SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-15303
ENTRADE INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 52-2153008
-------------------------------- -------------------
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
500 Central Avenue, Northfield, IL 60093
-------------------------------------- --------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (847) 784-3300
Not Applicable
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 3, 2000
------------------------------- -------------------------------
Common Stock, without par value 17,788,537
<PAGE>
ENTRADE INC
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 . . . . . . . . . 3
Condensed Consolidated Statements
of Operations Three and Nine Months
Ended September 30, 2000 and September 30, 1999. . . . . . 5
Condensed Consolidated Statement of
Changes in Shareholders' Equity (Deficit)
Nine Months Ended September 30, 2000 . . . . . . . . . . . 7
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and
September 30, 1999 . . . . . . . . . . . . . . . . . . . . 9
Notes to Condensed Consolidated Financial Statements . . . . 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 29
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . . . . 37
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 38
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . 38
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
(Unaudited) (Audited)
ASSETS
------
Current assets:
Cash and equivalents . . . . . . . . . $ 3,700 $ 9,667
Receivables, less allowance for
doubtful accounts of $10 in 2000
and 1999 . . . . . . . . . . . . . . 1,730 812
Available-for-sale securities. . . . . 2,670 4,386
Other. . . . . . . . . . . . . . . . . 586 461
-------- --------
Total current assets . . . . . . 8,686 15,326
-------- --------
Property, plant and equipment,
net of accumulated depreciation
of $656 and $178, respectively . . . . 8,236 7,363
Other assets:
Intangibles, principally excess of
cost over net assets acquired,
net of accumulated amortization
of $3,234 and $1,088, respectively . 43,087 54,394
Investment in and advances to
affiliates . . . . . . . . . . . . . 26,927 3,554
Other. . . . . . . . . . . . . . . . . 96 121
-------- --------
Total assets . . . . . . . . . . $ 87,032 $ 80,758
======== ========
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Unaudited, in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
(Unaudited) (Audited)
LIABILITIES
-----------
Current liabilities:
Revolving line of credit . . . . . . . $ 2,999 $ 1,229
Notes payable, including amounts
due to related parties of $4,625 . . 9,625 --
Current maturities of long-term
debt, including amounts due to
related parties of $0 in 2000
and $7,000 in 1999 . . . . . . . . . 136 9,364
Cash overdraft . . . . . . . . . . . . -- 473
Accounts payable . . . . . . . . . . . 3,573 1,345
Accrued expenses . . . . . . . . . . . 2,752 2,850
Income taxes payable . . . . . . . . . 1,072 1,081
Liabilities of discontinued
operations . . . . . . . . . . . . . 3,558 3,875
Obligations expected to be settled
by the issuance of common stock
to related parties . . . . . . . . . 2,500 --
-------- --------
Total current liabilities. . . . 26,215 20,217
-------- --------
Long-term debt . . . . . . . . . . . . . 786 7,978
Obligations expected to be settled
by the issuance of common stock
to related parties . . . . . . . . . . 7,000 4,743
-------- --------
Total liabilities. . . . . . . . 34,001 32,938
-------- --------
Commitments and contingencies (Note 10) -- --
Redeemable warrants (Note 6) . . . . . . 481 --
SHAREHOLDERS' EQUITY
--------------------
Preferred stock, $1,000 par value,
authorized 4,000,000 shares;
no shares issued or outstanding. . . . -- --
Common stock, no par value;
authorized 40,000,000 shares;
issued 17,733,590 shares in 2000
and 15,082,186 shares in 1999. . . . . -- --
Additional paid-in capital . . . . . . . 165,492 119,539
Deferred stock compensation. . . . . . . (2,404) (4,929)
Unrealized appreciation of
investments. . . . . . . . . . . . . . 5,390 7,106
Accumulated deficit. . . . . . . . . . . (115,928) (73,896)
-------- --------
Total shareholders' eqity. . . . 52,550 47,820
-------- --------
Total liabilities and
shareholders' equity . . . . . $ 87,032 $ 80,758
======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
<TABLE>
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . $ 4,460 $ -- $ 11,969 $ --
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold, exclusive of depreciation
and amortization . . . . . . . . . . . . . . . . 1,882 -- 4,943 --
Selling, general and administrative,
exclusive of compensation related to
stock options. . . . . . . . . . . . . . . . . . 7,942 1,985 24,492 4,431
Compensation related to stock options. . . . . . . 499 324 1,589 2,096
Depreciation . . . . . . . . . . . . . . . . . . . 205 (267) 478 43
Amortization and impairment of goodwill. . . . . . 9,161 -- 11,307 --
-------- -------- -------- --------
19,689 2,042 42,809 6,570
-------- -------- -------- --------
Operating loss . . . . . . . . . . . . . . . . . . . (15,229) (2,042) (30,840) (6,570)
-------- -------- -------- --------
Other income (expense):
Net interest (expense) income, exclusive
of amortization of discount on notes payable . . (340) 109 (1,109) 316
Amortization of discount on notes payable. . . . . -- -- (1,138) --
Gain on sale of investments. . . . . . . . . . . . -- -- 8,089 --
Equity loss in affiliates. . . . . . . . . . . . . (2,349) -- (5,588) --
-------- -------- -------- --------
(2,689) 109 254 316
-------- -------- -------- --------
Loss before income taxes . . . . . . . . . . . . . . (17,918) (1,933) (30,586) (6,254)
Provision for income taxes . . . . . . . . . . . . . (6) -- (8) --
-------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . (17,924) (1,933) (30,594) (6,254)
-------- -------- -------- --------
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Dividends applicable to:
Redeemable preferred stock . . . . . . . . . . . . -- (98) -- (292)
Deemed dividend on mandatorily redeemable
convertible preferred stock. . . . . . . . . . . -- -- (23,226) --
Gain on redemption of mandatorily redeemable
convertible preferred stock. . . . . . . . . . . -- -- 11,788 --
-------- -------- -------- --------
Loss applicable to common shares . . . . . . . . . . $(17,924) $ (2,031) $(42,032) $ (6,546)
======== ======== ======== ========
Per share loss applicable to common shares:
Basic and diluted loss applicable
to common shares . . . . . . . . . . . . . . . . $ (1.04) $ (0.20) $ (2.47) $ (0.74)
======== ======== ======== ========
Weighted average number of shares of
common stock outstanding . . . . . . . . . . . . 17,243 9,766 16,985 8,850
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited in thousands, except share data)
<CAPTION>
ACCUMULATED
DEFERRED OTHER TOTAL
COMMON STOCK ADDITIONAL STOCK COMPRE- SHARE-
---------------------- PAID-IN COMPEN- HENSIVE ACCUMULATED HOLDERS'
SHARES DOLLARS CAPITAL SATION INCOME DEFICIT EQUITY
----------- ------- ---------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999 . . . . . . . . . . 15,082,186 $ -- $119,539 $ (4,929) $ 7,106 $ (73,896) $ 47,820
--------
Comprehensive loss:
Net loss. . . . . . . . . -- -- -- -- -- (30,594) (30,594)
Net decrease in
unrealized apprecia-
tion of investments. . . -- -- -- -- (1,716) -- (1,716)
--------
Comprehensive loss . . (32,310)
--------
Other changes in share-
holders' equity:
Exercise of warrants
to purchase common
stock . . . . . . . . . 127,667 -- 513 -- -- -- 513
Exercise of options
to purchase common
stock . . . . . . . . . 1,028,868 -- 3,503 -- -- -- 3,503
Forfeiture of
unvested stock
options . . . . . . . . -- -- (936) 936 -- -- --
Sale of common stock,
net of selling costs. . 220,368 -- 6,532 -- -- -- 6,532
Payments of notes
with issuance of
common stock. . . . . . 278,985 -- 4,743 -- -- -- 4,743
Deferred stock-based
compensation expense
recognized. . . . . . . -- -- -- 1,589 -- -- 1,589
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) - CONTINUED
ACCUMULATED
DEFERRED OTHER TOTAL
COMMON STOCK ADDITIONAL STOCK COMPRE- SHARE-
---------------------- PAID-IN COMPEN- HENSIVE ACCUMULATED HOLDERS'
SHARES DOLLARS CAPITAL SATION INCOME DEFICIT EQUITY
----------- ------- ---------- --------- ----------- ----------- --------
Allocation of proceeds
to and amortization
of beneficial conver-
sion feature. . . . . . -- -- 3,189 -- -- (3,189) --
Allocation of proceeds
to and amortization
of contingent bene-
ficial conversion
feature. . . . . . . . -- -- 20,037 -- -- (20,037) --
Gain on redemption of
mandatorily redeemable 31,516
convertible preferred
stock . . . . . . . . . -- -- (22,870) -- -- 11,788 (11,082)
Issuance of common
stock to purchase
additional interest
in affiliates . . . . . 964,000 -- 15,243 -- -- -- 15,243
Issuance of warrants
to purchase common
stock . . . . . . . . . -- -- 15,999 -- -- -- 15,999
--------
37,040
---------- -------- -------- -------- -------- --------- --------
Balance at September 30,
2000 . . . . . . . . . . 17,733,590 $ -- $165,492 $ (2,404) $ 5,390 $(115,928) $ 52,550
========== ======== ======== ======== ======== ========= ========
<FN>
The fair value of warrants granted during the nine months ended September 30, 2000 and in 1999 was estimated using the
Black-Scholes option pricing model with the following weighted average assumptions.
2000 1999
-------- --------
Expected live (years). . 3.7 5.0
Interest rate. . . . . . 6.0% 6.0%
Volatiliity. . . . . . . 59.0% 60.0%
Dividend yield . . . . . -- --
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Nine Months Ended
---------------------------------
September 30, September 30,
2000 1999
-------------- --------------
Net cash flows used by
operating activities. . . . . . . $(17,514) $ (4,824)
-------- --------
Cash flows from investing
activities:
Advances to NA Acquisition
Corp.. . . . . . . . . . . . . -- (4,099)
Investment in affiliates . . . . (6,413) --
Decrease in restricted cash. . . -- 945
Additions to property,
plant and equipment. . . . . . (1,382) --
Other. . . . . . . . . . . . . . 25 (288)
-------- --------
Net cash flows used by
investing activities. . . . . . . (7,770) (3,442)
-------- --------
Cash flows from financing
activities:
Proceeds from exercise of
stock options and warrants . . 4,016 7,532
Proceeds from the issuance
of notes payable . . . . . . . 8,625 --
Net proceeds from the sale
of common stock and warrants . 7,000 --
Net decrease in current
maturities of long-term debt . (5,920) --
Decrease in cash overdraft . . . (473) --
Net proceeds from issuance of
mandatorily redeemable
convertible preferred stock
and warrants . . . . . . . . . 28,579 --
Net proceeds from sale of
interest in affiliate. . . . . 10,000 --
Buyback of mandatorily
redeemable convertible
preferred stock. . . . . . . . (34,280) --
Proceeds from revolving line
of credit. . . . . . . . . . . 1,770 --
-------- --------
Net cash flows provided by
financing activities . . . . . . 19,317 7,532
-------- --------
Decrease in cash and
cash equivalents . . . . . . . . (5,967) (734)
Cash and equivalents,
beginning of period. . . . . . . 9,667 11,753
-------- --------
Cash and equivalents,
end of period. . . . . . . . . . $ 3,700 $ 11,019
======== ========
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Nine Months Ended
---------------------------------
September 30, September 30,
2000 1999
-------------- --------------
Supplemental schedule:
Interest paid. . . . . . . . . . $ 1,601 $ --
Noncash investing and
financing activities:
Warrants issued in acquisi-
tions of businesses. . . . . 9,544 --
Warrants issued in exchange
for services . . . . . . . . 468 --
Common stock issued to
purchase shares in
affiliates . . . . . . . . . 15,243 --
Common stock issued to
settle obligations to
related parties. . . . . . . 4,743 --
Issue common stock as
consideration for assets
acquired . . . . . . . . . . . -- 11,513
Exchange common stock for
ARTRA redeemable preferred
stock. . . . . . . . . . . . . -- 3,149
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The Registrant, Entrade Inc. ("Entrade"), formerly NA Acquisition Corp.,
incorporated in Pennsylvania in February 1999, provides asset disposition
and management services and manages its previous investments in business-
to-business e-commerce marketplaces in targeted industries. Entrade has
presented financial reports on a condensed consolidated basis compared to
earlier periods of reports of ARTRA Group Incorporated ("ARTRA"), a
Pennsylvania corporation, which became a wholly owned subsidiary of Entrade
as of September 23, 1999 pursuant to the Agreement and Plan of Merger
described below. 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 ARTRA's
wholly owned subsidiary, Bagcraft Corporation of America ("Bagcraft"),
which business was sold on November 20, 1998.
As discussed in Note 3, on February 23, 1999, ARTRA entered into an
agreement with Entrade and WorldWide Web NetworX Corporation ("WorldWide")
providing for the merger of a wholly owned subsidiary of Entrade with and
into ARTRA. At the time of the merger, Entrade owned all of the
outstanding capital stock of entrade.com, Inc. ("entrade.com") and 25% of
the Class A Common Stock of AssetTrade.com, Inc. ("AssetTRADE.com").
On September 22, 1999, ARTRA's shareholders approved ARTRA's merger with
Entrade and on September 23, 1999, the merger was completed. As a result
of the merger, ARTRA became 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.
In October 1999, Entrade completed the acquisition of all of the issued and
outstanding common stock of Public Liquidations Systems, Inc. and Asset
Liquidation Group, Inc., d/b/a Nationwide Auction Systems ("Nationwide").
Nationwide has been in operation for 20 years and is one of the nation's
largest volume public auction firms in the disposition of municipality, law
enforcement, corporate and utility company surplus property, primarily
vehicles and equipment. Nationwide also conducts auctions of real property
and jewelry. As of September 30, 2000, Entrade has also invested cash,
services and/or its proprietary software technology to gain equity
positions in eight e-commerce marketplaces.
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 annual report on Form 10-K.
Accordingly, the accompanying condensed consolidated financial statements
should be read in conjunction with the Entrade annual report on Form 10-K
for the fiscal year ended December 31, 1999 as filed with the Securities
and Exchange Commission. The condensed consolidated balance sheet as of
December 31, 1999 was derived from the audited consolidated financial
statements included in the Entrade annual report on Form 10-K.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all normal recurring adjustments necessary to
present fairly Entrade's financial position as of September 30, 2000, and
the results of operations for the three and nine month periods ended
September 30, 2000 and 1999 and cash flows for the nine months ended
September 30, 2000 and 1999. 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 full fiscal year. The accompanying
condensed consolidated financial statements reflect reclassifications of
prior year amounts to conform to current year presentation.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Entrade's Nationwide subsidiary generates adequate cash flow from
operations to continue its operations as currently conducted. However, the
Company's e-commerce operations have incurred substantial losses and
negative cash flows from operations. For the year ended December 31, 1999,
the Company incurred a loss from operations of approximately $12.6 million
and negative cashflows from operations of $9.5 million. For the nine
months ended September 30, 2000, the Company incurred a loss from
operations of approximately $30.6 million and negative cashflows from
operations of $17.5 million. As of December 31, 1999 and September 30,
2000, the Company had accumulated deficits of approximately $73.9 and
$115.9 million, respectively. As a result of the restructuring Entrade
announced in October, 2000 (see Note 13 to the condensed consolidated
financial statements "Subsequent Events," management anticipates improved
cash flow from operations in future periods. However, failure to generate
sufficient cash flow or raise additional capital, for which there can be no
assurance of either, could have a material adverse effect on Entrade's
ability to achieve its intended business objectives.
NOTE 2. PORTFOLIO COMPANY GROSS TRANSACTION VOLUME AND NET REVENUE EARNED
Net revenue in the statement of operations includes only the revenue of
consolidated companies and reflects the licensing and related fees charged
to non-consolidated affiliates and third parties and, for auction and/or
sales transactions, the commissions earned on such transactions, rather
than the gross transaction value.
NOTE 3. CHANGE OF BUSINESS
ENTRADE
On February 23, 1999, ARTRA entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Entrade, WorldWide, and WWWX Merger
Subsidiary, Inc. ("Merger Sub"), a wholly owned subsidiary of Entrade.
Terms of the Merger Agreement required the Merger Sub to merge into ARTRA
(the "Merger"), with ARTRA being the surviving corporation for financial
reporting purposes.
On September 22, 1999, ARTRA's shareholders approved the transaction and on
September 23, 1999, the Merger was completed. As a result of the Merger,
ARTRA became a wholly owned subsidiary of Entrade, and the common
shareholders of ARTRA became holders of 83% of the common stock of Entrade.
Under the terms of the Merger Agreement, the ARTRA common shareholders
received one share of Entrade no par common stock in exchange for each
share of ARTRA no par common stock. All stock options and warrants issued
by ARTRA and outstanding on the closing date of the Merger were converted
on a one-for-one basis into Entrade stock options and warrants. For
financial reporting purposes, Entrade's condensed consolidated financial
statements are compared to ARTRA's financial statements for earlier
periods, with shareholder's equity and share information restated to
reflect the effect of the Merger Agreement. All shareholders' equity and
share information has been restated to reflect this recapitalization.
Entrade's common stock became listed and commenced trading on the New York
Stock Exchange under the symbol "ETA" on September 24, 1999.
Entrade owns all of the outstanding capital stock of entrade.com and, as of
September 30, 2000, owned 16.1% (computed on a fully diluted basis) of the
Class A Common Stock of AssetTRADE.com. entrade.com is an e-commerce
software technology subsidiary of Entrade that provides an Internet-based
business-to-business transaction engine and related e-commerce solutions
for target markets. AssetTRADE.com provides business-to-business online
services that facilitate the remarketing of industrial machinery, equipment
and parts. These services are designed to enhance the current operation of
asset recovery teams and procurement groups of industrial companies.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In connection with the execution of the Merger Agreement, on February 23,
1999, Entrade acquired certain software and intellectual property and 25%
of the shares of Class A Common Stock of AssetTRADE.com from WorldWide, in
exchange for 1,800,000 shares of Entrade common stock, $800,000 in cash and
a note for $500,000, paid upon the consummation of the Merger. 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, paid upon the consummation of the Merger, in exchange for
certain retained rights Energy Trading Company held in the assets purchased
by Entrade. 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 lend Entrade
up to $2,000,000 and advance an additional $250,000 to fund the $800,000
cash payment to WorldWide and to provide funding for entrade.com until the
consummation of the Merger. Under the Merger Agreement, ARTRA also agreed
to guarantee the $4,000,000 funding for entrade.com.
In August 1999, WorldWide agreed to lend 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. Borrowings totaling $405,000 were
repaid to WorldWide prior to closing the Merger. WorldWide, held
approximately 1,575,000 shares of Entrade common stock at September 30,
2000.
The acquisition has been accounted for as a purchase. The operating
results of the acquired entities have been included in Entrade's condensed
consolidated financial statements since the effective date of acquisition,
and the acquired entities losses for the period from February 23, 1999
until the effective date of the Merger in September 1999 have also been
reflected in Entrade's condensed consolidated financial statements.
Through September, 2000, the amount of the purchase price allocated to
intangible assets acquired of approximately $10 million was being amortized
over five years. Due to Entrade's decision to not proceed with the
development of its software business or make additional investments in new
e-commerce market places, the remaining goodwill in the amount of
approximately $8 million relating to this acquisition was expensed at the
end of the third quarter of 2000.
NATIONWIDE
In October 1999, Entrade completed the acquisition of all of the issued and
outstanding common stock of Public Liquidations Systems, Inc. and Asset
Liquidation Group, Inc., d/b/a Nationwide Auction Systems ("Nationwide").
Nationwide has been in operation for 20 years and is one of the nation's
largest volume public auction firms in the disposition of municipality, law
enforcement, corporate and utility company surplus property, primarily
vehicles and equipment. Nationwide also conducts auctions of real property
and jewelry. Nationwide conducts its auctions at its facilities or at off-
site locations. Nationwide has six auction facilities located in
California, Missouri, Delaware, New Mexico and Georgia.
The consideration paid for Nationwide consisted of cash of $6,000,000;
1,570,000 shares of Entrade common stock; short-term promissory notes (the
"Notes") in the principal amount of $4,800,000; and promissory notes (the
"Term Notes") in the principal amount of $14,000,000, with a final maturity
of October 1, 2001. The Notes and the Term Notes provide for interest at
an annual rate of 8.0%. Entrade also issued 80,000 shares of Entrade
common stock in payment of fees to its agent in connection with the closing
of the transaction.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In January 2000, the Notes, net of amounts due from a selling shareholder
of $139,000, plus accrued interest, were converted into 278,985 shares of
Entrade common stock, subject to shareholder approval. Accordingly, at
December 31, 1999, net amounts due on the Notes plus accrued interest were
reclassified in Entrade's consolidated balance sheet as obligations
expected to be settled by the issuance of common stock. The total amount
reclassified, including accrued interest, was $4,743,000.
In March 2000, Entrade entered into an agreement with the Nationwide
selling shareholders to convert the Term Notes with a remaining principal
balance of $10,500,000 into 265,621 shares of Entrade common stock. The
Term Notes originally provided for principal payments of $3,500,000 in
October 2000 and $7,000,000 in October 2001. Completion of this trans-
action is subject to approval by Entrade's shareholders.
In May 2000, the Nationwide selling shareholders ("Sellers") participated
in the private sale of promissory notes in the aggregate amount of
$2,000,000. The Sellers agreed to purchase $1,000,000 of the Secured Notes
and to reduce by $1,000,000 the amount of Term Notes to be converted into
Entrade common stock and to exchange such amount for $1,000,000 of the
newly issued Secured Notes (See Note 6 to the condensed consolidated
financial statements "Promissory Notes and Related Warrants"). In
addition, in consideration for, among other things, the additional capital
and the continued personal guarantee of certain debt and a performance bond
by one of the Sellers, Entrade is currently renegotiating with the Sellers
in reference to the terms of the payoff of the Term Notes through the
issuance of additional Entrade common stock, which, when finalized, will be
subject to shareholders approval.
The 1999 Nationwide acquisition has been accounted for as a purchase. The
operating results of Nationwide have been included in Entrade's condensed
consolidated financial statements since the effective date of acquisition.
The amount of the purchase price allocated to intangible assets acquired,
principally goodwill, of approximately $45 million, is being amortized over
20 years.
E-COMMERCE MARKETPLACES
Effective October 4, 1999, Entrade acquired all of the then issued Series A
Preferred Stock of printeralliance.com ("Printeralliance Preferred") for
cash of $500,000 and a license to the entrade.com e-commerce software. A
privately owned e-commerce company, printeralliance.com was formed in 1999
to establish a buying group of independent commercial printers in order to
obtain cost savings on supplies, equipment and other services. The
Printeralliance Preferred shares acquired by Entrade are convertible into a
61% common stock ownership interest in printeralliance.com at the option of
Entrade. Accordingly, the acquisition has been accounted for as a purchase
and the operating results of printeralliance.com have been included in
Entrade's condensed consolidated financial statements since the effective
date of acquisition. The amount of the purchase price allocated to
intangible assets acquired is being amortized over five years. In the
first quarter of 2000, Entrade also invested $1,000,000 to acquire an
additional issue of Printeralliance Preferred shares, which are convertible
into a 3% common stock ownership interest. This additional investment
increased Entrade's equity interest to 64%. During the third quarter,
Entrade invested $522,000 in printeralliance.com through the purchase of
convertible notes.
In October 1999, entrade.com licensed its technology to Pricecontainer.com,
Inc. ("Pricecontainer.com") in return for a 15% ownership interest.
Pricecontainer.com is establishing itself as an on-line reservation system
for a variety of trans-oceanic and maritime logistics services. Entrade
accounts for its investment in Pricecontainer.com using the cost method.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
utiliparts.com, Inc., d/b/a GlobalPowerAssets.com, is owned 80% by
entrade.com and 20% by AssetTRADE.com. GlobalPowerAssets.com intends to
create an e-commerce marketplace in the utility industry utilizing
entrade.com's e-commerce software to provide investment recovery, internal
inventory optimization and asset disposition consulting services.
On February 10, 2000, Entrade agreed with Associates First Capital
Corporation ("Associates") to organize TruckCenter.com, Inc.
("TruckCenter.com"), a new company designed to create a business-to-
business e-commerce marketplace for the sale of trucks and related
services, including financing, certification, warranty and third party
inspection. The TruckCenter.com website was launched and became
transactional on April 15, 2000. For the six-month period following the
launch, Associates has agreed to list its truck inventory on the
TruckCenter.com website and not on any other website unaffiliated with
Associates. Subject to its independent underwriting guidelines, Associates
also intends to provide financing for purchasers transacting business over
the TruckCenter.com Website. Entrade currently owns 80% of TruckCenter.com
with Associates owning the remaining 20%. Entrade has invested in
TruckCenter.com an aggregate of approximately $4,390,000 in cash and
services as of September 30, 2000.
On February 18, 2000, Entrade's wholly-owned subsidiary, entrade.com,
entered into an agreement to acquire 1,011,667 shares of Series A
Convertible Preferred Shares, par value $.001 per share, of
TradeTextile.com ("TradeTextile Preferred"), a warrant to acquire 288,778
shares of the TradeTextile Preferred and a warrant to acquire 333,609
shares of the TradeTextile Preferred in exchange for (a) $3,500,000, to be
paid in installments subject to certain conditions, (b) a warrant to
acquire up to 75,000 shares of Entrade common stock and (c) a license to
TradeTextile.com of entrade.com's software technology. Pursuant to the
terms of the agreement, entrade.com will own 35% of TradeTextile.com on a
fully-diluted basis, assuming the full exercise of its warrants to purchase
the TradeTextile Preferred. TradeTextile.com, using the entrade.com
technology, facilitates the online trading of yarns, fabrics, garments, raw
materials, chemicals, and textile quotas, initially targeting the Chinese
textile industry. In May 2000, Entrade negotiated a deferment of the
remaining installment for the purchase of the TradeTextile Preferred
shares. The unpaid balance of $1,000,000 bears interest at 8.0% and is
payable and due monthly in arrears with quarterly principal payments
beginning in the fourth quarter of 2000. Management is attempting to
negotiate a non-cash settlement of this obligation, though there can be no
assurance that this negotiation will be successful. If this negotiation is
not successful, management anticipates that Entrade will be able to satisfy
this commitment only upon the receipt of additional funding from outside
sources.
On March 9, 2000, Entrade agreed with Textron Financial Corporation, a
subsidiary of Textron Inc., to organize a new entity to be known as
AssetControl.com, which is intended to be a business-to-business e-commerce
marketplace for the sale of surplus industrial equipment, excess inventory
and commercial real estate. Entrade owns 38.0% of AssetControl.com with
the remainder owned 47.5% by Textron Financial, 9.5% by ATM Service (a
majority owned subsidiary of WorldWide), and 5.0% by Safeguard Scientifics
Inc. As part of the consideration for this agreement, Entrade issued to
Textron Financial Corporation a warrant to acquire up to 1,000,000 shares
of Entrade common stock. The warrant initially vests 250,000 shares with
the remaining 750,000 shares scheduled to vest based upon certain
performance standards for AssetControl.com.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In June 2000, Entrade completed the investment of an additional $400,000,
for a total of approximately $500,000, in CommerceHealth.com which provides
procurement process solutions and consulting services for the large
hospital market. Entrade has an approximate 6% ownership of
CommerceHealth.com.
NOTE 4. INVESTMENT IN AssetTRADE.com
On February 23, 1999, Entrade acquired 25% of the outstanding shares of
Class A Common Stock of AssetTRADE.com, a provider of business-to-business
online services that facilitate the remarketing of industrial machinery,
equipment and parts.
On April 12, 2000, Entrade entered into a Stock Purchase Agreement with
Positive Asset Remarketing, Inc. ("PAR"), a Nevada corporation, and certain
other parties, pursuant to which Entrade terminated a prior agreement to
acquire PAR, and agreed to acquire from PAR 7,350,000 shares of the Class A
Common Stock of AssetTRADE.com, Inc., in exchange for a cash payment of
$3,488,000 and 964,000 shares of Entrade's Common Stock, subject to
adjustment in certain cases. On April 20, 2000, Entrade sold 6,000,000
shares of Class A Common Stock of AssetTRADE.com, for $10,000,000 which
resulted in a gain of $8,069,000. At September 30, 2000, Entrade owned
16.1% (computed on a fully diluted basis) of the Class A Common Stock of
AssetTrade.com.
Summarized financial data for AssetTRADE.com for the nine month period
ended September 30, 2000 and the twelve month period ended December 31,
1999 is as follows (in thousands):
September 30, December 31,
2000 1999
------------- ------------
Revenues . . . . . . . . . . . . . . $ 1,032 $ --
======== ========
Operating loss . . . . . . . . . . . $(18,606) $ (1,831)
======== ========
Net loss . . . . . . . . . . . . . . $(18,312) $ (1,778)
======== ========
Current assets . . . . . . . . . . . $ 7,036 $ 4,719
Noncurrent assets. . . . . . . . . . 39,450 283
-------- --------
$ 46,486 $ 5,002
======== ========
Current liabilities. . . . . . . . . $ 34,478 $ 1,030
Noncurrent liabilities . . . . . . . 10,122 --
Redeemable preferred stock . . . . . 19,134 5,750
Shareholders' deficit. . . . . . . . (17,248) (1,778)
-------- --------
$ 46,486 $ 5,002
======== ========
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5. INVESTMENT IN COMFORCE CORPORATION
At September 30, 2000 and December 31, 1999, ARTRA owned 1,525,000 shares
of common stock of Comforce Corporation ("Comforce"), an ownership interest
of approximately 9.0%, which was classified in ARTRA's consolidated balance
sheet in current assets as "Available-for-sale securities." At September
30, 2000 and December 31, 1999, the gross unrealized gain relating to
ARTRA's investment in Comforce, reflected as a separate component of
shareholders' equity, was $5,390,000 and $7,106,000, respectively. The
investment in Comforce common stock is subject to liquidity and market
price risks. An attempt to sell a large number of the Comforce shares over
a limited period could be expected to result in a reduction of the market
price of those shares.
In January 1996, ARTRA's board of directors approved the sale of 200,000 of
ARTRA's Comforce common shares to certain of the officers, directors and
key employees of ARTRA for non-interest bearing notes totaling $400,000.
The notes are collateralized by the related Comforce common shares.
Additionally, the noteholders have the right to put their Comforce shares
back to ARTRA in full payment of the balance of their notes.
ARTRA had concluded that, for reporting purposes, it had effectively
granted options to those officers, directors and key employees to acquire
200,000 of ARTRA's Comforce common shares. Accordingly, in January 1996,
these 200,000 Comforce common shares were removed from ARTRA's portfolio of
"available-for-sale securities" and were classified in its consolidated
balance sheet as other receivables with an aggregate value of $400,000,
based upon the value of proceeds to be received upon future exercise of the
options.
The disposition of these 200,000 Comforce common shares resulted in a gain
that was deferred and will not be recognized in ARTRA's financial
statements until the options to purchase these 200,000 Comforce common
shares are exercised. Prior to the fourth quarter of 1997, no options to
acquire any of the 200,000 Comforce common shares had been exercised.
During the fourth quarter of 1997, options to acquire 59,500 of these
Comforce common shares were exercised resulting in a realized gain of
$225,000. During 1998, options to acquire 84,750 of these Comforce common
shares were exercised resulting in a realized gain of $320,000. During
1999, options to acquire 20,000 of these Comforce common shares were
exercised resulting in a realized gain of $66,000. During 2000, options to
acquire 5,250 of these Comforce common shares were exercised resulting in a
gain of $20,000.
At September 30, 2000 and December 31, 1999, options to acquire 32,000 and
37,250, respectively, Comforce common shares, remained unexercised and were
classified in ARTRA's consolidated balance sheet as other receivables with
aggregate values of $64,000 based upon the value of proceeds to be received
upon future exercise of the options.
NOTE 6. PROMISSORY NOTES AND RELATED REDEEMABLE WARRANTS
During the week of May 15, 2000, Entrade agreed to issue approximately
$10,625,000 from the private sale of promissory notes ("Notes") and related
warrants to certain related and unrelated individual accredited investors,
including the former owners of Nationwide, one of whom is a Director, and
two additional Directors. Entrade also exchanged other obligations of
$1,000,000 (See Note 3 to the condensed consolidated financial statements
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
"Change of Business - Nationwide") for Notes as incentive for the former
owners of Nationwide to enter into the Note agreement. The Notes, due
July 15, 2001, bear interest at a rate of 15.0% per annum payable in
arrears on a quarterly basis. The Notes may be pre-paid at any time at
Entrade's option, subject to certain pre-payment fees. Of the total amount
of Notes issued, notes with an aggregate face value of $7,000,000 are
secured by 100% of the issued and outstanding stock of Nationwide. The
remaining $4,625,000 of Notes are unsecured obligations of Entrade. The
Company received $8,625,000 in cash proceeds and $2,000,000 in the form of
a note which was due on October 15, 2000. The investor failed to fund the
$2,000,000 note when it became due on October 15, 2000 in accordance with
its terms.
In connection with the issuance of the Notes, Entrade has issued redeemable
warrants to purchase shares of Entrade common stock, at the rate of
warrants to purchase 40,000 shares per $1,000,000 face amount of Notes.
The warrants have an exercise price of $16.21 per share and are exercisable
at any time until May 15, 2005. Entrade allocated the value of the
warrants issued through September 30, 2000 at $1,138,000 based on the fair
value of warrants granted and the proceeds received from the issued notes;
resulting in a discounting of the Notes issued. Upon maturity of the Notes
or the occurrence of an event of default, the investors have the option to
continue to hold the warrants or to put them to Entrade for an amount equal
to five percent of the initial principal amount of the Notes. Entrade
notified the secured Note holders that a technical covenant default existed
at September 30, 2000. As of November 20, 2000 the default was cured
through a verbal waiver from the secured Note holders in exchange for a
personal guarantee of the secured Notes by the Vice Chairman of Entrade.
On October 26, Entrade issued $750,000 of promissory notes to a third-party
investor. The notes have a 12 month term and a 15% coupon, payable
quarterly in arrears. In conjunction with the issuance of the promissory
notes, Entrade issued 37,500 warrants, with a term of three years and an
exercise price of $3.00 per share, to the investor.
NOTE 7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In March 2000, Entrade raised approximately $28,579,000 in net proceeds
from the sale of 30,000 shares of Entrade's Series A mandatorily redeemable
convertible non-voting preferred stock (the "Series A Preferred Stock").
The investors also received warrants to purchase 400,000 shares of Entrade
common stock at an exercise price of approximately $41.38 per share,
subject to adjustment in certain circumstances. The Series A Preferred
Stock, $1,000 par value, bore a 6.0% dividend payable at Entrade's option
in either cash or common stock. For the first 15 months after issuance of
the Series A Preferred Stock, and subject to certain registration rights
and other conditions, Entrade had the right to convert all or part of the
Series A Preferred Stock at the lesser of $78.73 per share or 91% of the
lowest closing sale price of Entrade's common stock during the two
consecutive trading days ending on the date of the election. In addition,
Entrade had the right during this period to redeem the preferred stock at
115% of its value. Entrade had to redeem or convert all of the Series A
Preferred Stock within two years of the date of its issuance, and, until
the Series A Preferred Stock was redeemed or converted, Entrade could not
pay dividends on its common stock without the approval of the preferred
stockholders. To the extent that the fair market value of the common stock
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
received upon conversion of the Series A Preferred Stock would have been
deemed to exceed the carrying value of the Series A Preferred Stock, a
beneficial conversion feature would have existed. A deemed dividend to the
Series A Preferred Stock shareholders would have been reflected to the
extent of any beneficial conversion feature which would have increased the
net loss available to common shareholders.
The Series A Preferred Stock contained a feature pursuant to which the
maximum conversion price per share and the terms of the warrant adjusted
upon the occurrence of certain events, including in the event that the
price of Entrade's common stock closed at a sale price lower than
approximately $20.69 per share for any 15 trading days in a 20 trading day
period or the price of Entrade's common stock closed at a sale price lower
than $15.00 per share for any two consecutive trading days. As a result of
either of such events, the maximum conversion price for the Series A
Preferred Stock would have adjusted to the lesser of 120% of the
"Liquidation Default Date Price" or 91% of the lower closing price of
Entrade's common stock during the two consecutive trading days ending on
the date of the conversion election. The Liquidation Default Date Price
was the arithmetic average of the 15 lowest trading prices in such 20-
trading day period (in the case of such trigger) or the middle three of the
five trading days ending on the second consecutive day on which Entrade's
common stock closed at a sale price lower than $15.00 per share (in the
case of such trigger). Also as a result of any such events, the warrant
exercise price would adjust to a price equal to the Liquidation Default
Date Price and the number of shares issuable upon exercise of the warrant
would have increased to a number equal to the prior number times a
fraction, the numerator of which was the prior exercise price of the
warrant and the denominator of which is the revised exercise price of the
warrant.
Because the closing sale price of Entrade's common stock on April 13 and
14, 2000, was less than $15.00 per share, the investors had the right to
convert the Series A Preferred Stock at a conversion price equal to the
lesser of $19.44 or 91% of the lower closing sale price of Entrade's common
stock during the two consecutive trading days ending on the date of such
election. Following such event, Entrade had one business day to exercise
its right to redeem the Series A Preferred Stock at 115% of par.
Entrade issued the redemption notice on April 17, 2000. On April 20, 2000,
holders of 300 shares of the Series A Preferred Stock elected to convert
those shares into 31,516 shares of Entrade common stock and Entrade
redeemed the remaining 29,700 issued and outstanding shares of that Series
A Preferred Stock redeemed for an aggregate payment of approximately
$34,280,000. The redemption of the Series A Preferred Stock triggered both
a deemed dividend of $23,190,000 and a gain of approximately $11,788,000
resulting in a net charge to retained earnings of $11,402,000. This
increased the loss per share applicable to common shares in the second
quarter of 2000 by $0.50.
In addition, the investors' original right to receive warrants to purchase
400,000 shares of Entrade common stock at an exercise price of
approximately $41.38 was adjusted such that they had warrants to purchase
approximately 1,021,000 shares of Entrade common stock at an exercise price
of approximately $16.21 per share. These warrants would have expired in
March 2003 and, subject to certain conditions, would have continued to
adjust in both share amount and exercise price if Entrade had issued
additional shares of its common stock or certain equivalents at a price per
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
share below the then current exercise price of approximately $16.21. On
October 24, 2000, Entrade agreed to exchange these warrants for new
warrants to purchase 1,021,080 shares of the common stock of Entrade at a
price of $2.875 per share that expire on October 23, 2004. The dilution
provisions of the old warrants were eliminated with the new warrants, which
do not have a provision that would result in any increase in the number of
shares. The new warrants do provide that the exercise price of the
warrants will be reduced to an amount equal to the lowest consideration
paid per share of common stock which the Company issue or sells, or is
deemed to issue or sell, through October 23, 2001.
NOTE 8. INCOME TAXES
No income tax benefit was recognized in connection with Entrade's 2000 and
1999 pre-tax losses from Entrade's tax loss carryforwards due to the
uncertainty of future taxable income.
At December 31, 1999, Entrade and its subsidiaries had Federal income tax
loss carryforwards of approximately $14,800,000 expiring principally in
2012 - 2019, available to be applied against future taxable income, if any.
In recent years, Entrade 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, Entrade
is not currently subject to such limitations regarding the utilization of
its Federal income tax loss carryforwards. Should Entrade 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.
NOTE 9. EARNINGS (LOSS) 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, 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, by the weighted average number of shares of
common stock and common stock equivalents (stock options and warrants),
unless anti-dilutive, during each period.
Earnings (loss) per share for the three and nine month periods ended
September 30, 2000 and 1999 was computed as follows (in thousands, except
per share amounts):
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
-------------------- --------------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
AVERAGE SHARES OUTSTANDING
Weighted average
shares outstanding . . . 17,243 17,243 9,766 9,766
Common stock equivalents
(options/warrants) . . . -- -- -- --
-------- -------- -------- --------
17,243 17,243 9,766 9,766
======== ======== ======== ========
(Loss):
Net loss . . . . . . . . $(17,924) $(17,924) $ (1,933) $ (1,933)
Dividends applicable to:
Redeemable preferred
stock . . . . . . . . -- -- (98) (98)
Deemed dividends on
mandatorily redeem-
able convertible
preferred stock . . . -- -- -- --
Gain on redemption
of mandatorily
redeemable conver-
tible preferred
stock . . . . . . . . -- -- -- --
-------- -------- -------- --------
Loss applicable to
common shares. . . . . . $(17,924) (17,924) (2,031) (2,031)
======== ======== ======== ========
Per Share Amounts:
Loss per shares
applicable to
common shares . . . . . $ (1.04) $ (1.04) $ (0.20) $ (0.20)
======== ======== ======== ========
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
-------------------- --------------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
AVERAGE SHARES OUTSTANDING:
Weighted average
shares outstanding. . . 16,985 16,985 8,850 8,850
Common stock equivalents
(options/warrants). . . -- -- -- --
-------- -------- -------- --------
16,985 16,985 8,850 8,850
======== ======== ======== ========
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
-------------------- --------------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
(Loss):
Net loss . . . . . . . . $(30,594) (30,594) (6,254) (6,254)
Dividends applicable to:
Redeemable preferred
stock. . . . . . . . -- -- (292) (292)
Deemed dividends on
mandatorily redeem-
able convertible
preferred stock. . . (23,226) (23,226) -- --
Gain on redemption
of mandatorily
redeemable convert-
ible preferred
stock. . . . . . . . 11,788 11,788 -- --
-------- -------- -------- --------
Loss applicable to
common shares . . . . . $(42,032) $(42,032) $ (6,546) $ (6,546)
======== ======== ======== ========
Per Share Amounts:
Loss per shares
applicable to
common shares . . . . . $ (2.47) $ (2.47) $ (0.74) $ (0.74)
======== ======== ======== ========
NOTE 10. LITIGATION
In addition to legal proceedings and claims that arise in the ordinary
course of business, none of which management considers to be material,
Entrade and/or its subsidiaries are involved in the following proceedings.
ARTRA and its subsidiaries are the defendants in various business-related
litigation, environmental matters and product liability claims. At
September 30, 2000 and December 31, 1999, ARTRA had accrued current
liabilities of $1,400,000 for potential business-related litigation and
environmental liabilities. No liabilities were accrued for the product
liability claims because no reasonable basis exists on which such claims
could be quantified.
PRODUCT LIABILITY CLAIMS
Since 1983, ARTRA has responded to significant product liability claims
relating to the use of asbestos in the manufacture of products by various
companies, including a former ARTRA subsidiary. Reports from outside
counsel indicate, as of September 30, 2000, pending claims asserted by
approximately 45,300 plaintiffs (excluding loss of consortium claims) in 16
states. It is probable that a significant number of additional claims will
be asserted in the future. ARTRA has no reasonable basis on which to
quantify the potential cost to it of these pending and unasserted claims.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ARTRA's primary insurance carriers paid approximately $13,000,000 in
disposition of asbestos and other product liability claims from 1983
through September 1998, when ARTRA's primary insurance carriers asserted
that ARTRA's primary insurance coverage for the claims had been exhausted.
Beginning in September 1998, certain of ARTRA's excess insurance carriers,
under a reservation of the right to deny coverage at a subsequent date,
assumed the defense of the claims and paid defense, settlement and
indemnity costs relating to these claims, pursuant to an interim agreement,
which costs totaled approximately $17,500,000 through December 31, 1999.
The interim agreement expired as of January 31, 2000.
Until January 31, 2000, pursuant to the interim agreement, certain of
ARTRA's excess insurance carriers funded defense and indemnity costs as
they became due. Under the interim agreement, the claims were administered
by one of ARTRA's principal excess insurers, which was one of the
participants in the expired interim agreement. Since January 31, 2000,
that excess insurer has not administered the claims. From January 1, 2000
through September 30, 2000, the excess insurers have paid $585,000 in
defense costs. ARTRA estimates that defense, settlement and indemnity
expenses incurred between January 1, 2000 and September 30, 2000 were
approximately $14,100,000 of which approximately $1,309,000 was subject to
the interim agreement through January 31, 2000 and was advanced by excess
insurers, or is subject to potential reimbursement from the excess
insurers. During the time period from February 1, 2000 to September 30,
2000 ARTRA estimates that between $16,000,000 and $18,000,000 in defense
settlement and indemnity expenses were incurred which are subject to
potential reimbursement from the excess insurers.
Negotiations are continuing with the principal excess insurer and the other
excess insurers regarding the establishment of a permanent funding, claims
administration and coverage agreement. Unless and until such a permanent
agreement is reached, as to which ARTRA can provide no assurance, ARTRA
intends, unless litigation should become necessary in light of the
positions of the excess carriers or other circumstances, to: (i) administer
the claims and (ii) fund defense, settlement and indemnity costs to the
extent necessary and then seek reimbursement in settlement and defense
costs from the excess insurance carriers. At September 30, 2000, ARTRA has
advanced $245,000 which is subject to potential reimbursement from certain
excess insurers. It is also possible that these excess insurance carriers
could cease making payments at any time on the basis of their various
reservations of rights.
ARTRA and two of its excess insurers currently have a dispute as to the
existence of certain insurance coverage, in the approximate amount of
$25,000,000, for the period 1968 through 1974. These carriers contend that
the policies for this period, if they ever existed, are "lost." If ARTRA
were to be unable to locate all or some of these policies or provide
sufficient evidence of their existence, then, absent the negotiation of an
agreement with the carriers, as to which ARTRA can provide no assurance, a
court could find that no coverage existed for all or some of the periods in
question. In that event, a court might find ARTRA responsible for funding
its pro rata share of payments for defense and indemnity costs. A similar
issue exists with respect to an unknown amount of primary and excess
insurance coverage by unknown insurers for the period 1947 through 1962,
for which ARTRA has not been able to locate policies, with potential effect
similar to that possible with respect to the 1968 through 1975 period.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
If ARTRA were unable to conclude a permanent agreement with its excess
insurance carriers regarding the claims or with respect to coverage for the
potential gaps described herein, if ARTRA were ultimately unsuccessful in
attempting to marshal any such insurance, if a court were to determine that
gaps in coverage exist, or if a court were to determine that ARTRA is
responsible for a portion of the defense and indemnity costs associated
with those potential gaps in coverage, there could be a material adverse
effect on ARTRA's financial condition. ARTRA's financial condition could
also be materially adversely affected to the extent, if any, that its
existing insurance coverage and any to which it might become entitled in
the future is not sufficient to respond fully to the claims.
ARTRA has the following amounts of excess insurance it believes are
available to indemnify ARTRA against its liability on some or all of the
claims: (a) approximately $204,000,000 for which ARTRA has policies, less
amounts expended from September 1998 through September 30, 2000 and such
additional amounts as have been paid or committed since September 30, 2000;
(b) an additional amount which may total as much as $45,000,000 for which
ARTRA thus far has been unable to locate insurance policies but for which
ARTRA has certain evidence of coverage, and (c) any potentially applicable
coverage in an undetermined amount for any other policies that may exist
over certain years, which ARTRA is investigating. There is also potential
additional coverage from two excess insurers, which ARTRA believes are or
may be involved in insolvency proceedings. In the event ARTRA were unable
to satisfy the claims through a combination of insurance coverage and its
own net assets, or in the event that ARTRA does not receive timely
reimbursement from its excess carriers of amounts ARTRA may be required to
expend on defense, settlement and indemnity payments, it is possible that
ARTRA could be forced to seek protection under the federal bankruptcy laws
and that Entrade would lose its entire investment in ARTRA.
If the combination of insurance coverage and ARTRA's assets are not
sufficient to satisfy asbestos and product liability claims against it, it
is also possible that the plaintiffs presenting the claims could attempt to
pursue legal action against Entrade. Entrade believes that no valid basis
exists for, and it would have meritorious defenses against, the imposition
of ARTRA's liability for the asbestos and product liability claims against
Entrade, and Entrade would vigorously defend itself against any attempt to
impose such liability. In the event of an unfavorable outcome of such
legal action, however, there could be a material adverse effect upon
Entrade's financial condition and results of operations.
ENVIRONMENTAL MATTERS
EPA NOTICES ALLEGING ENVIRONMENTAL VIOLATIONS
In April 1994, the EPA notified ARTRA 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 of Harvel
Industries, Inc., a majority owned subsidiary of ARTRA. In 1985, Harvel was
merged into ARTRA's Fil-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 Industries, Inc. 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 $7,000,000 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.
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
LAWSUITS SEEKING RECOVERY OF ENVIRONMENTAL CLEAN-UP COSTS
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 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 that were stored,
disposed of or otherwise released at the manufacturing facility. This
facility was owned by Baltimore Paint and Chemical Company, formerly a
subsidiary of ARTRA from 1969 to 1980. Sherwin-Williams's current
projection of the cost of clean-up is approximately $5,000,000 to
$6,000,000. ARTRA has filed counterclaims against Sherwin-Williams and
cross claims against other former owners of the property. ARTRA also is
vigorously defending this action and has raised numerous defenses.
Currently, the case is in discovery, and ARTRA 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 in respect to the 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, a 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 allegedly hazardous substances as a by-product of the
manufacturing process. ARTRA presently estimates the total liability for
clean-up costs at this site to be approximately $500,000.
If the combination of insurance coverage and ARTRA's assets are not
sufficient to satisfy environmental claims against it, it is also possible
that the plaintiffs presenting the claims could attempt to pursue legal
action against Entrade. Entrade believes that no valid basis exists for,
and it would have meritorious defenses against, the imposition of ARTRA's
liability for the environmental claims against Entrade, and Entrade would
vigorously defend itself against any attempt to impose such liability. In
the event of an unfavorable outcome of such legal action, however, there
could be a material adverse effect upon Entrade's financial condition and
results of operations.
OTHER CASES
Bagcraft Packaging, LLC and Packaging Dynamics, LLC filed suit against
ARTRA and its BCA Holdings, Inc. subsidiary in the Circuit Court of Cook
County, Illinois, on November 22, 1999, alleging that ARTRA breached a non-
compete agreement entered into in connection with the sale of certain
assets to Bagcraft Packaging, LLC by hiring Mark Santacrose as Chief
Executive Officer and President of ARTRA. The plaintiffs seek damages in
excess of $5,000,000. ARTRA is vigorously defending itself in this action.
In addition, on or about March 16, 2000, Christi Mottola Enterprises, Inc.
("CME"), filed a complaint in the Superior Court of California, Orange
County, naming as defendants Don Haidl, Corey Schlossmann, Nationwide
Auction Systems, and Does 1 to 100, alleging interference with contract and
with prospective economic advantage, civil conspiracy and violation of
California's Unfair Business Practices Act. CME seeks 20 percent of
157,000 Entrade shares Haidl allegedly agreed to transfer to JDK &
Associates, Inc. in connection with Entrade's acquisition of Nationwide (or
an equivalent amount as damages), consequential losses, punitive damages
and "restitution and disgorgement of all income, consideration, or
compensation, in any form, received by the defendants in conjunction with
the acquisition of Nationwide by Entrade."
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Management does not believe that the outcome of either of these two cases
will have a material adverse effect upon Entrade's financial condition and
results of operations.
NOTE 11. BUSINESS SEGMENTS
Through November 20, 1998, the Company's ARTRA subsidiary operated in one
industry segment as a manufacturer of packaging products principally
serving the food industry. The packaging products business was conducted
by ARTRA's wholly-owned Bagcraft subsidiary, which business was sold on
November 20, 1998.
As discussed in Note 3, on February 23, 1999, ARTRA entered into an
agreement with Entrade providing for the merger of a wholly-owned
subsidiary of Entrade with and into ARTRA. On September 22, 1999, ARTRA's
shareholders approved the transaction and on September 23, 1999, the merger
was completed. As a result of the merger, ARTRA became a wholly-owned
subsidiary of Entrade. Entrade is a business-to-business company
specializing in the creation of e-commerce marketplaces.
In October 1999, Entrade completed the acquisition of all of the issued and
outstanding common stock of Nationwide, which has operated for 20 years and
is one of the nation's largest volume public auction firms in the
disposition of municipality, law enforcement, corporate and utility company
surplus property. In addition to vehicles and equipment, Nationwide
conducts real property and jewelry auctions.
The Company has adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 requires certain
disclosures about operating segments in a manner that is consistent with
how management evaluates the performance of the segments. At September 30,
2000, Entrade's two reportable segments consist of development stage
business services provided principally by the software technology licensing
and e-commerce marketplaces and the transaction services business conducted
principally by Nationwide.
The following table summarizes financial information for Entrade's
reportable segments for the three and nine month periods ended
September 30, 2000 and 1999, respectively (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES:
Development stage
businesses . . . . . . $ 269 $ -- $ 719 $ --
Transaction services . . 4,191 -- 11,250 --
-------- -------- -------- --------
$ 4,460 $ -- $ 11,969 $ --
======== ======== ======== ========
OPERATING LOSS:
Development stage
businesses . . . . . . $ 10,686 $ -- $ 19,375 $ --
Transaction services . . (173) 1,371 1,070 5,899
Corporate expenses . . . 4,716 671 10,395 671
-------- -------- -------- --------
Operating loss . . . . . . 15,229 2,042 30,840 6,570
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Equity in loss of
affiliates . . . . . . (2,349) -- (5,588) --
Gain on sale of
investments. . . . . . -- -- 8,089 --
Net interest (expense)
income . . . . . . . . (340) 109 (1,109) 316
Amortization of
discount on note
payable. . . . . . . . -- -- (1,138) --
-------- -------- -------- --------
Loss before income taxes. $(17,918) $ (1,933) $(30,586) $ (6,254)
======== ======== ======== ========
CAPITAL EXPENDITURES:
Development stage
businesses . . . . . . $ 35 $ -- $ 532 $ --
Transaction services . . 59 -- 417 --
Corporate. . . . . . . . 6 -- 434 --
-------- -------- -------- --------
$ 100 $ -- $ 1,383 $ --
======== ======== ======== ========
DEPRECIATION AND
AMORTIZATION:
Development stage
businesses . . . . . . $ 8,522 $ 43 $ 9,696 $ 43
Transaction services . . 752 -- 1,961 --
Corporate. . . . . . . . 92 (310) 128 --
-------- -------- -------- --------
$ 9,366 $ (267) $ 11,785 $ 43
======== ======== ======== ========
The following table summarizes financial information for Entrade's
responsible segments for the nine month periods ended September 30, 2000,
and 1999, respectively.
Nine Months Ended
September 30,
------------------------
2000 1999
-------- --------
TOTAL ASSETS:
Development stage business . . . . . . . $ 1,217 $ --
Transaction services . . . . . . . . . . 52,145 --
Corporate. . . . . . . . . . . . . . . . 6,743 29,415
Investment in and advances to
affiliates . . . . . . . . . . . . . . 26,927 --
-------- --------
$ 87,032 $ 29,415
======== ========
<PAGE>
ENTRADE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
During the three and nine months ended September 30, 2000, there were no
significant intersegment sales. No one customer accounted for more than 10%
of the Company's total revenues.
NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") released Issue 00-2,
"Accounting for Web Site Development Costs." EITF Issue 00-2 establishes
standards for determining the capitalization or expensing of incurred costs
relating to the development of Internet web sites based upon the respective
stage of development. The Issue is effective for fiscal quarters beginning
after September 30, 2000 (including costs incurred for projects in process
at the beginning of the quarter of adoption). The Company adopted the
provisions of EITF 00-2 effective July 1, 2000. The capitalization of a
major portion of the Company's web site development costs could have a
significant effect on the results of operations in the remainder of fiscal
year 2000 and future periods.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25"(the
"Interpretation"). The Interpretation is intended to clarify certain
issues that have arisen in practice since the issuance of APB 25. The
Company adopted the provisions of this pronouncement during the first
quarter of 2000.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition. The Company believes its revenue recognition policy is in
compliance with SAB No. 101.
NOTE 13. SUBSEQUENT EVENTS
RESTRUCTURING
In October 2000, the Company developed and announced a plan to restructure
its operations to focus on providing asset disposition and management
services rather than on developing its software business or new e-commerce
marketplaces. As a result of this change, Mark Santacrose, former
President, CEO and Director, Mark Miller, former COO, and Carrie Shea,
former EVP of Marketing and Business Development, have resigned to pursue
other opportunities. Peter R. Harvey, Vice Chairman, will be acting
President and CEO in the interim. Additionally, Entrade has eliminated
approximately 45 employees in its marketing, business development, and
technology departments. The company expects to take a charge in the fourth
quarter to reflect the costs of this restructuring, primarily severance and
lease expense. On a preliminary basis, management estimates that the
charge will be between $2 million to $4 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS
This Report contains forward-looking statements based on the Company's
current expectations, estimates, projections, beliefs and assumptions.
Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates," "may," "will" and variations of these words or
similar expressions are intended to identify forward-looking statements.
In addition, any statements that refer to expectations, projections or
other characterizations of future events or circumstances, including any
underlying assumptions, are forward-looking statements. Such statements
are not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. Therefore,
actual Company results could differ materially and adversely from those
anticipated in any forward-looking statements as a result of numerous
factors, many of which are described in the "Risk Factors" section in the
Company's prospectus filed with the SEC on February 10, 2000. You should
carefully consider those risks, in addition to the other information in
this Report and in the Company's other filings with the SEC, before
deciding to invest in the Company or to maintain or increase your
investment. The Company undertakes no obligation to revise or update
publicly any forward-looking statements for any reason.
The following discussion supplements the information found in the financial
statements and related notes:
GENERAL BUSINESS
Entrade provides asset disposition and management services and manages its
previous investments in business-to-business e-commerce marketplaces in
targeted industries. Through a diversified portfolio of companies and a
"Bricks and Clicks" strategy, Entrade has developed a competency in asset
management, asset disposition and fulfillment.
The land-based portion of Entrade's asset disposition expertise is anchored
by its wholly-owned Nationwide subsidiary. Nationwide specializes in the
disposition through auction of used vehicles, light construction equipment
and personal property for federal, state and local government agencies,
corresponding law enforcement agencies, utilities, service contractors and
other capital-intensive businesses. Additionally, Nationwide provides
auction services to a large and growing number of financial institutions,
rental companies and large corporations such as PH&H (vehicle fleet
lessor), Pacific Gas & Electric, United Rentals, Chevron, Hertz and Shell.
Auctions are primarily performed at Nationwide's locations and are
occasionally performed at off-site locations at the request of the
consignor. The consignor base for off-site auctions includes companies
such as United Rentals and Hertz. Currently, Nationwide operates six
permanent full service public auction facilities within the following
states: California, Georgia, Delaware, Missouri and New Mexico.
Nationwide does not take title to any auction merchandise and therefore
does not take principal risk. Nationwide receives a fee from both the
successful bidder and the consignor. Historically, approximately 95% of
Nationwide's revenue has been generated from fees paid for the disposition
of used vehicles and equipment.
Entrade marketplaces are intended to generate multiple revenue streams
including transaction fees, membership and listing fees, fees from
ancillary services such as credit, financing, appraisal, escrow and
warranty, and advertising. Entrade also generates revenue through existing
licenses of its technology. The following table contains a summary as of
September 30, 2000 of the e-commerce companies in which Entrade has an
interest and the marketplace each company is pursuing. In addition, the
table indicates the quarter Entrade's ownership interest in each company
began and the period in which each company launched its website.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Owner-
ship
Interest
(1) at
Septem- Owner-
ber 30, ship Website
Company e-commerce marketplace 2000 Date Launched
------- -------------------------- -------- -------- --------
Asset-
Control.com Sale of surplus industrial
equipment, excess inventory
and commercial real estate 38% Q1 2000 May 2000
AssetTRADE.com Industrial machinery,
equipment and parts
remarketing 16.1% Q1 1999 Apr 2000
Commerce-
Health.com On-line institutional
healthcare procurement
system 6% Q2 2000 Beta
Testing
printer-
alliance.com Buying group of independent
commercial printers in order
to obtain cost savings on
supplies, equipment and
other services 64% Q4 1999
Apr 2000
Trade-
Textile.com Trading of excess yarns
and fabrics, garments, raw
materials, chemicals, and
textile quotas, initially
targeting the Chinese
textile industry 21% Q1 2000 Mar 2000
GlobalPower
Assets.com Asset recovery and internal
inventory management
services to utility industry 80%(2) Q2 1999 Jun 2000
Truck-
Center.com Sale of trucks and related
services including financing,
certification, warranty and
third party inspection 80% Q1 2000 Apr 2000
Pricecon-
tainer.com On-line reservation system
designed to facilitate trans-
oceanic shipping and logistics 15% Q4 1999 Apr 2000
(1) On a fully-diluted basis.
(2) Does not reflect Entrade's additional ownership due to
AssetTRADE.com's 20% interest in GlobalPower Assets.com
(3) See Note 3 to the condensed consolidated financial
statements "Change of Business - e-commerce Marketplaces"
for a description of the ownership of TruckCenter.com.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
On February 10, 2000, Entrade agreed with Associates First Capital
Corporation to organize a new entity to be known as TruckCenter.com to
create a business-to-business e-commerce marketplace for the sale of trucks
and related services, including financing, certification, warranty and
third party inspection.
On February 18, 2000, Entrade entered into an agreement to acquire shares
of Series A Convertible Preferred Shares of TradeTextile.com.
TradeTextile.com provides business-to-business e-commerce for the trading
of yarns, fabrics, garments, raw materials, chemicals, and textile quotas,
initially targeting the Chinese textile industry.
On March 9, 2000, Entrade agreed with Textron Financial Corporation, a
subsidiary of Textron Inc., to organize a new entity to be known as
AssetControl.com to create a business-to-business electronic commerce
marketplace for the sale of surplus industrial equipment, excess inventory
and commercial real estate.
On March 20, 2000, Entrade raised approximately $28,579,000 in net proceeds
from the sale of 30,000 shares of its Series A Mandatorily Redeemable
Convertible preferred stock. See Note 7 to the condensed consolidated
financial statements "Mandatorily Redeemable Convertible Preferred Stock"
and the "Liquidity Capital Resources" section relating to the redemption of
the Series A Mandatorily Redeemable Convertible Preferred Stock and other
matters affecting Entrade's ongoing results of operations.
In June 2000, Entrade invested an additional $400,000, for a total of
$500,000, in CommerceHealth.com which provides procurement process
solutions and consulting services for the large hospital market. Entrade
has an approximate 6% ownership of CommerceHealth.com.
Entrade also owns all of the Series A Preferred Stock (convertible into a
61% common stock ownership interest) of printeralliance.com, and in the
first quarter of 2000 acquired an additional 3% interest for $1,000,000
bringing its total interest to 64%. During the third quarter, Entrade
invested an additional $522,000 in printeralliance.com through the purchase
of convertible notes. Entrade also owns a 15% interest in
Pricecontainer.com and an 80% interest in utiliparts.com, Inc., d/b/a
GlobalPowerAssets.com.
RESULTS OF OPERATIONS
PORTFOLIO COMPANY GROSS TRANSACTION VOLUME AND NET REVENUE EARNED
Net revenue in the statement of operations reflects the licensing and
related fees charged to non-consolidated affiliates and third parties and,
for auction and/or sales transactions, the commissions earned on such
transactions, rather than the gross transaction value, only for companies
whose results are consolidated into the statement of operations. Financial
data for Entrade's portfolio companies (whether accounted for in the
statement of operations on the consolidation, equity or cost methods)
regarding gross transaction value and total net revenue for the three and
nine month periods ended September 30, 2000 is as follows (in thousands):
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
------------- -------------
Portfolio companies exclusive of
Nationwide
Gross transaction volume . . . . . . . $ 16,669 $ 41,992
-------- --------
Net revenue. . . . . . . . . . . . 1,605 3,097
-------- --------
Nationwide
Gross transaction volume . . . . . . . 23,444 63,278
-------- --------
Net revenue. . . . . . . . . . . . 4,191 11,250
-------- --------
All portfolio companies
Total gross transaction volume . . $ 40,113 $105,270
======== ========
Total net revenue. . . . . . . . . $ 5,796 $ 14,347
======== ========
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 VS. THREE
AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999
Revenues of $4,460,000 and $11,969,000 for the three and nine month periods
ended September 30, 2000, as compared with zero for the respective prior
year periods, reflect the results principally from the auction fees and
related revenue of Nationwide, which was acquired in the fourth quarter of
1999. Revenues of $269,000 and $719,000 were earned by Entrade's e-
commerce businesses during the three and nine month periods ended September
30, 2000, respectively. The cost of goods sold of $1,882,000 for the three
month period ended September 30, 2000 represents the cost of goods sold of
Nationwide.
Selling, general and administrative expenses from operations were
$7,942,000 and $24,492,000 for the three and nine month periods ended
September 30, 2000, respectively, as compared with $1,985,000 and
$4,431,000 for the respective prior year periods. The increase from 1999 to
2000 is due primarily to increases in personnel and related costs,
consulting, legal, and professional fees related to the development of
Entrade's various e-commerce marketplaces and proprietary software. Entrade
incurred non-cash compensation charges of $499,000 and $1,589,000 during
the three and nine month periods ended September 30, 2000 as compared with
$324,000 and $2,096,000 for the respective prior year periods.
During the three and nine month periods ended September 30, 2000, Entrade
had net interest expense of $340,000 and $1,109,000 as compared with net
interest income of $109,000 and $316,000 during the three and nine month
periods ended September 30, 1999, respectively. During the second quarter,
Entrade incurred charges of $1,138,000 for the amortization of the discount
incurred in connection with the private placement of promissory notes. In
April 2000, Entrade sold 6,000,000 shares of Class A Common Stock of
AssetTRADE.com which resulted in a gain of $8,069,000. In addition, 5,250
shares of Comforce common stock were sold for a gain of $20,000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Entrade's consolidated working capital decreased by $12,638,000 to
($17,529,000) at September 30, 2000, as compared with consolidated working
capital of ($4,891,000) at December 31, 1999. Entrade used working capital
to invest in its affiliates, retire debt and preferred stock, fund
operating expenses, and to acquire assets. These uses of working capital
were partially offset by proceeds from the exercise of stock options and
warrants, and the private placement of notes and other securities.
LIQUIDITY AND CAPITAL RESOURCES
Entrade has sustained significant net losses and negative cash flows from
operations in the first nine months of 2000. Entrade's ability to meet its
obligations in the ordinary course of business is dependent upon its
ability to establish profitable operations and to raise additional
financing through public or private equity financing, bank financing or
other sources of capital.
Entrade was unable to recognize an income tax benefit in connection with
its first nine months of 2000 from its tax loss carry forwards due to the
uncertainty of future taxable income.
Entrade's cash and cash equivalents decreased $5,967,000 during the nine
months ended September 30, 2000. Cash flows used by operating activities
of $17,514,000 and cash flows used by investing activities of $7,770,000
were less than cash flows from financing activities of $19,317,000.
Operating activities used cash flows to fund Entrade's net loss for the
nine months ended September 30, 2000, including amounts used to support its
affiliates. Investing activities used cash flows to invest in Entrade's
affiliates and to acquire assets. Financing activities provided cash flows
from the exercise of stock options, warrants, and the private placement of
promissory notes and other securities during the nine months ended
September 30, 2000.
In March 2000, Entrade raised approximately $28,579,000 in net proceeds
from the sale of the Company's Series A mandatorily redeemable convertible
preferred stock ("Series A Preferred Stock"). In April 2000, Entrade sold
6,000,000 shares of Class A Common Stock of AssetTRADE.com and used the
$10,000,000 of proceeds from such sale, along with cash on hand, to satisfy
the redemption of 29,700 shares of the Series A Preferred Stock issued in
March for approximately $34,280,000, which materially decreased the cash
available to Entrade to finance its continuing e-commerce operations. See
Note 7 to the condensed consolidated financial statements "Mandatorily
Redeemable Convertible Preferred Stock" in Item 1 of Part 1 to this Form
10-Q report.
During the week of May 15, 2000, Entrade agreed to issue, through a private
placement, $10,625,000 of promissory notes and related warrants to certain
individual accredited investors. Of the total proceeds, $2,000,000 was in
the form of a note that had its due date extended to October 15, 2000. The
investor failed to fund the $2,000,000 note when it became due on October
15, 2000 in accordance with its terms.
On October 26, Entrade issued $750,000 of promissory notes to a third-party
investor. The notes have a 12 month term and a 15% coupon, payable
quarterly in arrears. In conjunction with the issuance of the promissory
notes, Entrade issued 37,500 warrants, with a term of three years and an
exercise price of $3.00 per share, to the investor.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
In June 2000, management engaged two investment banking firms to raise
additional capital in order to fund its operations and execute its e-
commerce business plan into 2001. This engagement was terminated
unsuccessfully in September 2000. As a result of Entrade's inability to
raise adequate funds on acceptable terms to continue to expand its e-
commerce business operations, Entrade has decided to focus on providing
asset disposition and management services and managing its previous
investments in e-commerce marketplaces. Management believes that Entrade's
Nationwide subsidiary generates adequate cash flow from operations to
continue its operations as currently conducted. See Note 13 to the
condensed consolidated financial statements "Subsequent Events -
Restructuring."
Management believes that cash on hand as of the filing date, including that
held by a subsidiary, is sufficient to continue its restructured operations
to the end of this year. In addition, the referenced subsidiary has
marketable securities with a current value of approximately three million
dollars. To the extent that the sale of these securities would generate
cash proceeds equal to their current market value, management believes that
it would fund its restructured operations for at least an additional
quarter. However, there can be no assurance that these securities can be
sold at the current market price or at all. If adequate funds are not
generated from the sale of these securities or from one or more financings
on acceptable terms, Entrade will not be able to continue its operations,
which would materially harm its business, results of operations and
financial condition.
As of September 30, 2000, Entrade has a commitment to provide $1,000,000 in
cash to Tradetextile.com. Management is attempting to negotiate a non-cash
settlement of this obligation, though there can be no assurance that this
negotiation will be successful. If this negotiation is not successful,
management anticipates that Entrade will be able to satisfy this commitment
only upon the receipt of additional funding from outside sources.
Entrade notified the holders of the secured promissory notes issued during
the week of May 15, 2000 that a technical covenant default existed at
September 30, 2000. As of November 20, 2000, the default was cured through
a verbal waiver from the secured Note holders in exchange for a personal
guarantee of the secured Notes by the Vice Chairman of Entrade.
OPERATING PLAN
During 1999, Entrade entered the business of developing business-to-
business e-commerce marketplaces primarily through its acquisition of
entrade.com, printeralliance.com and other equity interests. Entrade also
entered the land-based asset disposition public auction business through
its October 1999 acquisition of Nationwide. In 2000, Entrade invested in
TruckCenter.com, AssetControl.com, TradeTextile.com, CommerceHealth.com and
began the buildout of its software company on a stand-alone basis. In June
2000, management engaged two investment banking firms to raise additional
capital in order to fund its operations and execute its e-commerce business
plan into 2001. This engagement was terminated unsuccessfully in September
2000. As a result of Entrade's inability to raise adequate funds on
acceptable terms to continue to expand its e-commerce business operations,
Entrade has decided to focus on providing asset disposition and management
services and managing its previous investments in e-commerce marketplaces.
See Note 3 to the condensed consolidated financial statements "e-commerce
Marketplaces" and Note 13 to the condensed consolidated financial
statements "Subsequent Event - Restructuring," both included in Item 1 of
Part I of this Form 10-Q report.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
NATIONWIDE AUCTION SYSTEMS
On April 19, 1999, Entrade 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. Nationwide is a public auction firm for the disposition of
municipality, law enforcement, corporate and utility company surplus
property. In addition to vehicles and equipment, Nationwide conducts real
property and jewelry auctions.
On October 19, 1999, Entrade completed the acquisition of all of the
outstanding capital stock of Nationwide. Entrade paid the following
amounts to close the transaction: (a) 1,570,000 shares of Entrade common
stock; (b) promissory notes (the "Notes") with a total principal amount of
$4,800,000, maturing on November 29, 1999; (c) $6,000,000 cash; and (d)
promissory notes (the "Term Notes") with a total principal amount of
$14,000,000, maturing October 1, 2001. The Notes and the Term Notes bear
interest at an annual rate of 8%. Entrade paid the cash portion of the
purchase price out of cash in its accounts. Entrade also issued 80,000
shares of Entrade common stock in payment of fees to its agent in
connection with the closing of the transaction.
In January 2000, the Notes, net of amounts due from a selling shareholder
of $139,000, plus accrued interest, were converted into 278,985 shares of
Entrade common stock. Accordingly, at December 31, 1999, net amounts due
on the Notes plus accrued interest were reclassified in the Entrade's
consolidated balance sheet as obligations expected to be settled by the
issuance of common stock. The total amount reclassified, including accrued
interest, was $4,743,000.
In March 2000, Entrade entered into an agreement with the Nationwide
selling shareholders to convert the Term Notes with a remaining principal
balance of approximately $10,500,000 into 265,621 shares of Entrade common
stock. The Term Notes originally provided for principal payments of
$3,500,000 in October 2000 and $7,000,000 in October 2001. Completion of
this transaction is subject to approval by Entrade's shareholders.
The Nationwide acquisition has been accounted for as a purchase. The
operating results of Nationwide have been included in Entrade's
consolidated financial statements since the effective date of acquisition.
The amount of the purchase price allocated to intangible assets acquired,
principally goodwill, of approximately $45 million is being amortized over
20 years.
Entrade also entered into an employment agreement with an individual to
serve as an executive officer of Nationwide. The initial term of the
employment agreement is three years. The term will automatically be
extended on each anniversary of the agreement commencing the third
anniversary for one year unless either party gives notice that it does not
wish to extend the employment term not later than 90 days preceding such
anniversary date. In connection with such employment, this individual was
issued a nonqualified stock option for the purchase of 200,000 shares of
Entrade common stock at an exercise price of $9.00 per share. The option
became exercisable in full on the date of the closing of the Nationwide
acquisition. As of the closing date of the Nationwide acquisition, this
individual was appointed as a Director of Entrade.
LITIGATION
Entrade and/or its subsidiaries are involved in several legal proceedings.
See Note 10 to the condensed consolidated financial statements
"Litigation," included in Item 1 of Part I of this Form 10-Q report.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONCLUDED
NET OPERATING LOSS CARRYFORWARDS
In recent years, Entrade 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 change in the ownership of a
corporation's common stock occurs.
In management's opinion, Entrade is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should Entrade continue to issue a significant number of
shares of common stock, it could trigger a limitation that would prevent it
from utilizing a substantial portion of its federal income tax loss
carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") released Issue 00-2,
"Accounting for Web Site Development Costs." EITF Issue 00-2 establishes
standards for determining the capitalization or expensing of incurred costs
relating to the development of Internet web sites based upon the respective
stage of development. The Issue is effective for fiscal quarters beginning
after September 30, 2000 (including costs incurred for projects in process
at the beginning of the quarter of adoption). The Company plans to adopt
the provisions of EITF 00-2 effective July 1, 2000. The Company's web site
development costs for all periods through September 30, 2000 have been
expensed. The capitalization of a major portion of the Company's web site
development costs could have a significant effect on the results of
operations in the remainder of fiscal year 2000 and future periods.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25" (the
"Interpretation"). The Interpretation is intended to clarify certain
issues that have arisen in practice since the issuance of APB 25. The
Company had adopted the provisions of this pronouncement during the first
quarter of 2000.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition. The Company believes its revenue recognition policy is in
compliance with SAB No. 101.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by the
Registrant since December 31, 1999. ARTRA's investment in Comforce common
stock is subject to liquidity and market price risks.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by Part II, Item 1 of Form 10-Q is hereby
incorporated by reference to Note 10 to Entrade's condensed consolidated
financial statements for the three and nine months ended September 30,
2000, included in Item 1 of Part I of this Form 10-Q report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(b) Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ENTRADE INC.
Registrant
Dated: November 14, 2000 /s/ Peter R. Harvey
--------------------------------
PETER R. HARVEY
President and
Chief Executive Officer (Interim)
and Vice-Chairman
Dated: November 14, 2000 /s/ Norman Smagley
--------------------------------
NORMAN SMAGLEY
Executive Vice President and
Chief Financial Officer
