of $1,000 per share plus accrued dividends. Accumulated
dividends of $1,338,000 ($724 per share) and $1,246,000 ($674 per share) were
accrued at June 30, 1999 and December 31, 1998, respectively.
BCA Holdings/ Bagcraft
During 1992 and 1993, in exchange for cash consideration of $3,675,000, a former
related party received 3,675 shares of BCA Series A preferred stock (6%
cumulative, redeemable preferred stock with a liquidation preference equal to
$1,000 per share). At June 30, 1999 and December 31, 1998, liabilities of
discontinued operations included 1,036.39 and 1,672.18 BCA Series A redeemable
preferred shares with accumulated dividends of $318,000 ($307 per share) and
$514,000 ($307 per share), respectively.
F-37
<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 June 30, 1999 and
December 31, 1998, liabilities of discontinued operations included 1,675.79 BCA
Series B redeemable preferred shares with accumulated dividends of $650,000
($388 per share).
Both the BCA Series A preferred stock and the BCA Series B preferred stock are
redeemable at the option of the issuer for an amount equal to face value plus
accumulated dividends. The BCA Series B preferred stock was redeemable on June
1, 1997.
At June 30, 1999 and December 31, 1998, liabilities of discontinued operations
included 8,650 shares of Bagcraft 13.5% cumulative, redeemable preferred stock
(liquidation preference equal to $100 per share). Accumulated dividends of
$1,315,000 were accrued at June 30, 1999 and December 31, 1998 ($152 per share).
Proposed Exchange Under Merger Agreement
On February 23, 1999, ARTRA entered into a Merger Agreement with WorldWide and
Entrade (see Note 2). As a result of the Merger, the Company will become a
wholly owned subsidiary of Entrade, and the shareholders of the Company will
become shareholders of Entrade. Under the terms of the Merger Agreement, if
approved by the Company's shareholders, the holders of ARTRA Series A preferred
stock will receive 329 shares of Entrade Common Stock in exchange for each share
of their ARTRA Series A preferred stock.
The Merger Agreement as amended as of August 9, 1999, does not provide for the
issuance of shares of Entrade common stock in exchange for any outstanding
shares of BCA Series A preferred stock or BCA Series B preferred stock.
5. INCOME TAXES
No income tax benefit was recognized in connection with the Company's 1998 and
1997 pre-tax losses due to the Company's tax loss carryforwards and the
uncertainty of future taxable income.
At December 31, 1998, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $10,000,000 expiring principally in 2010 -
2012, available to be applied against future taxable income, if any. In recent
years, the Company has issued shares of its common stock to repay various debt
obligations, upon exercise of stock options and warrants, as consideration for
acquisitions, to fund working capital obligations and as consideration for
various other transactions. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its Federal income tax loss carryforwards
when certain changes in the ownership of a corporation's common stock occurs. In
the opinion of management, the Company is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should the Company continue to issue a significant number of
shares of its common stock, it could trigger a limitation on its ability to
utilize its Federal income tax loss carryforwards. The pending Merger with
Entrade will not affect ARTRA's Federal income tax loss carryforwards.
6. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". Basic earnings (loss) per share is computed by dividing the income
available to common shareholders, net earnings (loss), less redeemable preferred
stock dividends and redeemable common stock accretion, by the weighted average
number of shares of common stock outstanding during each period.
F-38
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. During the three months
ended June 30, 1999 and 1998, the number of anti-dultive common stock
equivalents oustanding during each period totaled 26,000 and 25,000 shares,
respectively. During the six months ended June 30, 1999 and 1998, the number of
anti-dultive common stock equivalents outstanding during each period totaled
1,471,000 and 1,098,000 shares, respectively.
Earnings (loss) per share for the three and six months ended June 30, 1999 and
1998 was computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
AVERAGE SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 8,655 8,655 7,864 7,864
Common stock equivalents (options/warrants) -- -- -- --
------- ------- ------- -------
8,655 8,655 7,864 7,864
======= ======= ======= =======
EARNINGS (LOSS):
Loss from continuing operations $(3,053) $(3,053) $(1,114) $(1,114)
Dividends applicable to
redeemable preferred stock (130) (130) (95) (95)
------- ------- ------- -------
Loss from continuing operations
applicable to common shareholders (3,183) (3,183) (1,209) (1,209)
Earnings from discontinued operations -- -- 948 948
------- ------- ------- -------
Net loss $(3,183) $(3,183) $ (261) $ (261)
======= ======= ======= =======
PER SHARE AMOUNTS:
Loss from continuing operations
applicable to common shares $ (.37) $ (.37) $ (.15) $ (.15)
Earnings from discontinued operations -- -- .12 .12
------- ------- ------- -------
Net loss applicable to common shares $ (.37) $ (.37) $ (.03) $ (.03)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
AVERAGE SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 8,331 8,331 7,914 7,914
Common stock equivalents (options/warrants) -- -- -- --
------- ------- ------- -------
8,331 8,331 7,914 7,914
======= ======= ======= =======
EARNINGS (LOSS):
Loss from continuing operations $(4,321) $(4,321) $(2,893) $(2,893)
Dividends applicable to
redeemable preferred stock (194) (194) (219) (219)
------- ------- ------- -------
Loss from continuing operations
applicable to common shareholders (4,515) (4,515) (3,112) (3,112)
Earnings from discontinued operations -- -- 810 810
------- ------- ------- -------
Net loss $(4,515) $(4,515) $(2,302) $(2,302)
======= ======= ======= =======
PER SHARE AMOUNTS:
Loss from continuing operations
applicable to common shares $ (.54) $ (.54) $ (.39) $ (.39)
Earnings from discontinued operations -- -- .10 .10
------- ------- ------- -------
Net loss applicable to common shares $ (.54) $ (.54) $ (.29) $ (.29)
======= ======= ======= =======
</TABLE>
F-39
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At June 30, 1999 and December 31, 1998,
the Company had accrued current liabilities of $1,500,000 for potential
business-related litigation and environmental liabilities. While these
litigation and environmental matters involve wide ranges of potential liability,
management does not believe the outcome of these matters will have a material
adverse effect on the Company's financial statements.
The discontinued Bagcraft subsidiary's Chicago facility has been the subject of
allegations that it violated laws and regulations associated with the Clean Air
Act. The facility has numerous sources of air emissions of volatile organic
materials ("VOMs") associated with its printing operations and was required to
maintain and comply with permits and emissions regulations with regard to each
of these emission sources.
In November of 1995, the EPA issued a Notice of Violation ("NOV") against
Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act
and related regulations. In May 1998 Bagcraft paid $170,000 to formally
extinguish this claim.
In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of hazardous substances which were stored, disposed
of or otherwise released at this manufacturing facility. This facility was owned
by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from
1969 to 1980. Sherwin-William's current projection of the cost of clean-up is
approximately $5 to $6 million. The Company has filed counterclaims against
Sherwin-Williams and cross claims against other former owners of the property.
The Company also is vigorously defending this action and has raised numerous
defenses. Currently, the case is in its early stages of discovery and the
Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process. ARTRA entered into a
consent decree with the EPA in which it agreed to pay $85,000 for one phase of
the clean-up costs for this site; however, ARTRA defaulted on its payment
obligation. ARTRA is presently unable to estimate the total potential liability
for clean-up costs at this site, which clean-up is expected to continue for a
number of years. The consent decree, even if it had been honored by ARTRA, was
not intended to release ARTRA from liability for costs associated with other
phases of the clean-up at this site. The Company is presently unable determine
what, if any, additional liability it may incur in this matter.
F-40
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Since 1983, Artra has been a party to product liability asbestos claims relating
to the manufacture of products by The Synkoloid Company, a former operating
subsidiary. As of September 1998, Artra's primary insurance carriers had paid
approximately $13 million in claims related to Synkoloid products, at which
point the primary carriers asserted that primary insurance coverage had been
exhausted. Since that date, some of Artra's excess insurance carriers have
assumed the defense and indemnity costs related to the defense and settlement of
all Synkoloid product liability claims under a temporary agreement.
From September 1998 through August 1, 1999, these carriers had paid
approximately $8.5 million to settle claims. Artra believes that the remaining
excess coverage totals approximately $200 million. Under the temporary
agreement, these carriers could either individually or collectively cease making
indemnity or defense payments at any time or refuse to renew the temporary
agreement, which was due to expire on August 16, 1999. Artra has received an
oral representation from the carriers' lead counsel that the temporary agreement
has been extended to September 30, 1999.
While ARTRA is currently negotiating a permanent agreement with these carriers,
there is no assurance that any permanent agreement will be reached or that the
carriers will continue to make payments on the same terms as under the temporary
agreement. If the terms of the new agreement are less favorable or the temporary
agreement expires without the execution of a new agreement, ARTRA could become
obligated to assume a percentage of the indemnity payments and defense costs.
ARTRA is not able to quantify the potential costs of claims that remain
outstanding or unasserted. If claims exceed the insurance coverage, ARTRA's
financial position could be materially and adversely affected and ARTRA's
ability to fund its operations would be impaired.
Several cases have arisen from ARTRA's purchase of Dutch Boy Paints which owned
a facility in Chicago which it purchased from NL Industries. In a case titled
City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in
the Circuit Court of Cook County, Illinois, the City of Chicago brought a
nuisance action and alleged that ARTRA (and NL Industries, Inc.) had improperly
stored, discarded and disposed of hazardous substances at the Dutch Boy site,
and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up
costs. At the time the suit was filed, the City of Chicago claimed that it would
cost $1,000,000 to remediate the site. The Company is currently negotiating with
the City of Chicago to settle this claim.
ARTRA and NL Industries, Inc. have counter sued each other and have filed third
party actions against the subsequent owners of the property. The Company is
presently unable to determine its liability, if any, in connection with this
case. The parties were conducting discovery but the case was stayed pending the
resolution of the EPA action described below.
On November 17, 1995, the EPA issued letters to ARTRA, NL Industries and others
alleging that they were potentially responsible parties with respect to releases
at the Dutch Boy facility in Chicago and demanding that they remediate the site.
NL Industries entered into a consent decree with EPA in which it agreed to
remediate the site. The Company is presently unable to determine its liability,
if any, in connection with this case.
8. OTHER INFORMATION
On June 28, 1999, the Company's board of directors entered into a three-year
employment agreement with Mark F. Santacrose, under which, Mr. Santacrose agreed
to become the President and Chief Executive Officer of ARTRA. In connection with
such employment, Mr. Santacrose received an option to purchase 200,000 shares of
ARTRA common stock at an exercise price of $10.00 per share (exercisable
immediately) and 100,000 shares of ARTRA common stock at an exercise price of
$12.875 per share (exercisable commencing June 28, 2000). The market value of
ARTRA common stock on the date of grant of the options was $12.875 per share.
Accordingly, at June 30, 1999, ARTRA recognized compensation expense of $575,000
related to these stock options.
F-41
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On February 23, 1999, the Company entered into three-year employment agreements
with four individuals to manage the Company's entry into the Internet
business-to-business e-commerce and on-line auction business. In connection with
such employment, the three individuals received nonqualified stock options for
the purchase of 1,600,000 shares of the Company's Common Stock at an exercise
price of $2.75 per share. The options vest in three equal installments over a
period ending February 18, 2001. During the six months ended June 30, 1999, the
Company recognized compensation expense of approximately $1,200,000 related to
these stock options.
ARTRA had fallen below the New York Stock Exchange's quantitative and other
continued listing criteria. These criteria included the New York Stock
Exchange's net tangible assets and average three-year net income requirements.
Also, after the sale of ARTRA 's Bagcraft subsidiary, ARTRA has lacked an
ongoing operating business as required under the New York Stock Exchange's
rules. At the New York Stock Exchange's request, ARTRA has provided a definitive
action plan demonstrating ARTRA 's ability to achieve compliance with the
Exchange's listing standards, including the succession of Entrade common stock
to this listing after the Merger. Based upon a review of that plan, the New York
Stock Exchange is continuing the listing of ARTRA common stock.
ARTRA and, after the Merger, Entrade will be subject to ongoing quarterly
monitoring for compliance with the plan. Failure to meet any of the quarterly
plan projections could result in the suspension from trading and subsequent
delisting of ARTRA common stock and, after the Merger, Entrade common stock.
ARTRA 's plan is dependent upon the closing of the Merger during the third
quarter of 1999. If the Merger is not completed, ARTRA may not be able to
satisfy the listing requirements of the New York Stock Exchange, and ARTRA
common stock may be delisted from the New York Stock Exchange.
On April 19, 1999, ARTRA entered into a letter of intent to purchase all of the
issued and outstanding common stock of Public Liquidations Systems, Inc. and
Asset Liquidation Group, Inc., d/b/a as Nationwide Auction Systems Corp. The
purchase price shall consist of cash of $10,800,000 payable at closing,
1,570,000 shares of ARTRA common stock and a $14,000,000 note, subject to
adjustment, payable over a two year period subsequent to the closing of the
transaction. Consummation of the transaction is subject to certain conditions,
including performance of the buyer's and seller's due diligence and negotiation
of a definitive asset purchase agreement. The parties had extended the
expiration date of the letter of intent to August 12, 1999 and are negotiating
to further extend the expiration date. This potential acquisition is not as yet
deemed probable as no assurance can be given that the parties will complete
their due diligence or enter into a definitive agreement by that date.
9. SUBSQUENT EVENTS
As discussed in Note 2, on February 23, 1999, ARTRA entered into an agreement
with Entrade, and WorldWide providing for the merger of a subsidiary of Entrade
with ARTRA. On September 22, 1999, the shareholders of ARTRA approved the
agreement and, effective September 23, 1999, the merger was completed. The
former ARTRA shareholders received one share of Entrade common stock in exchange
for each share of ARTRA common stock. Additionally, holders of ARTRA Series A
preferred stock receive 329 shares of Entrade common stock for each share of
ARTRA Series A preferred stock.
Entrade had no operations and no revenues related to the assets it acquired
prior to commencing limited operations in February 1999. Accordingly, the
historical financial statements of ARTRA are presented as the precessor
financial statements of Entrade.
In September 1999, asseTrade.com entered into an agreement with an investor
providing for an initial purchase of shares asseTrade.com Series A Preferred
stock. Upon completion of the transaction, subject to certain performance
criteria on the part of asseTrade.com, the investor will purchase additional
shares of asseTrade.com Series A Preferred stock. Upon certain conditions, the
asseTrade.com Series A Preferred stock is convertible into shares of
asseTrade.com Class A common stock. Assuming completion of the transaction and
conversion of the asseTrade.com Series A Preferred stock into shares of
asseTrade.com Class A common stock, the investor will hold a 30.1% interest in
the Class A Common Stock of asseTrade.com. and Entrade's interest in the Class A
Common Stock of asseTrade.com. will be reduced to 17.5%.
F-42
<PAGE>
Item 7 (b) Pro Forma Financial Information
The following unaudited pro forma condensed combined balance sheet as of June
30, 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 June 30, 1999.
On September 22, 1999, the shareholders of ARTRA approved the merger with
Entrade and, effective September 23, 1999, the merger was completed.
ENTRADE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1999
(Unaudited in Thousands)
<TABLE>
<CAPTION>
ARTRA Pro Forma
Historical Entrade Inc. Adjustments Pro Forma
------------- ------------ ------------- -------------
CURRENT ASSETS
<S> <C> <C> <C>
Cash and equivalents $10,495 $176 $10,671
Restricted cash and equivalents 111 111
Available-for-sale securities 4,577 4,577
Other 221 65 286
------------- ------------ -------------
Total current assets 15,404 241 15,645
------------- ------------ -------------
Advances to Entrade Inc. 1,428 ($2,100)(A) -
1,300 (B)
(628)(F)
Property,plant & equipment, net 304 304
Intangibles, net 3,510 4,625 (C) 9,763
1,000 (E)
628 (F)
Investment in asseTrade.com 3,500 3,500
Other 89 89
------------- ------------ ------------- -------------
16,921 7,555 4,825 29,301
============= ============ ============= =============
CURRENT LIABILITIES
Accrued liabilities 590 12 506 (E) 1,108
Common stock put warrants 511 511
Accounts payable, including amounts
due related parties 383 383
Income taxes payable 1,114 1,114
Note payable 500 500
Due to ARTRA 2,100 (2,100)(A) -
Liabilities of discontinued operations 8,464 8,464
------------- ------------ -------------
10,679 2,995 12,080
------------- ------------ -------------
Redeemable preferred stock 3,051 (3,051)(D) -
Shareholders' Equity 3,191 4,560 1,300 (B) 17,221
4,625 (C)
3,051 (D)
494 (E)
------------- ------------ ------------- -------------
$16,921 $7,555 4,825 $29,301
============= ============ ============= =============
<PAGE>
Notes to the pro forma condensed combined balance sheet:
<FN>
(A) Eliminate ARTRA advances to Entrade Inc.
(B) Reverse Entrade Inc. expenses reported in ARTRA's historical financial
statements.
(C) Reflects the market value of Entrade Inc. common shares to be issued as
consideration for the Entrade Inc. transaction. No readily ascertainable
market exists to value the Entrade Inc. common shares. Accordingly, the
valuation of Entrade Inc. common shares is based upon the market price of
ARTRA common stock, as discounted, as of February 23, 1999, the date of the
merger agreement.
Number of common shares to be issued 2,000
Market value of ARTRA common stock
at February 23, 1999 $5.812500
Less 15% blockage discount (.871875)
---------
$4.940625
---------
Fair market value of common shares to be issued 9,881
Less Entrade fair value at June 30, 1999 (5,256)
---------
Adjustment to equity $ 4,625
=========
(D) Exchange ARTRA preferred stock for Entrade Inc. common stock at the rate of
329 Entrade Inc. common shares for each share of ARTRA preferred stock. The
fair value of Entrade Inc. common stock issued will be used as the basis to
account for the exchange of ARTRA preferred stock. The excess of fair value
of the Entrade Inc. common stock over the book value of the preferred
shares will be accounted for like a preferred stock dividend. Due to its
non-recurring nature, this transaction was not reflected in the pro forma
condensed combined financial statements.
(E) Accrue finders fee and other acquisition related costs.
(F) Reclass acquisition costs and fees paid by ARTRA.
</FN>
</TABLE>
<PAGE>
The following unaudited pro forma condensed combined statement of operations for
the six months ended June 30, 1999 is presented as if 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.
On September 22, 1999, the shareholders of ARTRA approved the merger with
Entrade and, effective September 23, 1999, the merger was completed.
Entrade had no operations and no revenues related to the assets acquired.
asseTrade.com had no operations and no revenues when the 25% voting interest was
acquired by Entrade. Accordingly, no pro forma results of operations are
presented for the six months ended June 30, 1998 and the twelve months ended
December 31, 1998 as in the opinion of management this information would not be
meaningful.
ENTRADE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited in Thousands)
<TABLE>
<CAPTION>
ARTRA Pro Forma
Historical Entrade Inc. Adjustments Pro Forma
---------- ------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ - $ 111 $111
---------- ------------ ------------
Costs and expenses:
Selling, general and administrative 4,528 1,102 5,630
Depreciation and amortization 310 700 (A) 1,010
---------- ------------ ------------
4,528 1,412 6,640
---------- ------------ ------------
Operating loss (4,528) (1,301) (6,529)
---------- ------------ ------------
Other income (expense):
Interest income, net 207 1 208
---------- ------------ ------------
207 1 208
---------- ------------ ------------
Loss from continuing operations before income taxes (4,321) (1,300) (6,321)
Provision for income taxes - -
---------- ------------ ------------ ------------
Loss from continuing operations ($4,321) $ (1,300) $700 ($6,321)
========== ============ ============ ============
Per share loss from continuing operations
applicable to common shares:
Basic ($0.54) ($0.59)
========== ============
Diluted ($0.54) ($0.59)
========== ============
Weighted average number of shares of
common stock outstanding:
Basic 8,331 11,039
========== ============
Diluted 8,331 11,039
========== ============
<PAGE>
Notes to the pro forma condensed combined statement of operations:
<FN>
(A) Additional amortization of intangible assets, assumes a 5 year life.
(B) Pro forma weighted average shares outstanding
Historical 8,331
Shares issed for Entrade Inc. transaction 2,000
Finder's fee for Entrade Inc. transaction 100
Entrade Inc. common shares exchanged for
ARTRA preferred shares 608
----------
11,039
==========
(C) The fair value of Entrade Inc. common stock issued will be used as the
basis to account for the exchange of ARTRA preferred stock. The excess of
fair value of the Entrade Inc. common stock over the book value of the
preferred shares will be accounted for like a preferred stock dividend. Due
to its non-recurring nature, this transaction was not reflected in the pro
forma condensed combined financial statements. Had the transaction been
reflected in the pro forma condensed combined financial statements, the
effect on pro forma loss per share had the exchange been made on February
23, 1999 would have been as follows:
Pro forma loss per share from continuing operations
as presented above ($0.59)
Effect of the excess of fair value of the
Entrade Inc. common stock over the book
value of the ARTRA preferred exchanged ($0.04)
------
Adjusted pro forma loss per share
from continuing operations ($0.63)
======
</FN>
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this report on Form 8-K of Entrade Inc. of our
report dated February 1, 1999 relating to the financial statements of ARTRA
Group Incorporated.
/s/PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
October 6, 1999
