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 March 28, 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 April 30, 1996
------------------------------- -------------------------------
Common stock, without par value 7,492,418
<PAGE>
ARTRA GROUP INCORPORATED
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 28, 1996 and December 28, 1995 2
Condensed Consolidated Statements of Operations
Three Months Ended March 28, 1996
and March 30, 1995 4
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Three Months Ended March 28, 1996 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 28, 1996
and March 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
March 28, December 28,
1996 1995
---------- -----------
ASSETS
Current assets:
Cash and equivalents $71 $2,347
Restricted cash and equivalents - 552
Receivables, less allowance for doubtful
accounts of $203 in 1996 and $250 in 1995 10,502 10,897
Inventories 17,174 16,634
Available -for-sale securities - 1,427
Other 593 324
---------- -----------
Total current assets 28,340 32,181
---------- -----------
Property, plant and equipment 44,680 44,273
Less accumulated depreciation and amortization 18,009 17,335
---------- -----------
26,671 26,938
---------- -----------
Other assets:
Available -for-sale securities 19,830 15,519
Excess of cost over net assets acquired,
net of accumulated amortization of
$1,854 in 1996 and $1,778 in 1995 3,182 3,258
Other 121 53
---------- -----------
23,133 18,830
---------- -----------
$78,144 $77,949
========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
March 28, December 28,
1996 1995
---------- -----------
LIABILITIES
Current liabilities:
Notes payable, including amounts due to
related parties of $3,125 in 1996
and $5,675 in 1995 $12,697 $25,300
Current maturities of long-term debt 3,246 3,512
Accounts payable, including amounts due to a
related party of $389 in 1996 and $399 in 1995 12,166 10,925
Accrued expenses 10,244 14,106
Income taxes 415 203
Liabilities of discontinued operations 3,145 4,500
----------- -----------
Total current liabilities 41,913 58,546
----------- -----------
Long-term debt 37,551 34,113
Other noncurrent liabilities 1,065 650
Commitments and contingencies
Redeemable common stock, issued 283,965 shares 4,860 4,774
ARTRA redeemable preferred stock payable to a
related party, $1,000 par value; Series A,
6% cumulative payment-in-kind, including
accumulated dividends,net of unamortized
discount of $1,504 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 3,842 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 1,920 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 4,198 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 8,266 -
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value;
authorized 7,500,000 shares;
issued 7,216,035 shares in 1996 and
7,102,979 shares in 1995 5,625 5,540
Additional paid-in capital 38,546 38,526
Unrealized appreciation of investments 23,365 21,047
Receivable from related party,
including accrued interest (4,294) (4,318)
Accumulated deficit (88,606) (98,755)
----------- -----------
(25,364) (37,960)
Less treasury stock (7,582 shares in 1996 and
57,038 shares in 1995), at cost 107 805
----------- -----------
(25,471) (38,765)
----------- -----------
$78,144 $77,949
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
-----------------------
March 28, March 30,
1996 1995*
--------- ----------
Net sales $28,402 $28,111
--------- ----------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization 23,141 23,779
Selling, general and administrative 3,800 4,479
Depreciation and amortization 976 991
--------- ----------
27,917 29,249
--------- ----------
Operating earnings (loss) 485 (1,138)
--------- ----------
Other income (expense):
Interest expense (1,747) (1,811)
Realized gain on disposal of
available-for-sale securities 1,799 -
Other income (expense), net (131) 8
--------- ----------
(79) (1,803)
--------- ----------
Earnings (loss) from continuing operations
before income taxes and minority interest 406 (2,941)
Provision for income taxes - -
Minority interest 553 (224)
--------- ----------
Earnings (loss) from continuing operations 959 (3,165)
Earnings from discontinued operations - 75
--------- ----------
Earnings (loss) before extraordinary credit 959 (3,090)
Extraordinary credit, net discharge of indebtedness 9,424 9,113
--------- ----------
Net earnings 10,383 6,023
Dividends applicable to redeemable preferred stock (148) (135)
Reduction of retained earnings applicable to
redeemable common stock (86) (78)
--------- ----------
Earnings applicable to common shares $10,149 $5,810
========= ==========
Earnings (loss) per share:
Continuing operations $0.09 ($0.50)
Discontinued operations - 0.01
--------- ----------
Earnings (loss) before extraordinary credit 0.09 (0.49)
Extraordinary credit 1.23 1.35
--------- ----------
Net earnings $1.32 $0.86
========= ==========
Weighted average number of shares of common stock
and common stock equivalents outstanding 7,673 6,705
========= ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
______________________________________________
* As reclassified for discontinued operations.
<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 - - - - - 10,383 - - 10,383
Common stock issued
to pay liabilities 47,512 36 244 - - - - - 280
Common stock as additional
consideration for
short-term borrowings 50,544 38 (295) - - - (49,456) 698 441
Net decrease in receivable
from related party,
including accrued interest - - - - 24 - - - 24
Increase in unrealized
appreciation of investments - - - 2,318 - - - - 2,318
Exercise of stock options 15,000 11 71 - - - - - 82
Redeemable common
stock accretion - - - - - (148) - - (148)
Redeemable preferred
stock dividends - - - - - (86) - - (86)
---------- ------- -------- --------- --------- ----------- ------- ------ ----------
Balance at March 28, 1996 7,216,035 $5,625 $38,546 $23,365 ($4,294) ($88,606) 7,582 ($107) ($25,471)
========== ======= ======== ========= ========= =========== ======= ====== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Three Months Ended
-----------------------
March 28, March 30,
1996 1995
--------- ---------
Net cash flows from (used by)
operating activities, ($648) $455
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (719) (647)
Retail fixtures - (338)
Proceeds from sale of COMFORCE common stock 633 -
Payment of liabilites with restricted cash - 550
Decrease in unexpended plant construction funds 552 263
Other 37 -
--------- ---------
Net cash flows from (used by) investing activities 503 (172)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term debt (5,571) 1,460
Proceeds from long-term borrowings 35,914 31,746
Reduction of long-term debt (32,557) (35,406)
Other 83 176
--------- ---------
Net cash flows used by financing activities (2,131) (2,024)
--------- ---------
Decrease in cash and cash equivalents (2,276) (1,741)
Cash and equivalents, beginning of period 2,347 2,070
--------- ---------
Cash and equivalents, end of period $71 $329
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $2,396 $1,487
Income taxes paid, net 8 5
Supplemental schedule of noncash
investing and financing activities:
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 280 174
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<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 March 28, 1996, and the
results of operations and changes in cash flows for the three month periods
ended March 28, 1996 and March 30, 1995. 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 subsidiaries, 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 62.9% owned subsidiary, The 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 March 28, 1996 ARTRA's common stock ownership
interest in COMFORCE common stock was reduced to approximately 21%. 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 certain obligations of ARTRA's
president, Peter R. Harvey for ARTRA's cash payment of $5,050,000, Mr. Harvey's
cash payment of $100,000 and Mr. Harvey's $850,000 note payable to the bank.
ARTRA recognized a gain 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 March 28, 1996 and December 28,
1995, respectively, $3,145,000 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.
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 21% and 25% at March 28, 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 months ended March 30, 1995 consist of:
Net sales $ 6,964
=========
Loss from discontinued operations
before income taxes $ 85
Provision for income taxes
(10)
---------
Earnings from discontinued operations $ 75
=========
3. CONCENTRATION OF RISK
The accounts receivable of the Company's Bagcraft subsidiary at March 28, 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
in the food industry. At March 28, 1996, Bagcraft had 10 customers with accounts
receivable balances that aggregated approximately 40% of the Company's total
trade accounts receivable. In fiscal year 1995 no single customer accounted for
10% or more of Bagcraft's sales.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
4. INVENTORIES
Inventories (in thousands) consist of:
March 28, December 28,
1996 1995
------- -------
Raw materials and supplies $ 4,649 $ 5,645
Work in process 230 40
Finished goods 12,295 10,949
------- -------
$17,174 $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 is not
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 will 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 8)
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.
At March 28, 1996 and December 28, 1995 ARTRA's remaining investment in COMFORCE
(1,983,036 shares, currently a 21% common stock ownership interest) was
classified in the Company's condensed consolidated balance sheet in noncurrent
assets as "Available-for-sale securities." At March 28, 1996 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $23,365,000.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 certain obligations of ARTRA's
president, Peter R. Harvey for ARTRA's cash payment of $5,050,000, Mr. Harvey's
cash payment of $100,000 and Mr. Harvey's $850,000 note payable to the bank.
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 Holdings, Inc. (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:
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
========
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. 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.
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.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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:
March 28, December 28,
1996 1995
------- -------
ARTRA bank notes payable,
at various interest rates $ - $ 12,063
Amounts due to related parties,
interest from 8% to 12% 3,125 5,675
ARTRA 12% convertible
subordinated promissory notes
1,975 2,500
Other, interest from 8% to 20% 7,597 5,062
------- -------
$ 12,697 $ 25,300
======= =======
Bank Notes Payable
At December 28, 1995, $12,063,000 of ARTRA notes, plus accrued interest, 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 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 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 certain obligations of ARTRA's
president, Peter R. Harvey for ARTRA's cash payment of $5,050,000, Mr. Harvey's
cash payment of $100,000 and Mr. Harvey's $850,000 note payable to the bank.
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 Holdings, Inc.
(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 his advance and other previous advances (see Note 14), Mr. Harvey
provided ARTRA a $2,150,000 security interest in certain real estate.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Amounts Due To Related Parties
At March 28, 1996 and December 28, 1995, the Company had outstanding borrowings
from its Chairman, John Harvey, of $125,000 and $175,000, respectively. Since
January, 1995, John Harvey's borrowings have been evidenced by unsecured
short-term notes bearing interest at 12%. As additional compensation the loans
provide for the issuance of warrants to purchase ARTRA common shares, the number
of which is determined by the number of days the loans are outstanding. The
warrants expire five years from the date of issuance. Through April 30, 1996,
John Harvey has 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.
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 ($19.50 per share at March 28, 1996). The $2,500,000 note payable
to the private corporation is reflected in the above table 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 March 28, 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.
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. In the event the notes and all accrued interest is not
paid in full at maturity, the noteholders have the option to convert all or a
portion of the amount due into shares of ARTRA common at a conversion price of
$3.00 per share. The proceeds from the private placement, held in escrow at
December 28, 1995, were used to pay down other debt obligations in January,
1996. At March 28, 1996, the outstanding principal amount due on these notes was
reduced to $1,975,000. In April 1996 the remaining outstanding notes were
repaid, principally with proceeds from a new private placement of ARTRA notes.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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% is 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 a cash payment of
$500,000 to ARTRA, 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 March 28, 1996 and December 28, 1995, other notes payable includes short-term
borrowings of $5,197,000 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 8% to 20%.
8. LONG-TERM DEBT
Long-term debt (in thousands) consists of:
March 28, 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% 4,000 4,600
Revolving credit loan,
interest at the prime rate plus 1.5% 13,341 9,231
Unamortized discount (185) -
Bagcraft
City of Baxter Springs, Kansas
loan agreements,
interest at varying rates 11,641 11,794
------- -------
40,797 37,625
Current scheduled maturities (3,246) (3,512)
------- -------
$ 37,551 $ 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 March 28, 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
March 28, 1996 and December 28, 1995, approximately $277,000 and $6,600,000,
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 March 28, 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
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 March 28, 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 March 28, 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 March 28, 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 March 28, 1996 and December 28, 1995,
Bagcraft had outstanding borrowings of $491,000 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,
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 March 28, 1996
and 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 $4,860,000 and $4,774,000, respectively.
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 $1,596,000 and $1,519,000 were
accrued at March 28, 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 $1,055,000 were outstanding at
March 28, 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
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(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, 1996. Accumulated
dividends of $131,000 were accrued at March 28, 1996.
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.
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 March 28, 1996, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $36,000,000 available to be applied against
future taxable income, if any. ARTRA's tax loss carryforwards of approximately
$25,000,000 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 March 28, 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. 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
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
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 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.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 March 28, 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.
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,
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
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:
March 28, December 28,
1996 1995
-------- --------
(in thousands)
Total advances, including accrued interest $ 5,451 $ 5,369
Less interest for the period
January 1, 1993 to date,
accrued and fully reserved (1,157) (1,051)
-------- --------
Net advances $ 4,294 $ 4,318
======== ========
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA has total advances due from its president, Peter R. Harvey, of which
$5,451,000 and $5,369,000, including accrued interest, remained outstanding at
March 28, 1996 and December 28, 1995 The advances bear interest at the prime
rate plus 2% (10.25% at March 28, 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. The debt
discharge was principally funded by ARTRA.
In May, 1991, ARTRA's wholly-owned Fill-Mor subsidiary made advances to Peter R.
Harvey. The advances provided for interest at the prime rate plus 2%. At March
30, 1995 advances of $1,540,000, including accrued interest, were outstanding.
In April, 1995, these advances from ARTRA's Fill-Mor subsidiary to Peter R.
Harvey were transferred to ARTRA as a dividend.
Commencing January 1, 1993 to date, interest on all advances to Peter R. Harvey
has been accrued and fully reserved. Interest accrued and fully reserved on the
advances to Peter R. Harvey for the three months ended March 28, 1996 and March
30, 1995 totaled $106,000 and $104,000, 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.
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did
not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey.
The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of
Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of
Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan
agreement, a condition of which was the application of a portion of the proceeds
thereof to the payment of certain of Mr. Harvey's loan obligations to the bank.
However, the resolutions did not acknowledge the use of such proceeds for this
purpose and the formal loan documents with the bank did not set forth this
condition (though in fact, the proceeds were so applied by the bank).
As partial collateral for amounts due from Peter R. Harvey, the Company has
received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a
liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr.
Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial
Communication Company (a private company). Such interest is valued by Mr. Harvey
at $800,000 to $1,000,000. 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 Puretech
International, Inc., a publicly traded corporation. In February 1996, as
collateral for a 1996 advance representing Mr. Harvey's prorata share of debt
discharged by a bank and other previous advances, Mr. Harvey provided ARTRA a
$2,150,000 security interest in certain 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 March 28, 1996 and December 28, 1995, respectively, $3,145,000 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 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
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 21% and 25% at March 28, 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>
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Cash and cash equivalents decreased $2,276,000 during the three months ended
March 28, 1996. Cash flows used by operating activities of $648,000 and cash
flows used by financing activities of $2,131,000 exceeded cash flows from
investing activities of $503,000. Cash flows used by operating activities were
principally attributable to a reduction of debt obligations, exclusive of bank
debt discharged. 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 $12,792,000 to
$13,573,000 during the three months ended March 28, 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.
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 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.
ARTRA Corporate
At December 28, 1995, $12,063,000 in ARTRA notes, plus accrued interest, 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 certain obligations of ARTRA's
president, Peter R. Harvey for ARTRA's cash payment of $5,050,000, Mr. Harvey's
cash payment of $100,000 and Mr. Harvey's $850,000 note payable to the bank.
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 Holdings, Inc.
("BCA", the parent of Bagcraft) preferred stock (see Notes 6 and 10 to the
Company's condensed consolidated financial statements) along with proceeds
received from a short-term loan agreement with an unaffiliated company. As
collateral for his 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.
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% is 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 a cash payment of
$500,000 to ARTRA, 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
<PAGE>
$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. In the event the notes and all accrued interest is not
paid in full at maturity, the noteholders have the option to convert all or a
portion of the amount due into shares of ARTRA common at a conversion price of
$3.00 per share. The proceeds from the private placement, held in escrow at
December 28, 1995, were used to pay down other debt obligations in January,
1996. At March 28, 1996, the outstanding principal amount due on these notes was
reduced to $1,975,000. In April, 1996, the remaining outstanding notes were
repaid principally with proceeds from a new private placement of ARTRA notes.
In April 1996, ARTRA completed a private placement of approximately $6,700,000
of 12% promissory notes due April 15, 1997. The notes are collateralized by
ARTRA's interest in all of the common stock of BCA Holdings, Inc. (the parent of
Bagcraft. As additional consideration the noteholders received warrants to
purchase an aggregate of 335,000 ARTRA common shares at a price of $6.00 per
share. The warrants become exercisable August 15, 1996 and expire April 15,
1999. The proceeds from this private placement were used to pay down various
ARTRA 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 $5,451,000 and $5,369,000, including accrued interest, remained
outstanding at March 28, 1996 and December 28, 1995 The advances bear interest
at the prime rate plus 2% (10.25% at March 28, 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.
In May, 1991, ARTRA's wholly-owned Fill-Mor subsidiary made advances to Peter R.
Harvey. The advances provided for interest at the prime rate plus 2%. At March
30, 1995 advances of $1,540,000, including accrued interest, were outstanding.
In April, 1995, these advances from ARTRA's Fill-Mor subsidiary to Peter R.
Harvey were transferred to ARTRA as a dividend.
Commencing January 1, 1993 to date, interest on all advances to Peter R. Harvey
has been accrued and fully reserved.
Peter R. Harvey has not received other than nominal compensation for his
services as an officer or director of ARTRA or any of its subsidiaries since
October of 1990. Additionally, Mr. Harvey has agreed not to accept any
compensation for his services as an officer or director of ARTRA or any of its
subsidiaries until his obligations to ARTRA, described above, are fully
satisfied.
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania
corporation) is permitted to make loans to officers and directors. Further,
under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is
permitted to make loans to an officer (including any officer who is also a
director, as in the case of Peter R. Harvey), whenever, in the judgment of the
directors, the loan can reasonably be expected to benefit Fill-Mor.
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did
not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey.
The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of
Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of
Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan
agreement, a condition of which was the application of a portion of the proceeds
thereof to the payment of certain of Mr. Harvey's loan obligations to the bank.
However, the resolutions did not acknowledge the use of such proceeds for this
purpose and the formal loan documents with the bank did not set forth this
condition (though in fact, the proceeds were so applied by the bank).
As partial collateral for amounts due from Peter R. Harvey, the Company has
received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a
liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr.
Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial
Communication Company (a private company). Such interest is valued by Mr. Harvey
at $800,000 to $1,000,000. 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 Puretech
International, Inc., a publicly traded corporation. As additional collateral for
the above mentioned advances and a 1996 advance for Mr. Harvey's prorata of
certain bank debt discharged, Mr. Harvey provided ARTRA a $2,150,000 security
interest in certain real estate.
<PAGE>
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 $18,226,000 outstanding at
March 28, 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.
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 March 28, 1996,
outstanding borrowings on Term Loan A and Term Loan B were $12,000,000 and
$4,000,000, 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
March 28, 1996 and December 28, 1995, approximately $277,000 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 March 28, 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).
<PAGE>
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 March 28, 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 March 28, 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 March 28, 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 March 28, 1996 and December 28, 1995,
Bagcraft had outstanding borrowings of $491,000 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.
The Kansas facility replaced Bagcraft's production facilities in Joplin,
Missouri and Carteret, NJ. Additionally, Bagcraft converted its former
manufacturing facility in Forest Park, Georgia into a distribution facility.
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.
<PAGE>
Investment In COMFORCE Corporation
At December 28, 1995 ARTRA held common stock ownership interest in COMFORCE of
approximately 25%.
In February 1996, ARTRA sold 200,000 COMFORCE common shares COMFORCE to certain
officers, directors and key employees of ARTRA for notes totaling $400,000. As
additional consideration for a February 1996 short-term loan the 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.
At March 28, 1996 ARTRA's remaining investment in COMFORCE (1,983,036 shares,
currently a 21% common stock ownership interest) was classified in the Company's
condensed consolidated balance sheet in noncurrent assets as "Available-for-sale
securities." At March 28, 1996 the gross unrealized gain relating to ARTRA's
investment in COMFORCE, reflected as a separate component of shareholders'
equity, was $23,365,000.
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 March 28, 1996 and December 28,
1995, respectively, $3,145,000 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 March 28, 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 March 28, 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.
Net Operating Loss Carryforwards
At March 28, 1996, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $36,000,000 available to be applied against
future taxable income, if any. ARTRA's tax loss carryforwards of approximately
$25,000,000 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.
<PAGE>
Results of Operations
On October 26, 1995, Bagcraft, completed the sale of the business assets,
subject to the buyer's assumption of certain liabilities, of its Arcar
subsidiary.
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 jewelry business.
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 following discussion of results of
operations is presented for the Company's continuing operations at March 28,
1996, which were conducted by the Company's wholly-owned Bagcraft subsidiary.
The Company's Bagcraft subsidiary 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.
Three Months Ended March 28, 1996 vs. Three Months Ended March 30, 1995
Net sales from continuing operations of $28,402,000 for the three months ended
March 28, 1996 were $291,000, or 1.0%, higher than net sales from continuing
operations for the three months ended March 30, 1995. The 1996 sales increase is
attributable to several 1995 price increases in response to the significant
increases in paper costs in the second half of 1994 and in early 1995 and to
increased international sales in 1996.
The Company's cost of sales from continuing operations of $23,141,000 for the
three months ended March 28, 1996 decreased $638,000 as compared to the three
months ended March 30, 1995. Cost of sales from continuing operations in the
three months ended March 28, 1996 was 81.5% of net sales compared to a cost of
sales percentage of 84.6% for the three months ended March 30, 1995. The
decrease in cost of sales and 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
$3,800,000 in the three months ended March 28, 1996 as compared to $4,479,000 in
the three months ended March 30, 1995. Selling, general and administrative
expenses were 13.4% of net sales in the three months ended March 28, 1996 as
compared to 15.0% of net sales in the three months ended March 30, 1995. The
1996 decrease in selling, general and administrative expenses is primarily
attributable to professional fees related to certain consulting projects during
1995.
The Company had operating earnings in the three months ended March 28, 1996 of
$485,000 as compared to operating loss of $1,138,000 in the three months ended
March 30, 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 three months ended March 28,
1996 decreased $64,000 as compared to the three months ended March 30, 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.
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.
<PAGE>
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 three months ended March 28, 1996 and
March 30, 1995.
(b) Reports on Form 8-K:
On February 6, 1996 the Company filed Form 8-K/A, Amendment
No. 2, to amend its Form 8-K dated October 17, 1995 to
provide item 7(a) Financial Statements of Business Acquired
and item 7(b) Pro Forma Financial Information relating to
COMFORCE Corporation's acquisition of COMFORCE Global, Inc.
<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: May 20, 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)
Three Months Ended
-------------------
Line March 28, March 30,
1996 1995*
--------- -------- -------
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of
common stock outstanding during the period 7,401 6,689
2 Net additional shares assuming stock options
and warrants exercised and proceeds
used to purchase treasury shares 272 52
--------- --------
3 Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 7,673 6,741
========= ========
EARNINGS (LOSS)
4 Earnings (loss )from continuing operations 959 (3,165)
5 Less dividends applicable
to redeemable preferred stock (148) (135)
6 Less redeemable common stock accretion (86) (78)
========= ========
7 Amount for per share computation $725 ($3,378)
========= ========
8 Earnings (loss) before extraordinary credit 959 (3,089)
9 Less dividends applicable
to redeemable preferred stock (148) (135)
10 Less redeemable common stock accretion (86) (78)
========= ========
11 Amount for per share computation $725 ($3,302)
========= ========
12 Net earnings $10,383 $6,023
13 Less dividends applicable
to redeemable preferred stock (148) (135)
14 Less redeemable common stock accretion (86) (78)
--------- --------
15 Amount for per share computation $10,149 5,810
========= ========
PER SHARE AMOUNTS
Earnings (loss) from continuing operations
(line 7 / line 3) $0.09 ($0.50)
========= ========
Earnings (loss) before extraordinary credit
(line 11 / line 3) $0.09 ($0.49)
========= ========
Net earnings
(line 15 / line 3) $1.32 $0.86
========= ========
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.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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