Competition
Auction Business. In general, a few large international auction companies, including Ritchie Brothers, Manheim and Adesa, dominate the auction industry. These companies compete for the liquidation of large plants and large volumes of machinery and vehicles and primarily sell to dealers only. The remainder of the auction industry is fragmented and largely composed of independently-owned single-facility or regional auction companies. Nationwide believes that it currently competes favorably with existing competitors, primarily on the basis of its quality of service, and due to the fact that it serves a different market since the majority of Nationwide’s sales are to the general public, not dealers. There can be no guarantee that Nationwide will continue to compete financially in the future.
Retail Business. We operate in a highly competitive industry. We believe that the principal competitive factors in the automotive retailing business are location, service, price and selection. Each of our markets includes a large number of well-capitalized competitors that have extensive automobile store managerial experience and strong retail locations and facilities. According to the National Automotive Dealers Association and reports of various industry analysts, the automotive retail industry is served by approximately 21,500 franchised automotive dealerships and approximately 45,000 independent used vehicle dealers. Several other public companies operate numerous automotive retail stores on a national or regional basis. We are subject to competition from dealers that sell the same brands of new vehicles that we sell and from dealers that sell other brands of new vehicles that we do not represent in a particular market. New vehicle stores have franchise agreements with the various vehicle manufacturers and, as such, generally have access to new vehicles and compete with us. Additionally, we are subject to competition in the automotive retailing business from private market buyers and sellers of used vehicles.
Employees
As of December 31, 2006, we had approximately 300 full and part-time employees. We consider the relationships with our employees to be adequate, however turnover in our industry and at our company remains very high. Our employees are not covered by collective bargaining agreements.
Because of the complexity of our operations, there are a limited number of people who have the requisite skills and experience to qualify for these positions. Thus, the job market for these specialties is competitive. If we are unable to retain our existing personnel, and attract and train additional qualified personnel, our revenue and our profitability may be limited or circumstances could cause actual results to differ materially from those projected or predicted.
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Website Address and Access to Company Information
We currently do not maintain a website since our primary purpose is to serve as a holding company. The website address for our principal operating subsidiary, Nationwide, is www.nationwideauction.com. We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith file reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC toll free at 1-800-SEC-0330 for information about its public reference room. You may also read our filings at the SEC’s web site at http://www.sec.gov. Additionally, you may request a copy of these filings, at no cost, by written or oral request made to us at the following address or telephone number: 500 Central Avenue, Northfield, Il 60093; (847)441-6650.
Financial Information
Please refer to Item 6, “Selected Consolidated Financial Data,” for a review of our financial results and financial position for the five years ended December 31, 2006, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a review of revenue and net income (loss) for the three years ended December 31, 2006.
| ITEM 1A | RISK FACTORS |
You should carefully consider the risks described below, together with all of the other information in this Annual Report, including the consolidated financial statements and related notes, before making an investment decision with respect to our common stock. If any of the following risks occur, our business, financial condition, or operating results could suffer. As a result, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks and uncertainties described below are not the only significant risks we may face. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition.
Risks Related to United Stated Securities and Exchange Commission Investigation
United Stated Securities and Exchange Commission Investigation
On January 20, 2006, we announced that the United States Securities and Exchange Commission issued a Formal Order of Investigation relating to our failure to file a Form 10-Q since November 20, 2000 and a Form 10-K since March 30, 2000. The investigation also includes our possible failure to file other required filings, issues relating to our internal control and books and records, issues relating to the audit of our financial statements and issues relating to trading in our securities. The Formal Order is directed to us, our officers, directors, and subsidiaries. We are cooperating fully with the SEC and the SEC has made no determination of any wrongdoing at this time. Based on instruction from the SEC, we are filing this Form 10-K for our year ended December 31, 2006. However, this Form 10-K will not result in us being in compliance with all of the filing requirements of a Public Registrant.
We may face deregistration proceedings under Section 12(j) of the Exchange Act.
Due to our failure to timely file our periodic reports with the SEC, the SEC may commence deregistration proceedings under Section 12(j) of the Exchange Act. If our common stock is deregistered, publicly available information regarding our operations and financial results may be limited and the price of our common stock would likely suffer an immediate and significant decline.
Risks Related to the Operations of Entrade and our Subsidiaries
We anticipate that we will incur continued losses for the foreseeable future.
Although our recent restructuring plan was implemented in October 2006 to achieve profitability more quickly, attaining profitability requires significant improvement in the operating results of Nationwide and our other operating subsidiaries. Particularly given Nationwide’s underperformance from fiscal 2000 through fiscal 2006, and the unsuccessful development of each of our e-commerce market places, profitability in the near-term in all subsidiaries is doubtful.
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We may have difficulties sustaining and managing our growth.
One of the main elements of our strategy is to continue to grow our business, primarily by increasing Nationwide’s earnings and expanding into new geographic markets and into market segments in which we have not had a significant presence in the past. As part of this strategy, we may from time to time acquire additional assets or businesses from third parties. We may not be successful in growing our business or in managing this growth. For us to be successful in growing our business, we need to accomplish a number of objectives, including:
| • | identifying and developing new geographic markets and market segments; |
| • | identifying and acquiring, on terms favorable to us, businesses that might be appropriate acquisition targets; |
| • | successfully managing expansion; |
| • | obtaining necessary financing; |
| • | receiving necessary authorizations and approvals from governments for proposed development or expansion; |
| • | successfully integrating new facilities and acquired businesses into our existing operations; |
| • | achieving acceptance of the auction process in general by potential consignors, bidders and buyers; |
| • | establishing and maintaining favorable relationships with consignors, bidders and buyers in new markets and market segments, and maintaining these relationships in our existing markets; |
| • | capitalizing on changes in the supply of and demand for industrial assets, in our existing and in new markets; and |
| • | designing and implementing business processes that are able to support profitable growth. |
We may need to hire additional employees, or terminate certain employees to manage any growth that we achieve. In addition, growth may increase the geographic scope of our operations and increase demands on both our operating and financial systems. These factors will increase our operating complexity and the level of responsibility of existing and new management personnel. It may be difficult for us to attract and retain qualified managers and employees, and our existing operating and financial systems and controls may not be adequate to support our growth. We may not be able to improve our systems and controls as a result of increased costs, technological challenges, or lack of qualified employees. Our past results and growth may not be indicative of our future prospects or our ability to expand into new markets, many of which may have different competitive conditions and demographic characteristics than our existing markets.
We are in breach of affirmative covenants under certain promissory notes.
We have issued secured and unsecured promissory notes aggregating approximately $46.0 million in principal (the “Promissory Notes”). In connection with our issuance of certain promissory notes, we agreed to affirmative covenants obligating us to make all payments under the Promissory Notes and make all securities filings as required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have failed to meet our payment obligations under the Promissory Notes and we are not current with respect to our reporting obligations under the Exchange Act and have failed to satisfy certain other technical requirements of the Notes and related security agreements. It is possible that the holders of our outstanding promissory notes may assert such breaches and attempt to exercise their rights and remedies under the Promissory Notes, including declaring all obligations under such notes immediately due and payable.
To date none of the note holders has initiated any action to collect payment of the Promissory Notes, but there is no assurance that a holder will not initiate such claims in the future. We will actively seek waivers of all breaches from the holders of Promissory Notes, although we can give no assurance that such waivers can or will be obtained. If we fail to obtain the necessary waivers and the holders of Promissory Notes bring an action against us, we may not be in a position to pay all amounts owing under the Promissory Notes.
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We may have difficulty obtaining additional capital, and might have to accept terms that would adversely affect our shareholders.
In order to continue operating, we may have to raise funds from additional financings, which may result in dilution to our existing shareholders. We may have difficulty obtaining additional funding, and we may have to accept terms that would adversely affect our shareholders and us. For example, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which business is conducted. Lending institutions or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions, or significant asset sales. Most significantly, we may not be able to locate additional funding sources on any terms, which would have a material adverse effect on our ability to continue operating.
We will need additional financing in the future, which may not be available on favorable terms, if at all.
We will need additional funds to finance our operations, as well as to enhance our services, fund our expansion, respond to competitive pressures or acquire complementary businesses or technologies. Currently, our business will not generate the cash needed to finance such requirements. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders would be reduced, and these securities may have rights, preferences or privileges senior to those of our common stock. If adequate funds are not available or are not available on acceptable terms, our ability to enhance our services, fund our expansion, respond to competitive pressures or take advantage of business opportunities would be significantly limited, and we might need to significantly restrict our operations.
We may make acquisitions that require significant resources and could be unsuccessful.
In the future, we may acquire other businesses, products and technologies to complement our current business. We may not be able to identify, negotiate, finance, complete or integrate any future acquisition successfully. Acquisitions involve a number of risks, including possible adverse effects on our operating results, diversion of management’s attention, inability to retain key employees of the acquired business and risks associated with unanticipated events or liabilities, some or all of which could disrupt our business and reduce the likelihood that we will receive the anticipated benefits of the acquisition in the amount or the time frame that we expect.
Should we be unable to successfully integrate a new business, we could be required to either dispose of the operation or restructure the operation. In either event, our business could be disrupted and we may not achieve the anticipated benefits of the acquisition. In addition, future transactions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization of expenses, or write-offs of goodwill, any of which could harm our financial condition and operating results. Future transactions may also require us to obtain additional financing, which may not be available on favorable terms or at all.
Our business would be harmed if there were decreases in the supply of, demand for, or market values of industrial and commercial assets, primarily used industrial equipment and commercial automobiles.
Our auction revenues could be reduced if there was significant erosion in the supply of, demand for, or market values of used trucks and commercial automobiles, which would affect our financial condition and results of operations. We have no control over any of the factors that affect the supply of, and demand for, used trucks and commercial automobiles, and the circumstances that cause market values for used trucks and commercial automobiles to fluctuate are beyond our control. In addition, price competition and availability of new trucks and commercial automobiles directly affect the supply of, demand for, and market value of used trucks and commercial automobiles.
Current economic conditions may harm our results of operations.
In the normal course of business, we are subject to changes in general or regional U.S. economic conditions, including, but not limited to, consumer credit availability, consumer credit delinquency and loss rates, interest rates, gasoline prices, inflation, personal discretionary spending levels and consumer sentiment about the economy in general. Any significant changes in economic conditions could adversely affect consumer demand and/or increase costs.
Our revenues and profitability could be reduced as a result of competition in our core markets.
The used truck and equipment sectors of the global industrial equipment market, and the auction segment of those markets, are highly fragmented. We compete directly for potential purchasers of industrial equipment with other auction companies. Our indirect competitors include equipment manufacturers, distributors and dealers that sell new or used equipment, and equipment rental companies. When sourcing equipment to sell at our auctions, we compete with other auction companies, equipment dealers and brokers, and equipment owners that have traditionally disposed of equipment in private sales.
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Our direct competitors are primarily national and regional auction companies. Some of our direct and indirect competitors have significantly greater financial and marketing resources and name recognition than we do. New competitors with greater financial and other resources may enter the industrial equipment auction market in the future. Additionally, existing or future competitors may succeed in entering and establishing successful operations in new geographic markets prior to our entry into those markets. They may also compete against us through internet-based services. If existing or future competitors seek to gain or retain market share by reducing commission rates, we may also be required to reduce commission rates, which may reduce our revenue and harm our operating results and financial condition.
Loss of key employees.
Our business is largely a service business in which the ability of our employees to develop and maintain relationships with potential sellers and buyers is essential to our success. Moreover, our business is both complex and unique, making it important to retain key specialists and members of management. Accordingly, our business is highly dependent upon our success in attracting and retaining qualified personnel.
On October 6, 2006, and concurrently with the consummation of the agreement to sell Nationwide’s existing assets and business operations (the “Sold Operations”) relating to its auction sites located in Delaware, Georgia and Texas (the “Sold Locations”), effective September 1, 2006, Corey Schlossmann tendered, and we accepted, his resignation as the Chief Executive Officer of Nationwide and our director.
Government laws and regulations
Many of our activities are subject to laws and regulations including, but not limited to, Department of Motor Vehicles, import and export regulations, property ownership laws, data protection and privacy laws, anti-money laundering laws, antitrust laws and value added sales taxes. In addition, we are subject to local auction regulations. Such regulations do not impose a material impediment to our business but do affect the market generally, and a material adverse change in such regulations could affect our business. Additionally, export and import laws and property ownership laws could affect the availability of certain kinds of property for sale at our principal auction locations or could increase the cost of moving property to such locations, or may decrease our ability to sell property for export.
Violations of Internal Revenue Code Section 6050I
On December 4, 2006, Nationwide received notice from the Internal Revenue Service (IRS) of its intention to impose fines and penalties totaling approximately $19.6 million on Nationwide as a result of (a) its failure to file all necessary Form 8300s required by Internal Revenue Code (IRC) Section 6050I during 2003, 2004, 2005 and a portion of 2006, and (b) its failure to provide payee information statements to certain customers as required by IRC Section 6050I. IRC Section 6050I requires a person engaged in a trade or business who receives more than $10,000 in cash from one or more related transactions to disclose the purchaser’s name, address and tax identification number on form 8300, along with the date and nature of the transaction. On May 15, 2007, the IRS and Nationwide entered into a Closing Agreement, pursuant to which Nationwide agreed to pay fines and penalties totaling $81,100 and the IRS agreed not to assert any further penalties and fines with respect all reportable currency transactions for the calendar years ended December 31, 2003, 2004, 2005 and 2006. In connection with the settlement of this matter, certain officers of Nationwide executed an acknowledgement of Nationwide’s obligations under IRC Section 6050I and the fines and penalties that may be imposed by the IRS with respect to any future violations of IRC Section 6050I by Nationwide. Given this acknowledgement, we believe that any future violations by Nationwide of IRC Section 6050I will result in the imposition of substantial fines and penalties by the IRS.
Unfavorable findings resulting from a government investigation or audit could subject us to a variety of penalties and sanctions, could negatively impact our future operating results and could force us to adjust previously reported operating results.
Federal, state, and local governments have the right to audit our performance under our government auction contracts as well as for general regulatory and compliance verification. Any adverse findings from audits conducted by such agencies or reviews of our performance under our contracts could result in a significant adjustment to our previously reported operating results. If this occurs, our past operating margins may be reduced. The results of an audit by any government could result in significant fines and/or reduce the volume and type of merchandise made available to us under our contracts with various government agencies, resulting in lower gross merchandise volume, revenue, and profitability for our company. If such a government audit uncovers improper or illegal
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activities, we could be subject to the civil and criminal penalties, administrative sanctions, significant fines and reputational harm. If, as the result of an audit of our contracts with the government, we are suspended or debarred from contracting with various government agencies, if our reputation or relationship with government agencies is impaired, or if the government otherwise ceases doing business with us or significantly decreases the amount of business it does with us, our revenue and profitability would substantially decrease.
Risks Relating to the Securities Markets and Ownership of Our Securities
New York Stock Exchange delisting.
On July 23, 2001 we were notified by the NYSE that the trading price of our common stock had fallen below the continued listing criteria relating to market capitalization, book value and minimum trading price per share. We submitted a business plan to the NYSE which indicated our ability to meet the listing requirements. The New York Stock Exchange delisted our common stock on October 11, 2001. We were unsuccessful in appealing the delisting, and, our common stock is currently traded on the “pink sheets” market under the symbol “ETAD”
Our delisting has reduced the market and liquidity of our common stock and consequently may adversely affect the ability of our stockholders and brokers/dealers to purchase and sell our shares in an orderly manner if at all. Due in part to the decreased trading price of our common stock and the elimination of analyst coverage, the trading price of our common stock may change quickly and, you may not be able to execute trades as quickly as you could when the common stock was listed on the NYSE.
The interests of significant shareholders may conflict with the interests of Entrade or other shareholders.
We are aware of three directors, officers or holders of more than 5.00% of the outstanding shares of our common stock, that own approximately 6.98%, 5.67%, and 5.62% of the outstanding common stock as of December 31, 2006 respectively. Because of their stock ownership, one or more of these shareholders may be in a position to affect significantly our corporate actions, including, for example, mergers or takeover attempts, in a manner that could conflict with the interests of other public shareholders.
Anti-takeover provisions contained in our charter documents could make a third party acquisition of us difficult.
We are a Pennsylvania corporation. The anti-takeover provisions of Pennsylvania law may make it more difficult for a third party to acquire control of us, even if such a change in control would be beneficial to shareholders.
Our Articles of Incorporation provide that the board of directors may issue preferred stock without shareholder approval. The issuance of preferred stock could make it more difficult for a third party to acquire us. The board of directors may issue preferred stock with voting or conversion rights that may have the effect of delaying, deferring, or preventing a change of control and would adversely affect the market price of our common stock and the voting and other rights of holders of our common stock.
The common stock price has been and may continue to be highly volatile.
The market price of our common stock may continue to be highly volatile because of general market volatility. Shareholders may not be able to resell their shares of common stock following periods of volatility because of the market’s inability to react to general market volatility. Though we are focusing on auction and retail business opportunities going forward, volatility in Internet-related stocks could still affect the stock price given our continued ownership interests in e-commerce market places.
Factors that could cause volatility in our stock price may include, among other things:
| • | actual or anticipated variations in quarterly operating results; |
| • | announcements of technological innovations by competitors or affiliates; |
| • | new sales formats or new products or services; |
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| • | changes in financial estimates by securities analysts; |
| • | conditions or trends in large manufacturing, auction and automotive industries; |
| • | conditions or trends in the Internet industry; |
| • | changes in the market valuations of other Internet companies; |
| • | announcements by us or our competitors of significant acquisitions, strategic partnerships or joint ventures |
| • | changes in capital commitments; |
| • | additions or departures of key personnel; and |
| • | sales of common stock. |
Many of these factors are beyond our control. These factors may materially adversely affect the market price of the common stock, regardless of operating performance.
Our quarterly operating results have fluctuated in the past and may do so in the future, which could cause volatility in our stock price.
Our prior operating results have fluctuated due to changes in our business and the e-commerce industry. Similarly, our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our operating results as an indication of our future performance. Factors that may affect our quarterly operating results include the following:
| • | the addition of new consignors or the loss of existing consignors; |
| • | the volume, size, timing and completion rate of transactions in our marketplaces; |
| • | changes in the supply and demand for and the volume, price, mix and quality of our supply of wholesale, surplus and salvage assets; |
| • | introduction of new or enhanced websites, services or product offerings by us or our competitors; |
| • | implementation of significant new contracts; |
| • | changes in our pricing policies or the pricing policies of our competitors; |
| • | changes in the conditions and economic prospects of the automotive and auction industries or the economy generally, which could alter current or prospective buyers’ and sellers’ priorities; |
| • | technical difficulties, including telecommunication system or Internet failures; |
| • | changes in government regulation of the automotive, surplus asset sales, remarketing or auction industry; |
| • | event-driven disruptions such as war, terrorism, disease and natural disasters; |
| • | seasonal patterns in selling and purchasing activity; and |
| • | costs related to acquisitions of technology or equipment. |
Our operating results may fall below the expectations of market analysts and investors in some future periods. If this occurs, even temporarily, it could cause volatility in our stock price.
Shares eligible for future sales by current shareholders may adversely affect our stock price.
If existing shareholders sell in the public market substantial amounts of our common stock, including shares issued on the exercise of outstanding options and warrants, then the market price of our common stock could fall.
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We do not intend to pay dividends on our common stock, and you may lose the entire amount of your investment in our common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any funds without selling your shares. We cannot assure that you will receive a positive return on your investment when you sell your shares or that you will not lose the entire amount of your investment.
Risks Related to Our Public Filing Requirements
Our internal control over financial reporting was not effective as of December 31, 2006 and weaknesses in our internal controls and procedures could adversely affect our financial condition.
Our management assessed the internal controls over financial reporting as of December 31, 2006, the end of our most recent fiscal year, and concluded that material weaknesses existed and that we lacked effective internal control over our financial reporting.
We have engaged in, and are continuing to engage in, substantial efforts to improve our internal control over financial reporting and disclosure controls and procedures related to substantially all areas of our financial statements and disclosures. The remediation efforts are continuing and are expected to continue throughout fiscal 2008 and beyond. There remains a risk that we will fail to prevent or detect a material misstatement of our annual or interim financial statements. In addition, if we are unsuccessful in our remediation efforts, our financial condition, our ability to report our financial condition and results of operations accurately and in a timely manner, and our ability to earn and retain the trust of our shareholders, employees, and customers, could be adversely affected. In addition, if we are unable to improve our internal control over financial reporting, we may risk losing our public company status.
In relation to the size of our Company we incur significant costs as a result of being a public company.
As a public company, we incur significant accounting, legal, governance, compliance and other expenses that private companies do not incur. In addition, the Sarbanes-Oxley Act of 2002 and the rules subsequently implemented by the Securities and Exchange Commission have required changes in corporate governance practices of public companies. These rules and regulations increase our legal, audit and financial compliance costs and makes some activities more time-consuming and costly. For example, as a result of being a public company, we are required to maintain additional board committees and formalize our internal control over financial reporting and disclosure controls and procedures. In addition, we incur additional costs associated with our public company reporting requirements. These rules and regulations also make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it is more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
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| ITEM 2. | PROPERTIES |
Entrade
We currently conduct our corporate operations through a leased facility in Northfield, Illinois comprising approximately 10,500 square feet of office space. This lease operates on a month-to-month basis.
Artra
Artra currently conducts its operations through a leased facility in Bloomingdale, Illinois comprising approximately 2,000 square feet of office space. This lease operates on a month-to-month basis.
Nationwide
Nationwide’s headquarters are located in Aliso Viejo, California.
Nationwide’s operating locations are all leased in California and are described as follows:
Anaheim. Approximately 40,000 square feet of land including two buildings comprising 5,000 square feet of office space. This lease has a term of five years and 11 days and expires on November 30, 2008. The lease was obtained by Nationwide in conjunction with the Automax transaction.
Chino. Approximately 63,000 square feet of storage in an industrial building. This sublease has a term of 3 years, 9 months and 23 days and expires on May 31, 2009.
Benicia. Approximately 15.5 usable acres of land including two buildings comprising approximately 38,000 square feet. This lease has been extended through May 31, 2009 under five one-year renewals. (See Note 16 to the consolidated financial statements “Related Party Transactions”).
City of Industry. Approximately 11 acres of land including a 6,000 square foot office building and a 4,000 square foot warehouse. This lease has been extended through May 31, 2009 under five one-year renewals. (See Note 16 to the consolidated financial statements “Related Party Transactions”)
North Hollywood. Approximately 70,000 square feet of land and a 10,000 square foot building. This lease has a term of 7 years and 10 1/3 months and expires on September 30, 2011. The lease was obtained by Nationwide in conjunction with the Automax transaction.
Otay Mesa (San Diego). Approximately 4 acres of land and adjacent parking. This lease has a term of 2 years and expires on December 31, 2008.
West Covina. Approximately 168,000 square feet of property on which an automotive showroom is located. This lease has a term of 3 years and 9 months and expires on August 30, 2007. The lease was obtained by Nationwide in conjunction with the Automax transaction. The lease was terminated in 2007.
We entered into the following lease agreements subsequent to December 31, 2006.
Aliso Viejo, CA. Approximately 17,000 square feet of office space. This sublease was entered into on June 16, 2007 and expires on June 29, 2009.
Long Beach, CA. Approximately 72,000 square feet of land area, including approximately 22,000 square feet of facilities. This sublease was entered into effective June 1, 2007, expiring on May 31, 2008. The sublease provides for 2 one-year extensions at our option. We vacated this lease facility in April, 2008.
Chino, CA. Approximately 66,000 square feet of storage in an industrial building. This sublease was entered into on October 15, 2007 and commenced on December 01, 2007. The sublease has a term of 4 years and expires on November 30, 2011.
Las Vegas, NV. Approximately 15 acres of land including buildings. This lease has a term of 2 years, 3 months from the time of possession and a conditional extension of up to 3 additional years.
We abandoned our leases in Anaheim, North Hollywood and San Diego, California locations in 2007 and Long Beach, California in April 2008. Additionally, we are currently in default on both of our leases in Chino, California and have received, or been notified that we will receive, 3-day notices to vacate the property. We are not currently using these facilities to transact business.
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| Location |
Lessor |
Lease Expiration |
Monthly Amount |
Future Rental Commitments | |||||||||||||||||||||
| 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||||||||
| City of Industry | Hearthstone Properties LLC (Nationwide Selling Shareholder and Principal Stockholder) | May 31, 2007, five-one year renewals, assumed renewal thru May 31, 2009 | $ | 57,500 | $ | 690,000 | $ | 690,000 | $ | 287,500 | $ | — | $ | — | $ | 1,667,500 | |||||||||
| Benicia | Hearthstone Properties LLC (Nationwide Selling Shareholder and Principal Stockholder) | May 31, 2007, five-one year renewals, assumed renewal thru May 31, 2009 | 47,500 | 570,000 | 570,000 | 237,500 | — | — | 1,377,500 | ||||||||||||||||
| Total Related Parties | $ | 105,000 | $ | 1,260,000 | $ | 1,260,000 | $ | 525,000 | — | — | $ | 3,045,000 | |||||||||||||
| Non-Related Parties: | |||||||||||||||||||||||||
| Otay Mesa | Otay Mesa Property LP | December 31, 2008 (a) | $ | 12,400 | $ | 149,200 | $ | 153,600 | $ | — | $ | — | $ | — | $ | 302,800 | |||||||||
| Chino, CA (c) | Omnia Italian Design | May 31, 2009 (b) | 28,000 | 340,457 | 350,671 | 148,638 | — | — | 839,766 | ||||||||||||||||
| Anaheim (c) | Marilyn Liekhus | November 30, 2008 | 6,754 | 81,048 | 74,294 | — | — | — | 155,342 | ||||||||||||||||
| West Covina | West Covina Auto Retail, Inc. | August 30, 2007 | 27,800 | 222,400 | — | — | — | — | 222,400 | ||||||||||||||||
| North Hollywood (c) | Gerald Ambinder | September 30, 2011 | 30,000 | 360,000 | 360,000 | 390,000 | 390,000 | 300,000 | 1,800,000 | ||||||||||||||||
| Irvine | Spectrum Business Center, L.P. | December 31, 2007 | 9,710 | 116,520 | — | — | — | — | 116,520 | ||||||||||||||||
| Total- Other | $ | 114,664 | $ | 1,269,625 | $ | 938,565 | $ | 538,638 | $ | 390,000 | $ | 300,000 | $ | 3,436,828 | |||||||||||
| $ | 219,664 | $ | 2,529,625 | $ | 2,198,565 | $ | 1,063,638 | $ | 390,000 | $ | 300,000 | $ | 6,481,828 | ||||||||||||
| (a) | Monthly payment increased to $12,800 per month effective December 1, 2007 in accordance with CPI increase provision in lease agreement. |
| (b) | Includes CPI adjustment in accordance with CPI increase provided in the lease agreement. |
| (c) | We terminated our operations in Anaheim, North Hollywood and San Diego, California locations in 2007 and our Long Beach, California location in April, 2008. Additionally, we are currently in default on both of our leases in Chino, California and have received, or been notified that we will receive, 3-day notices to vacate the property. |
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| Item 3. | Legal Proceedings |
Entrade
U.S. Department of Labor
On January 22, 2007, the U.S. Department of Labor notified us of its intention to assess a penalty against us for our failure to file an annual report on Form 5500 with respect to the Entrade Savings and Retirement Plan for the fiscal year ended December 31, 2004. On February 26, 2007, we filed with the U.S. Department of Labor a written statement of reasonable cause (“Statement of Reasonable Cause”) as to why we did not file the required annual report for the fiscal year ended December 31, 2004. On March 5, 2007, we were notified by the U.S. Department of Labor that our Statement of Reasonable Cause had been rejected and a fine of $86,500 would be assessed against us. On October 10, 2007, we agreed with the U.S. Department of Labor to settle and dismiss the matter in exchange for payment by us of penalties totaling $13,000.
Artra
On June 3, 2002, Artra filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The petition was filed in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. The petition was filed in response to a growing number of asbestos and asbestos related litigation claims directed toward Artra, arising primarily from Artra’s previous ownership of Baltimore Paint and Chemical and The Synkoloid Company and their affiliated entities.
On or about June 25, 2002, the United States Trustee for the Northern District of Illinois appointed the Official Committee of Unsecured Creditors, (the “Creditors Committee”) to represent the interests of Artra’s unsecured creditors. By order dated August 30, 2002, the Bankruptcy Court appointed a legal representative for future asbestos claimants (the “Future Representative”).
The Creditors Committee filed an action in the Bankruptcy Court, seeking to consolidate us, and our principal operating subsidiary Nationwide, with Artra. The Creditors Committee’s action alleged that we were indebted to Artra in an approximate aggregate principal amount of approximately $23.3 million, plus accrued interest, pursuant to a series of promissory notes made by us during the 2001 fiscal year (the “Entrade Notes”).
In response to the claims made by the Creditors Committee, we negotiated a settlement with Artra, the Creditors Committee and the Futures Representative. Under the terms of this settlement agreement, we agreed to make a one-time payment of $3.0 million to Artra, and further agreed to issue a promissory note to Artra in the principal amount of $2.0 million, which promissory note was to be secured by a letter of credit. In exchange for those payments, Artra, the Creditors Committee and the Futures Representative agreed to: (i) permanently dismiss the action brought by the Creditors Committee; (ii) release all claims against us under the Entrade Notes, (iii) release us from any and all liability associated with existing asbestos claims and (iv) release us from any and all future asbestos claims through issuance of a channeling injunction, which is more fully described below. The release also applied to our officers and directors, as well as our affiliated entities, in particular Nationwide, and certain persons associated with those affiliated entities.
The settlement agreement was subject to the satisfaction of certain conditions, including approval by the Bankruptcy Court and the issuance by the Bankruptcy Court of a permanent injunction under Section 105 of the Bankruptcy Code, permanently enjoining any further prosecution of Asbestos Claims against us and our affiliated parties. In addition, the settlement agreement required Artra, the Creditors Committee and the Futures Representative to use their best efforts to obtain a channeling injunction in our favor. A channeling injunction is an injunction issuable by the Bankruptcy Court under Section 524(g) of the United States Bankruptcy Code that permanently enjoins future prosecution of Asbestos Claims against us. The Bankruptcy Court approved the settlement agreement, with certain modifications. However, the implementation of the settlement agreement was deferred until the date on which the Bankruptcy Court issues a final order confirming a plan of reorganization for Artra.
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Subsequent Events
On January 24, 2007, Artra and the Creditors Committee filed a Joint Reorganization Plan of Artra Group Incorporated (the “Plan”). As proposed under the Plan, Artra would emerge from the bankruptcy case as an operating business. The primary elements of the Plan were: (i) the creation of an asbestos trust to which all of the present and future Asbestos Claims against Artra would be channeled for resolution and payment (the “Asbestos Trust”); (ii) the transfer of assets to the asbestos trust for the payment of such claims; (iii) the emergence of Artra with sufficient assets from which to fund its post-confirmation business activities; and (iv) entry of a permanent channeling injunction that would enjoin future prosecution of asbestos claims against us, Artra and our affiliated parties.
The Plan requires all holders of asbestos claims to file a claim form with the Asbestos Trust. The Asbestos Trust then evaluates, resolves and pays the asbestos claims. The Plan provides for the Asbestos Trust to be funded primarily through (i) the realization of cash proceeds from Artra’s various insurance policies, through settlement or otherwise; (ii) a settlement with the third party to whom Artra sold The Synkoloid Company and (iii) the settlement with us described above.
In exchange for our contribution to the Asbestos Trust, we, and our affiliated parties, would be released from all Asbestos Claims. The Plan also would enjoin all present and future holders of asbestos claims, and all holders of pre-confirmation rights, from pursuing any actions against us, and our affiliated parties, by issuance of a channeling injunction.
On January 25, 2007, the Bankruptcy Court entered an order confirming the Plan. On February 28, 2007, the United States District Court for the Northern District of Illinois entered an additional order affirming confirmation of the Plan. The Plan became effective on April 2, 2007.
On April 9, 2007, we, Artra and the Asbestos Trust amended and restated the terms of the original settlement agreement described above. As a result of the amendment, we were no longer obligated to make the payments called for by the original settlement agreement, instead we are required to: (i) make a one time payment to Artra in the amount of $1.8 million, which amount would be used to pay certain obligations of Artra; (ii) assume a $0.7 million obligation to fund Artra’s ongoing business activities, of which $0.2 million was payable immediately and $0.5 million would be payable at the discretion of us and Artra and (iii) issue to the Asbestos Trust a promissory note in the principal amount of $2.5 million (the “New Entrade Note”).
The New Entrade Note is non-interest bearing and is payable on April 9, 2012. If we make full payment on or before April 9, 2009, we will receive a prepayment discount of $1.5 million; if we make payment on or before April 9, 2010, we will receive a prepayment discount of $1.0 million, and if we make payment on or before April 5, 2011, we will receive a prepayment discount of $0.5 million. In addition, $0.5 million of the New Entrade Note is convertible into 200,000 shares of our common stock. The conversion may be elected at any time by the Asbestos Trust, and may be elected by us upon the satisfaction of certain conditions.
The amended and restated settlement agreement has received all necessary confirmation orders and affirming orders from the Bankruptcy Court and United States District Court for the Northern District of Illinois, as applicable. On April 9, 2007, we tendered to the Asbestos Trust $2.0 million in payment of the cash portion of our obligations under the amended and restated settlement agreement. We also delivered the New Entrade Note and assumed the obligation to fund an additional $0.5 million towards Artra’s ongoing business operations as required by the amended and restated settlement agreement. As a result of these actions, we have fulfilled all obligations necessary to initiate the permanent and irrevocable protections of us, and our affiliated entities, pursuant to the channeling injunction. Consequently, the channeling injunction in our favor of, and our affiliated parties, is now in full force and effect.
The amended and restated settlement agreement does not affect the relief granted to us under the Plan. Specifically, we will continue to receive the benefit of the release of asbestos claims and will continue to enjoy the protection of the channeling injunction. These protections will remain in effect even if we default on our obligations to provide the additional $0.5 million for Artra’s business operations or if we default on payment of the New Entrade Note.
Nationwide
Retail Business
In November 2006, the Convertible Promissory Notes (the “Kowal Notes”) issued by us to Joe Kowal (“Mr. Kowal”), a member of the Schlossmann Joint Venture, in connection with the acquisition of the Retail Business, matured but were not paid. Mr. Kowal brought an action against us seeking payment of the Kowal Notes.
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We entered into a settlement agreement with Mr. Kowal (the “Kowal Settlement Agreement”) in July 2007, whereby we agreed to compromise the obligations evidenced by the Kowal Notes and substitute the following consideration: (i) 250,000 shares of our common stock; (ii) $0.2 million in cash, payable to Mr. Kowal on signing of the Kowal Settlement Agreement and (iii) $0.4 million in cash, payable to Mr. Kowal in monthly installments over a period of one year. We issued the shares under the Kowal Settlement Agreement, and we have made certain installment payments to Mr. Kowal, but we are currently in default with respect to the Kowal Settlement Agreement.
In connection with the Kowal Settlement Agreement, we also agreed to a repayment schedule with certain noteholders affiliated with Mr. Kowal. The repayments are for an aggregate $0.5 million principal indebtedness over a period of one year.
Employment, Sales Tax and Compliance Settlements
Failure to File Form 8300s and Provide Annual Customer Notifications
On December 4, 2006, Nationwide received notice from the IRS of its intention to impose fines and penalties totaling approximately $19.6 million on Nationwide as a result of (a) its failure to file all necessary Form 8300s required by IRC Section 6050I during 2003, 2004, 2005 and a portion of 2006, and (b) its failure to provide payee information statements to certain customers as required by IRC Section 6050I . IRC Section 6050I requires a person engaged in a trade or business who receives more than $10,000 in cash from one or more related transactions to disclose the purchaser’s name, address and tax identification number on Form 8300, along with the date and nature of the transaction. IRC Section 6050I also requires that we deliver to each customer listed on a Form 8300, a payee information sheet by January 31st of the year following payment.
On May 15, 2007, the IRS and Nationwide entered into a closing agreement, pursuant to which Nationwide agreed to pay fines and penalties totaling $81,100 and the IRS agreed not to assert any further penalties and fines with respect all reportable currency transactions for the calendar years ended December 31, 2003, 2004, 2005 and 2006. In connection with the settlement of this matter, certain officers of Nationwide executed an acknowledgement of Nationwide’s obligations under IRC Section 6050I and the fines and penalties that may be imposed by the IRS with respect to any future violations of IRC Section 6050I by Nationwide. As a result of this acknowledgement, we believe that any future violations by Nationwide of IRC Section 6050I will result in the imposition of substantial fines and penalties by the IRS.
Internal Revenue Service- Failure To File Form 1099s and W-2s
Nationwide failed to file all necessary Form 1099s for its independent contractors and W-2s for its employees for the fiscal years ended December 31, 2003, 2004, and 2005. In order to settle the matter and prevent the IRS from assessing additional fines and penalties against Nationwide, the parties entered into a closing agreement dated as of November 28, 2006. Pursuant to the Closing Agreement the IRS agreed to release Nationwide from any further liability with respect to these matters in exchange for the payment by Nationwide of $332,145 in taxes, fines and penalties.
California State Board of Equalization
On April 8, 2002, Nationwide received a Notice of Determination (the “Determination”) from the California State Board of Equalization (the “Board of Equalization”) stating that Nationwide owed approximately $3.1 million to the Board of Equalization for failing to pay all necessary taxes under the California Sales and Use Tax laws. After a series of re-audits, the Board of Equalization reduced the total liability (taxes and interest) owing under the Determination from $3.1 million to $0.4 million. Nationwide disputed the Determination on several grounds, including, that certain sales were conducted in interstate commerce and therefore not subject to the California Sales and Use Tax laws. On May 16, 2007, Nationwide and the State Board of Equalization entered into a Settlement Agreement, pursuant to which Nationwide was released from any further liability with respect to these matters in exchange for the payment by Nationwide to the Board of Equalization of $0.4 million in taxes and interest.
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Ordinary Course
We are subject from time to time, to certain legal proceedings and claims in the ordinary course of conducting our business. We will record a liability related to our legal proceedings and claims when we have determined that it is probable that we will be obligated to pay and the related amount can be reasonably estimated, and we will disclose the related facts in the footnotes to our financial statements, if material. If we determine that an obligation is reasonably possible, we will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made.
For further discussion of litigation matters, see Note 11 “Commitments and Contingencies” and Note 12 “ Asbestos Litigation.” to the consolidated financial statements.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market for Registrants Common Equity
Our common stock was delisted by the New York Stock Exchange on October 11, 2001. Our common stock currently trades on the “pink sheets” published by the National Quotation Bureau under the symbol “ETAD”. However, the fact that our securities have limited and sporadic trading on the pink sheets does not by itself constitute a public market, and as such, historical price quotations relating to trades in our stock on the pink sheets have not been included in this filing. In the future, we plan to apply for quotation on the Over-The-Counter Bulletin Board, assuming that we are able to become current in our periodic filings with the SEC, of which there can be no assurance. As of December 31, 2006, we had 35,220,027 shares of common stock outstanding held by approximately 776 shareholders of record.
We have never paid cash dividends on our common stock. We currently anticipate that we will retain earnings, if any, to support operations and to finance the growth and development of our business and do not anticipate paying cash dividends in the foreseeable future. The payment of cash dividends by us is restricted by our current bank credit facility, which contains a restriction prohibiting us from paying any cash dividends without the bank’s prior approval.
Unregistered Sale of Equity Securities
2004
During 2004, we issued: (i) 230,000 restricted warrants at exercise prices between $0.10 and $1.91 per share in consideration of the extension of existing notes totaling $1.5 million; (ii) 625,000 restricted warrants exercisable at $0.10 per share and 1,500,000 restricted shares of common stock to the former owners of Nationwide in consideration of the extension of certain note and other obligations owed the sellers; which could be put back to the Company for $4.00 per share (no shares were put to the Company); (iii) $0.7 million in demand notes at 10% with 52,500 five year restricted warrants at an exercise price of $0.10 to $0.94 per share; (iv) $11.9 million notes at 10% due within one year of issuance with one year extension, and in connection therewith, we issued an additional $1.2 million of non-interest bearing notes due in two years from the date of issuance and 1,185,005 five year restricted warrants to purchase our common stock at $0.10 per share; (v) 214,286 restricted common shares of our stock at $0.70 per share and 107,142 restricted warrants at exercisable at $0.84 per share.
In total, during 2004 we issued 2,219,647 restricted warrants at an exercise price of $0.10 to $1.91 per share of which 20,000 were immediately returned and cancelled in 2004 at the request of the warrant holder, sold 214,286 shares of restricted common stock at $0.70 per share, issued 1,500,000 shares of restricted common stock in exchange for the extension of certain loan obligations, and issued notes totaling $13.8 million with interest from 0% to 10% and maturity dates from due on demand to two years from the date of issuance. We believe that all of these issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”).
2005
During 2005 we issued: (i) $1.4 million of 6% to 10% notes due on demand to one month for 42,500 five year restricted warrants at an exercise price of $0.10 per share; (ii) 500,000 restricted warrants exercisable at $0.10 per share to a noteholder in exchange for his agreement to restructure certain note and related obligations owed by us (the noteholder is the son-in-law of John J. Harvey, a director of the company); (iii) 3,772,000 shares of common stock, $3.8 million in 10% notes and $0.4 million in non-interest bearing notes to certain noteholders in exchange for their agreement to restructure certain note obligations owed by us; (iv) 280,000 restricted warrants exercisable for $0.10 to $1.27 per share in consideration for the extension of certain of our note obligations totaling $1.2 million; (v) $7.6 million, 10% notes due within one year of issuance with one year extension and in connection therewith issued 397,500 restricted warrants at a exercise price of $0.10 per share, and $0.8 million of non-interest bearing notes due two years from date of issuance; (vi) $0.9 million of non-interest bearing notes due within two years and 885,005 five year restricted warrants exercisable at $0.10 per share; (vii) five year restricted warrants to purchase 7,500 common shares of our stock for $0.10 per share for services rendered; (viii) 150,000 and 25,000 five year restricted warrants to purchase our common shares exercisable at $0.10 and $1.00 per share, respectively, and (ix) 142,858 restricted common shares for $0.70 per share.
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In total, during 2005, we issued 2,287,505 restricted warrants at an exercise price of $0.10 to $1.27 per share, issued 1,150,000 shares of restricted common stock to the former owners of Nationwide as a penalty for non-payment of certain promissory notes as required by the terms of the notes, sold 142,858 shares of restricted common stock at $0.70 per share and issued notes totaling $14.9 million with interest rates from 0% to 10% and maturity dates from due on demand to 2 years. We believe that all of these issuances were exempt from registration pursuant to Section 4(2) of the Securities Act.
2006
During 2006, we issued $0.8 million in non-interest bearing notes due in two years from date of issue and 774,700 of restricted warrants at an exercise price of $0.10 per share in exchange for extension of certain note agreements and we issued 254,164 restricted warrants at an exercise price of $0.10 in exchange for extensions on certain note agreements. We also issued 185,127 restricted warrants at an exercise price of $0.10 as part of a settlement agreement with the former owners of Nationwide. Finally, we issued 325,000 restricted warrants at an exercise price of $0.10 in relation to certain financing agreements. We believe that all of these issuances were exempt from registration pursuant to Section 4(2) of the Securities Act.
In total in 2006, we issued 1,538,991 restricted warrants at $0.10, issued 1,850,000 shares of common stock to the former owners of Nationwide as a penalty for non-payment of certain promissory notes, as required by the terms of the notes, and we issued 750,000 shares of common stock to an unrelated third party note holder as penalty for non-payment of a promissory note, as required by the terms of the note.
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