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 June 27, 1996
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: (847) 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 July 31, 1996
------------------------------- ------------------------------
Common stock, without par value 7,492,372
<PAGE>
ARTRA GROUP INCORPORATED
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 27, 1996 and December 28, 1995 2
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended
June 27, 1996 and June 29, 1995 4
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Six Months Ended June 27, 1996 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 27, 1996
and June 29, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
<TABLE>
<CAPTION>
June 27, December 28,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $987 $2,347
Restricted cash and equivalents - 552
Receivables, less allowance for doubtful accounts
of $227 in 1996 and $250 in 1995 10,563 10,897
Inventories 15,345 16,634
Available -for-sale securities - 1,427
Other 926 324
------------ ------------
Total current assets 27,821 32,181
------------ ------------
Property, plant and equipment 45,132 44,273
Less accumulated depreciation and amortization 18,898 17,335
------------ ------------
26,234 26,938
------------ ------------
Other assets:
Available -for-sale securities 47,042 15,519
Excess of cost over net assets acquired,
net of accumulated amortization of $1,930 in1996 and $1,778 in 1995 3,106 3,258
Other 58 53
------------ ------------
50,206 18,830
------------ ------------
$104,261 $77,949
============ ============
<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>
June 27, December 28,
1996 1995
------------ ------------
LIABILITIES
<S> <C> <C>
Current liabilities:
Notes payable, including amounts due to related parties
of $3,000 in 1996 and $5,675 in 1995 $14,330 $25,300
Current maturities of long-term debt 2,504 3,512
Accounts payable, including amounts due to a related party of $399 in 1995 9,668 10,925
Accrued expenses 10,262 14,106
Income taxes 465 203
Liabilities of discontinued operations 2,254 4,500
------------ ------------
Total current liabilities 39,483 58,546
------------ ------------
Long-term debt 35,428 34,113
Other noncurrent liabilities 1,500 650
Commitments and contingencies
Redeemable common stock,
issued 164,847 shares in 1996 and 283,965 shares in 1995 4,369 4,774
ARTRA redeemable preferred stock,
$1,000 par value; Series A, 6% cumulative payment-in-kind,
including accumulated dividends, net of unamortized discount
of $1,426 in 1996 and $1,575 in 1995; redeemable March 1, 2000
at $1,000 per share plus accrued dividends;
authorized 2,000,000 shares all series; issued 3,750 shares 4,000 3,694
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; issued 8,650 shares in 1996 and 50,000 shares in 1995 1,949 10,794
BCA Holdings preferred stock:
Series A, $1.00 par value, 6% cumulative,
including accumulated dividends; liquidation preference of
$1,000 per share; 10,000 shares authorized; issued 3,675 shares 4,253 4,143
Series B payable to a related party, $1.00 par value, 13.5% cumulative,
including accumulated dividends; redeemable in 1997 with a liquidation
preference of $1,000 per share; 8,135 shares authorized and issued 8,544 -
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; authorized 7,500,000 shares;
issued 7,335,153 shares in 1996 and 7,102,979 shares in 1995 5,625 5,540
Additional paid-in capital 38,782 38,526
Unrealized appreciation of investments 50,363 21,047
Receivable from related party, including accrued interest (3,816) (4,318)
Accumulated deficit (86,167) (98,755)
------------ ------------
4,787 (37,960)
Less treasury stock (7,628 shares in 1996 and 57,038 shares in 1995), at cost 52 805
------------ ------------
4,735 (38,765)
------------ ------------
$104,261 $77,949
============ ============
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
June 27, June 29, June 27, June 29,
1996 1995* 1996 1995*
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales $ 32,363 $ 32,640 $ 60,765 $ 60,751
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold, exclusive of depreciation and amortization 25,715 27,375 48,856 51,154
Selling, general and administrative 4,172 4,650 7,972 9,129
Depreciation and amortization 983 1,228 1,959 2,219
-------- -------- -------- --------
30,870 33,253 58,787 62,502
-------- -------- -------- --------
Operating earnings (loss) 1,493 (613) 1,978 (1,751)
-------- -------- -------- --------
Other income (expense):
Interest expense (1,737) (1,960) (3,484) (3,771)
Realized gain on disposal of available-for-sale securities 3,452 -- 5,251 --
Other income (expense), net (79) 25 (210) 33
-------- -------- -------- --------
1,636 (1,935) 1,557 (3,738)
-------- -------- -------- --------
Earnings (loss) from continuing operations
before income taxes and minority interest 3,129 (2,548) 3,535 (5,489)
(Provision) credit for income taxes (50) 1 (50) 1
Minority interest (363) (224) 190 (448)
-------- -------- -------- --------
Earnings (loss) from continuing operations 2,716 (2,771) 3,675 (5,936)
Loss from discontinued operations -- (7,829) -- (7,754)
--------
-------- -------- -------- --------
Earnings (loss) before extraordinary credit 2,716 (10,600) 3,675 (13,690)
Extraordinary credit, net discharge of indebtedness -- -- 9,424 9,113
-------- -------- -------- --------
Net earnings (loss) 2,716 (10,600) 13,099 (4,577)
Dividends applicable to redeemable preferred stock (158) (143) (306) (278)
Reduction of retained earnings applicable to redeemable common stock (119) (84) (205) (162)
-------- -------- -------- --------
Earnings (loss) applicable to common shares $ 2,439 ($10,827) $ 12,588 ($ 5,017)
======== ======== ======== ========
Earnings (loss) per share:
Continuing operations $ 0.29 ($ 0.44) $ 0.38 ($ 0.94)
Discontinued operations -- (1.17) -- (1.16)
-------- -------- -------- --------
Earnings (loss) before extraordinary credit 0.29 (1.61) 0.38 (2.10)
Extraordinary credit -- -- 1.23 1.35
-------- -------- -------- --------
Net earnings (loss) $ 0.29 ($ 1.61) $ 1.61 ($ 0.75)
======== ======== ======== ========
Weighted average number of shares of common stock and
common stock equivalents outstanding 8,003 6,724 7,834 6,705
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
- --------------------
* As reclassified for discontinued operations.
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized Receivable Total
Common Stock Additional Appreciation From Treasury Stock Shareholders'
------------------ Paid-in of Related Accumulated ------------------- Equity
Shares Dollars Capital Investments Party (Deficit) Shares Dollars (Deficit)
--------- ------- ------- ----------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1995 7,102,979 $5,540 $38,526 $ 21,047 ($4,318) ($98,755) 57,038 ($ 805) ($ 38,765)
Net earnings -- -- -- -- -- 13,099 -- -- 13,099
Common stock issued
to pay liabilities 47,512 36 (6) -- -- -- (120,554) 818 848
Common stock as
additional consideration
for short-term borrowings 50,544 38 (398) -- -- -- (99,456) 1,021 661
Increase in receivable from
related party,
including accrued interest -- -- -- -- (85) -- -- -- (85)
Common stock received
for pay down of receivable
from related party -- -- -- -- 587 -- 100,000 (587) --
Increase in unrealized
appreciation of investments -- -- -- 29,316 -- -- -- -- 29,316
Exercise of stock options 15,000 11 51 -- -- -- (16,900) 109 171
Common stock received
as consideration
for short-term note -- -- -- -- -- -- 87,500 (608) (608)
Reclassification of
redeemable common stock 119,118 609 609
Redeemable common
stock accretion -- -- -- -- -- (205) -- -- (205)
Redeemable preferred
stock dividends -- -- -- -- -- (306) -- -- (306)
--------- ------ ------- --------- ------- -------- --------- ------- ---------
Balance at June 27, 1996 7,335,153 $5,625 $38,782 $ 50,363 ($3,816) ($86,167) 7,628 ($ 52) $ 4,735
========= ====== ======= ========= ======= ========= ========= ======== =========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 27, June 29,
1996 1995
---------- ---------
<S> <C> <C>
Net cash flows used by operating activities, ($1,971) ($722)
---------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,275) (1,480)
Retail fixtures - (610)
Proceeds from collection of Welch notes 342 3,000
Proceeds from sale of COMFORCE common stock 3,717 -
Payment of liabilites with restricted cash - 550
Decrease in unexpended plant construction funds 552 228
Other 89 -
---------- ---------
Net cash flows from (used by) investing activities 3,425 1,688
---------- ---------
Cash flows from financing activities:
Net decrease in short-term debt (4,060) (142)
Proceeds from long-term borrowings 67,753 66,529
Reduction of long-term debt (66,676) (68,938)
Other 169 (65)
---------- ---------
Net cash flows used by financing activities (2,814) (2,616)
---------- ---------
Decrease in cash and cash equivalents (1,360) (1,650)
Cash and equivalents, beginning of period 2,347 2,070
---------- ---------
Cash and equivalents, end of period $987 $420
========== =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $2,579 $2,831
Income taxes paid, net 8 7
Supplemental schedule of noncash
investing and financing activities:
BCA Holdings redeemable preferred stock
issued in exchange for
Bagcraft redeemable preferred stock 8,135 -
Issue common stock and redeemable common stock
to pay down current liabilities 848 205
<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. BASIS OF PRESENTATION AND FINANCIAL RESTRUCTURING
ARTRA GROUP Incorporated's ("ARTRA" or the "Company") 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 June 27, 1996, and the
results of operations and changes in cash flows for the three and six month
periods ended June 27, 1996 and June 29, 1995. In recent years, 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
1996. 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 7
Notes Payable, and Note 8 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 subsidiary, ARTRA has historically met its
operating expenditures with funds generated by alternative sources, such as
private placements of ARTRA common stock and notes, 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.
ARTRA, through its wholly-owned subsidiary, Bagcraft Corporation of America
("Bagcraft"), currently operates in one industry segment as a manufacturer of
packaging products principally serving the food industry. Prior to September 28,
1995, ARTRA's then majority owned subsidiary, COMFORCE Corporation ("COMFORCE",
formerly The Lori Corporation "Lori"), operated as a designer and distributor of
popular-priced fashion costume jewelry and accessories. In September 1995
COMFORCE adopted a plan to discontinue its jewelry business.
On October 17, 1995, COMFORCE acquired all of the capital stock of COMFORCE
Global Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD
Global. Global 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.
Effective July 4, 1995, COMFORCE and ARTRA entered into 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 COMFORCE. After the issuance of
the COMFORCE common shares, plus the effects of the issuance of COMFORCE common
shares sold by private placements and other COMFORCE common shares issued in
conjunction with the Global acquisition, ARTRA's common stock ownership interest
in COMFORCE common stock was reduced to approximately 25% at December 28, 1995.
Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned
subsidiaries were deconsolidated from ARTRA's consolidated financial statements
and ARTRA's investment in COMFORCE was accounted for under the equity method
through the end of fiscal 1995. At June 27, 1996 ARTRA's common stock ownership
interest in COMFORCE common stock was reduced to approximately 19%. See Note 5
for a further discussion of ARTRA's investment in COMFORCE.
Effective October 26, 1995, Bagcraft completed the sale of the business assets,
subject to the buyer's assumption of certain liabilities, of its wholly-owned
subsidiary, Arcar Graphics, Inc. ("Arcar"), for cash of approximately
$20,300,000. The net proceeds, after extinguishment of certain Arcar debt
obligations, of approximately $10,400,000, were used to reduce Bagcraft debt
obligations.
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey, resulting in a gain to ARTRA on the discharge of
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
this indebtedness of $9,424,000 in the first quarter of 1996. The cash payment
due the bank was funded principally with proceeds received from a short-term
loan agreement along with proceeds received from the Bagcraft subsidiary in
conjunction with the issuance of BCA Holdings, Inc. ("BCA" the parent of
Bagcraft) preferred stock. See Notes 6, 7 and 10 for further discussions of
these transactions.
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 certain
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.
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 28,
1995, 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 28, 1995 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.
The Company has adopted a 52/53 week fiscal year ending the last Thursday of
December.
2. CHANGE OF BUSINESS
Arcar Graphics, Inc.
Effective April 8, 1994, Bagcraft purchased the business assets, subject to
buyer's assumption of certain liabilities, of Arcar, a manufacturer and
distributor of waterbase inks. Effective October 26, 1995, Bagcraft sold the
business assets, subject to the buyer's assumption of certain liabilities, of
Arcar for cash of approximately $20,300,000, resulting in a net gain of
$8,483,000. The net proceeds, after extinguishment of certain Arcar debt
obligations, of approximately $10,400,000, were used to reduce Bagcraft debt
obligations.
COMFORCE
In September, 1995, COMFORCE adopted a plan to discontinue its jewelry business
and recorded a provision of $1,000,000 for the estimated costs to complete the
disposal of the fashion costume jewelry business.
Effective October 17, 1995, COMFORCE acquired all of the capital stock of
COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a
YIELD Global, for consideration of approximately $6.4 million, net of cash
acquired. This consideration consisted of cash to the seller of approximately
$5.1 million, fees of approximately $700,000, including a fee of $500,000 to a
related party, and 500,000 shares of COMFORCE common stock issued as
consideration for various fees and guarantees associated with the transaction.
The 500,000 shares issued by COMFORCE consisted of (i) 100,000 shares issued to
an unrelated party for guaranteeing the purchase price to the seller, (ii)
100,000 shares issued to ARTRA in consideration of its guaranteeing the purchase
price to the seller and agreeing to enter into a liability assumption agreement
as discussed below, (iii) 150,000 issued to two unrelated parties for advisory
services in connection with the acquisition, and (iv) 150,000 shares issued to
Peter R. Harvey, then a vice president and director of COMFORCE, for
guaranteeing the payment of the purchase price to the seller and other
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
guarantees to facilitate the transaction. The shares issued to Peter R. Harvey
and ARTRA are subject to ratification by COMFORCE's stockholders. These
transactions have been approved by COMFORCE's current management personnel and
ARTRA, which together own a majority of the outstanding common shares of
COMFORCE and, therefore, such ratification is expected.
Global 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.
Additionally, in conjunction with the Global acquisition, ARTRA agreed to assume
substantially all pre-existing Lori liabilities and indemnify COMFORCE in the
event any future liabilities arise concerning pre-existing environmental matters
and business related litigation. Accordingly, at June 27, 1996 and December 28,
1995, respectively, $2,254,000 and $4,500,000 of such pre-existing Lori
liabilities were classified in ARTRA's condensed consolidated balance as current
liabilities of discontinued operations.
Effective July 4, 1995, COMFORCE and ARTRA entered into 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 COMFORCE. After the issuance of
the COMFORCE common shares, plus the effects of other transactions, ARTRA's
common stock ownership interest in COMFORCE common stock was reduced to
approximately 19% and 25% at June 27, 1996 and December 28, 1995, respectively.
Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned
subsidiaries were deconsolidated from ARTRA's consolidated financial statements.
See Note 5 for a further discussion of the accounting treatment of ARTRA's
investment in COMFORCE.
The Company's consolidated financial statements have been reclassified to report
separately the results of operations of Arcar and COMFORCE's discontinued
jewelry business prior to the deconsolidation of COMFORCE and its majority-owned
subsidiaries effective October 1995. The operating results (in thousands) of
Bagcraft's discontinued Arcar subsidiary and COMFORCE's discontinued jewelry
business for the three and six months ended June 29, 1995 consist of:
Three Months Six Months
Ended Ended
June 29, June 29,
1995 1995
-------- ---------
Net sales $ 4,823 $ 11,787
======== =========
Loss from discontinued operations
before income taxes $ (7,814) $ (7,729)
Provision for income taxes
income taxes (15) (25)
-------- ---------
Earnings from discontinued operations $ (7,829) $ (7,754)
======== =========
3. CONCENTRATION OF RISK
The accounts receivable of the Company's Bagcraft subsidiary at June 27, 1996
consist primarily of amounts due from companies in the food industry. As a
result, the collectibility of these receivables is dependent, to an extent, upon
the economic condition and financial stability of the food industry. Credit risk
is minimized as a result of the large number and diverse nature of Bagcraft's
customer base. Bagcraft's major customers include some of the largest companies
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
in the food industry. At June 27, 1996, Bagcraft had 10 customers with accounts
receivable balances that aggregated approximately 33% of the Company's total
trade accounts receivable. In fiscal year 1995 no single customer accounted for
10% or more of Bagcraft's sales.
4. INVENTORIES
Inventories (in thousands) consist of:
June 27, December 28,
1996 1995
------- -------
Raw materials and supplies $ 5,252 $ 5,645
Work in process 397 40
Finished goods 9,696 10,949
------- -------
$15,345 $16,634
======= =======
5. INVESTMENT IN COMFORCE CORPORATION
In prior years and until October 1995, COMFORCE was a majority-owned subsidiary
of ARTRA and, accordingly, the accounts of COMFORCE and its majority-owned
subsidiaries were included in the consolidated financial statements of ARTRA..
As discussed in Note 2, primarily due to the issuances of COMFORCE common shares
in conjunction with the acquisition of Global, ARTRA's common stock ownership in
COMFORCE was reduced to approximately 25% at December 28, 1995. Accordingly, in
October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were
deconsolidated from ARTRA's consolidated financial statements and ARTRA's
investment in COMFORCE was accounted for under the requirements of APB Opinion
No. 18 "The Equity Method of Accounting for Investments in Common Stock" through
the end of fiscal 1995.
Effective December 28, 1995, John Harvey and Peter R. Harvey, ARTRA's chairman
and president, respectively, resigned as directors of COMFORCE and Peter R.
Harvey resigned as a vice president of COMFORCE. Due to such factors as a lack
of board of directors representation and participation in policy formulation by
ARTRA, as well as a lack of interchange of managerial personnel, ARTRA no longer
was able to exercise significant influence over the operating and financial
policies of COMFORCE. Additionally, assuming contemplated additional issuances
of COMFORCE common shares, on a fully diluted basis ARTRA's ownership interest
in COMFORCE at December 28, 1995 would be reduced to less than 20%. In the
opinion of the Company, effective December 28, 1995, ARTRA's investment in
COMFORCE ceased to conform to the requirements of APB Opinion No. 18.
Accordingly, ARTRA adopted SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Under this statement, at December 28, 1995, ARTRA's
investment in COMFORCE was reclassified as available for sale and was stated at
fair value. The adoption of SFAS No. 115 resulted in an increase to
shareholders' equity in the fourth quarter of 1995 of $21,047,000.
In February 1996, ARTRA sold 200,000 of its COMFORCE common shares to certain
officers, directors and key employees of ARTRA for notes totaling $400,000. As
additional consideration for a February 1996 short-term loan (see Notes 6 and 7)
a lender received 25,000 COMFORCE common shares held by ARTRA. In March 1996,
ARTRA sold 93,000 COMFORCE shares in the market, with the proceeds of
approximately $630,000 used for working capital. The above mentioned 318,000
COMFORCE common shares were classified in the Company's consolidated balance
sheet at December 28, 1995 in current assets as "Available-for-sale securities."
The disposition of these 318,000 COMFORCE shares during the quarter ended March
28, 1996 resulted in realized gains of $1,799,000, with cost determined by
average cost.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In June 1996, ARTRA sold 100,000 COMFORCE shares in the market, with the
proceeds of approximately $3,100,000 used principally to pay down debt
obligations. As additional consideration for two short-term loans, in April 1996
the lenders received 20,000 COMFORCE common shares held by ARTRA. The
disposition of these 120,000 COMFORCE shares during the quarter ended June 27,
1996 resulted in additional realized gains of $3,452,000, with cost determined
by average cost.
At June 27, 1996 ARTRA's remaining investment in COMFORCE (1,863,036 shares,
currently a common stock ownership interest of approximately 19%) was classified
in the Company's condensed consolidated balance sheet in noncurrent assets as
"Available-for-sale securities." At June 27, 1996 the gross unrealized gain
relating to ARTRA's investment in COMFORCE, reflected as a separate component of
shareholders' equity, was $50,363,000.
6. EXTRAORDINARY GAINS
ARTRA Debt Restructuring
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note, and ARTRA discharged $2,150,000 of Mr. Harvey's
prior advances. ARTRA recognized a gain on the discharge of this indebtedness of
$9,424,000 ($1.23 per share) in the first quarter of 1996. The cash payment due
the bank was funded principally with proceeds received from the Bagcraft
subsidiary in conjunction with the issuance of BCA (the parent of Bagcraft)
preferred stock along with proceeds received from a short-term loan agreement
with an unaffiliated company that was subsequently repaid. See Notes 7 and 10
for further discussions of these transactions. As additional compensation for
its loan and for participating in the above discharge of indebtedness the
unaffiliated company received 150,000 shares of ARTRA common stock (with a then
fair market value of $661,000 after a discount for restricted marketability) and
25,000 shares of COMFORCE common stock held by ARTRA (with a then fair market
value of $200,000).
The extraordinary gain resulting from the discharge of bank debt is calculated
(in thousands) as follows:
The extraordinary gain resulting from the discharge of bank debt is calculated
(in thousands) as follows:
Amounts due the bank:
ARTRA notes $ 12,063
Accrued interest 2,656
--------
14,719
Cash payment to the bank $ 5,050
Less amount applicable to
Peter R. Harvey indebtedness (1,089)
--------
(3,961)
--------
Bank debt discharged 10,758
Less fair market value of ARTRA
common stock issued as consideration
for a loan used in par to fund
the discharge of bank debt (661)
Less fair market value of COMFORCE
common stock issued as consideration
for a loan used in par to fund
the discharge of bank debt (200)
Other fees and expenses (473)
--------
Net extraordinary gain $ 9,424
========
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The amount of the $5,050,000 cash payment to the bank applicable to Peter R.
Harvey ($1,089,000) was charged to amounts due from Peter R. Harvey. Per terms
of the debt discharge agreement, ARTRA received additional collateral from Mr.
Harvey consisting of a $2,150,000 security interest in certain real estate,
subordinated to the bank's $850,000 security interest in this real estate.
COMFORCE Debt Restructuring
Per terms of a debt settlement agreement, borrowings due a bank under the loan
agreements of COMFORCE and its discontinued jewelry business 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 COMFORCE's obligation to the bank and $2,645,000 pertained to
Fill-Mor's obligation to the bank). As a result of the reduction of amounts due
the bank, in December 1994, the Company recognized an extraordinary gain of
$8,965,000 ($1.57 per share) in December 1994.
On March 31, 1995, the bank was paid $750,000 and the remaining indebtedness of
COMFORCE and Fill-Mor was discharged, resulting in an additional extraordinary
gain to the Company of $9,113,000 ($1.35 per share) in the first quarter of
1995.
7. NOTES PAYABLE
Notes payable (in thousands) consist of:
June 27, December 28,
1996 1995
-------- --------
ARTRA bank notes payable,
at various interest rates $ - $ 12,063
Amounts due to related parties,
interest from 8% to 12% 3,000 5,675
ARTRA 12% secured promissory notes 7,375 -
ARTRA 12% convertible
subordinated promissory notes - 2,500
Other, interest from 10% to 20% 3,955 5,062
-------- --------
$ 14,330 $ 25,300
======== ========
Bank Notes Payable
At December 28, 1995, $12,063,000 of ARTRA notes, plus accrued interest and
fees, were payable to a bank. The notes provided for interest at the prime rate.
These bank notes were collateralized by, among other things, 100% of the common
stock of ARTRA's BCA subsidiary, the parent of Bagcraft, a secondary position on
the assets of BCA and 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 Acquisition Corporation ("Emerald") for breaches of fiduciary duty by
the directors of Emerald, induced by Salomon and Kelly, in connection with the
reorganization of Envirodyne Industries, Inc. ("Envirodyne") as discussed in
Note 13. Additionally, the bank notes were
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
collateralized by a $5,500,000 personal guaranty of a private investor. As
additional compensation, the private investor received 1,833 shares of ARTRA
common stock for each month the guaranty was outstanding. Among other things,
the bank notes prohibited the payment of cash dividends by ARTRA.
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note, and ARTRA discharged $2,150,000 of Mr. Harvey's
prior advances. ARTRA recognized a gain on the discharge of this indebtedness of
$9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a
receivable for Mr. Harvey's prorata share ($1,089,000) of the debt discharge
funded by the Company. The cash payment due the bank was funded principally with
proceeds received from the Bagcraft subsidiary in conjunction with the issuance
of BCA (the parent of Bagcraft) preferred stock (see Note 10) along with
proceeds received from a short-term loan agreement with an unaffiliated company.
As collateral for this advance and other previous advances (see Note 14), Mr.
Harvey provided ARTRA a $2,150,000 security interest in certain real estate,
subordinated to the bank's $850,000 security interest in this real estate.
Amounts Due To Related Parties
At December 28, 1995, the Company had outstanding borrowings from its Chairman,
John Harvey, of $175,000. John Harvey's borrowings were evidenced by unsecured
short-term notes bearing interest at 12%. As additional compensation the loans
provided for the issuance of warrants to purchase ARTRA common shares, the
number of which was determined by the number of days the loans were outstanding.
The warrants expire five years from the date of issuance. John Harvey received
warrants to purchase an aggregate of 66,045 shares of ARTRA common stock at
prices ranging from $3.75 to $6.125 per share as additional compensation for his
loans to ARTRA. In May 1996, ARTRA repaid all borrowings from John Harvey.
On March 31, 1994, ARTRA entered into a series of agreements with its bank
lender and with a private corporation that had guaranteed $2,500,000 of the
ARTRA bank notes discharged in February 1996 as noted above. A major shareholder
and executive officer of the private corporation is an ARTRA director. Per terms
of the agreements, the private corporation purchased $2,500,000 of ARTRA notes
from ARTRA's bank 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.
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 ($20.063 per share at June 27, 1996). The $2,500,000 note payable
to the private corporation was reflected in the above table at December 28, 1995
as amounts due to related parties. During the first quarter of 1996, the
$2,500,000 note and related accrued interest was paid in full principally with
proceeds from additional short-term borrowings.
At June 27, 1996 and December 28, 1995, ARTRA had outstanding borrowings of
$3,000,000 from an unaffiliated company currently holding approximately 7% of
ARTRA's outstanding common stock.. The loans are evidenced by unsecured
short-term notes bearing interest at 10%. As additional compensation for the
above loans, the lender received five year warrants expiring in 1998 to purchase
an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00 to $7.00
per share. In December 1995 the unaffiliated company received 126,222 shares of
ARTRA common in payment of past due interest through October 31, 1995.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Secured Promissory Notes
In April 1996, ARTRA commenced a private placement of $7,575,000 of 12% secured
promissory notes due April 15, 1997, of which $7,375,000 was placed as of June
27, 1996. As additional consideration the noteholders received warrants to
purchase an aggregate of 413,750 ARTRA common shares at a price of $6.00 per
share. The warrants are exercisable August 15, 1996 and expire April 15, 1999.
These promissory notes are collateralized by ARTRA's interest in all of the
common stock of BCA (the parent of Bagcraft). The proceeds from the private
placement, completed in July 1996, were used principally to pay down other debt
obligations.
Convertible Subordinated Promissory Notes
In December 1995, ARTRA completed a private placement of $2,500,000 of 12%
convertible subordinated promissory notes due March 21, 1996. As additional
consideration the noteholders received 15,000 ARTRA common shares per each
$100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The
ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the
closing market value of ARTRA common stock on the date of issue, discounted for
restricted marketability. The proceeds from the private placement, held in
escrow at December 28, 1995, were used to pay down other debt obligations in
January, 1996. In March and April 1996 the notes were repaid, principally with
proceeds from the private placement of the secured promissory notes discussed
above.
Other
In conjunction with the discharge of bank debt discussed above, the Company
entered into a $1,900,000 short-term loan agreement with an unaffiliated
company. The loan, due May 26, 1996, with interest at 12% was collateralized by,
among other things, the common stock of ARTRA's BCA subsidiary. As additional
compensation for its loan and for participating in the above discharge of
indebtedness the unaffiliated company received 150,000 shares of ARTRA common
stock (with a then fair market value of $661,000 after a discount for restricted
marketability) and 25,000 shares of COMFORCE common stock held by ARTRA (with a
then fair market value of $200,000). Additionally, for consideration of
$500,000, the lender purchased an option to acquire up to 40% of the common
stock of Bagcraft for nominal consideration. The borrowings under this
short-term loan agreement were repaid in April, 1996 and, per terms of the loan
agreement, ARTRA repurchased the option for a cash payment of $550,000.
At June 27, 1996 and December 28, 1995, other notes payable includes short-term
borrowings of $3,955,000 and $5,062,000, respectively, payable under various
short-term loan agreements with unaffiliated companies and private investors.
These loans bear interest at varying rates from 10% to 20%.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. LONG-TERM DEBT
Long-term debt (in thousands) consists of:
June 27, December 28,
1996 1995
-------- --------
Bagcraft Credit Agreement:
Term loan A,
interest at the prime rate plus 1.75% $ 12,000 $ 12,000
Term loan B,
interest at the prime rate plus 3% 3,400 4,600
Revolving credit loan,
interest at the prime rate plus 1.5% 11,915 9,231
Unamortized discount (770) -
Bagcraft
City of Baxter Springs,
Kansas loan agreements,
interest at varying rates 11,387 11,794
-------- --------
37,932 37,625
Current scheduled maturities (2,504) (3,512)
-------- --------
$ 35,428 $ 34,113
======== ========
Bagcraft
Bagcraft's Credit Agreement that provides for a revolving credit loan and two
separate term loans. The term loans are separate 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. At June 27, 1996, interest
rates on Term Loan A and Term Loan B were 10 % and 11.25% 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
June 27, 1996 and December 28, 1995, approximately $1,800,000 and $6,600,000,
respectively, was available and unused by Bagcraft under the revolving credit
loan. Borrowings under the revolving credit loan bear interest at the lender's
index rate plus 1.5% and are payable upon maturity of the Credit Agreement,
unless accelerated under terms of the Credit Agreement. At June 27, 1996 the
interest rate on the revolving credit loan was 9.75%.
Effective February 1, 1996, the Credit Agreement was amended whereby, among
other things, the maturity date of the Credit Agreement was extended until
September 30, 1997, certain loan covenants were amended. The principal payments
under Term Loan B were modified to include twenty-three monthly installments of
$200,000 from November 15, 1995 to September 30, 1997, with the remaining
balance payable at maturity (September 30, 1997). Additionally, in conjunction
with a preferred stock exchange agreement between BCA (the parent of Bagcraft),
Bagcraft and the holder of Bagcraft's 13.5% cumulative redeemable preferred
stock, the lender consented to an advance to Bagcraft of $4,135,000 under the
revolving credit loan to be transferred to ARTRA as a dividend (see Note 10).
As additional compensation for borrowings under the Credit Agreement, the lender
received a detachable warrant, expiring in December 1998, allowing the holder to
purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal
value. 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
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
value or market value of Bagcraft. In connection with the February 1, 1996
amendment to the Credit Agreement, the warrant agreement was amended to permit
the holder to purchase 13% of the fully diluted common equity of Bagcraft at the
original nominal purchase price and to extend the expiration date to December
17, 1999.
Borrowings under the Credit Agreement are collateralized by substantially all of
the assets of Bagcraft. The Credit Agreement, as amended, contains various
restrictive covenants, that among other restrictions, require Bagcraft to
maintain minimum levels of tangible net worth and liquidity levels, and limits
capital expenditures and restricts additional loans, dividend payments and
payments to related parties. In addition, the Credit Agreement prohibits changes
in ownership of Bagcraft. At June 27, 1996 Bagcraft was in compliance with the
provisions of its Credit Agreement.
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. At June 27, 1996 and December 28, 1995, Bagcraft
had outstanding borrowings of $6,300,000 under this loan agreement.
A $5,000,000 subordinated promissory note payable as follows: $150,000
due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The
subordinated promissory note is non-interest bearing, subject to
certain repayment provisions as defined in the agreement (as amended).
At June 27, 1996 and December 28, 1995, Bagcraft had outstanding
borrowings of $4,850,000 and $5,000,000, respectively, under this loan
agreement.
Two separate $250,000 subordinated promissory notes payable in varying
installments through January 20, 2025. The subordinated promissory
notes are non-interest bearing, subject to certain repayment provisions
as defined in the agreement. At June 27, 1996 and December 28, 1995,
Bagcraft had outstanding borrowings of $237,000 and $494,000,
respectively, 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. Under certain circumstances,
repayment of the borrowings under the above loan agreements is subordinated to
the repayment of obligations under Bagcraft's Credit Agreement. At December 28,
1995 $552,000 of borrowings from the above loan agreements was reflected in the
condensed consolidated balance sheet in current assets as restricted cash and
equivalents. These funds, invested in interest bearing cash equivalents and
restricted for expenditures associated with the Baxter Springs, Kansas project
were expended during the first quarter of 1996.
9. 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. At June 27, 1996
and December 28, 1995 options are outstanding that, if exercised, would require
ARTRA to repurchase 164,847 and 283,965 shares of its common stock for an
aggregate amount of $4,369,000 and $4,774,000, respectively.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. 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 $1,676,000 and $1,519,000 were
accrued at June 27, 1996 and December 28, 1995, respectively.
In 1987, Bagcraft obtained financing from 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 Series A 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.
In 1987, Bagcraft issued to 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 holder has agreed to forego dividend payments as long as such
payments are prohibited by Bagcraft's lenders. Accumulated dividends of
$5,794000 were accrued at December 28, 1995. After giving effect to the
preferred stock exchange discussed below, 8,650 shares of Bagcraft redeemable
preferred stock with accumulated dividends of $1,084,000 were outstanding at
June 27, 1996.
Effective February 15, 1996, BCA, Bagcraft and Ozite entered into an agreement
to exchange certain preferred stock between the Companies. Per terms of the
exchange agreement BCA issued 8,135 shares of BCA Series B preferred stock
(13.5% cumulative, redeemable preferred stock with a liquidation preference
equal to $1,000 per share, or a total carrying value of $8,135,000) to Ozite in
exchange for 41,350 shares of Bagcraft redeemable preferred stock (with a
liquidation preference equal to $100 per share plus accumulated dividends of
$4,838,000, or a total carrying value of $8,973,000). The preferred stock
exchange resulted in a gain of $838,000 which was reflected in the Company's
condensed consolidated statement of operations as minority interest.
The BCA Series B preferred stock is redeemable on June 1, 1997. Accumulated
dividends of $409,000 were accrued at June 27, 1997.
In conjunction with the preferred stock exchange agreement, Bagcraft's lender
consented to advance of $4,135,000 under Bagcraft's revolving credit to be
transferred to ARTRA as a dividend. ARTRA used the funds from this dividend plus
funds from a short-term loan agreement to fund a payment to its bank lender in
accordance with provisions of its debt discharge agreement as discussed in Notes
6 and 7.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
11. INCOME TAXES
The 1996 and 1995 extraordinary credits represent net gains from discharge of
indebtedness. No income tax expense is reflected in the Company's financial
statements resulting from the extraordinary credits and from the Company's 1996
earnings from continuing operations due to the utilization of tax loss
carryforwards.
At June 27, 1996, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $33,000,000 available to be applied against
future taxable income, if any. ARTRA's tax loss carryforwards of approximately
$22,000,000 expire principally in 2003 - 2010. Additionally, 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.
12. 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.
13. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At June 27, 1996 and December 28, 1995,
the Company had accrued $1,900,000 and $1,500,000, respectively, for potential
business-related litigation and environmental liabilities. While these
litigation and environmental matters involve wide ranges of potential liability,
management does not believe the outcome of these matters will have a material
adverse effect on the Company's financial statements. 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.
In November 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 relating to the acquisition of
Envirodyne in 1989. Envirodyne subsequently filed a Chapter 11 bankruptcy which
provided ARTRA with no value in Envirodyne's parent's stock. 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 retained jurisdiction of ARTRA's claims against the
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 order
retaining jurisdiction over two claims was denied. On July 26, 1995, the
Bankruptcy Court entered an order dismissing these claims. On August 4, 1995,
ARTRA appealed from the Bankruptcy Court's dismissal order. That appeal is still
pending.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On July 18, 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 causes
of action for breach of the fiduciary duty of due care were repleaded to reserve
ARTRA's right to appeal the State Court's dismissal of the causes of action in
the Third Amended Complaint. Defendant Kelly was dismissed with prejudice
pursuant to a stipulation between ARTRA and the Kelly Defendants.
On or about March 1, 1996, DPK brought a motion for summary judgment as to
ARTRA's claims for breach of contract and promissory estoppel. DPK's motion is
currently pending.
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 cash at closing, $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.
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
June 1996 the note was paid in accordance with terms of the settlement agreement
at its present value and ARTRA received proceeds of $342,000.
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 its liability costs in connection with
the Cross Brothers case. Bagcraft was subsequently reimbursed by its insurers
for its liability costs incurred in connection with the EPA claim. With regard
to the state action, Bagcraft is participating in settlement discussions with
the State and thirteen other potential responsible parties to resolve all claims
associated with the State. The maximum state claim is $1.1 million for all
participants. Bagcraft has accrued $120,000 related to the State action in the
Company's condensed consolidated financial statements at June 27, 1996 and
December 28, 1995.
Bagcraft was listed as a de minimis contributor at the American Chemical
Services, Inc. off-site disposal location in Griffith, Indiana and the Duane
Marine off-site disposal location in Perth Amboy, New Jersey. These sites are
included in the EPA's National Priorities List. Bagcraft is presently unable to
determine its liability, if any, with respect to this site.
Bagcraft has been notified by the Federal Environment Protection Agency that it
is a potentially responsible party for the disposal of hazardous substances at a
site on Ninth Avenue in Gary, Indiana. The Company has no records indicating
that it deposited hazardous substances at this site and intends to vigorously
defend itself in this matter.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 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.
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.
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 $350,000 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.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In a case titled Illinois Environmental Protection Agency v. NL Industries,
Inc., ARTRA GROUP Incorporated, et al, the Illinois Environmental Protection
Agency filed suit alleging all former owners contributed to the contamination of
the site. The suit was dismissed, but subject to possible appeal. The Company is
presently unable to determine ARTRA's liability, if any, in connection with this
case.
The EPA has identified ARTRA GROUP Incorporated as a potentially responsible
party in an action involving the former manufacturing facility. The EPA is
currently investigating the site to determine the extent and type of
contamination, if any. The Company is presently unable to determine ARTRA's
liability, if any, in connection with this case.
14. 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,
consist of:
June 27, December 28,
1996 1995
-------- --------
(in thousands)
Total advances, including accrued interest $ 5,072 $ 5,369
Less interest for the period
January 1, 1993 to date,
accrued and fully reserved (1,256) (1,051)
-------- --------
Net advances $ 3,816 $ 4,318
======== ========
ARTRA has total advances due from its president, Peter R. Harvey, of which
$5,072,000 and $5,369,000, including accrued interest, remained outstanding at
June 27, 1996 and December 28, 1995 The advances bear interest at the prime rate
plus 2% (10.25% at June 27, 1996 and 10.5% at December 28, 1995, respectively).
This receivable from Peter R. Harvey has been classified as a reduction of
common shareholders' equity. See Note 6 for an additional 1996 advance for Mr.
Harvey's prorata share of debt discharged by a bank funded by ARTRA. Per terms
of the debt discharge agreement, as partial consideration, the bank also
received Mr. Harvey's $3,000,000 note payable to the bank. The bank assigned
ARTRA a $2,150,000 interest in the Mr. Harvey's note, subordinated to the bank's
$850,000 interest in Mr. Harvey's note, and ARTRA discharged $2,150,000 of Mr.
Harvey's prior advances.
Commencing January 1, 1993 to date, interest on the 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 six months ended June 27, 1996 and June 29,
1995 totaled $205,000 and $222,000, 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.
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.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 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. During 1995, Peter R. Harvey entered into a pledge agreement with
ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067
shares of ARTRA common stock and 707,281 shares of Pure Tech International,
Inc., a publicly traded corporation. Per terms of a February discharge of bank
indebtedness (see Note 6), ARTRA received additional collateral from Mr. Harvey
consisting of a $2,150,000 security interest in certain real estate,
subordinated to the bank's $850,000 security interest in this real estate.
In conjunction with Lori's October 1995 acquisition of Global (see Note 2),
ARTRA agreed to assume substantially all pre-existing Lori liabilities and
indemnify COMFORCE in the event any future liabilities arise concerning
pre-existing environmental matters and business related litigation. Accordingly,
at June 27, 1996 and December 28, 1995, respectively, $2,254,000 and $4,500,000
of such pre-existing Lori liabilities were classified in ARTRA's condensed
consolidated balance at as current liabilities of discontinued operations.
For a discussion of certain other related party debt obligations see Note 7.
<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 Company's condensed consolidated financial
statements, effective April 8, 1994, Bagcraft purchased the business assets,
subject to buyer's assumption of certain liabilities, of Arcar, a manufacturer
and distributor of waterbase inks. Effective October 26, 1995, Bagcraft sold the
business assets, subject to the buyer's assumption of certain liabilities, of
Arcar for cash of approximately $20,300,000, resulting in a net gain of
$8,483,000. The net proceeds, after extinguishment of certain Arcar debt
obligations, of approximately $10,400,000, were used to reduce Bagcraft debt
obligations.
COMFORCE
In September, 1995, COMFORCE Corporation (formerly Lori) adopted a plan to
discontinue its jewelry business and recorded a provision of $1,000,000 for the
estimated costs to complete the disposal of its jewelry business.
Effective October 17, 1995, COMFORCE acquired all of the capital stock of
COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a
YIELD Global, for consideration of approximately $6.4 million, net of cash
acquired. This consideration consisted of cash to the seller of approximately
$5.1 million, fees of approximately $700,000, including a fee of $500,000 to a
related party, and 500,000 shares of COMFORCE common stock issued as
consideration for various fees and guarantees associated with the transaction.
The 500,000 shares issued by COMFORCE consisted of (i) 100,000 shares issued to
an unrelated party for guaranteeing the purchase price to the seller, (ii)
100,000 shares issued to ARTRA in consideration of its guaranteeing the purchase
price to the seller and agreeing to enter into a liability assumption agreement
as discussed below, (iii) 150,000 issued to two unrelated parties for advisory
services in connection with the acquisition, and (iv) 150,000 shares issued to
Peter R. Harvey, then a vice president and director of COMFORCE, for
guaranteeing the payment of the purchase price to the seller and other
guarantees to facilitate the transaction. The shares issued to Peter R. Harvey
and ARTRA are subject to ratification by COMFORCE 's stockholders. These
transactions have been approved by COMFORCE 's current management personnel and
ARTRA, which together own a majority of the outstanding common shares of
COMFORCE and, therefore, such ratification is expected.
Global 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.
Effective July 4, 1995, COMFORCE and ARTRA entered into 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 COMFORCE. After the issuance of
the COMFORCE common shares, plus the effects of other transactions, ARTRA's
common stock ownership interest in COMFORCE common stock was reduced to
approximately 19% and 25% at June 27, 1996 and December 28, 1995, respectively.
Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned
subsidiaries were deconsolidated from ARTRA's consolidated financial statements.
See Note 5 to the Company's condensed consolidated financial statements for a
further discussion of the accounting treatment of ARTRA's investment in
COMFORCE.
<PAGE>
Results of Operations
The Company's consolidated financial statements have been reclassified to report
separately the results of operations of Arcar and COMFORCE's discontinued
jewelry business prior to the deconsolidation of COMFORCE and its majority-owned
subsidiaries effective October 1995. Accordingly, the following discussion of
results of operations is presented for the Company's continuing operations at
June 27, 1996, which were conducted by the Company's wholly-owned Bagcraft
subsidiary. Bagcraft sells all of its products directly to its 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.
The following table presents, as a percentage of net sales, operating expenses
and other income (expense) included the Company's earnings (loss) from
continuing operations for the three and six month periods ended June 27, 1996
and June 29, 1995.
Three Months Ended Six Months Ended
------------------ ----------------
June 27, June 29, June 27, June 29,
1996 1995 1996 1995
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Cost of goods sold,
exclusive of depreciation
and amortization 79.5% 83.9% 80.4% 84.2%
Selling, general and administrative 12.9% 14.2% 13.1% 15.0%
Depreciation and amortization 3.0% 3.8% 3.2% 3.7%
----- ----- ----- -----
95.4% 101.9% 96.7% 102.9%
----- ----- ----- -----
Operating earnings (loss) 4.6% -1.9% 3.3% -2.9%
----- ----- ----- -----
Other income (expense):
Interest expense -5.4% -6.0% -5.7% -6.2%
Realized gain on disposal of
available-for-sale securities 10.7% -- 8.6% --
Other income (expense), net -0.2% 0.1% -0.3% 0.1%
----- ----- ----- -----
5.1% -5.9% 2.6% -6.1%
----- ----- ----- -----
Earnings (loss) from
continuing operations
before income taxes
and minority interest 9.7% -7.8% 5.9% -9.0%
Provision for income taxes -0.2% -- -0.1% --
----- ----- ----- -----
Minority interest -1.1% -0.7% 0.3% -0.7%
----- ----- ----- -----
Earnings (loss) from
continuing operations 8.4% -8.5% 6.1% -9.7%
===== ===== ===== =====
Three Months Ended June 27, 1996 vs. Three Months Ended June 29, 1995
Net sales from continuing operations of $32,363,000 for the three months ended
June 27, 1996 were $277,000, or 1.0%, lower than net sales from continuing
operations for the three months ended June 29, 1995. The 1996 sales decrease is
attributable to an overall volume decrease partially offset by increased selling
prices. The volume decrease is principallly attributable to a 1995 promotion by
a major fast food customer. The increased 1996 selling prices were in response
to the significant increases in paper costs in 1995.
The Company's cost of sales from continuing operations of $25,715,000 for the
three months ended June 27, 1996 decreased $1,660,000 as compared to the three
months ended June 29, 1995. Cost of sales from continuing operations in the
three months ended June 27, 1996 was 79.5% of net sales compared to a cost of
sales percentage of 83.9% for the three months ended June 29, 1995.
<PAGE>
The decrease in cost of sales is primarily attributable to lower paper costs and
decreased sales volume as noted above. The decrease in cost of sales percentage
is primarily attributable to lower paper costs and improved production
efficiencies in 1996.
Selling, general and administrative expenses from continuing operations were
$4,172,000 in the three months ended June 27, 1996 as compared to $4,650,000 in
the three months ended June 29, 1995. Selling, general and administrative
expenses were 12.9% of net sales in the three months ended June 27, 1996 as
compared to 14.2% of net sales in the three months ended June 29, 1995. The 1996
decrease in selling, general and administrative expenses is primarily
attributable to professional fees for certain 1995 consulting projects,
partially offset by costs accrued in June 1996 to consolidate Bagcraft's
distribution facilities.
Depreciation and amortization expense from continuing operations was $983,000 in
the three months ended June 27, 1996 as compared to $1,228,000 in the three
months ended June 29, 1995. Depreciation and amortization expense was 3.0 % of
net sales in the three months ended June 27, 1996 as compared to 3.8% of net
sales in the three months ended June 29, 1995. The 1996 decrease in depreciation
and amortization expense is primarily attributable to the December 1995
write-down of idle machinery and equipment dedicated to the production of
microwave popcorn products.
The Company had operating earnings in the three months ended June 27, 1996 of
$1,493,000 as compared to operating loss of $613,000 in the three months ended
June 29, 1995. The 1996 increase in operating earnings is attributable to
improved operating margins and to the decrease in selling, general and
administrative expenses and depreciation and amortization expense as noted
above.
Interest expense from continuing operations in the three months ended June 27,
1996 decreased $223,000 as compared to the three months ended June 29, 1995. The
1996 decrease is principally due to the February 1996 discharge of ARTRA bank
indebtedness, partially offset by loan fees on 1996 short-term borrowings used
to pay down certain debt obligations.
In June 1996, ARTRA sold 100,000 COMFORCE shares in the market. As additional
consideration for two short-term loans, in April 1996 the lenders received
20,000 COMFORCE common shares held by ARTRA. The disposition of these 120,000
COMFORCE shares resulted in realized gains of $3,452,000 during the three months
ended June 27, 1996.
No income tax expense is reflected in the Company's financial statements
resulting from the Company's 1996 earnings from continuing operations due to the
utilization of tax loss carryforwards. 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 pre-tax loss.
Six Months Ended June 27, 1996 vs. Six Months Ended June 29, 1995
Net sales from continuing operations were $60,765,000 for the six months ended
June 27, 1996 as compared to net sales from continuing operations of $60,751,000
for the six months ended June 29, 1995. In 1996, as compared to 1995, the
Company experienced an overall decrease in sales volume, partially offset by
increased selling prices. The 1996 volume decrease is principallly attributable
to a 1995 promotion by a major fast food customer. The increased 1996 selling
prices were in response to the significant increases in paper costs in 1995.
The Company's cost of sales from continuing operations of $48,856,000 for the
six months ended June 27, 1996 decreased $2,298,000 as compared to the six
months ended June 29, 1995. Cost of sales from continuing operations in the six
months ended June 27, 1996 was 80.4% of net sales compared to a cost of sales
percentage of 84.2% for the six months ended June 29, 1995. The decrease in cost
of sales is primarily attributable to lower paper costs and decreased sales
volume as noted above. The decrease in cost of sales percentage is primarily
attributable to lower paper costs and improved production efficiencies in 1996.
Selling, general and administrative expenses from continuing operations were
$7,972,000 in the six months ended June 27, 1996 as compared to $9,129,000 in
the six months ended June 29, 1995. Selling, general and administrative expenses
<PAGE>
were 13.1% of net sales in the six months ended June 27, 1996 as compared to
15.0% of net sales in the six months ended June 29, 1995. The 1996 decrease in
selling, general and administrative expenses is primarily attributable to
professional fees related to certain 1995 consulting projects.
Depreciation and amortization expense from continuing operations was $1,959,000
in the six months ended June 27, 1996 as compared to $2,219,000 in the six
months ended June 29, 1995. Depreciation and amortization expense was 3.2 % of
net sales in the three months ended June 27, 1996 as compared to 3.7% of net
sales in the three months ended June 29, 1995. The 1996 decrease in depreciation
and amortization expense is primarily attributable to the December 1995
write-down of idle machinery and equipment dedicated to the production of
microwave popcorn products.
The Company had operating earnings in the six months ended June 27, 1996 of
$1,978,000 as compared to operating loss of $1,751,000 in the six months ended
June 29, 1995. The 1996 increase in operating earnings is attributable to
improved operating margins and to the decrease in selling, general and
administrative expenses as noted above.
Interest expense from continuing operations in the six months ended June 27,
1996 decreased $287,000 as compared to the six months ended June 29, 1995. The
1996 decrease is principally due to the February 1996 discharge of ARTRA bank
indebtedness, partially offset by loan fees on 1996 short-term borrowings used
to pay down certain debt obligations.
During the six months ended June 27, 1996, ARTRA sold 200,000 of its COMFORCE
common shares to certain officers, directors and key employees of ARTRA for
notes totaling $400,000 and sold 193,000 COMFORCE shares in the market. As
additional consideration for 1996 short-term loans, the lenders received 45,000
COMFORCE common shares held by ARTRA. The disposition of these 438,000 COMFORCE
shares resulted in realized gains of $5,251000 during the six months ended June
27, 1996.
The 1996 and 1995 extraordinary credits represent net gains from discharge of
indebtedness. No income tax expense is reflected in the Company's financial
statements resulting from the extraordinary credits and from the Company's 1996
earnings from continuing operations due to the utilization of tax loss
carryforwards. 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 pre-tax loss.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Cash and cash equivalents decreased $1,360,000 during the six months ended June
27, 1996. Cash flows used by operating activities of $1,971,000 and cash flows
used by financing activities of $2,814,000 exceeded cash flows from investing
activities of $3,425,000. Cash flows used by operating activities were
principally attributable to funds used to pay down accounts payable and accrued
liabilities. Cash flows used by financing activities were principally
attributable to a net reduction of short-term borrowings, partially offset by a
net increase in long-term debt. Cash flows from investing activities principally
represent proceeds from the sale of COMFORCE common stock.
The Company's consolidated working capital deficiency decreased $14,703000 to
$11,662,000 during the six months ended June 27, 1996. The decrease in working
capital deficiency is principally attributable to an agreement to discharge
amounts due on ARTRA bank notes and related accrued interest and fees.
Status of Debt Agreements and Operating Plan
At December 28, 1995 the Company's corporate entity was in default of provisions
of certain of its credit agreements. Under certain debt agreements ARTRA is
limited in the amounts it can withdraw from its Bagcraft operating subsidiary.
In February, 1996, a bank lender agreed to discharge amounts due under bank
notes of the corporate entity ($12,063,000 plus accrued interest and fees) and
certain obligations of the Company's president, Peter R. Harvey. Effective
February 1, 1996, Bagcraft's credit agreement was extended until September 30,
1997. See Notes 6, 7 and 8 to the Company's condensed consolidated financial
statements and discussion below.
<PAGE>
ARTRA Corporate
At December 28, 1995, $12,063,000 in ARTRA notes, plus accrued interest and
fees, were payable to a bank. The notes provided for interest at the prime rate.
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note, and ARTRA discharged $2,150,000 of Mr. Harvey's
prior advances. ARTRA recognized a gain on the discharge of this indebtedness of
$9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a
receivable for Mr. Harvey's prorata share ($1,089,000) of the debt discharge
funded by the Company. The cash payment due the bank was funded principally with
proceeds received from the Bagcraft subsidiary in conjunction with the issuance
of BCA (the parent of Bagcraft) preferred stock (see Note 10) along with
proceeds received from a short-term loan agreement with an unaffiliated company.
As collateral for this advance and other previous advances (see Note 14 to the
Company's condensed consolidated financial statements), Mr. Harvey provided
ARTRA a $2,150,000 security interest in certain real estate, subordinated to the
bank's $850,000 security interest in this real estate.
In conjunction with the discharge of bank debt discussed above, the Company
entered into a $1,900,000 short-term loan agreement with an unaffiliated
company. The loan, due May 26, 1996, with interest at 12% was collateralized by,
among other things, the common stock of ARTRA's BCA subsidiary. As additional
compensation for its loan and for participating in the above discharge of
indebtedness the unaffiliated company received 150,000 shares of ARTRA common
stock (with a then fair market value of $661,000 after a discount for restricted
marketability) and 25,000 shares of COMFORCE common stock held by ARTRA (with a
then fair market value of $200,000). Additionally, for consideration of
$500,000, the lender purchased an option to acquire up to 40% of the common
stock of Bagcraft for nominal consideration. The borrowings under this
short-term loan agreement were repaid in April, 1996 and, per terms of the loan
agreement, ARTRA repurchased the option for a cash payment of $550,000.
In December 1995, ARTRA completed a private placement of $2,500,000 of 12%
convertible subordinated promissory notes due March 21, 1996. As additional
consideration the noteholders received 15,000 ARTRA common shares per each
$100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The
ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the
closing market value of ARTRA common stock on the date of issue, discounted for
restricted marketability. The proceeds from the private placement, held in
escrow at December 28, 1995, were used to pay down other debt obligations in
January, 1996. In March and April 1996 the notes were repaid, principally with
proceeds from the private placement of the secured promissory notes discussed
above.
In April 1996, ARTRA commenced a private placement of $7,575,000 of 12% secured
promissory notes due April 15, 1997, of which $7,375,000 was placed as of June
27, 1996. As additional consideration the noteholders received warrants to
purchase an aggregate of 413,750 ARTRA common shares at a price of $6.00 per
share. The warrants are exercisable August 15, 1996 and expire April 15, 1999.
These promissory notes are collateralized by ARTRA's interest in all of the
common stock of BCA (the parent of Bagcraft). The proceeds from the private
placement, completed in July 1996, were used principally to pay down other debt
obligations.
As discussed in Note 14 to the Company's condensed consolidated financial
statements, ARTRA has total advances due from its president, Peter R. Harvey, of
which $5,072,000 and $5,369,000, including accrued interest, remained
outstanding at June 27, 1996 and December 28, 1995 The advances bear interest at
the prime rate plus 2% (10.25% at June 27, 1996 and 10.5% at December 28, 1995,
respectively). Commencing January 1, 1993 to date, interest on all advances to
Peter R. Harvey has been accrued and fully reserved. This receivable from Peter
R. Harvey has been classified as a reduction of common shareholders' equity.
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>
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 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. During 1995, Peter R. Harvey entered into a pledge agreement with
ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067
shares of ARTRA common stock and 707,281 shares of Pure Tech International,
Inc., a publicly traded corporation. Per terms of a February discharge of bank
indebtedness (see Note 6 to the Company's condensed consolidated financial
statements), ARTRA received additional collateral from Mr. Harvey consisting of
a $2,150,000 security interest in certain real estate, subordinated to the
bank's $850,000 security interest in this real estate.
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
December 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 $4,860,000. 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 10 to the condensed consolidated financial statements,
ARTRA, Bagcraft and Bagcraft's parent BCA have various redeemable preferred
stock issues with an aggregate carrying value of $18,746,000 outstanding at June
27, 1997. 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 1996. 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 and notes, 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.
ARTRA does not currently have available funds to repay amounts due under various
loan arrangements, principally with private investors, some of which are
currently past due. 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.
<PAGE>
Bagcraft
Bagcraft's Credit Agreement that provides for a revolving credit loan and two
separate term loans. The term loans are separate 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. At June 27, 1996,
outstanding borrowings on Term Loan A and Term Loan B were $12,000,000 and
$3,400,000, respectively, with interest rates of 10 % and 11.25% 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
June 27, 1996 and December 28, 1995, approximately $1,800,000 and $6,600,000,
respectively, was available and unused by Bagcraft under the revolving credit
loan. Borrowings under the revolving credit loan bear interest at the lender's
index rate plus 1.5% and are payable upon maturity of the Credit Agreement,
unless accelerated under terms of the Credit Agreement. At June 27, 1996 the
interest rate on the revolving credit loan was 9.75%.
Effective February 1, 1996, the Credit Agreement was amended whereby, among
other things, the maturity date of the Credit Agreement was extended until
September 30, 1997, certain loan covenants were amended. The principal payments
under Term Loan B were modified to include twenty-three monthly installments of
$200,000 from November 15, 1995 to September 30, 1997, with the remaining
balance payable at maturity (September 30, 1997). Additionally, in conjunction
with a preferred stock exchange agreement between BCA (the parent of Bagcraft),
Bagcraft and the holder of Bagcraft's 13.5% cumulative redeemable preferred
stock, the lender consented to an advance to Bagcraft of $4,135,000 under the
revolving credit loan to be transferred to ARTRA as a dividend (see Note 10 to
the Company's condensed consolidated financial statements).
As additional compensation for borrowings under the Credit Agreement, the lender
received a detachable warrant, expiring in December 1998, allowing the holder to
purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal
value. 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 connection with the February 1, 1996
amendment to the Credit Agreement, the warrant agreement was amended to permit
the holder to purchase 13% of the fully diluted common equity of Bagcraft at the
original nominal purchase price and to extend the expiration date to December
17, 1999.
Borrowings under the Credit Agreement are collateralized by substantially all of
the assets of Bagcraft. The Credit Agreement, as amended, contains various
restrictive covenants, that among other restrictions, require Bagcraft to
maintain minimum levels of tangible net worth and liquidity levels, and limits
capital expenditures and restricts additional loans, dividend payments and
payments to related parties. In addition, the Credit Agreement prohibits changes
in ownership of Bagcraft. At June 27, 1996 Bagcraft was in compliance with the
provisions of its Credit Agreement.
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. At June 27, 1996 and December 28, 1995, Bagcraft
had outstanding borrowings of $6,300,000 under this loan agreement.
A $5,000,000 subordinated promissory note payable as follows: $150,000
due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The
subordinated promissory note is non-interest bearing, subject to
certain repayment provisions as defined in the agreement (as amended).
At June 27, 1996 and December 28, 1995, Bagcraft had outstanding
borrowings of $4,850,000 and $5,000,000, respectively, under this loan
agreement.
Two separate $250,000 subordinated promissory notes payable in varying
installments through January 20, 2025. The subordinated promissory
notes are non-interest bearing, subject to certain repayment provisions
as defined in the agreement. At June 27, 1996 and December 28, 1995,
Bagcraft had outstanding borrowings of $237,000 and $494,000,
respectively, under this loan agreement.
<PAGE>
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. Under certain circumstances,
repayment of the borrowings under the above loan agreements is subordinated to
the repayment of obligations under Bagcraft's Credit Agreement. At December 28,
1995 $552,000 of borrowings from the above loan agreements was reflected in the
condensed consolidated balance sheet in current assets as restricted cash and
equivalents. These funds, invested in interest bearing cash equivalents and
restricted for expenditures associated with the Baxter Springs, Kansas project
were expended during the first quarter of 1996. The Kansas facility replaced
Bagcraft's production facilities in Joplin, Missouri and Carteret, NJ.
Bagcraft has historically funded its capital requirements with cash flow from
operations and funds available under its revolving credit loan. These sources
should provide sufficient cash flow to fund Bagcraft's short-term capital
requirements. As discussed above, it is anticipated that Bagcraft's recently
amended Credit Agreement will provide Bagcraft with the ability to fund its
long-term capital requirements.
Bagcraft anticipates that its 1996 capital expenditures, principally for
manufacturing equipment, will be approximately $2,500,000 and will be funded
principally from the above mentioned credit facilities and also from operations.
Investment In COMFORCE Corporation
At December 28, 1995 ARTRA held common stock ownership interest in COMFORCE of
approximately 25%.
During the six months ended June 27, 1996, ARTRA sold 200,000 of its COMFORCE
common shares to certain officers, directors and key employees of ARTRA for
notes totaling $400,000 and sold 193,000 COMFORCE shares in the market. As
additional consideration for 1996 short-term loans, the lenders received 45,000
COMFORCE common shares held by ARTRA. The disposition of these 438,000 COMFORCE
shares resulted in realized gains of $5,251000 during the six months ended June
27, 1996.
At June 27, 1996 ARTRA's remaining investment in COMFORCE (1,983,036 shares
currently a common stock ownership interest of approximately 19%) was classified
in the Company's condensed consolidated balance sheet in noncurrent assets as
"Available-for-sale securities." At June 27, 1996 the gross unrealized gain
relating to ARTRA's investment in COMFORCE, reflected as a separate component of
shareholders' equity, was $50,363,000.
Additionally, in conjunction with the Global acquisition, ARTRA agreed to assume
substantially all pre-existing Lori liabilities and indemnify COMFORCE in the
event any future liabilities arise concerning pre-existing environmental matters
and business related litigation. Accordingly, at June 27, 1996 and December 28,
1995, respectively, $2,254,000 and $4,500,000 of such pre-existing Lori
liabilities were classified in ARTRA's condensed consolidated balance at as
current liabilities of discontinued operations. See Note 5 to the condensed
consolidated financial statements for a further discussion of ARTRA's investment
in COMFORCE.
The common stock and virtually all the assets of the Company and its Bagcraft
subsidiary have been pledged as collateral for borrowings under various loan
agreements. Under certain debt agreements the Company is limited in the amounts
it can withdraw from its operating subsidiaries. At June 27, 1996 and December
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.
Litigation
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. See Note 13 to the Company's consolidated
financial statements. At June 27, 1996 and December 28, 1995, the Company had
accrued $1,800,000 and $1,500,000 respectively, 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.
<PAGE>
Net Operating Loss Carryforwards
At June 27, 1996, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $33,000,000 available to be applied against
future taxable income, if any. ARTRA's tax loss carryforwards of approximately
$22,000,000 expire principally in 2003 - 2010. Additionally, 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.
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.
Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. This new accounting principle is effective for the
Company's fiscal year ending December 26, 1996. The Company believes that
adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock based
compensation is not mandatory, the pronouncement requires companies that choose
not to adopt the new fair value accounting, to disclose the pro-forma net income
and earnings per share under the new method. This new accounting principle is
effective for the Company's fiscal year ending December 26, 1996. The Company
believes that adoption will not have a material impact on its financial
statements as the Company will not adopt the new fair value accounting, but
instead comply with the disclosure requirements.
<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 six months ended June
27, 1996 and June 29, 1995.
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ARTRA GROUP INCORPORATED
________________________
Registrant
Dated: August 14, 1996 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)
Six Months Ended
--------------------
Line June 27, June 29,
- ---- 1996 1995
-------- --------
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of
common stock outstanding during the period 7,435 6,705
2 Net additional shares assuming stock options
and warrants exercised and proceeds used
to purchase treasury shares 399 --
-------- --------
3 Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 7,834 6,705
======== ========
EARNINGS (LOSS)
4 Earnings (loss) from continuing operations $ 3,675 ($ 5,936)
5 Less dividends applicable to
redeemable preferred stock (306) (278)
6 Less redeemable common stock accretion (205) (162)
-------- --------
7 Amount for per share computation $ 3,164 ($ 6,376)
======== ========
8 Earnings (loss) before extraordinary credit $ 3,675 ($13,690)
9 Less dividends applicable to
redeemable preferred stock (306) (278)
10 Less redeemable common stock accretion (205) (162)
-------- --------
11 Amount for per share computation $ 3,164 ($14,130)
======== ========
12 Net earnings (loss) $ 13,099 ($ 4,577)
13 Less dividends applicable to
redeemable preferred stock (306) (278)
14 Less redeemable common stock accretion (205) (162)
-------- --------
15 Amount for per share computation $ 12,588 ($ 5,017)
======== ========
PER SHARE AMOUNTS
Earnings (loss) from continuing operations
(line 7 / line 3) $ 0.38 ($ 0.94)
======== ========
Earnings (loss) before extraordinary credit
(line 11 / line 3) $ 0.38 ($ 2.10)
======== ========
Net earnings (loss)
(line 15 / line 3) $ 1.61 ($ 0.75)
======== ========
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 27, 1996 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> 6-mos
<FISCAL-YEAR-END> DEC-26-1996
<PERIOD-START> DEC-29-1995
<PERIOD-END> JUN-27-1996
<EXCHANGE-RATE> 1.000
<CASH> 987
<SECURITIES> 0
<RECEIVABLES> 10,790
<ALLOWANCES> 227
<INVENTORY> 15,345
<CURRENT-ASSETS> 27,821
<PP&E> 45,132
<DEPRECIATION> 18,898
<TOTAL-ASSETS> 104,261
<CURRENT-LIABILITIES> 39,483
<BONDS> 0
18,746
0
<COMMON> 5,625
<OTHER-SE> (890)
<TOTAL-LIABILITY-AND-EQUITY> 104,261
<SALES> 60,765
<TOTAL-REVENUES> 60,765
<CGS> 48,856
<TOTAL-COSTS> 48,856
<OTHER-EXPENSES> 4,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,484
<INCOME-PRETAX> 3,725
<INCOME-TAX> 50
<INCOME-CONTINUING> 3,675
<DISCONTINUED> 0
<EXTRAORDINARY> 9,424
<CHANGES> 0
<NET-INCOME> 13,099
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 0
</TABLE>
