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 28, 1995
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 1-3916
ARTRA GROUP INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1095978
-------------------------------- -----------------
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: (708) 441-6650
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 October 31, 1995
------------------------------- -------------------------------
Common stock, without par value 6,730,423
<PAGE>
ARTRA GROUP INCORPORATED
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 28, 1995 and December 29, 1994 2
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended
September 28, 1995 and September 29, 1994 4
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Nine Months Ended September 28, 1995 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 28, 1995
and September 29, 1994 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 45
SIGNATURES 46
<PAGE>
Item 1. Financial Statements
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
<TABLE>
<CAPTION>
September 28, December 29,
1995 1994
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 82 $ 2,070
Restricted cash and equivalents 550 1,324
Receivables, less allowance for doubtful accounts
and markdowns of $386 in 1995 and $1,654 in 1994 10,184 13,707
Inventories 18,433 20,268
Other 674 1,148
Assets of discontinued operations held for disposal 16,164
-------- --------
Total current assets 46,087 38,517
-------- --------
Property, plant and equipment 47,337 48,150
Less accumulated depreciation and amortization 18,793 17,110
-------- --------
28,544 31,040
-------- --------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of
$1,931 in 1995 and $7,934 in 1994 3,672 19,076
Other 858 4,796
-------- --------
4,530 23,872
-------- --------
$ 79,161 $ 93,429
======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
<TABLE>
<CAPTION>
September 28, December 29,
1995 1994
-------- --------
LIABILITIES
<S> <C> <C>
Current liabilities:
Notes payable, including amounts due to related parties
of $6,561 in 1995 and $5,669 in 1994 $ 28,867 $ 28,053
Current maturities of long-term debt 34,420 37,521
Accounts payable 15,484 16,788
Accrued expenses 18,367 16,533
Income taxes 690 94
Obligations expected to be settled by the issuance of common stock 3,000
Liabilities of discontinued operations held for disposal 14,159
-------- --------
Total current liabilities 114,987 98,989
-------- --------
Long-term debt 11,086 19,673
Debt subsequently discharged 9,750
Other noncurrent liabilities 1,455 1,463
Commitments and contingencies
Redeemable common stock,
issued 283,965 shares in 1995 and 279,679 shares in 1994 4,253 4,144
ARTRA redeemable preferred stock payable to a related party,
$1,000 par value; Series A, 6% cumulative payment-in-kind,
including accumulated dividends, net of unamortized discount of
of $1,643 in 1995 and $1,842 in 1994; redeemable March 1, 2000
at $1,000 per share plus accrued dividends;
authorized 2,000,000 shares all series; issued 3,750 shares 3,551 3,129
Bagcraft redeemable preferred stock payable to a related party, cumulative $.01
par value, 13.5%; including accumulated dividends; redeemable in 1997 with a
liquidation preference equal to $100 per share;
50,000 shares authorized and issued 10,625 10,119
BCA Holdings preferred stock payable to a related party,
6% cumulative; including accumulated dividends;
liquidation preference of $1,000 per share;
10,000 shares authorized; issued 3,675 shares 4,087 3,922
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; authorized 7,500,000 shares;
issued 6,503,496 shares in 1995 and 6,455,602 shares in 1994 5,091 5,052
Additional paid-in capital 36,764 36,613
Receivable from related party, including accrued interest (4,159) (4,100)
Accumulated deficit (107,774) (94,520)
-------- --------
(70,078) (56,955)
Less treasury stock (57,038 shares), at cost 805 805
-------- --------
(70,883) (57,760)
-------- --------
$ 79,161 $ 93,429
======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 28, Sept 29, Sept 28, Sept 29,
1995 1994* 1995 1994*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $29,952 $28,191 $90,703 $82,936
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization 25,717 24,510 76,871 69,134
Selling, general and administrative 6,843 4,021 15,972 11,833
Depreciation and amortization 1,087 1,038 3,306 3,240
----- ----- ----- -----
33,647 29,569 96,149 84,207
------ ------ ------ ------
Operating loss (3,695) (1,378) (5,446) (1,271)
------ ------ ------ ------
Other income (expense):
Interest expense (2,621) (2,019) (6,392) (6,188)
Other income (expense), net (32) 100 1 73
-------- -------- -------- --------
(2,653) (1,919) (6,391) (6,115)
-------- -------- -------- --------
Loss from continuing operations
before income taxes and minority interest (6,348) (3,297) (11,837) (7,386)
(Provision) credit for income taxes (36) 60 (35) 5
Minority interest (223) (223) (671) (665)
-------- -------- -------- --------
Loss from continuing operations (6,607) (3,460) (12,543) (8,046)
Loss from discontinued operations (1,402) (1,003) (9,156) (2,738)
-------- -------- -------- --------
Loss before extraordinary credit (8,009) (4,463) (21,699) (10,784)
Extraordinary credit, net discharge of indebtedness 9,113
-------- -------- -------- --------
Net loss (8,009) (4,463) (12,586) (10,784)
Dividends applicable to redeemable preferred stock (144) (131) (422) (385)
Reduction of retained earnings
applicable to redeemable common stock (84) (90) (246) (210)
-------- -------- -------- --------
Loss applicable to common shares ($8,237) ($4,684) ($13,254) ($11,379)
======== ======== ======== ========
Earnings (loss) per share:
Continuing operations ($1.02) ($0.64) ($1.96) ($1.59)
Discontinued operations (0.20) (0.18) (1.36) (0.51)
------ ------ ------ ------
Loss before extraordinary credit (1.22) (0.82) (3.32) (2.10)
Extraordinary credit 1.35
------ ------ ------ ------
Net loss ($1.22) ($0.82) ($1.97) ($2.10)
====== ====== ====== ======
Weighted average number of shares of common stock
and common stock equivalents outstanding 6,730 5,717 6,712 5,409
===== ===== ===== =====
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
- --------------------
* As reclassified for discontinued operations.
<PAGE>
<TABLE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited in thousands, except share data)
<CAPTION>
Receivable Total
Additional From Shareholders'
Common Stock Paid-in Related Accumulated Treasury Stock Equity
Shares Dollars Capital Party (Deficit) Shares Dollars (Deficit)
--------- ---------- ---------- -------- ---------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 29, 1994 6,455,602 $ 5,052 $ 36,613 ($ 4,100) ($ 94,520) 57,038 ($805) ($57,760)
Net loss (12,586) (12,586)
Reclassification of
redeemable common stock (100,000) (500) (500)
Common stock issued
to pay liabilities 43,182 33 175 208
Net increase in receivable
from related party
including accrued interest (59) (59)
Redeemable common stock
put option exercised (8) 8
Sale and reclassification
of redeemable common stock 85,714 399 399
Exercise of stock options 12,100 9 39 48
Redeemable common
stock accretion (246) (246)
Redeemable preferred
stock dividends (422) (422)
Common stock
issued as compensation 6,898 5 30 35
--------- ---------- ---------- -------- ---------- ------ ------ --------
Balance at September 28, 1995 6,503,496 $ 5,091 $ 36,764 ($ 4,159) ($ 107,774) 57,038 ($805) ($70,883)
========= ========== ========== ======== ========== ====== ====== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------
Sept 29, Sept 28,
1995 1994
--------- ---------
<S> <C> <C>
Net cash flows from (used by) operating activities, ($ 284) ($ 4,235)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,892) (9,195)
Retail fixtures (631) (514)
Investment in Yield Global (753)
Acquisition of Arcar (2,264)
Proceeds from collection of Welch notes 3,000
Payment of liabilites with restricted cash 550
(Increase) decrease in unexpended plant construction funds 224 (1,746)
--------- ---------
Net cash flows used by investing activities 498 (13,719)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term debt 1,564 (381)
Proceeds from long-term borrowings 101,406 84,280
Reduction of long-term debt (104,813) (68,068)
Proceeds from private placements of ARTRA common stock 3,230
Other (359) (43)
--------- ---------
Net cash flows from (used by) financing activities (2,202) 19,018
--------- ---------
Increase (decrease) in cash and cash equivalents (1,988) 1,064
Cash and equivalents, beginning of period 2,070 1,060
--------- ---------
Cash and equivalents, end of period $ 82 $ 2,124
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 4,793 $ 3,828
Income taxes paid, net 18 48
Supplemental schedule of noncash investing and financing activities:
Notes issued as consideration for Arcar acquisition 8,000
ARTRA common stock issued under terms of Lori's debt settlement 2,500
agreement
Lori common stock issued under terms of Lori's debt settlement 700
agreement
Issue common stock and redeemable common stock to pay down 205 756
liabilities
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL RESTRUCTURING AND BASIS OF PRESENTATION
Prior to September 28, 1995, ARTRA Group Incorporated and its majority-owned
subsidiaries (hereinafter "ARTRA" or the "Company") principally operated in two
industry segments as: 1) a manufacturer of packaging products principally
serving the food industry; and 2) a designer and distributor of popular-priced
fashion costume jewelry and accessories. The packaging products business is
conducted by the Company's wholly-owned subsidiary, Bagcraft Corporation of
America ("Bagcraft"). The jewelry business was conducted by the then 62.9% owned
subsidiary, The Lori Corporation ("Lori"), through its two wholly-owned
subsidiaries Lawrence Jewelry Corporation ("Lawrence") and Rosecraft, Inc.
("Rosecraft"). As discussed below, in September, 1995 Lori adopted a plan to
discontinue its fashion costume jewelry business.
The Company's condensed consolidated financial statements are presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. In the opinion of
the Company, the accompanying condensed consolidated financial statements
reflect all normal recurring adjustments necessary to present fairly the
financial position as of September 28, 1995, and the results of operations and
changes in cash flows for the periods ended September 28, 1995 and September 29,
1994. The Company has suffered recurring losses from operations and has a net
capital deficiency. As a result of these factors, the Company has experienced
difficulty in obtaining adequate financing to replace certain current credit
arrangements, certain of which are in default, to fund its debt service and
liquidity requirements in 1995. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. See Note 8, Notes Payable, and Note 9, Long Term Debt, for further
discussion of the status of credit arrangements and restrictions on the ability
of operating subsidiaries to fund ARTRA corporate obligations. Due to its
limited ability to receive operating funds from its operating subsidiaries,
ARTRA has historically met its operating expenditures with funds generated by
such alternative sources as private placements of ARTRA common stock, sales of
ARTRA common stock with put options, loans from officers/directors and private
investors, as well as through sales of assets and/or other equity infusions.
ARTRA plans to continue to seek such alternative sources of funds to meet its
future operating expenditures.
On July 31, 1995, ARTRA and Bagcraft, entered into a letter of intent to sell
the business assets, subject to the buyer's assumption of certain liabilities,
of Bagcraft's wholly-owned Arcar Graphics, Inc. ("Arcar") subsidiary. Arcar is a
manufacturer and distributor of waterbase inks. On October 26, 1995, Bagcraft
completed the sale of the business assets, subject to the buyer's assumption of
certain liabilities, of Arcar for cash of approximately $20,500,000. The net
proceeds, after extinguishment of certain Arcar debt obligations of
approximately $9,900,000, were used to reduce Bagcraft debt obligations.
Effective October 30, 1995, ARTRA settled certain debt obligations due a bank
lender totaling approximately $5,000,000 for a cash payment of $150,000. The
gain on this debt extinguishment will be reflected in the Company's financial
statements in the fourth quarter of 1995.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the
former Welch Vacuum Technology ("Welch") subsidiary under terms of a
noncompetition agreement and a subordinated note in the principal amount of
$2,500,000 received by ARTRA as part of the proceeds from the 1989 sale of
Welch. Per terms of the settlement agreement, ARTRA received cash of $3,000,000
and a subordinated note in the principal amount of $640,000 payable June 30,
2001. The cash proceeds were used for a $2,500,000 reduction of amounts due on
certain ARTRA bank notes, with the remainder used for working capital. In
conjunction with this transaction, ARTRA entered into a letter agreement with
the bank whereby the bank agreed to not to exercise any of its rights and
remedies with respect to amounts due the bank under its ARTRA notes (see Note 8)
and certain obligations of ARTRA's president, Peter R. Harvey. In exchange for a
payment of $5,700,000, plus accrued interest and fees, the bank agreed to
discharge all amounts due the bank by ARTRA and to sell the obligations of Peter
R. Harvey due the bank to ARTRA. As of November 15, 1995, the Company had not
made the payment to settle the amounts due the bank. The Company is currently
negotiating with the bank to extend the due date for the payment due the bank
and is currently negotiating with potential lenders to fund the amounts due the
bank. Upon consummation of this transaction, ARTRA will recognize a gain on the
discharge of this indebtedness.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA intends to continue to negotiate with its creditors to extend due dates to
allow ARTRA to maximize value from possible sale of assets and to explore
various other sources of funding to meet its future operating expenditures. If
ARTRA is unable to negotiate extensions with its creditors and complete the
above mentioned transactions, ARTRA could suffer severe adverse consequences,
and as a result, ARTRA may be forced to liquidate its assets or file for
protection under the Bankruptcy Code.
In recent years, Lori's fashion costume jewelry operations had experienced a
pattern of significantly lower sales levels and related operating losses
primarily due to a shift in the buying patterns of its major customers (i.e.
certain mass merchandisers) from participation in Lori's service program to
purchases of costume jewelry and accessories directly from manufacturers and due
to a continued unfavorable retail environment. Accordingly, in September, 1995,
Lori adopted a plan to discontinue its fashion costume jewelry business as
discussed in Note 4.
As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase
agreement to participate in the acquisition of one hundred percent of the
capital stock of Spectrum Global Services, Inc. d/b/a YIELD Global ("YIELD"), a
wholly owned subsidiary of Spectrum Information Technologies, Inc. for
consideration consisting of cash of approximately $6 million, net of cash
acquired, and 450,000 Lori common shares issued as consideration for various
fees and guarantees associated with the transaction. Additionally, in
conjunction with the Yield acquisition, ARTRA has agreed to assume certain
pre-existing Lori liabilities and indemnify Lori in the event any future
liabilities arise concerning pre-existing environmental matters and business
related litigation. YIELD provides telecommunications and computer technical
staffing services worldwide to Fortune 500 companies and maintains an extensive,
global database of technical specialists, with an emphasis on wireless
communications capability. On October 17, 1995, Lori completed the acquisition
of one hundred percent of the capital stock of YIELD. The acquisition of Yield
was funded principally by private placements of approximately 1,900,000 Lori
common shares at $3.00 per share (total proceeds of approximately $5,700,000)
plus detachable warrants to purchase approximately 950,000 Lori common shares at
$3.375 per share. The warrants expire three years from the date of issue.
It is anticipated that Lori's entry into the telecommunications and computer
technical staffing services business through the acquisition of Yield will
provide Lori with sufficient liquidity and capital resources to fund its
operations for the remainder of 1995 and beyond. Lori continues to search for
additional funding, either through borrowings or equity infusions to expand its
entry into the telecommunications and computer technical staffing services
business.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's annual report on Form 10-K for the fiscal year ended December 29,
1994, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 29, 1994 was derived from
the audited consolidated financial statements in the Company's annual report on
Form 10-K.
Reported interim results of operations are based in part on estimates which may
be subject to year-end adjustments. In addition, these quarterly results of
operations are not necessarily indicative of those expected for the year.
2. ARCAR GRAPHICS, INC.
In March, 1994, Bagcraft entered into an agreement to purchase the business
assets, subject to buyer's assumption of certain liabilities, of Arcar, a
manufacturer and distributor of waterbase inks, for consideration of $10,264,000
consisting of cash of $2,264,000 and subordinated promissory notes totaling
$8,000,000. In addition to the initial consideration, the agreement called for
the purchase price to be increased based upon Arcar's cumulative earnings, as
defined in the purchase agreement,
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
for the period from January 1, 1994 until December 31, 1997 ("earnout
compensation"). The seller also received a warrant to purchase 177,778 ARTRA
common shares at a price of $5.625 per share, the market value at the date of
grant. Exercise of the warrant is payable only through a reduction of the
subordinated promissory notes and accrued interest due the seller under terms of
the purchase agreement. The acquisition of Arcar, completed on April 8, 1994,
was accounted for by the purchase method and, accordingly, the assets and
liabilities of Arcar were included in ARTRA's financial statements at their
estimated fair market value at the date of acquisition.
As discussed below in Note 4, on July 31, 1995, ARTRA and Bagcraft, entered into
a letter of intent to sell the business assets, subject to the buyer's
assumption of certain liabilities, of Arcar. The sale of Arcar was completed on
October 26, 1995.
3 YIELD GLOBAL ACQUISITION
On September 11, 1995, Lori signed a stock purchase agreement to participate in
the acquisition of one hundred percent of the capital stock of Spectrum Global
Services, Inc. d/b/a YIELD Global ("YIELD"), a wholly owned subsidiary of
Spectrum Information Technologies, Inc. for consideration consisting of cash of
approximately $6 million, net of cash acquired, and 450,000 Lori common shares
issued as consideration for various fees and guarantees associated with the
transaction. The cash consideration included net cash payments to the selling
shareholders of approximately $5.1 million. The 450,000 Lori common shares
issued as consideration for the Yield transaction included 150,000 shares issued
to Peter R. Harvey, a director of Lori and the president of ARTRA and 100,000
shares issued to ARTRA for their guarantee to the selling shareholder of the
payment of the Yield purchase price at closing. The shares issued to Peter R.
Harvey and ARTRA are subject to approval by Lori's shareholders. Additionally,
in conjunction with the Yield acquisition, ARTRA has agreed to assume certain
pre-existing Lori liabilities and indemnify Lori in the event any future
liabilities arise concerning pre-existing environmental matters and business
related litigation. YIELD provides telecommunications and computer technical
staffing services worldwide to Fortune 500 companies and maintains an extensive,
global database of technical specialists, with an emphasis on wireless
communications capability. The acquisition of YIELD, completed on October 17,
1995, will be accounted for by the purchase method.
The acquisition of Yield was funded principally by private placements of
approximately 1,900,000 Lori common shares at $3.00 per share (total proceeds of
approximately $5,700,000) plus detachable warrants to purchase approximately
950,000 Lori common shares at $3.375 per share. The warrants expire three years
from the date of issue.
The following unaudited pro forma condensed consolidated balance sheet at
September 28, 1995 presents the financial position of the Company at September
28, 1995 as if the acquisition of Yield and the related private placement of
Lori common shares had been consummated as of September 28, 1995. The unaudited
pro forma condensed consolidated statement of operations for the nine months
ended September 28, 1995 and September 29, 1994 present the Company's results of
operations as if the acquisition of Yield and the related private placement of
Lori common shares had been consummated as of December 30, 1993. Due to the
issuances of additional Lori common stock relating to the Yield acquisition and
certain other non-related transactions, ARTRA's common stock ownership interest
in Lori will be reduced to approximately 25%. The following unaudited pro forma
condensed consolidated financial statements present ARTRA's investment in Lori
as accounted for using the equity method.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 28, 1995
(In thousands)
<TABLE>
<CAPTION>
Deconsolidate Pro Forma
Historical Lori Adjustments Pro Forma
---------- --------- -------- --------
(A)
<S> <C> <C> <C> <C> <C>
Current assets $ 46,087 $ (4,525) $ 76 (B) $ 41,638
Property, plant and equipment, net 28,544 28,544
Investment in Lori (6,916) 3,631 (B) (3,285)
Excess of cost over net assets acquired, net 3,672 3,672
Other 858 (753) 105
---------- --------- -------- --------
$ 79,161 $ (12,194) $ 3,707 $ 70,674
========== ========== ======== ========
Current liabilities $ 114,987 $ (11,239) $ 2,752 (B) $106,500
Long-term debt 11,086 11,086
Other noncurrent liabilities 1,455 (955) 955 (B) 1,455
Redeemable common stock 4,253 4,253
ARTRA redeemable preferred stock 3,551 3,551
Bagcraft redeemable preferred stock 10,625 10,625
BCA Holdings redeemable preferred stock 4,087 4,087
Shareholders' equity (deficit) (70,883) (70,883)
--------- --------- -------- --------
$ 79,161 $ (12,194) $ 3,707 $ 70,674
========= ========= ======== ========
<FN>
Pro forma adjustments to the unaudited condensed consolidated balance sheet
consist of:
(A) Deconsolidate Lori and present ARTRA's investment in and advances to Lori
under the equity method.
(B) Lori liabilities assumed by ARTRA per provisions of the Yield acquisition
agreement.
</FN>
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 28, 1995
(In thousands)
<TABLE>
<CAPTION>
Deconsolidate Pro Forma
Historical Lori Adjustments Pro Forma
--------- -------- --------- -------
<S> <C> <C> <C> <C>
(A)
Net sales $ 90,703 $ 90,703
Operating costs and expenses 96,149 $ (3,265) 92,884
--------- -------- -------
Operating earnings (loss) (5,446) 3,265 (2,181)
Equity in Lori loss (3,189) (B) (3,189)
Interest and other non-operating expenses (6,391) 410 (410) (C) (6,391)
--------- -------- --------- -------
Loss from continuing operations
before income taxes and minority interest (11,837) 3,675 (11,761)
Provision for income taxes (35) (35)
Minority interest (671)
--------- -------- -------- -------
Loss from continuing operations $ (12,543) $ 3,675 $ (3,599) $(12,467)
========= ======== ========= =========
Earnings (loss) per share from continuing operations $ (1.96) $ (1.95)
======== ========
Weighted average shares outstanding 6,712 6,712
========= ========
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 29, 1994
(In thousands)
<TABLE>
<CAPTION>
Deconsolidate Pro Forma
Historical Lori Adjustments Pro Forma
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Net sales $ 82,936 $ 82,936
Operating costs and expenses 84,207 $ (692)
-------- ------- -------
83,515
Operating earnings (loss) (1,271) 692 (579)
Equity in Lori loss $ (1,171) (B) (1,171)
Interest and other non-operating expenses (6,115) 959 (5,156)
-------- ------- -------
Loss from continuing operations
before income taxes and minority interest (7,386) 1,651 (6,906)
Credit for income taxes 5 5
Minority interest (665) (665)
-------- ------- -------- -------
Loss from continuing operations $ (8,046) $ 1,651 $ (1,171) $ (7,566)
======== ======= ======== =======
Earnings (loss) per share from continuing operations $ (1.59) $ (1.50)
======== =========
Weighted average shares outstanding 5,409 5,409
======== =======
<FN>
Pro forma adjustments to the unaudited condensed consolidated statements of
operations:
(A) Deconsolidate Lori and present ARTRA's investment in and advances to Lori
under the equity method.
(B) Reflect ARTRA's equity in Lori's pro forma loss.
(C) Reflect interest expense on Lori obligations assumed by ARTRA.
</FN>
</TABLE>
4. DISCONTINUED OPERATIONS
On July 31, 1995, ARTRA and Bagcraft, entered into a letter of intent to sell
the business assets, subject to the buyer's assumption of certain liabilities,
of Arcar. On October 26, 1995, Bagcraft completed the sale of Arcar for cash of
approximately $20,500,000. The net proceeds, after extinguishment of certain
Arcar debt obligations of approximately $9,900,000, were used principally to
reduce Bagcraft debt obligations. The gain on the sale of Arcar of approximately
$7,500,000 will be reflected in the Company's financial statements in the fourth
quarter of 1995.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In September, 1995, Lori adopted a plan to discontinue its fashion costume
jewelry business and recorded a provision of $1,000,000 for the estimated costs
to complete the disposal of the fashion costume jewelry business.
The Company's condensed consolidated financial statements have been reclassified
to report separately assets and liabilities and results of operations of Arcar
and Lori's discontinued fashion costume jewelry business. At September 28, 1995,
current assets of the discontinued operations consist principally of accounts
receivable and inventory, while current liabilities consist principally of notes
payable, accounts payable, other trade related debt and the above mentioned
provision of $1,000,000 for the estimated costs to complete the disposal of the
fashion costume jewelry business. The December 31, 1994 condensed consolidated
balance sheet has not been reclassified.
The 1995 and 1994 operating results (in thousands) of Bagcraft's discontinued
Arcar subsidiary and Lori's discontinued fashion costume jewelry business
consists of:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 28, Sept 29, Sept 28, Sept 29,
1995 1994 1995 1994
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales $ 5,145 $ 10,166 $ 16,932 $ 30,234
---------- ---------- ---------- ---------
Operating expenses 5,244 10,538 17,560 31,572
Goodwill impairment 6,430
Interest and other expense 323 625 1,093 1,385
---------- ---------- ---------- ---------
5,567 11,163 25,083 32,957
---------- ---------- ---------- ---------
Earnings(loss)from operations
before income taxes (422) (997) (8,151) (2,723)
(Provision)credit for income taxes 20 (6) (5) (15)
---------- ---------- ---------- ---------
Earnings (loss) from operations $ (402) $ (1,003) $ (8,156) $ (2,738)
---------- ---------- ---------- ---------
Provision for disposal of business $ (1,000) $ (1,000)
Provision for income taxes
---------- ---------- ---------- ---------
$ (1,000) $ (1,000)
---------- ---------- ---------- ---------
Loss from discontinued operations $ (1,402) $ (1,003) $ (9,156) $ (2,738)
========= ========== ========== ========
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
At March 31, 1995 and at December 31, 1994, the Lori's business plan had
anticipated that the restructuring of its debt (see Note 7), along with a
consolidation and restructuring of its operations would permit it to obtain a
sufficient level of borrowings to fund its capital requirements in 1995 and
beyond. With the above business plan in place, funded by an adequate level of
conventional working capital borrowings, it was anticipated that future cash
flows from operations would be sufficient to recover the carrying value of the
Company's goodwill.
During the second quarter of 1995, due primarily to competitive conditions in
the costume jewelry industry, Lori's operating subsidiaries experienced a
reduction in business with certain major customers. Additionally, , Lori's
operating subsidiaries discontinued certain unprofitable programs with other
customers resulting in charges to operations for merchandise credits and
inventory valuation allowances totaling $450,000. Due to the continued losses
from operations and the inability of the Lori to obtain conventional bank
financing, Lori determined that its remaining goodwill balance could no longer
be recovered over its remaining life through forecasted future operations.
Accordingly, the Company recorded a charge against operations of $6,430,000
($.96 per share) to write-off all of the goodwill of Lori's costume jewelry
operations at June 29, 1995.
5. INVENTORIES
Inventories (in thousands) consist of:
<TABLE>
<CAPTION>
Sept 28, Dec 29,
1995 1994
------- -------
<S> <C> <C>
Raw materials and supplies $ 5,784 $ 7,041
Work in process 439 877
Finished goods 12,210 12,350
------- -------
$18,433 $20,268
======= =======
</TABLE>
6. INVESTMENT IN EMERALD ACQUISITION CORPORATION / ENVIRODYNE INDUSTRIES, INC.
In March, 1989, Envirodyne Industries, Inc. ("Envirodyne") and Emerald
Acquisition Corporation ("Emerald") entered into a definitive agreement for a
subsidiary of Emerald to acquire all of the issued and outstanding shares of
Envirodyne common stock. Pursuant to the terms of certain letter agreements,
ARTRA agreed to participate in the transaction and received Envirodyne's consent
to sell its then 4,830,000 Envirodyne common shares (a 26.3% interest) to
Emerald. On May 3, 1989 the transaction was consummated. ARTRA received
consideration consisting of: (i) cash of $75,000,000; (ii) a 27.5% common stock
interest in Emerald and (iii) Emerald junior debentures ("Junior Debentures")
with a principal amount of $20,992,710. The Junior Debentures were scheduled to
mature May 1, 2001, twelve years from the date of issuance, and to accrue and
pay interest in the form of cash or additional Junior Debentures, at Emerald's
option, semi-annually, for the first six years at the rate of 15% and to pay
interest at the rate of 15% in the form of cash thereafter, semi-annually in
arrears. ARTRA's 27.5% interest in Emerald common stock and Emerald Junior
Debentures, as required by the Securities and Exchange Commission Staff
Accounting Bulletin No. 81, were carried net of a valuation allowance.
On January 6, 1993, a group of bondholders filed an involuntary petition for
reorganization of Envirodyne under Chapter 11 of the U.S. Bankruptcy Code. On
January 7, 1993, Envirodyne and certain of its subsidiaries (the "Debtor") filed
petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division.
Subsequently, Emerald filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in the same court.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On December 17, 1993 the Bankruptcy Court confirmed the First Amended Joint Plan
of Reorganization as twice modified (the "Plan") with respect to Envirodyne and
certain of its subsidiaries. The confirmation of the Plan was affirmed by the
United States District Court for the Northern District of Illinois on December
28, 1993 and Envirodyne and certain of its subsidiaries emerged from Chapter 11
on December 31, 1993, the Effective Date. A notice of appeal to the United
States Court of Appeals for the Seventh Circuit was thereafter filed by certain
holders of Envirodyne's 13.5% Subordinated Notes Due 1996. Envirodyne has filed
a motion, which is currently pending, to dismiss the appeal. Confirmation of the
Plan was affirmed on appeal. The Emerald Chapter 11 case is still pending
although ARTRA has moved to dismiss that case.
Envirodyne's plan of reorganization did not provide any consideration or value
to Emerald and Emerald, therefore, is without assets to provide value to ARTRA
for ARTRA's investment in Emerald common stock and Emerald Junior Debentures.
See discussion below and in Note 13 Litigation for remedies being pursued by
ARTRA as compensation for the lost value of its investment in Emerald common
stock and Emerald Junior Debentures.
On November 2, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth
Judicial Circuit for the state of Illinois (the State Court Action") against
Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K.
Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P.
Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with
DPK), James F. Massey and William Rifkind. On November 22, 1993, ARTRA filed a
First Amended Complaint. The defendants removed the case to the Bankruptcy Court
in which the Emerald Chapter 11 case is pending. On July 15, 1994 all but two of
ARTRA's causes of action were remanded to the state court. The Bankruptcy Court
maintained jurisdiction of ARTRA's claims against the individual defendants for
breaching their fiduciary duty as directors of Emerald to Emerald's creditors
and interference with ARTRA's contractual relations with Emerald. On April 7,
1995, the Company's appeal of the Bankruptcy Court's retention of claims was
denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these
claims. On August 4, 1995, ARTRA filed its Notice of Appeal of the Bankruptcy
Court's order.
On November 23, 1994, the Company filed a Second Amended Complaint against the
Salomon Defendants and the Kelly Defendants. On December 21, 1994, the Salomon
Defendants and the Kelly Defendants brought motions to dismiss ARTRA's Second
Amended Complaint in the State Court Action. On February 8, 1995, ARTRA's Second
Amended Complaint was dismissed in part, with leave to replead.
On March 10, 1995, ARTRA filed a Third Amended Complaint in the State court
Action. On April 13, 1995, the Salomon Defendants and the Kelly Defendants
brought motions to dismiss the Company's Third Amended Complaint. On June 8,
1995, the Third Amended Complaint was dismissed in part, with leave to replead.
On July 19, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court
Action for breach of fiduciary duty, fraudulent misrepresentation, negligent
misrepresentation, breach of contract and promissory estopel. In the State Court
Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of
$408.6 million and approximately $33 million in fees paid to Salomon.
The case is in its early stages and discovery is just beginning. ARTRA cannot
predict, with any certainty, the outcome of the suit.
7. DEBT RESTRUCTURING
Effective August 18, 1994, as amended December 23, 1994, Lori and Lori's
operating subsidiaries (collectively, the "Borrowers"), ARTRA and Lori's parent,
Fill-Mor, entered into an agreement with Lori's bank lender to settle
obligations due the bank under terms of the bank loan agreements of Lori and its
operating subsidiaries.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Per terms of the Amended Settlement Agreement, borrowings due the bank under the
loan agreements of the Borrowers and Fill-Mor (approximately $25,000,000 as of
December 23, 1994), plus amounts due the bank for accrued interest and fees were
reduced to $10,500,000 (of which $7,855,000 pertained to Lori's obligation to
the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank). Upon
the satisfaction of certain conditions of the Amended Settlement Agreement in
1995, as discussed below, the balance of this indebtedness was discharged.
In conjunction with the Amended Settlement Agreement, ARTRA entered into a
$1,850,000 short-term loan agreement with a non-affiliated corporation, the
proceeds of which were used to fund amounts due the bank as discussed below. The
loan, due June 30, 1995, with interest payable monthly at 10%, was
collateralized by 100,000 shares of Lori common stock. These 100,000 Lori common
shares were originally issued to the bank under terms of the August 18, 1994
Settlement Agreement. In August, 1995 the loan was extended until September 15,
1995 and the lender received the above mentioned 100,000 Lori common shares as
consideration for the loan extension. The loan has not been paid as of November
15, 1995 and ARTRA has entered into discussions to extend the due date of the
loan.
In exchange for the reduction of amounts due the bank, and as additional
consideration for the $1,850,000 short-term loan agreement from the
non-affiliated corporation, the Borrowers, ARTRA and Fill-Mor agreed to pay the
following consideration:
A) A cash payment to the bank of $1,900,000, which was made in
December, 1994.
B) 400,000 shares of ARTRA common stock. These 400,000 ARTRA
common shares were originally issued to the bank under terms
of the August 18, 1994 Settlement Agreement. The bank retained
100,000 shares and the non-affiliated corporation received
300,000 shares as additional consideration for its short-term
loan.
C) Assignment to the bank of all of the assets of Lori's New
Dimensions subsidiary.
D) A $750,000 note payable to the bank due March 31, 1995.
The Settlement Agreement required ARTRA to advance $400,000 to Lori which, along
with $150,000 of the ARTRA $1,850,000 short-term loan agreement noted above, was
deposited in trust at December 29, 1994. This deposit was used to fund the
installment payment due December 31, 1994 for unsecured claims arising from the
May 3, 1993 reorganization of New Dimensions. The installment payment was made
in January, 1995.
The August 18, 1994 settlement agreement required ARTRA to contribute cash of
$1,500,000 to Lori for working capital. ARTRA's cash contribution was funded by
private placements of ARTRA common stock. An officer/director of Lori
participated in the private placement of ARTRA common stock purchasing $150,000
of ARTRA common stock (37,500 shares), subject to the same terms and conditions
as the other outside investors.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company recognized an extraordinary gain of $8,965,000 ($1.57 per share) in
December 1994 as a result of the reduction of amounts due the bank under the
loan agreements of the Borrowers and Fill-Mor to $10,500,000 (of which
$7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained
to Fill-Mor's obligation to the bank) as of December 23, 1994 calculated (in
thousands) as follows:
<TABLE>
<S> <C>
Amounts due the bank under loan agreements
of Lori and its operating subsidiaries and Fill-Mor $ 25,394
Less amounts due the bank at December 29, 1994 (10,500)
--------
Bank debt discharged 14,894
Accrued interest and fees discharged 3,635
Other liabilities discharged 1,985
Less consideration to the bank per terms of the
amended settlement agreement
Cash (1,900)
ARTRA common stock (2,500)
New Dimensions assets assigned to the bank
at estimated fair market value (7,149)
--------
Net extraordinary gain $ 8,965
========
</TABLE>
Lori also recorded a charge against operations in December 1994 to
write-off New Dimensions' goodwill, which had a book value of $10,800,000.
In March, 1995 the $750,000 note due the bank was paid and the remaining
indebtedness of Lori and Fill-Mor was discharged, resulting in an additional
extraordinary gain to Lori and Fill-Mor of $9,113,000 ($1.35 per share) in the
first quarter of 1995. Among other things, ARTRA has agreed to register the
ARTRA shares issued in order to enable the ARTRA shares issued to be freely
tradeable without restriction on or before July 31, 1995. In the event the
shares are not registered by July 31, 1995, the bank has the right to put the
100,000 ARTRA shares back to ARTRA for an exercise price of $500,000. The
$750,000 note payment was funded with the proceeds of a $850,000 short-term loan
from a director of Lori. The loan provides for interest at the prime rate plus
1%. As consideration for assisting in the debt restructuring, the director
received 150,000 Lori common shares valued at $337,500 ($2.25 per share) based
upon Lori's closing market value on March 30, 1995. The first quarter 1995
extraordinary gain was calculated (in thousands) as follows:
<TABLE>
<S> <C>
Amounts due the bank under loan agreements
of Lori and its operating subsidiaries and Fill-Mor $ 10,500
Less amounts due the bank (750)
--------
Bank debt discharged 9,750
Less fair market value of Lori common stock
issued as consideration for the debt restructuring (337)
Other fees and expenses (300)
--------
Net extraordinary gain $ 9,113
========
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. NOTES PAYABLE
Notes payable (in thousands) consist of:
<TABLE>
<CAPTION>
Sept 28, December 29,
1995 1994
-------- --------
<S> <C> <C>
ARTRA bank notes payable,
at various interest rates $ 16,008 $ 18,507
Amounts due to related parties,
interest from 8.5% to 12% 6,561 5,669
Lori accounts receivable credit facility 770
Other, interest from 8% to 20% 6,298 3,877
-------- --------
29,637 28,053
Less amounts classified as liabilities
of discontinued operations (770) -
-------- --------
$ 28,867 $ 28,053
======== ========
</TABLE>
ARTRA
At December 30, 1993, $18,452,000 in ARTRA notes and related loan fees of
$1,107,000 were payable to a bank. The notes provided for interest at the prime
rate. These bank notes are collateralized by, among other things, 100% of the
common stock of ARTRA's BCA Holdings, Inc. ("BCA") subsidiary, the parent of
Bagcraft, and a secondary position on the assets of BCA, payments due under a
noncompetition agreement with the Company's former Welch subsidiary and by a
subordinated note in the principal amount of $2,500,000 received by ARTRA as
part of the proceeds from the sale of Welch. Additionally, the bank notes are
collateralized by a $5,500,000 personal guaranty of a private investor and,
prior to March 31, 1994 as discussed below, the bank notes were collateralized
by a $2,500,000 guaranty of a private corporation. A major shareholder and
executive officer of the private corporation is an ARTRA director. As additional
compensation, the private investor is receiving 1,833 shares of ARTRA common
stock for each month the guaranty is outstanding and the private corporation
received 833 shares of ARTRA common stock for each month the guaranty was
outstanding. Among other things, the bank notes prohibit the payment of cash
dividends by ARTRA.
On December 31, 1993, a religious organization, currently holding approximately
5.8% of ARTRA's outstanding common stock, made a $2,000,000 short-term loan to
the Company with interest at 10%. See discussion of amounts due to related
parties below for further discussion of this transaction and additional
consideration received by the religious organization. The proceeds of this loan
were remitted to the bank to pay interest and other costs due through December
31, 1993 and to reduce the principal amount outstanding on the bank notes to
$17,063,000 at December 31, 1993.
On March 31, 1994, ARTRA entered into a series of agreements with its bank
lender and with the private corporation noted above that had guaranteed
$2,500,000 of ARTRA's bank notes. Per terms of the agreements, the private
corporation purchased $2,500,000 of ARTRA notes from ARTRA's bank thereby
reducing the outstanding principal on ARTRA's bank notes to $14,563,000 and the
bank released the private corporation from its $2,500,000 loan guaranty. The
ARTRA bank notes and related loan fees were payable on September 30, 1994.
Interest on the bank notes continues to accrue at the prime rate (8.75% and 8.5%
at September 28, 1995 and December 29, 1994, respectively) and is payable
quarterly. Interest on the bank notes has been paid through June 14, 1994.
Effective March 31, 1994, ARTRA pledged, as additional collateral for its bank
notes, any and all net proceeds arising from its lawsuit against Salomon
Brothers, Inc., Salomon Brothers Holding Company Inc. (collectively, "Salomon")
D.P. Kelly & Associates, L.P. ("Kelly") and all of the directors of Emerald for
breaches of fiduciary duty by the directors of Emerald, induced by Salomon and
Kelly, in connection with the reorganization of Envirodyne as discussed in Note
6. As consideration for purchasing $2,500,000 of ARTRA bank notes, the private
corporation received a $2,500,000 note payable from ARTRA bearing interest at
the prime rate.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As additional consideration, the private corporation has received an option to
put back to ARTRA the 49,980 shares of ARTRA common stock received as
compensation for its former $2,500,000 ARTRA loan guaranty at a price of $15.00
per share. The put option is exercisable on the later of the day that the
$2,500,000 note payable to the private corporation becomes due or the date the
ARTRA bank notes have been paid in full. The option price increases by $2.25 per
share annually ($18.375 per share at September 28, 1995). The $2,500,000 note
payable to the private corporation is reflected in the above table as amounts
due to related parties.
On October 25, 1994, ARTRA's bank lender filed suit against ARTRA in the Circuit
Court of Cook County, Illinois alleging nonpayment by ARTRA of the amounts due
under the above notes payable to the bank. The bank has requested that the court
enter judgment in its favor against ARTRA in the amount of approximately
$16,000,000, which includes the principal balance of the notes of $14,563,000,
plus interest, costs and fees.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the
former Welch subsidiary under terms of a noncompetition agreement and a
subordinated note in the principal amount of $2,500,000 received by ARTRA as
part of the proceeds from the 1989 sale of Welch. Per terms of the settlement
agreement, ARTRA received cash of $3,000,000 and a subordinated note in the
principal amount of $640,000 payable June 30, 2001. The cash proceeds were used
for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the
remainder used for working capital. In conjunction with this transaction, ARTRA
entered into a letter agreement with the bank whereby the bank agreed to not to
exercise any of its rights and remedies with respect to amounts due the bank
under its ARTRA notes and certain obligations of ARTRA's president, Peter R.
Harvey. In exchange for a payment of $5,700,000, plus accrued interest and fees,
the bank agreed to discharge all amounts due the bank by ARTRA and to sell the
obligations of Peter R. Harvey due the bank to ARTRA. As of November 15, 1995,
the Company had not made the payment to settle the amounts due the bank. The
Company is currently negotiating with the bank to extend the due date for the
payment due the bank and is currently negotiating with potential lenders to fund
the amounts due the bank. Upon consummation of this transaction, ARTRA will
recognize a gain on the discharge of this indebtedness.
Effective May 14, 1991, ARTRA, through its wholly-owned Fill-Mor subsidiary,
entered into a loan agreement with a bank providing for borrowings of up to
$2,500,000 with interest at the prime rate plus 2%, of which $2,200,000 was
outstanding at December 29, 1994. The loan was collateralized by ARTRA's
interest in Lori common stock and preferred stock, by the proceeds of a tax
sharing agreement between ARTRA and its Bagcraft subsidiary and by ARTRA's
interest in Fill-Mor's common stock. At December 29, 1994, borrowings on this
note were reclassified as amounts due under the debt restructuring agreement
discussed in Note 7. In March, 1995, borrowings due under this loan agreement
were discharged.
A $3,600,000 bank note payable due December 31, 1990, had not been paid as of
September 28, 1995. Effective October 30, 1995, the Company settled this bank
obligation totaling approximately $5,000,000, including accrued interest, for a
cash payment of $150,000. The gain on this debt extinguishment will be reflected
in the Company's financial statements in the fourth quarter of 1995.
An ARTRA bank note with outstanding borrowings of $345,000 at September 28, 1995
and December 29, 1994 is guaranteed by a private company. Interest on the note
is at the prime rate plus 2% (10.75% at September 28, 1995 and 10.5% at December
29, 1994). In October, 1995 all amounts due on this bank note were paid in full.
Amounts Due To Related Parties
In January, 1995, John Harvey loaned ARTRA $100,000 evidenced by an unsecured 60
day note bearing interest at 8%. As additional compensation for the loan, John
Harvey received a warrant to purchase 6,000 ARTRA common shares at $4.75 per
share based upon the market value of ARTRA's common stock at the date of
issuance. The warrant expires five years from the date of issuance. Terms of the
note provide for the issuance of additional warrants to purchase ARTRA common
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
shares, as determined by the number of days the loan is outstanding. In April,
1995, John Harvey made additional advances to ARTRA totaling $33,000 and as
consideration for all outstanding advances, received additional warrants to
purchase 11,667 shares of ARTRA common stock at $3.75 per share based upon the
market value of ARTRA's common stock at the date of issuance. At September 28,
1995 and December 29, 1994, total outstanding borrowings from John Harvey were
$175,000 and $42,000, respectively.
At March 30, 1995, amounts due to related parties included a $850,000 short-term
loan from a director of Lori. The loan provides for interest at the prime rate
plus 1%. As consideration for assisting with the debt restructuring, the
director received 150,000 Lori common shares valued at $337,500 ($2.25 per
share) based upon Lori's closing market value on March 30, 1995. The principal
amount of the loan was reduced to $775,000 at June 30, 1995 and further reduced
to $750,000 at July 31, 1995. The remaining loan principle was not repaid on its
scheduled to maturity date of July 31, 1995. Per terms of the loan agreement,
the Lori director received an additional 50,000 Lori common shares as
compensation for the non-payment of the loan at its originally scheduled
maturity. The maturity date of the loan was subsequently extended to September
30, 1995. The Company has entered into discussions with the director to extend
the maturity date of the loan. loan extension.
At September 28, 1995 and December 29, 1994, amounts due to related parties also
included borrowings of $136,000 and $127,000, respectively, from the above
mentioned director of Lori. As additional compensation the Lori director has
received, through September 28, 1995, warrants to purchase an aggregate of
236,315 ARTRA common shares at prices ranging from $3.75 to $6.375 per share
based upon the market value of ARTRA's common stock at the date of issuance. The
warrants expire five years from the date of issuance. Terms of the note provide
for the issuance of additional warrants to purchase ARTRA common shares as
determined by the number of days the loan is outstanding.
On December 31, 1993, a religious organization, currently holding approximately
5.8% of ARTRA's outstanding common stock, loaned the Company $2,000,000
evidenced by a short-term note bearing interest at 10%. The proceeds of this
loan were remitted to ARTRA's bank to pay principal and interest on ARTRA's bank
notes as discussed above. In January, 1994 the religious organization made an
additional $1,000,000 short-term loan to the Company also with interest at 10%.
As additional compensation for the above loans, the lender received warrants to
purchase an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00
to $7.00 per share based upon the market of ARTRA's common stock at the date of
issuance. The warrants expire in 1998, five years from the date of issuance. In
July, 1994 ARTRA made a $2,000,000 payment against the amounts outstanding on
the above loans and the religious organization subsequently loaned ARTRA an
additional $2,000,000. At September 28, 1995 and December 29, 1994 borrowings
due the religious organization totaled $3,000,000.
Other
In conjunction with the debt settlement agreement discussed in Note 7, ARTRA
entered into a $1,850,000 short-term loan agreement with a non-affiliated
corporation, the proceeds of which were advanced to Lori and used to fund
amounts due the bank as discussed below. The loan, due June 30, 1995, with
interest payable monthly at 10%, was collateralized by 100,000 shares of Lori
common stock. These 100,000 Lori common shares were originally issued to the
bank under terms of the August 18, 1994 Settlement Agreement. In August, 1995
the loan was extended until September 15, 1995 and the lender received the above
mentioned 100,000 Lori common shares as consideration for the loan extension.
The loan has not been paid as of November 15, 1995 and ARTRA has entered into
discussions to extend the due date of the loan.
During the second and third quarters of 1995, Lori entered into a series of
agreements with certain unaffiliated investors that provided for $1,800,000 of
short-term loans that provide for interest at 15%. As additional compensation
the lenders received an aggregate of 91,176 Lori common shares. The proceeds
from these loans were used for the September $500,000 down payment on the Yield
acquisition, with the remainder used for working capital.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In August, 1995 Lori obtained a credit facility for the factoring of the
accounts receivable of its fashion costume jewelry operations. The credit
facility provides for advances of 80% of receivables assigned, less allowances
for markdowns and other merchandise credits. The factoring charge, a minimum of
1.75% of the receivables assigned, increases on a sliding scale if the
receivables assigned are not collected within 45 days. Borrowings under the
credit facility are collateralized by the accounts receivable, inventory and
equipment of Lori's operating subsidiaries and guaranteed by Lori. At September
28, 1995 outstanding borrowings under this credit facility of $770,000 were
classified in the Company's condensed consolidated balance sheet as current
liabilities of discontinued operations held for disposal.
9. LONG-TERM DEBT
Long-term debt (in thousands) consists of:
<TABLE>
<CAPTION>
Sept 28, December 29,
1995 1994
-------- --------
<S> <C> <C>
Bagcraft Credit Agreement,
Term loans,
interest at the prime rate plus 1.75% to 3% $ 17,000 $ 17,000
Revolving credit loan,
interest at the prime rate plus 1.5% 16,731 16,672
Unamortized discount (30) (315)
Bagcraft, City of Baxter Springs, Kansas loan agreements,
interest, at varying rates 11,799 12,310
Arcar subordinated promissory notes due to seller,
interest, at the prime rate 5,500 8,000
Arcar bank term loan,
interest at the prime rate plus .75% 2,625 2,750
Arcar revolving credit loan,
interest at the prime rate plus .5% 441
Amounts due a bank term under terms of
a debt settlement agreement 10,500
Other, at various interest rates,
due in varying amounts through 1995 6 27
-------- --------
54,072 66,944
Current scheduled maturities (34,420) (37,521)
Less amounts classified as liabilities of discontinued operations (8,566)
Debt subsequently discharged (9,750)
-------- --------
$ 11,086 $ 19,673
======== ========
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Bagcraft
Effective December 17, 1993, Bagcraft refinanced its bank debt by entering into
a Credit Agreement that provides for a revolving credit loan and two separate
term loans. The term loans were separate two-year facilities initially totaling
$12,000,000 (Term Loan A) and $8,000,000 (Term Loan B), bearing interest at the
lender's index rate plus 1.75% and 3%, respectively. The principal under Term
Loan A is payable at maturity (December 17, 1995), unless accelerated under
terms of the Credit Agreement. The principal under Term Loan B ($5,000,000
outstanding at September 28, 1995 and December 29, 1994) was scheduled to be
payable in varying monthly installments from January 1, 1994 to December 1,
1995, with the remaining principal balance payable at maturity (December 17,
1995), unless accelerated under terms of the Credit Agreement. At September 28,
1995, interest rates on Term Loan A and Term Loan B were 10.5% and 11.75%
respectively.
The amount available to Bagcraft under the revolving credit loan is subject to a
borrowing base, as defined in the agreement, up to a maximum of $18,000,000. At
September 28, 1995 and December 29, 1994, approximately $50,000 and $450,000,
respectively, was available and unused by Bagcraft under the revolving credit
loan. The revolving credit loan bears interest at the lender's index rate plus
1.5%. The revolving credit loan was scheduled to become due and payable upon
maturity of the Credit Agreement (December 17, 1995), unless accelerated under
terms of the Credit Agreement. At September 28, 1995 the interest rate on the
revolving credit loan was 10.25%.
Borrowings under the Credit Agreement are collateralized by substantially all of
the assets of Bagcraft. The Credit Agreement contains various restrictive
covenants, that among other restrictions, require Bagcraft to maintain minimum
levels of net worth and liquidity levels and limit additional loans, dividend
payments, capital expenditures and payments to related parties. In addition, the
Credit Agreement prohibits changes in ownership of Bagcraft. At September 28,
1995 Bagcraft was not in compliance with certain provisions of its Credit
Agreement. In October, 1995 the Credit Agreement was amended whereby, among
other things the maturity date of the Credit Agreement was extended until March
31, 1996. Bagcraft is currently negotiating with its lender to further extend
and/or amend its Credit Agreement.
As additional compensation for borrowings under the Credit Agreement, the lender
received a detachable warrant with a put option to purchase up to 10% of the
fully diluted common equity of Bagcraft. The warrant allows Bagcraft to
reacquire up to 2-1/2% of Bagcraft's fully diluted common equity from the lender
contingent upon Bagcraft's repayment of Term Loan B as defined in the Credit
Agreement. Under certain conditions Bagcraft is required to repurchase the
warrant from the lender. The determination of the repurchase price of the
warrant is to be based on the warrant's pro rata share of the highest of book
value, appraised value or market value of Bagcraft.
In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a
$12,500,000 financing package associated with the construction of a new 265,000
sq. ft. production facility in Baxter Springs, Kansas. The financing package,
funded by a combination of Federal, state and local funds, consists of the
following loan agreements payable by Bagcraft directly to the City of Baxter
Springs:
A $7,000,000 promissory note payable in ten installments of $700,000
due annually on July 21 of each year beginning in 1995 through maturity
on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is
payable semi-annually. Bagcraft has borrowed the maximum available
under this loan agreement.
A $5,000,000 subordinated promissory note payable as follows:
$2,000,000 installments due June 30,1998 and June 30, 1999; $1,000,000
due on January 2, 2000. The subordinated promissory note is interest
free provided that loan payments are made on a timely basis and no
events of default occur under terms of the agreement. At September 28,
1995 and December 29, 1994, Bagcraft had outstanding borrowings of
$5,000,000 and $4,810,000, respectively, under this loan agreement.
A $250,000 subordinated promissory note payable in 240 monthly
installments commencing August 1, 1995 through maturity on July 18,
2015. The subordinated promissory note is interest free provided that
loan payments are made on a timely basis and no events of default occur
under terms of the agreement. At September 28, 1995 and December 29,
1994, Bagcraft had borrowed the maximum amount available under this
loan agreement.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
A $250,000 subordinated promissory note payable January 20, 2005. The
subordinated promissory note is interest free provided that loan
payments are made on a timely basis and no events of default occur
under terms of the agreement. At September 28, 1995 and December 29,
1994, Bagcraft had borrowed the maximum amount available under this
loan agreement.
Borrowings under the above loan agreements are collateralized by a first lien on
the land and building at the Baxter Springs, Kansas production facility and by a
second lien on certain machinery and equipment. At September 28, 1995 and
December 29, 1994, $546,000 and $774,000, respectively, of borrowings from the
above loan agreements is reflected in the condensed consolidated balance sheet
in current assets as restricted cash and equivalents. These funds, invested in
interest bearing cash equivalents, are restricted for expenditures associated
with the Baxter Springs, Kansas project.
Arcar
As discussed in Note 2, on April 8, 1994, Bagcraft completed the acquisition of
Arcar for consideration consisting of cash of $2,264,000 and subordinated
promissory notes totaling $8,000,000 ($5,500,000 and $8,000,000 outstanding at
September 28, 1995 and December 29, 1994, respectively). The subordinated
promissory notes provided for interest payable quarterly at the prime rate (as
defined in the agreement). At September 28, 1995, the remaining outstanding
promissory notes were scheduled to mature as follows: $2,500,000 payable March
15, 1996; $2,500,000 payable March 15, 1997; $500,000 payable March 15, 1998.
The seller also received a warrant to purchase 177,778 ARTRA common shares at a
price of $5.625 per share, the market value at the date of grant. Exercise of
the warrant is payable only through a reduction of the subordinated promissory
notes and accrued interest due the seller under terms of the purchase agreement.
The subordinated promissory notes were paid in full in October, 1995 with
proceeds from the sale of Arcar (see Note 4).
Effective April 8, 1994, Arcar entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for a revolving credit loan and a term
loan. The term loan, in the original principal amount of $2,750,000, bears
interest at the prime rate plus .75%. The principal under the term loan was
originally scheduled to be payable in forty-eight varying monthly installments
from April 30, 1995 to March 31, 1999, unless accelerated under terms of the
Agreement. At September 28, 1995 the interest rate on the term loan was 9. 5%.
The amount available to Arcar under the revolving credit loan was subject to a
borrowing base, as defined in the agreement, up to a maximum of $1,500,000. The
revolving credit loan bears interest at the prime rate plus .5% (9.25% at
September 28, 1995) and was due and payable March 31, 1996, unless accelerated
under terms of the Agreement. The revolving credit loan, renewable solely at the
discretion of the lender for additional one year periods until maturity of the
Agreement (March 31, 1999. At September 28, 1995 approximately $1,050,000 was
available and unused by Arcar under the revolving credit loan.
Borrowings under the Agreement were collateralized by substantially all of the
assets of Arcar. The Agreement contained various restrictive covenants, that
among other restrictions, require Arcar to maintain minimum levels of net worth
and liquidity levels and limit additional loans, dividend payments, capital
expenditures and payments to related parties.
All borrowings under the Agreement were paid in full in October, 1995 with
proceeds of the sale of Arcar (see Note 4).
Lori
As discussed in Note 7, effective August 18, 1994, as amended effective December
23, 1994, ARTRA, Fill-Mor, Lori and Lori's operating subsidiaries entered into
an agreement with Lori's bank lender to settle obligations due the bank under
terms of the bank loan agreements of Lori and its operating subsidiaries and
Fill-Mor. Per terms of the Amended Settlement Agreement, borrowings due the bank
under the loan agreements of Lori and its operating subsidiaries and
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Lori's parent, Fill-Mor, plus amounts due the bank for accrued interest and fees
were reduced to $10,500,000 as of December 23, 1994 (of which $7,855,000
pertained to Lori's obligation to the bank and $2,645,000 pertained to
Fill-Mor's obligation to the bank). As partial consideration for the Amended
Settlement Agreement the bank received a $750,000 Lori note payable due March
31, 1995.
In March, 1995 the $750,000 note due the bank was paid and the remaining
indebtedness of Lori and Fill-Mor was discharged, resulting in an additional
extraordinary gain to Lori and Fill-Mor of $9,113,000 in 1995 (See Note 7).
The common stock and virtually all the assets of ARTRA's subsidiaries have been
pledged as collateral for ARTRA's and its subsidiaries' borrowings. Under
certain debt agreements the Company is limited in the amounts it can withdraw
from its operating subsidiaries. At September 28, 1995 and December 29, 1994,
substantially all cash and equivalents on the Company's consolidated balance
sheet are restricted to use by and for the Company's operating subsidiaries.
10. OBLIGATIONS EXPECTED TO BE SETTLED BY THE ISSUANCE OF COMMON STOCK
Effective July 4, 1995, Lori and ARTRA entered into an employment or consulting
services agreements with certain individuals to manage Lori's entry into and
development of the telecommunications and computer technical staffing services
business. As additional compensation, the agreements provided for the issuance
in aggregate of a 35% common stock interest in Lori. The Lori shares, issued on
October 6, 1995, were valued at $.93 per share based upon Lori's average closing
market price on the American Stock Exchange for the period beginning 5 business
days prior to and ending 5 business days after the acceptance of the employment
or consulting services agreements (July 4, 1995), as discounted for dilution,
blockage and restricted marketability. Accordingly, Lori has accrued the
compensation charge of $3,000,000 related to the issuance of the 35% common
stock interest in Lori (approximately 3,200,000 Lori common shares), which is
classified in the Company's condensed consolidated balance sheet at September
28, 1995 as obligations expected to be settled by the issuance of common stock.
After the issuance of these common shares, plus the effects of the issuance of
common shares sold by private placements and other common shares issued in
conjunction with the Yield acquisition, ARTRA's common stock ownership interest
in Lori will be reduced to approximately 25%.
11. REDEEMABLE COMMON STOCK
ARTRA has entered into various agreements under which it has sold its common
shares along with options that require ARTRA to repurchase these shares at the
option of the holder, principally one year after the date of each agreement. The
difference between the option price and the net proceeds received is amortized
over the life of the options by a charge to retained earnings. Additionally, as
discussed in Note 7, ARTRA has agreed to register the 100,000 ARTRA common
shares issued to a bank in as partial consideration for a debt settlement
agreement on or before July 31, 1995. In the event the shares are not registered
by July 31, 1995, the bank has the right to put the 100,000 ARTRA common shares
back to ARTRA for an exercise price of $500,000. As of November 15, 1995 the
ARTRA shares have not been registered and the bank has not exercised it put
option. At September 28, 1995 and December 29, 1994 options are outstanding
that, if exercised, would require ARTRA to repurchase 283,965 and 279,679 shares
of its common stock for an aggregate amount of $4,253,000 and $4,144,000,
respectively.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
12. REDEEMABLE PREFERRED STOCK
On September 27, 1989, ARTRA received a proposal to purchase BCA, the parent of
Bagcraft, from Sage Group, Inc. ("Sage"), a privately-owned corporation that
owned 100% of the outstanding common stock of BCA. Sage was merged with and into
Ozite Corporation ("Ozite") on August 24, 1990. Peter R. Harvey, ARTRA's
President, and John Harvey, ARTRA's Chairman of the Board of Directors, were the
principal shareholders of Sage and are the principal shareholders of Ozite.
Effective March 3, 1990, a wholly-owned subsidiary of ARTRA acquired 100% of
BCA's issued and outstanding common shares for consideration of $5,451,000,
which included 772,000 shares of ARTRA common stock and 3,750 shares of $1,000
par value junior non-convertible payment-in-kind redeemable Series A Preferred
Stock with an estimated fair value of $1,012,000, net of unamortized discount of
$2,738,000. The Series A Preferred Stock accrues dividends at the rate of 6% per
annum and is redeemable by ARTRA on March 1, 2000 at a price of $1,000 per share
plus accrued dividends. Accumulated dividends of $1,444,000 and $1,221,000 were
accrued at September 28, 1995 and December 29, 1994, respectively.
In 1987, Bagcraft issued to an affiliate, currently a subsidiary of Ozite,
$5,000,000 of preferred stock (50,000 shares of 13.5% cumulative, redeemable
preferred stock with a liquidation preference equal to $100 per share)
redeemable by Bagcraft in 1997 at a price of $100 per share plus accrued
dividends. Dividends, which accrue and are payable semiannually on June 1 and
December 1 of each year, are reflected in the Company's condensed consolidated
statement of operations as minority interest. The affiliate has agreed to forego
dividend payments as long as such payments are prohibited by bank lenders.
Accumulated dividends of $5,625,000 and $5,119,000 were accrued at September 28,
1995 and December 29, 1994, respectively.
In 1987, Bagcraft obtained financing from an affiliate, currently a subsidiary
of Ozite, through the issuance of a $5,000,000 unsecured subordinated note, due
June 1, 1997. During 1992, per agreement with the noteholder, the interest
payments were remitted to ARTRA and the noteholder received 675 shares of BCA
preferred stock ($1.00 par value, 6% cumulative with a liquidation preference
equal to $1,000 per share) with a liquidation value of $675,000. In December,
1993, the unsecured subordinated note and accrued interest thereon were paid in
full from proceeds of Bagcraft's credit agreement. Per agreement with the
noteholder, the accrued interest outstanding on the note of $3,000,000 was
remitted to ARTRA and the noteholder received an additional 3,000 shares BCA
preferred stock having a liquidation value of $3,000,000.
13. INCOME TAXES
No income tax benefit was recognized in connection with the Company's 1995 and
1994 pre-tax losses due to the Company's tax loss carryforwards. The 1995
extraordinary credit represents a net gain from discharge of bank indebtedness.
At September 28, 1995, ARTRA had Federal income tax loss carryforwards of
approximately $42,000,000 expiring principally in 2003 - 2009. ARTRA's
discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss
carryforwards of approximately $11,000,000 available to be applied against
future taxable income, if any. In recent years, the Company has issued shares of
its common stock to repay various debt obligations, as consideration for
acquisitions, to fund working capital obligations and as consideration for
various other transactions. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its Federal income tax loss carryforwards
when certain changes in the ownership of a corporation's common stock occurs. In
the opinion of management, the Company is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should the Company continue to issue a significant number of
shares of its common stock, it could trigger a limitation that would prevent it
from utilizing a substantial portion of its Federal income tax loss
carryforwards.
At June 29, 1995, Lori and its subsidiaries had Federal income tax loss
carryforwards of approximately $53,000,000 available to be applied against
future taxable income, if any, expiring principally in 1995 - 2009. Lori has
recently issued a significant number of shares of its common stock in
conjunction with the Yield acquisition and certain related transactions.
Accordingly, Lori is currently subject to significant limitations under Section
382 of the Internal Revenue Code of 1986 regarding the utilization of its
Federal income tax loss carryforwards.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
14. EMPLOYEE BENEFIT PLANS
Effective June 1, 1990, the Company adopted an Employee Stock Ownership Plan
("ESOP") which covers substantially all employees of ARTRA and its Bagcraft
subsidiary. Employer contributions to the Plan are at the discretion of ARTRA's
Board of Directors. Employee contributions are not permitted. ARTRA's
contribution for the plan years ended December 31, 1995 and 1994, 15,000 ARTRA
common shares and 8,750 ARTRA common shares, respectively, has been accrued in
the Company's condensed consolidated balance sheet in current liabilities at
their fair market value. Effective August 1, 1995, the Company terminated the
ESOP and is currently is the process of distributing the related Employee
accounts to participants.
15. EARNINGS PER SHARE
Earnings (loss) per share is computed by dividing net earnings (loss), less
dividends applicable to redeemable preferred stock and redeemable common stock
accretion by the weighted average number of shares of common stock and common
stock equivalents (redeemable common stock, stock options and warrants), unless
anti-dilutive, outstanding during each period. Fully diluted earnings per share
are not presented since the result is equivalent to primary earnings per share.
16. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At September 28, 1995 and December 29,
1994, the Company had accrued $1,500,000 for potential business-related
litigation and environmental liabilities. While these litigation and
environmental matters involve wide ranges of potential liability, management
does not believe the outcome of these matters will have a material adverse
effect on the Company's financial statements. However, ARTRA may not have
available funds to pay liabilities arising out of these business-related
litigation and environmental matters or, in certain instances, to provide for
its legal defense. ARTRA could suffer severe adverse consequences in the event
of an unfavorable judgment in any of these matters.
On November 2, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth
Judicial Circuit for the state of Illinois (the State Court Action") against
Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K.
Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P.
Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with
DPK), James F. Massey and William Rifkind. On November 22, 1993, ARTRA filed a
First Amended Complaint. The defendants removed the case to the Bankruptcy Court
in which the Emerald Chapter 11 case is pending. On July 15, 1994 all but two of
ARTRA's causes of action were remanded to the state court. The Bankruptcy Court
maintained jurisdiction of ARTRA's claims against the individual defendants for
breaching their fiduciary duty as directors of Emerald to Emerald's creditors
and interference with ARTRA's contractual relations with Emerald. On April 7,
1995, the Company's appeal of the Bankruptcy Court's retention of claims was
denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these
claims. On August 4, 1995, ARTRA filed its Notice of Appeal of the Bankruptcy
Court's order.
On November 23, 1994, the Company filed a Second Amended Complaint against the
Salomon Defendants and the Kelly Defendants. On December 21, 1994, the Salomon
Defendants and the Kelly Defendants brought motions to dismiss ARTRA's Second
Amended Complaint in the State Court Action. On February 8, 1995, ARTRA's Second
Amended Complaint was dismissed in part, with leave to replead.
On March 10, 1995, ARTRA filed a Third Amended Complaint in the State court
Action. On April 13, 1995, the Salomon Defendants and the Kelly Defendants
brought motions to dismiss the Company's Third Amended Complaint. On June 8,
1995, the Third Amended Complaint was dismissed in part, with leave to replead.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On July 19, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court
Action for breach of fiduciary duty, fraudulent misrepresentation, negligent
misrepresentation, breach of contract and promissory estopel. In the State Court
Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of
$408.6 million and approximately $33 million in fees paid to Salomon.
The case is in its early stages and discovery is just beginning. ARTRA cannot
predict, with any certainty, the outcome of the suit.
Effective December 31, 1989, ARTRA completed the disposal of its former
scientific products segment with the sale of its Welch subsidiary, formerly
Sargent-Welch Scientific Company, to a privately held corporation whose
president and sole shareholder was a vice president of Welch prior to the sale.
The consideration received by ARTRA consisted of $2,625,000 payable June 30,
1997, with interest at 10% beginning June 30, 1990, under terms of a
noncompetition agreement and the buyer's subordinated note in the principal
amount of $2,500,000. The receivable due June 30, 1997 under terms of the
noncompetition agreement was reflected in ARTRA's condensed consolidated balance
sheet at December 29, 1994 in other assets at $2,625,000. The subordinated
security, due in 1997, was originally scheduled to be non-interest bearing for a
period of three years, after which time interest will accrue at the rate of 10%
per annum. The note was discounted at a rate of 10% during the non-interest
bearing period and was reflected in ARTRA's condensed consolidated balance sheet
at December 29, 1994 in other assets at $1,375,000, net of a discount of
$1,125,000.
In December, 1991 Welch filed a lawsuit against ARTRA alleging that certain
representations, warranties and covenants made by ARTRA, which were contained in
the parties' Stock Purchase Agreement, were false. Welch was seeking
compensatory damages in the amount of $3,800,000. Subsequently, ARTRA had filed
a counterclaim predicated upon Welch's breach of the payment terms of the
parties' Non-Competition Agreement and the Subordinated Note executed by Welch.
ARTRA was seeking damages in the amount of approximately $5,300,000 plus accrued
interest. On November 23, 1994, the Circuit Court of Cook County Law Division in
Chicago granted a judgment in favor of ARTRA affirming the validity of the
amounts due under the Non-Competition Agreement and the Subordinated Note of
$2,625,000 and $2,500,000, respectively.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by
Welch under terms of the noncompetition agreement and the subordinated security.
Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a
subordinated note in the principal amount of $640,000 payable June 30, 2001.
In January, 1985 the United States Environmental Protection Agency ("EPA")
notified the Company's Bagcraft subsidiary that it was a potentially responsible
party under the Comprehensive Environmental Responsibility Compensation and
Liability Act ("CERCLA") for alleged release of hazardous substances at the
Cross Brothers site near Kankakee, Illinois. Although Bagcraft has denied
liability for the site, it has entered into a settlement agreement with the EPA,
along with the other third party defendants, to resolve all claims associated
with the site except for state claims. In May, 1994 Bagcraft paid $850,000 plus
accrued interest of $29,000 to formally extinguish the EPA claim. Bagcraft filed
suit in 1993 in the United States District Court for the Northern District of
Illinois, against its insurers to recover a portion of its liability costs in
connection with the Cross Brothers case. Bagcraft recovered $725,000 from its
insurers in 1994 and an additional $250,000 in 1995. With regard to the state
action, Bagcraft is participating in settlement discussions with the State and
thirteen other potential parties to resolve all claims associated with the
State. The maximum state claim is $1.1 million. Bagcraft has accrued $120,000
related to the State action in the Company's consolidated financial statements
at September 28, 1995 and December 29, 1994.
Bagcraft was listed as a de minimis contributor at the American Chemical
Services, Inc. off-site disposal location in Griffith, Indiana. This site is
included in the EPA's National Priorities List. Bagcraft is presently unable to
determine its liability, if any, with respect to this site.
Bagcraft is presently undertaking a soil remediation project for
solvent-contaminated soil at its Chicago manufacturing facility. The
environmental firm responsible for implementing the remediation has recommended
that a soil vapor
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
extraction process be used, at an estimated cost of $175,000. Although there can
be no assurances that remediation costs will not exceed this estimate, in the
opinion of management, no material additional costs are anticipated.
In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of hazardous substances which were stored, disposed
of or otherwise released at this manufacturing facility. This facility was owned
by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from
1968 to 1980. Sherwin-William's current projection of the cost of clean-up is
approximately $5 to $6 million. The Company has filed counterclaims against
Sherwin-Williams and cross claims against other former owners of the property.
The Company also is vigorously defending this action and has raised numerous
defenses. Currently, the case is in its early stages of discovery and the
Company cannot determine what, if any, its liability may be in this matter.
In connection with this suit, in a case filed in 1992 in the Circuit Court for
Baltimore City, Maryland, American Motorists Insurance Company ("AMICO") is
seeking a declaratory judgment that it is not required to defend, indemnify or
provide insurance coverage to ARTRA in connection with the Sherwin-Williams
case. The Circuit Court ruled in favor of AMICO, but in June 1994, the Court of
Special Appeals of Maryland reversed the final Circuit Court, ruling that AMICO
was obligated to defend and indemnify ARTRA.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process.
ARTRA entered into a consent decree with the EPA in which it agreed to pay
$85,000 for one phase of the clean-up costs for this site; however, ARTRA
defaulted on its payment obligation. ARTRA is presently unable to estimate the
total potential liability for clean-up costs at this site, which clean-up is
expected to continue for a number of years. The consent decree, even if it had
been honored by ARTRA, was not intended to release ARTRA from liability for
costs associated with other phases of the clean-up at this site. The Company is
presently unable determine what, if any, additional liability it may incur in
this matter.
In a case titled City of Chicago v. NL Industries, Inc. and ARTRA GROUP
Incorporated, filed in the Circuit Court of Cook County, Illinois, the City of
Chicago alleged that ARTRA (and NL Industries, Inc.) had improperly stored,
discarded and disposed of hazardous substances at the subject site, and that
ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At
the time the suit was filed, the City of Chicago claimed to have expended
$1,000,000 in clean-up costs.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA and NL Industries, Inc. have counter sued each other and have filed third
party actions against the subsequent owners of the property. The City of Chicago
has made an offer to settle the matter for $400,000 for all parties. The parties
are currently conducting discovery. The Company is presently unable to determine
ARTRA's liability, if any, in connection with this case.
Lori has been notified by the Federal Environment Protection Agency that it is a
potentially responsible party for the disposal of hazardous substances by its
predecessor company at a site on Ninth Avenue in Gary, Indiana.. Lori has no
records indicating that it deposited hazardous substances at this site and
intends to vigorously defend itself in this matter.
In conjunction with the Yield acquisition (see Note 3), ARTRA has agreed to
assume certain pre-existing Lori liabilities and indemnify Lori in the event any
future liabilities arise concerning pre-existing environmental matters and
business related litigation.
17. RELATED PARTY TRANSACTIONS
Advances to Peter R. Harvey, ARTRA's president, classified in the condensed
consolidated balance sheet as a reduction of common shareholders' equity, (in
thousands) consist of:
<TABLE>
<CAPTION>
Sept 29, December 29,
1995 1994
------- -------
<S> <C> <C>
ARTRA ....................................... $ 5,099 $ 3,205
Fill-Mor .................................... 1,510
------- -------
5,099 4,715
Less interest for the period January 1, 1993
to date, accrued and fully reserved ....... (940) (615)
------- -------
$ 4,159 $ 4,100
======= =======
</TABLE>
ARTRA has total advances due from its president, Peter R. Harvey, of which
$5,099,000 and $3,205,000, including accrued interest, remained outstanding at
September 28, 1995 and December 29, 1994. The advances bear interest at the
prime rate plus 2% (10.75% at September 28, 1995). This receivable from Peter R.
Harvey has been classified as a reduction of common shareholders' equity.
In May, 1991, ARTRA's wholly-owned Fill-Mor subsidiary made advances to Peter R.
Harvey. The advances provided for interest at the prime rate plus 2%. At March
30, 1995 and December 29, 1994, advances of $1,540,000 and $1,510,000,
respectively, including accrued interest, were outstanding. In April, 1995,
these advances from ARTRA's Fill-Mor subsidiary to Peter R. Harvey were
transferred to ARTRA as a dividend.
Commencing January 1, 1993 to date, interest on all advances to Peter R. Harvey
has been accrued and fully reserved. Interest accrued and fully reserved on the
advances to Peter R. Harvey for the nine months ended September 28, 1995 and
September 29, 1994 totaled $325,000 and $240,000, respectively.
Peter R. Harvey has not received other than nominal compensation for his
services as an officer or director of ARTRA or any of its subsidiaries since
October of 1990. Additionally, Mr. Harvey has agreed not to accept any
compensation for his services as an officer or director of ARTRA or any of its
subsidiaries until his obligations to ARTRA, described above, are fully
satisfied.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania
corporation) is permitted to make loans to officers and directors. Further,
under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is
permitted to make loans to an officer (including any officer who is also a
director, as in the case of Peter R. Harvey), whenever, in the judgment of the
directors, the loan can reasonably be expected to benefit Fill-Mor.
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did
not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey.
The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of
Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of
Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan
agreement, a condition of which was the application of a portion of the proceeds
thereof to the payment of certain of Mr. Harvey's loan obligations to the bank.
However, the resolutions did not acknowledge the use of such proceeds for this
purpose and the formal loan documents with the bank did not set forth this
condition (though in fact, the proceeds were so applied by the bank).
As partial collateral for amounts due from Peter R. Harvey, the Company has
received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a
liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr.
Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial
Communication Company (a private company). Such interest is valued by Mr. Harvey
at $800,000 to $1,000,000.
For a discussion of certain other related party debt obligations see Note 8.
18. OTHER INFORMATION
In the fourth quarter of 1993 the Company adopted a 52/53 week fiscal year
ending the last Thursday of December. Accordingly, the Company's quarterly
periods now end on the last Thursday of March, June and September.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion supplements the information found in the financial
statements and related notes:
Changes in Business
Arcar
As discussed in Note 2 to the condensed consolidated financial statements, in
March, 1994, Bagcraft entered into an agreement to purchase the business assets,
subject to buyer's assumption of certain liabilities, of Arcar, a manufacturer
and distributor of waterbase inks, for consideration of $10,264,000 consisting
of cash of $2,264,000 and subordinated promissory notes totaling $8,000,000. In
addition to the initial consideration, the agreement called for the purchase
price to be increased based upon Arcar's cumulative earnings, as defined in the
purchase agreement, for the period from January 1, 1994 until December 31, 1997
("earnout compensation"). The seller also received a warrant to purchase 177,778
ARTRA common shares at a price of $5.625 per share, the market value at the date
of grant. Exercise of the warrant is payable only through a reduction of the
subordinated promissory notes and accrued interest due the seller under terms of
the purchase agreement. The acquisition of Arcar, completed on April 8, 1994,
was accounted for by the purchase method and, accordingly, the assets and
liabilities of Arcar were included in ARTRA's financial statements at their
estimated fair market value at the date of acquisition.
On July 31, 1995, ARTRA and Bagcraft, entered into a letter of intent to sell
the business assets, subject to the buyer's assumption of certain liabilities,
of Arcar. On October 26, 1995, Bagcraft completed the sale of Arcar for cash of
approximately $20,500,000. The net proceeds, after extinguishment of certain
Arcar debt obligations of approximately $9,900,000, were used principally to
reduce Bagcraft debt obligations. The gain on the sale of Arcar of approximately
$7,500,000 will be reflected in the Company's financial statements in the fourth
quarter of 1995.
Lori
On September 11, 1995, Lori signed a stock purchase agreement to participate in
the acquisition of one hundred percent of the capital stock of Spectrum Global
Services, Inc. d/b/a YIELD Global ("YIELD"), a wholly owned subsidiary of
Spectrum Information Technologies, Inc. for consideration consisting of cash of
approximately $6 million, net of cash acquired, and 450,000 Lori common shares
issued as consideration for various fees and guarantees associated with the
transaction. The cash consideration included net cash payments to the selling
shareholders of approximately $5.1 million. The 450,000 Lori common shares
issued as consideration for the Yield transaction included 150,000 shares issued
to Peter R. Harvey, a director of the Company and the president of ARTRA and
100,000 shares issued to ARTRA for their guarantee to the selling shareholder of
the payment of the Yield purchase price at closing. The shares issued to Peter
R. Harvey and ARTRA are subject to approval by Lori's shareholders.
Additionally, in conjunction with the Yield acquisition, ARTRA has agreed to
assume certain pre-existing Lori liabilities and indemnify Lori in the event any
future liabilities arise concerning pre-existing environmental matters and
business related litigation. YIELD provides telecommunications and computer
technical staffing services worldwide to Fortune 500 companies and maintains an
extensive, global database of technical specialists, with an emphasis on
wireless communications capability. The acquisition of YIELD, completed on
October 17, 1995, will be accounted for by the purchase method.
The acquisition of Yield was funded principally by private placements of
approximately 1,900,000 Lori common shares at $3.00 per share (total proceeds of
approximately $5,700,000) plus detachable warrants to purchase approximately
950,000 Lori common shares at $3.375 per share. The warrants expire three years
from the date of issue.
In September, 1995, Lori adopted a plan to discontinue Lori's fashion costume
jewelry business and recorded a provision of $1,000,000 for the estimated costs
to complete the disposal of the fashion costume jewelry business.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Envirodyne
As discussed in Note 6 to the condensed consolidated financial statements in
March, 1989, Envirodyne Industries, Inc. ("Envirodyne") and Emerald Acquisition
Corporation ("Emerald") entered into a definitive agreement for a subsidiary of
Emerald to acquire all of the issued and outstanding shares of Envirodyne common
stock. Pursuant to the terms of certain letter agreements, ARTRA agreed to
participate in the transaction and received Envirodyne's consent to sell its
then 4,830,000 Envirodyne common shares (a 26.3% interest) to Emerald. On May 3,
1989 the transaction was consummated. ARTRA received consideration consisting
of: (i) cash of $75,000,000; (ii) a 27.5% common stock interest in Emerald and
(iii) Emerald junior debentures ("Junior Debentures") with a principal amount of
$20,992,710. The Junior Debentures were scheduled to mature May 1, 2001, twelve
years from the date of issuance, and to accrue and pay interest in the form of
cash or additional Junior Debentures, at Emerald's option, semi-annually, for
the first six years at the rate of 15% and to pay interest at the rate of 15% in
the form of cash thereafter, semi-annually in arrears. ARTRA's 27.5% interest in
Emerald common stock and Emerald Junior Debentures, as required by the
Securities and Exchange Commission Staff Accounting Bulletin No. 81, were
carried net of a valuation allowance.
On January 6, 1993, a group of bondholders filed an involuntary petition for
reorganization of Envirodyne under Chapter 11 of the U.S. Bankruptcy Code. On
January 7, 1993, Envirodyne and certain of its subsidiaries filed petitions
under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of Illinois, Eastern Division. Subsequently,
Emerald filed a voluntary petition under Chapter 11 of the Bankruptcy Code in
the same court.
On December 17, 1993 the Bankruptcy Court confirmed the First Amended Joint Plan
of Reorganization as twice modified (the "Plan") with respect to Envirodyne and
certain of its subsidiaries. The confirmation of the Plan was affirmed by the
United States District Court for the Northern District of Illinois on December
28, 1993 and Envirodyne and certain of its subsidiaries emerged from Chapter 11
on December 31, 1993, the Effective Date. A notice of appeal to the United
States Court of Appeals for the Seventh Circuit was thereafter filed by certain
holders of Envirodyne's 13.5% Subordinated Notes due 1996. Envirodyne has filed
a motion, which is currently pending, to dismiss the appeal. Confirmation of the
Plan was affirmed on appeal. The Emerald Chapter 11 case is still pending
although ARTRA has moved to dismiss that case.
Envirodyne's plan of reorganization did not provide any consideration or value
to Emerald and Emerald, therefore, is without assets to provide value to ARTRA
for ARTRA's investment in Emerald common stock and Emerald Junior Debentures.
See discussion below and in Note 13 Litigation for remedies being pursued by
ARTRA as compensation for the lost value of its investment in Emerald common
stock and Emerald Junior Debentures.
On November 2, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth
Judicial Circuit for the state of Illinois (the State Court Action") against
Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K.
Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P.
Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with
DPK), James F. Massey and William Rifkind. On November 22, 1993, ARTRA filed a
First Amended Complaint. The defendants removed the case to the Bankruptcy Court
in which the Emerald Chapter 11 case is pending. On July 15, 1994 all but two of
ARTRA's causes of action were remanded to the state court. The Bankruptcy Court
maintained jurisdiction of ARTRA's claims against the individual defendants for
breaching their fiduciary duty as directors of Emerald to Emerald's creditors
and interference with ARTRA's contractual relations with Emerald. On April 7,
1995, the Company's appeal of the Bankruptcy Court's retention of claims was
denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these
claims. On August 4, 1995, ARTRA filed its Notice of Appeal of the Bankruptcy
Court's order.
On November 23, 1994, the Company filed a Second Amended Complaint against the
Salomon Defendants and the Kelly Defendants. On December 21, 1994, the Salomon
Defendants and the Kelly Defendants brought motions to dismiss ARTRA's Second
Amended Complaint in the State Court Action. On February 8, 1995, ARTRA's Second
Amended Complaint was dismissed in part, with leave to replead.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On March 10, 1995, ARTRA filed a Third Amended Complaint in the State court
Action. On April 13, 1995, the Salomon Defendants and the Kelly Defendants
brought motions to dismiss the Company's Third Amended Complaint. On June 8,
1995, the Third Amended Complaint was dismissed in part, with leave to replead.
On July 19, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court
Action for breach of fiduciary duty, fraudulent misrepresentation, negligent
misrepresentation, breach of contract and promissory estopel. In the State Court
Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of
$408.6 million and approximately $33 million in fees paid to Salomon.
The case is in its early stages and discovery is just beginning. ARTRA cannot
predict, with any certainty, the outcome of the suit.
As discussed below in the "Liquidity and Capital Resources" section, on February
5, 1993 the Lori's New Dimensions subsidiary filed a petition for reorganization
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York (Case No. 93 B 40653). On April 9, 1993,
New Dimensions' reorganization plan was confirmed by an order of the Bankruptcy
Court. On May 3, 1993, the consummation date of the reorganization, New
Dimensions emerged from Chapter 11 bankruptcy court protection. On August 18,
1994, as amended effective December 23, 1994, ARTRA, Lori's parent, Fill-Mor
Holding, Inc. ("Fill-Mor"), Lori and Lori's operating subsidiaries entered into
and agreement with Lori's bank lender to settle obligations due the bank under
terms of the bank loan agreements of Lori and its operating subsidiaries and
Fill-Mor. Under terms of the amended settlement agreement, Lori's bank lender
received all of the assets of New Dimensions and New Dimensions terminated
operations effective December 27, 1994. In March, 1995, the remaining
indebtedness of Lori and Fill-Mor was discharged, resulting in an additional
extraordinary gain to Lori and Fill-Mor in 1995.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Cash and cash equivalents decreased $1,988,000 during the nine months ended
September 28, 1995. Cash flows used by financing activities of $2,202,000 and
cash flows used by operating activities of $284,000 exceeded cash flows from
investing activities of $498,000. Cash flows used by financing activities were
attributable to a net reduction of long-term debt principally due to the March
15, 1995 maturity of a $2,500,000 note payable to the Arcar sellers. Cash flows
used by operating activities were principally attributable to the Company's loss
from operations, exclusive of the effect of a charge to operations of
$12,930,000 representing an impairment of goodwill at Lori's discontinued
fashion costume jewelry operations and a compensation charge to continuing
operations of $3,000,000 representing the issuance in aggregate of a 35% common
stock interest in Lori as additional consideration under employment or
consulting services agreements with certain individuals to manage Lori's entry
into and development of the telecommunications and computer technical staffing
services business. Cash flows from investing activities represent proceeds from
a settlement of notes receivable arising from the 1989 sale of the former Welch
Vacuum Technology subsidiary and the use of funds held in escrow at December 29,
1994 for the payment of certain liabilities, net of expenditures for plant and
equipment, retail fixtures and the down payment and certain costs incurred in
conjunction with Lori's October, 1995 acquisition of Yield.
The Company's consolidated working capital deficiency increased $8,428,000 to
approximately $68,900,000 during the nine months ended September 28, 1995. The
increase in working capital deficiency is principally attributable to the
Company's loss from operations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Status of Debt Agreements and Operating Plans
At September 28, 1995 the Company's corporate entity was in default of
provisions of certain of its credit agreements. Under certain subsidiary debt
agreements ARTRA is limited in the amounts it can withdraw from its operating
subsidiaries. See Notes 8 and 9 to the Company's condensed consolidated
financial statements and discussion below.
Effective August 18, 1994, as amended effective December 23, 1994, ARTRA,
Fill-Mor, Lori and Lori's operating subsidiaries entered into an agreement with
Lori's bank lender to settle obligations due the bank under terms of the bank
loan agreements of Lori and its operating subsidiaries and Fill-Mor. See Note 7
to the condensed consolidated financial statements and discussion below.
ARTRA Corporate
At December 30, 1993, $18,452,000 in ARTRA notes and related loan fees of
$1,107,000 were payable to a bank. On December 31, 1993, a religious
organization, currently holding approximately 5.8% of ARTRA's outstanding common
stock, made a $2,000,000 short-term loan to the Company with interest at 10%.
See Note 8 to the condensed consolidated financial statements for further
discussion of this transaction and additional consideration received by the
religious organization. The proceeds of this loan were remitted to the bank to
pay interest and other costs due through December 31, 1993 and to reduce the
principal amount outstanding on the bank notes to $17,063,000.
On March 31, 1994, ARTRA entered into a series of agreements with its primary
bank lender and with a private corporation that had guaranteed $2,500,000 of
ARTRA's bank notes. Per terms of the agreements, the private corporation
purchased $2,500,000 in ARTRA notes from ARTRA's bank thereby reducing the
outstanding principal on ARTRA's bank notes to $14,563,000 at March 31, 1994 and
the bank released the private corporation from its $2,500,000 loan guaranty. As
consideration for purchasing $2,500,000 of ARTRA bank notes, the private
corporation received a $2,500,000 note payable from ARTRA bearing interest at
the prime rate. See Note to the condensed consolidated financial statements for
further discussion of this transaction and additional consideration received by
the private corporation. A major shareholder and executive officer of the
private corporation is an ARTRA director.
The $14,563,000 of ARTRA bank notes were payable on September 30, 1994. On
October 25, 1994, ARTRA's bank lender filed suit against ARTRA in the Circuit
Court of Cook County, Illinois alleging nonpayment by ARTRA of the amounts due
under the above notes payable to the bank. The bank has requested that the court
enter judgment in its favor against ARTRA in the amount of approximately
$16,000,000, which includes the principal balance of the notes of $14,563,000,
plus interest, costs and fees.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the
former Welch subsidiary under terms of a noncompetition agreement and a
subordinated note in the principal amount of $2,500,000 received by ARTRA as
part of the proceeds from the 1989 sale of Welch. Per terms of the settlement
agreement, ARTRA received cash of $3,000,000 and a subordinated note in the
principal amount of $640,000 payable June 30, 2001. The cash proceeds were used
for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the
remainder used for working capital. In conjunction with this transaction, ARTRA
entered into a letter agreement with the bank whereby the bank agreed to not to
exercise any of its rights and remedies with respect to amounts due the bank
under its ARTRA notes and certain obligations of ARTRA's president, Peter R.
Harvey. In exchange for a payment of $5,700,000, plus accrued interest and fees,
the bank agreed to discharge all amounts due the bank by ARTRA and to sell the
obligations of Peter R. Harvey due the bank to ARTRA. As of November 15, 1995,
the Company had not made the payment to settle the amounts due the bank. The
Company is currently negotiating with the bank to extend the due date for the
payment due the bank and is currently negotiating with potential lenders to fund
the amounts due the bank. Upon consummation of this transaction, ARTRA will
recognize a gain on the discharge of this indebtedness.
As discussed in Note 17 to the condensed consolidated financial statements,
ARTRA has total advances due from its president, Peter R. Harvey, of which
$5,099,000 and $3,205,000, including accrued interest, remained outstanding at
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
September 28, 1995 and December 29, 1994. The advances bear interest at the
prime rate plus 2% (10.75% at September 28, 1995). This receivable from Peter R.
Harvey has been classified as a reduction of common shareholders' equity.
In May, 1991, ARTRA's wholly-owned Fill-Mor subsidiary made advances to Peter R.
Harvey. The advances provided for interest at the prime rate plus 2%. At March
30, 1995 and December 29, 1994, advances of $1,540,000 and $1,510,000,
respectively, including accrued interest, were outstanding. In April, 1995,
these advances from ARTRA's Fill-Mor subsidiary to Peter R. Harvey were
transferred to ARTRA as a dividend.
Commencing January 1, 1993 to date, interest on all advances to Peter R. Harvey
has been accrued and fully reserved.
Peter R. Harvey has not received other than nominal compensation for his
services as an officer or director of ARTRA or any of its subsidiaries since
October of 1990. Additionally, Mr. Harvey has agreed not to accept any
compensation for his services as an officer or director of ARTRA or any of its
subsidiaries until his obligations to ARTRA, described above, are fully
satisfied.
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania
corporation) is permitted to make loans to officers and directors. Further,
under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is
permitted to make loans to an officer (including any officer who is also a
director, as in the case of Peter R. Harvey), whenever, in the judgment of the
directors, the loan can reasonably be expected to benefit Fill-Mor.
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did
not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey.
The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of
Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of
Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan
agreement, a condition of which was the application of a portion of the proceeds
thereof to the payment of certain of Mr. Harvey's loan obligations to the bank.
However, the resolutions did not acknowledge the use of such proceeds for this
purpose and the formal loan documents with the bank did not set forth this
condition (though in fact, the proceeds were so applied by the bank).
As partial collateral for amounts due from Peter R. Harvey, the Company has
received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a
liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr.
Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial
Communication Company (a private company). Such interest is valued by Mr. Harvey
at $800,000 to $1,000,000.
ARTRA has entered into various agreements under which it has sold its common
shares along with options that require ARTRA to repurchase these shares at the
option of the holder, principally one year after the date of each agreement. At
September 28, 1995, options are outstanding that, if exercised, would require
ARTRA to repurchase 283,965 shares of its common stock for an aggregate amount
of approximately $4,253,000. ARTRA does not have available funds to satisfy its
obligations if these options were exercised. However the holders of redeemable
common stock have the option to sell their shares in the market subject to the
limitations of Securities Act Rule 144. At its discretion and subject to its
financial ability, ARTRA could reimburse the optionholders for any short-fall
resulting from such sale.
As discussed in Note 12 to the condensed consolidated financial statements,
ARTRA, Bagcraft and Bagcraft's parent BCA Holdings, Inc. ("BCA") have various
redeemable preferred stock issues with an aggregate carrying value of
$18,263,000 outstanding at September 28, 1995. These redeemable preferred stock
issues have various maturity dates commencing in 1997.
The Company has suffered recurring losses from operations and has a net capital
deficiency. As a result of these factors, the Company has experienced difficulty
in obtaining adequate financing to replace certain current credit arrangements,
certain of which are in default, to fund its debt service and liquidity
requirements in 1995. Due to its limited ability to receive operating funds from
its operating subsidiaries, ARTRA historically has met its operating
expenditures with funds generated by such alternative sources as private
placements of ARTRA common stock, sales of ARTRA common stock with put
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
options, loans from officers/directors and private investors, as well as through
sales of assets and/or other equity infusions. ARTRA plans to continue to seek
such alternative sources of funds to meet its future operating expenditures.
ARTRA does not currently have available funds to repay the principal amount of
its bank notes as of September 28, 1995. On October 25, 1994, ARTRA's bank
lender filed suit against ARTRA in the Circuit Court of Cook County, Illinois
alleging nonpayment by ARTRA of the amounts due under the above notes payable to
the bank. The bank has requested that the court enter judgment in its favor
against ARTRA in the amount of approximately $16,000,000, which includes the
principal balance of the notes of $14,563,000, plus interest, costs and fees.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the
former Welch subsidiary under terms of a noncompetition agreement and a
subordinated note in the principal amount of $2,500,000 received by ARTRA as
part of the proceeds from the 1989 sale of Welch. Per terms of the settlement
agreement, ARTRA received cash of $3,000,000 and a subordinated note in the
principal amount of $640,000 payable June 30, 2001. The cash proceeds were used
for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the
remainder used for working capital. In conjunction with this transaction, ARTRA
entered into a letter agreement with the bank whereby the bank agreed to not to
exercise any of its rights and remedies with respect to amounts due the bank
under its ARTRA notes and certain obligations of ARTRA's president, Peter R.
Harvey. In exchange for a payment of $5,700,000, plus accrued interest and fees,
the bank agreed to discharge all amounts due the bank by ARTRA and to sell the
obligations of Peter R. Harvey due the bank to ARTRA. As of November 15, 1995,
the Company had not made the payment to settle the amounts due the bank. The
Company is currently negotiating with the bank to extend the due date for the
payment due the bank and is currently negotiating with potential lenders to fund
the amounts due the bank. Upon consummation of this transaction, ARTRA will
recognize a gain on the discharge of this indebtedness.
ARTRA will continue to have significant levels of indebtedness in the future.
The level of indebtedness may affect the rate at which or the ability of ARTRA
to effectuate the refinancing or restructuring of debt. ARTRA intends to
continue to negotiate with its creditors to extend due dates to allow ARTRA to
maximize value from possible sale of assets and to explore various other sources
of funding to meet its future operating expenditures. If ARTRA is unable to
negotiate extensions with its creditors and complete the above mentioned
transactions, ARTRA could suffer severe adverse consequences, and as a result,
ARTRA may be forced to liquidate its assets or file for protection under the
Bankruptcy Code.
ARTRA's corporate entity has no material commitments for capital expenditures.
Bagcraft
Effective December 17, 1993, Bagcraft refinanced its bank debt by entering into
a Credit Agreement that provides for a revolving credit loan and two separate
term loans. The term loans were separate two-year facilities initially totaling
$12,000,000 (Term Loan A) and $8,000,000 (Term Loan B), bearing interest at the
lender's index rate plus 1.75% and 3%, respectively. The principal under Term
Loan A is payable at maturity (December 17, 1995), unless accelerated under
terms of the Credit Agreement. The principal under Term Loan B ($5,000,000
outstanding at September 28, 1995 and December 29, 1994) was scheduled to be
payable in varying monthly installments from January 1, 1994 to December 1,
1995, with the remaining principal balance payable at maturity (December 17,
1995), unless accelerated under terms of the Credit Agreement. At September 28,
1995, interest rates on Term Loan A and Term Loan B were 10.5% and 11.75%
respectively.
The amount available to Bagcraft under the revolving credit loan is subject to a
borrowing base, as defined in the agreement, up to a maximum of $18,000,000. At
September 28, 1995 and December 29, 1994, approximately $50,000 and $450,000,
respectively, was available and unused by Bagcraft under the revolving credit
loan. The revolving credit loan bears interest at the lender's index rate plus
1.5%. The revolving credit loan was scheduled to become due and payable upon
maturity of the Credit Agreement (December 17, 1995), unless accelerated under
terms of the Credit Agreement. At September 28, 1995 the interest rate on the
revolving credit loan was 10.25%.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Borrowings under the Credit Agreement are collateralized by substantially all of
the assets of Bagcraft. The Credit Agreement contains various restrictive
covenants, that among other restrictions, require Bagcraft to maintain minimum
levels of net worth and liquidity levels and limit additional loans, dividend
payments, capital expenditures and payments to related parties. In addition, the
Credit Agreement prohibits changes in ownership of Bagcraft. At September 28,
1995 Bagcraft was not in compliance with certain provisions of its Credit
Agreement. In October, 1995 the Credit Agreement was amended whereby, among
other things the maturity date of the Credit Agreement was extended until March
31, 1996. Bagcraft is currently negotiating with its lender to further extend
and/or amend its Credit Agreement.
As additional compensation for borrowings under the Credit Agreement, the lender
received a detachable warrant with a put option to purchase up to 10% of the
fully diluted common equity of Bagcraft. The warrant allows Bagcraft to
reacquire up to 2-1/2% of Bagcraft's fully diluted common equity from the lender
contingent upon Bagcraft's repayment of Term Loan B as defined in the Credit
Agreement. Under certain conditions Bagcraft is required to repurchase the
warrant from the lender. The determination of the repurchase price of the
warrant is to be based on the warrant's pro rata share of the highest of book
value, appraised value or market value of Bagcraft.
In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a
$12,500,000 financing package associated with the construction of a new 265,000
sq. ft. production facility in Baxter Springs, Kansas. The financing package,
funded by a combination of Federal, state and local funds, consists of the
following loan agreements payable by Bagcraft directly to the City of Baxter
Springs:
A $7,000,000 promissory note payable in ten installments of $700,000
due annually on July 21 of each year beginning in 1995 through maturity
on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is
payable semi-annually. Bagcraft has borrowed the maximum available
under this loan agreement.
A $5,000,000 subordinated promissory note payable as follows:
$2,000,000 installments due June 30,1998 and June 30, 1999; $1,000,000
due on January 2, 2000. The subordinated promissory note is interest
free provided that loan payments are made on a timely basis and no
events of default occur under terms of the agreement. At September 28,
1995 and December 29, 1994, Bagcraft had outstanding borrowings of
$5,000,000 and $4,810,000, respectively, under this loan agreement.
A $250,000 subordinated promissory note payable in 240 monthly
installments commencing August 1, 1995 through maturity on July 18,
2015. The subordinated promissory note is interest free provided that
loan payments are made on a timely basis and no events of default occur
under terms of the agreement. At September 28, 1995 and December 29,
1994, Bagcraft had borrowed the maximum amount available under this
loan agreement.
A $250,000 subordinated promissory note payable January 20, 2005. The
subordinated promissory note is interest free provided that loan
payments are made on a timely basis and no events of default occur
under terms of the agreement. At September 28, 1995 Bagcraft had
borrowed the maximum amount available under this loan agreement.
Borrowings under the above loan agreements are collateralized by a first lien on
the land and building at the Baxter Springs, Kansas production facility and by a
second lien on certain machinery and equipment. At September 28, 1995, $546,000
of borrowings from the above loan agreements is reflected in the Consolidated
Balance Sheet in current assets as restricted cash and equivalents. These funds,
invested in interest bearing cash equivalents, are restricted for expenditures
associated with the Baxter Springs, Kansas project.
The new Kansas facility replaced Bagcraft's production facility in Joplin,
Missouri. Additionally, with the completion of the new Kansas facility, Bagcraft
converted the manufacturing facility in Forest Park, Georgia into a distribution
facility. The former Carteret, New Jersey facility was sold in December, 1994
and the proceeds of approximately $1,700,000 were used to reduce borrowings
under Bagcraft's Credit Agreement.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
As discussed in Note 2, to the condensed consolidated financial statements, on
April 8, 1994, Bagcraft completed the acquisition of Arcar for consideration
consisting of cash of $2,264,000 and subordinated promissory notes totaling
$8,000,000 ($5,500,000 and $8,000,000 outstanding at September 28, 1995 and
December 29, 1994, respectively). The subordinated promissory notes provide for
interest payable quarterly at the prime rate (as defined in the agreement). At
September 28, 1995, the remaining outstanding promissory notes were scheduled to
mature as follows: $2,500,000 payable March 15, 1996; $2,500,000 payable March
15, 1997; $500,000 payable March 15, 1998. The seller also received a warrant to
purchase 177,778 ARTRA common shares at a price of $5.625 per share, the market
value at the date of grant. Exercise of the warrant is payable only through a
reduction of the subordinated promissory notes and accrued interest due the
seller under terms of the purchase agreement. The subordinated promissory notes
were paid in full in October, 1995 with proceeds from the sale of Arcar (see
Note 4 ).
Effective April 8, 1994, Arcar entered into a Loan and Security Agreement (the
"Agreement") with a bank that provided for a revolving credit loan and a term
loan. The term loan, in the original principal amount of $2,750,000, bears
interest at the prime rate plus .75%. The principal under the term loan was
originally scheduled to be payable in forty-eight varying monthly installments
from April 30, 1995 to March 31, 1999, unless accelerated under terms of the
Agreement. At September 28, 1995 the interest rate on the term loan was 9. 5%.
The amount available to Arcar under the revolving credit loan is subject to a
borrowing base, as defined in the agreement, up to a maximum of $1,500,000. The
revolving credit loan bears interest at the prime rate plus .5% (9.25% at
September 28, 1995) and was due and payable March 31, 1996, unless accelerated
under terms of the Agreement. The revolving credit loan, renewable solely at the
discretion of the lender for additional one year periods until maturity of the
Agreement (March 31, 1999. At September 28, 1995 approximately $1,050,000 was
available and unused by Arcar under the revolving credit loan.
Borrowings under the Agreement were collateralized by substantially all of the
assets of Arcar. The Agreement contained various restrictive covenants, that
among other restrictions, require Arcar to maintain minimum levels of net worth
and liquidity levels and limit additional loans, dividend payments, capital
expenditures and payments to related parties.
All borrowings under the Agreement were paid in full in October, 1995 with
proceeds of the sale of Arcar (see Note 4).
Bagcraft has historically generated cash flow from operations and has available
funds under its revolving credit loan. These sources should provide sufficient
cash flow to fund Bagcraft's short-term capital requirements. As discussed
above, Bagcraft is currently negotiating to amend or restructure the borrowings
under the Credit Agreement. It is anticipated that the successful completion of
these negotiations, of which there can be no assurance, will provide Bagcraft
with the ability to fund its long-term capital requirements.
Bagcraft anticipates that its 1995 capital expenditures, principally for the
Kansas facility and manufacturing equipment, will be approximately $2,500,000
and will be funded principally from the above mentioned credit facilities and
also from operations.
Lori
In recent years, Lori's fashion costume jewelry operations experienced a pattern
of significantly lower sales levels and related operating losses primarily due
to a shift in the buying patterns of its major customers (i.e. certain mass
merchandisers) from participation in the Lori's service program to purchases of
costume jewelry and accessories directly from manufacturers. As a result of the
significant operating loss incurred in 1992, on February 5, 1993, the Company's
former New Dimensions subsidiary filed a petition for reorganization under
Chapter 11 of the Bankruptcy Code. On April 9, 1993, New Dimensions'
reorganization plan was confirmed by an order of the Bankruptcy Court and on May
3, 1993, the consummation date of the reorganization, New Dimensions emerged
from Chapter 11 bankruptcy court protection. Lori assumed and guaranteed certain
New Dimensions' pre-bankruptcy loans payable to its bank and the bank also
provided New Dimensions with certain credit facilities. Additionally, Lori's
bank lender provided Lawrence and Rosecraft with new credit facilities in the
first quarter of 1993.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
At December 31, 1993 and during 1994, Lori and its operating subsidiaries were
not in compliance with certain provisions of their respective bank loan
agreements.
Effective August 18, 1994, as amended December 23, 1994, Lori and Lori's
operating subsidiaries (collectively, the "Borrowers"), ARTRA and Fill-Mor
entered into an agreement with Lori's bank lender to settle obligations due the
bank under terms of the bank loan agreements of Lori and its operating
subsidiaries.
Per terms of the Amended Settlement Agreement, borrowings due the bank under the
loan agreements of the Borrowers and Fill-Mor (approximately $25,000,000 as of
December 23, 1994), plus amounts due the bank for accrued interest and fees were
reduced to $10,500,000 as of December 23, 1994 (of which $7,855,000 pertained to
Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation
to the bank). Upon the satisfaction of certain conditions of the Amended
Settlement Agreement in March 1995, as discussed below, the balance of this
indebtedness was discharged.
In conjunction with the Amended Settlement Agreement, ARTRA entered into a
$1,850,000 short-term loan agreement with a non-affiliated corporation, the
proceeds of which were advanced to Lori and used to fund amounts due the bank as
discussed below. The loan, due June 30, 1995, with interest payable monthly at
10%, was collateralized by 100,000 shares of Lori common stock. These 100,000
Lori common shares were originally issued to the bank under terms of the August
18, 1994 Settlement Agreement. In August, 1995 the loan was extended until
September 15, 1995 and the lender received the above mentioned 100,000 Lori
common shares as consideration for the loan extension. The loan has not been
paid as of November 15, 1995 and ARTRA has entered into discussions to extend
the due date of the loan.
In exchange for the reduction of amounts due the bank, and as additional
consideration for the $1,850,000 short-term loan agreement from the
non-affiliated corporation, the Borrowers, ARTRA and Fill-Mor agreed to pay the
following consideration, which supersedes the consideration agreed to under
terms of the August 18, 1994 Settlement Agreement:
A) A cash payment to the bank of $1,900,000, which was made
prior to consummation of the Amended Settlement Agreement.
B) 400,000 shares of ARTRA common stock.. These 400,000 ARTRA
common shares were originally issued to the bank under terms
of the August 18, 1994 Settlement Agreement. The bank retained
100,000 shares and the non-affiliated corporation received
300,000 shares as additional consideration for its short-term
loan.
C) Assignment to the bank of all of the assets of Lori's New
Dimensions subsidiary.
D) A $750,000 note payable to the bank due March 31, 1995.
Additionally, ARTRA advanced $400,000 to Lori to be used to fund the installment
payment due December 31, 1994 for unsecured claims arising from the May 3, 1993
reorganization of New Dimensions.
The August 18, 1994 settlement agreement required ARTRA to contribute cash of
$1,500,000 to Lori for working capital. ARTRA's cash contribution was funded by
private placements of ARTRA common stock. An officer/director of Lori
participated in the private placement of ARTRA common stock purchasing $150,000
of ARTRA common stock (37,500 shares), subject to the same terms and conditions
as the other outside investors.
Lori recognized an extraordinary gain of $8,965,000 ($1.57 per share)
in December 1994 as a result of the reduction of amounts due the bank under the
loan agreements of the Borrowers and Fill-Mor to $10,500,000 (of which
$7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained
to Fill-Mor's obligation to the bank) as of December 23, 1994. Lori also
recorded a charge against operations of $10,800,000 in December 1994 to
write-off New Dimensions' remaining goodwill.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
In March, 1995 the $750,000 note due the bank was paid and the remaining
indebtedness of Lori and Fill-Mor was discharged, resulting in an additional
extraordinary gain to Lori and Fill-Mor of $9,113,000 ($1.35 per share) in the
first quarter of 1995. The $750,000 note payment was funded with the proceeds of
a $850,000 short-term loan from a director of Lori. The loan provides for
interest at the prime rate plus 1%. As consideration for assisting in the debt
restructuring, the director received 150,000 Lori common shares valued at
$337,500 ($2.25 per share) based upon Lori's closing market value on March 30,
1995.
In recent years, New Dimensions had experienced a pattern of significantly lower
sales levels and related operating losses primarily due to a shift in the buying
patterns of its major customers (i.e. certain mass merchandisers) from
participation in the New Dimension's service program to purchases of costume
jewelry and accessories directly from manufacturers. In the fourth quarter of
1994, New Dimensions' largest customer, Wal-Mart, ended its participation in New
Dimension's service program. Accordingly, the assignment to the Company's bank
lender of all of the assets of the New Dimensions subsidiary in accordance with
terms of the Amended Settlement Agreement, resulted in New Dimensions ceasing
its operations effective December 27, 1994. Due to the pattern of operating
losses, New Dimensions cessation of operations did not have a material adverse
effect on the financial condition, liquidity or results of operations of the
Company.
At March 31, 1995 and at December 31, 1994, Lori had anticipated that the
restructuring of its debt (see Note 7 to the Company's condensed consolidated
financial statements), along with a consolidation and restructuring of its
operations in order to reduce overhead costs and improve operational
efficiencies, would permit it to obtain a sufficient level of borrowings to fund
its capital requirements in 1995. During the second quarter of 1995, due
primarily to competitive conditions in the costume jewelry industry, Lori's
operating subsidiaries experienced a reduction in business with certain major
customers. Additionally, Lori's operating subsidiaries discontinued certain
unprofitable programs with other customers resulting in charges to operations
for merchandise credits and inventory valuation allowances totaling $450,000.
Due to the continued losses from operations and the inability of Lori to obtain
conventional bank financing, Lori determined that its remaining goodwill balance
could no longer be recovered over its remaining life through forecasted future
operations. Accordingly, the Company recorded a charge against operations of
$6,430,000 ($.96 per share) to write-off all of the goodwill of Lori (see Note 5
to the Company's condensed consolidated financial statements).
At March 31, 1995, subsequent to the discharge of Lori's former bank
indebtedness, Lori did not have a credit facility in place to fund its 1995
capital requirements. Lori entered into negotiations with various financial
institutions and other lenders to obtain a working capital financing. These
negotiations did not result in the placement of a credit facility. During June,
1995, Lori entered into a series of agreements with certain unaffiliated
investors that provided for $700,000 of short-term loans due January 1, 1996. In
August, 1995 Lori obtained a credit facility for the factoring of the accounts
receivable of its costume jewelry operations. The credit facility provides for
advances of 80% of receivables assigned, after allowances for markdowns and
other merchandise credits. The factoring charge, a minimum of 1.75% of the
receivables assigned, increases on a sliding scale if the receivables assigned
are not collected within 45 days. Borrowings under the credit facility are
collateralized by the accounts receivable, inventory and equipment of Lori's
operating subsidiaries and guaranteed by Lori.
However, due continued operating losses and the inability to obtain adequate
credit facilities to fund its fashion costume jewelry operations, in September,
1995, Lori adopted a plan to discontinue its fashion costume jewelry business
and recorded a provision of $1,000,000 for the estimated costs to complete the
disposal of the fashion costume jewelry business.
It is anticipated that Lori's entry into the telecommunications and computer
technical staffing services business through the acquisition of Yield will
provide Lori with sufficient liquidity and capital resources to fund its
operations for the remainder of 1995 and beyond. The acquisition of Yield was
funded principally by private placements of approximately 1,900,000 Lori common
shares at $3.00 per share (total proceeds of approximately $5,700,000) plus
detachable warrants to purchase approximately 950,000 Lori common shares at
$3.375 per share. The warrants expire three years from the date of issue. Lori
continues to search for additional funding , either through borrowings or equity
infusions to expand its entry into the telecommunications and computer technical
staffing services business.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
During the nine months ended September 28, 1995, ARTRA made advances of $365,000
to Lori. In conjunction with the Amended Settlement Agreement (see Note 4 to the
Company's condensed consolidated financial statements), ARTRA entered into a
$1,850,000 short-term loan agreement with a non-affiliated corporation, the
proceeds of which were advanced to Lori and used to fund amounts due Lori's
bank. The loan, due June 30, 1995, was collateralized by 100,000 shares of Lori
common stock. In August, 1995 the loan was extended until September 15, 1995 and
the lender received the above mentioned 100,000 Lori common shares as
consideration for the loan extension. Accordingly, the carrying value of these
100,000 Lori common shares was transferred to ARTRA as reduction of amounts due
ARTRA. The loan has not been paid as of November 15, 1995 and ARTRA has entered
into discussions to extend the due date of the loan.
Effective December 29, 1994 ARTRA exchanged $2,242,000 of its notes and advances
for additional Lori Series C preferred stock. Additionally, the August 18, 1994
Settlement Agreement required ARTRA to contribute cash of $1,500,000 and ARTRA
common stock with a fair market value of $2,500,000 to Lori's capital account.
The common stock and virtually all the assets of the Company and its operating
subsidiaries have been pledged as collateral for the Company's and its operating
subsidiaries' bank borrowings. Under certain debt agreements the Company is
limited in the amounts it can withdraw from its operating subsidiaries. At
September 28, 1995 substantially all cash and equivalents on the Company's
consolidated balance sheet were restricted to use by and for the Company's
operating subsidiaries. Due to the limited ability of the Company to receive
funds from its operating subsidiaries, effective July 1, 1989, ARTRA placed a
moratorium on the declaration and accrual of dividends on its Lori preferred
stock. The moratorium has been extended indefinitely.
The Company's operating subsidiaries sell all of their products directly to
their customers. On a very limited basis certain customers may be offered
extended payment terms beyond 30 days depending upon prevailing trade practices
and financial strength.
Litigation
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. See Note 16 to the condensed consolidated
financial statements. At September 28, 1995 and December 29, 1994, the Company
had accrued $1,500,000 for potential business-related litigation and
environmental liabilities. However, as discussed above ARTRA may not have
available funds to pay liabilities arising out of these business-related
litigation and environmental matters or, in certain instances, to provide for
its legal defense. ARTRA could suffer severe adverse consequences in the event
of an unfavorable judgment in any of these matters.
In conjunction with the Yield acquisition (see Note 3 to the condensed
consolidated financial statements), ARTRA has agreed to assume certain
pre-existing Lori liabilities and indemnify Lori in the event any future
liabilities arise concerning pre-existing environmental matters and business
related litigation.
Net Operating Loss Carryforwards
At September 28, 1995, ARTRA had Federal income tax loss carryforwards of
approximately $42,000,000 expiring principally in 2003 - 2009. ARTRA's
discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss
carryforwards of approximately $11,000,000 available to be applied against
future taxable income, if any. In recent years, the Company has issued shares of
its common stock to repay various debt obligations, as consideration for
acquisitions, to fund working capital obligations and as consideration for
various other transactions. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its Federal income tax loss carryforwards
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
when certain changes in the ownership of a corporation's common stock occurs. In
the opinion of management, the Company is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should the Company continue to issue a significant number of
shares of its common stock, it could trigger a limitation that would prevent it
from utilizing a substantial portion of its Federal income tax loss
carryforwards.
At June 29, 1995, Lori and its subsidiaries had Federal income tax loss
carryforwards of approximately $53,000,000 available to be applied against
future taxable income, if any, expiring principally in 1995 - 2009. Lori has
recently issued a significant number of shares of its common stock in
conjunction with the Yield acquisition and certain related transactions.
Accordingly, Lori is currently subject to significant limitations under Section
382 of the Internal Revenue Code of 1986 regarding the utilization of its
Federal income tax loss carryforwards.
Results of Operations
On July 31, 1995, ARTRA and Bagcraft, entered into a letter of intent to sell
the business assets, subject to the buyer's assumption of certain liabilities,
of Arcar. On October 26, 1995, Bagcraft completed the sale of Arcar.
In September, 1995, Lori adopted a plan to discontinue its fashion costume
jewelry business and recorded a provision of $1,000,000 for the estimated costs
to complete the disposal of the fashion costume jewelry business.
The Company's condensed consolidated financial statements have been reclassified
to report separately results of operations of Arcar and Lori's discontinued
fashion costume jewelry business. The following discussion of results of
operations is presented for the Company's continuing operations at September 28,
1995, which were conducted by the Company's wholly-owned Bagcraft subsidiary.
Three Months Ended September 28, 1995 vs. Three Months Ended September 29, 1994
Net sales from continuing operations of $29,952,000 for the three months ended
September 28, 1995 were $1,761,000, or 6.2%, higher than net sales for the three
months ended September 29, 1994. The 1995 sales increase is primarily
attributable to increased volume and increased 1995 selling prices due to the
significant increases in paper costs in the second half of 1994 and early 1995.
The Company's cost of sales from continuing operations of $25,717,000 for the
three months ended September 28, 1995 increased $ 1,207,000 as compared to the
three months ended September 29, 1994. Cost of sales in the three months ended
September 28, 1995 was 85.9% of net sales compared to a cost of sales percentage
of 86.9% for the three months ended September 29, 1994. The increase in cost of
sales is primarily attributable to increased volume and increased 1995 selling
prices due to the significant increases in paper costs in the second half of
1994 and early 1995. The decrease in cost of sales percentage is primarily
attributable to the Company's ability to pass along the significant increases in
paper costs and to improved production efficiencies in 1995.
Selling, general and administrative expenses from continuing operations were
$6,843,000 in the three months ended September 28, 1995 as compared to
$4,021,000 in the three months ended September 29, 1994. Selling, general and
administrative expenses were 22.8% of net sales in the three months ended
September 28, 1995 as compared to 14.3% of net sales in the three months ended
September 29, 1994. The 1995 increase in selling, general and administrative
expenses is primarily attributable to a compensation charge of $3,000,000
related to the issuance of a 35% common stock interest in Lori (approximately
3,200,000 Lori common shares) as additional compensation for certain individuals
to enter into employment or consulting services agreements to manage Lori's
entry into and development of the telecommunications and computer technical
staffing services business.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Operating loss from continuing operations in the three months ended September
28, 1995 was $3,695,000 as compared to operating loss of $1,378,000 in the three
months ended September 29, 1994. The increased operating loss is primarily
attributable to a compensation charge of $3,000,000 related to the issuance of a
35% common stock interest in Lori (approximately 3,200,000 Lori common shares)
as additional compensation for certain individuals to enter into employment or
consulting services agreements to manage Lori's entry into and development of
the telecommunications and computer technical staffing services business,
partially offset by improved operating margins of the Bagcraft subsidiary.
Interest expense from continuing operations in the three months ended September
28, 1995 increased $602,000 as compared to the three months September 29, 1994.
The 1995 increase is principally due to an overall increase in borrowings at the
Corporate entity and at Bagcraft, increased interest rates in 1995 and the cost
of Lori common stock issued to certain unaffiliated investors as additional
compensation for short-term loans.
Due to the Company's tax loss carryforwards and the uncertainty of future
taxable income, no income tax benefit was recognized in connection with the
Company's 1995 and 1994 pre-tax losses.
Nine months Ended September 28, 1995 vs. Nine months Ended September 29, 1994
Net sales from continuing operations of $90,703,000 for the nine months ended
September 28, 1995 were $7,767,000, or 9.4%, higher than net sales for the nine
months ended September 29, 1994. The 1995 sales increase is primarily
attributable to increased volume and increased 1995 selling prices due to the
significant increases in paper costs in the second half of 1994 and early 1995.
The Company's cost of sales from continuing operations of $76,871,000 for the
nine months ended September 28, 1995 increased $7,737,000 as compared to the
nine months ended September 29, 1994. Cost of sales in the three months ended
September 28, 1995 was 84.8% of net sales compared to a cost of sales percentage
of 83.4% for the nine months ended September 29, 1994. The increase in cost of
sales is primarily attributable to increased volume and increased 1995 selling
prices due to the significant increases in paper costs in the second half of
1994 and early 1995. The increase in cost of sales percentage is primarily
attributable to the Company's inability to completely pass along the significant
increases in paper costs in the second half of 1994 and early 1995, partially
offset by improved production efficiencies in 1995.
Selling, general and administrative expenses from continuing operations were
$15,972,000 in the nine months ended September 28, 1995 as compared to
$11,833,000 in the nine months ended September 29, 1994. Selling, general and
administrative expenses were 17.6% of net sales in the three months ended
September 28, 1995 as compared to 14.3% of net sales in the nine months ended
September 29, 1994. The 1995 increase in selling, general and administrative
expenses is primarily attributable to a compensation charge of $3,000,000
related to the issuance of a 35% common stock interest in Lori (approximately
3,200,000 Lori common shares) as additional compensation for certain individuals
to enter into employment or consulting services agreements to manage Lori's
entry into and development of the telecommunications and computer technical
staffing services business and to costs of consulting studies designed
re-engineer and realign manufacturing processes and improve overall
organizational efficiencies at the Bagcraft subsidiary.
Operating loss from continuing operations in the nine months ended September 28,
1995 was $5,446,000 as compared to operating loss of $1,271,000 in the nine
months ended September 29, 1994. The 1995 operating earnings increase is
primarily attributable to a compensation charge of $3,000,000 related to the
issuance of a 35% common stock interest in Lori (approximately 3,200,000 Lori
common shares) as additional compensation for certain individuals to enter into
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
employment or consulting services agreements to manage Lori's entry into and
development of the telecommunications and computer technical staffing services
business and to costs of consulting studies designed re-engineer and realign
manufacturing processes and improve overall organizational efficiencies at the
Bagcraft subsidiary.
Interest expense from continuing operations in the nine months ended September
28, 1995 increased $204,000 as compared to the nine months September 29, 1994.
The 1995 increase is principally due to an overall increase in borrowings at the
Corporate entity and at Bagcraft and increased interest rates in 1995.
Due to the Company's tax loss carryforwards and the uncertainty of future
taxable income, no income tax benefit was recognized in connection with the
Company's 1995 and 1994 pre-tax losses. The 1995 extraordinary credit represents
a net gain from discharge of bank indebtedness.
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in our economy; however, to the
extent permitted by competition, the Company generally passes increased costs to
its customers by increasing sales prices over time.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT 11
Computation of earnings per share and equivalent share of
common stock for the nine months ended September 28, 1995 and
September 29, 1994.
(b) Reports on Form 8-K:
On August 3, 1995 the Registrant Form 8-K to report that ARTRA
and Bagcraft, had entered into a letter of intent to sell the
business assets, subject to the buyer's assumption of certain
liabilities, of Bagcraft's wholly-owned Arcar Graphics, Inc.
subsidiary.
<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.
ARTRA GROUP INCORPORATED
Registrant
Dated: November 20, 1995 JAMES D. DOERING
------------------------------------------
Vice President and Chief Financial Officer
EXHIBIT 11
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
AND EQUIVALENT SHARE OF COMMON STOCK
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
September 28, September 29,
Line 1995 1994*
---- -------- --------
<S> <C> <C>
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of common stock
outstanding during the period 6,712 5,409
2 Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury shares
-------- --------
3 Weighted average number of shares and equivalent shares
of common stock outstanding during the period 6,712 5,409
======== ========
EARNINGS (LOSS)
4 Loss from continuing operations (12,543) (8,046)
5 Less dividends applicable to redeemable preferred stock (422) (385)
6 Less redeemable common stock accretion (246) (210)
-------- --------
7 Amount for per share computation ($13,211) ($ 8,641)
======== ========
8 Loss before extraordinary credit (21,699) (10,784)
9 Less dividends applicable to redeemable preferred stock (422) (385)
10 Less redeemable common stock accretion (246) (210)
-------- --------
11 Amount for per share computation ($22,367) ($11,379)
======== ========
12 Net earnings (loss) ($12,586) ($10,784)
13 Less dividends applicable to redeemable preferred stock (422) (385)
14 Less redeemable common stock accretion (246) (210)
-------- --------
15 Amount for per share computation ($13,254) (11,379)
======== =======
PER SHARE AMOUNTS
Loss from continuing operations
(line 7 / line 3) ($ 1.96) ($ 1.59)
======== ========
Loss before extraordinary credit
(line 11 / line 3) ($ 3.32) ($ 2.10)
======== ========
Net earnings (loss)
(line 15 / line 3) ($ 1.97) ($ 2.10)
======== ========
<FN>
Earnings (loss) per share is computed by dividing net earnings (loss),
less redeemable preferred stock dividends and redeemable common stock
accretion, by the weighted average number of shares of common stock and
common stock equivalents (redeemable common stock, stock options and
warrants), unless anti-dilutive, outstanding during the period. Fully
diluted earnings (loss) per share are not presented since the result is
equivalent to primary earnings (loss) per share.
* As reclassified for discontinued operations.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 28, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000200243
<NAME> ARTRA GROUP INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-28-1995
<PERIOD-START> DEC-30-1994
<PERIOD-END> SEP-28-1995
<EXCHANGE-RATE> 1.000
<CASH> 632
<SECURITIES> 0
<RECEIVABLES> 10,570
<ALLOWANCES> 386
<INVENTORY> 18,433
<CURRENT-ASSETS> 46,087
<PP&E> 47,337
<DEPRECIATION> 18,793
<TOTAL-ASSETS> 79,161
<CURRENT-LIABILITIES> 114,987
<BONDS> 0
<COMMON> 5,091
18,263
0
<OTHER-SE> (76,974)
<TOTAL-LIABILITY-AND-EQUITY> 79,161
<SALES> 90,703
<TOTAL-REVENUES> 90,703
<CGS> 76,871
<TOTAL-COSTS> 76,871
<OTHER-EXPENSES> 19,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,392
<INCOME-PRETAX> (12,508)
<INCOME-TAX> 35
<INCOME-CONTINUING> (12,543)
<DISCONTINUED> (9,156)
<EXTRAORDINARY> 9,113
<CHANGES> 0
<NET-INCOME> (12,586)
<EPS-PRIMARY> (1.97)
<EPS-DILUTED> 0
</TABLE>
