SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 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 October 31, 1996
------------------------------- -------------------------------
Common stock, without par value 7,694,872
<PAGE>
ARTRA GROUP INCORPORATED
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 26, 1996 and December 28, 1995 2
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended
September 26, 1996 and September 28, 1995 4
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Nine Months Ended September 26, 1996 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 26, 1996
and September 28, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 37
SIGNATURES 38
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
September 26, December 28,
1996 1995
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 99 $2,347
Restricted cash and equivalents -- 552
Receivables, less allowance for doubtful
accounts of $301 in 1996 and $250 in 1995 9,071 10,897
Inventories 15,211 16,634
Available-for-sale securities -- 1,427
Other 1,108 324
-------- -------
Total current assets 25,489 32,181
-------- -------
Property, plant and equipment 45,645 44,273
Less accumulated depreciation and amortization 19,795 17,335
-------- -------
25,850 26,938
-------- -------
Other assets:
Available -for-sale securities 31,728 15,519
Excess of cost over net assets acquired,
net of accumulated amortization of
$2,007 in 1996 and $1,778 in 1995 3,029 3,258
Other 35 53
-------- -------
34,792 18,830
-------- -------
$86,131 $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)
September 26, December 28,
1996 1995
-------- --------
LIABILITIES
Current liabilities:
Notes payable, including amounts due to related
parties of $3,600 in 1996 and $5,675 in 1995 $15,518 $25,300
Current maturities of long-term debt 2,407 3,512
Accounts payable, including amounts due to a
related party of $399 in 1995 7,645 10,925
Accrued expenses 9,667 14,106
Income taxes 367 203
Liabilities of discontinued operations 764 4,500
------- -------
Total current liabilities 36,368 58,546
------- -------
Long-term debt 34,541 34,113
Other noncurrent liabilities 1,750 650
Commitments and contingencies
Redeemable common stock,
issued 98,734 shares in 1996
and 283,965 shares in 1995 3,565 4,774
ARTRA redeemable preferred stock:
Series A, $1,000 par value,
6% cumulative payment-in-kind, including
accumulated dividends, net of unamortized
discount of $1,349 in 1996 and
$1,575 in 1995; redeemable March 1, 2000
at $1,000 per share plus accrued dividends;
authorized 2,000,000 shares all series;
issued 3,750 shares 4,157 3,694
Series E, $1,000 par value, 10% cumulative,
liquidation preference equal to $1,000
or 200 shares of common stock per
share, plus accrued dividends;
convertible, at the holder's option into
200 shares of common stock per share 2,250 --
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 1,978 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 4,308 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 8,818 --
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value;
authorized 20,000,000 shares in 1996
and 7,500,000 shares in 1995;
issued 7,603,766 shares in 1996
and 7,102,979 shares in 1995 5,777 5,540
Additional paid-in capital 40,140 38,526
Unrealized appreciation of investments 34,960 21,047
Receivable from related party,
including accrued interest (5,861) (4,318)
Accumulated deficit (86,568) (98,755)
-------- --------
(11,552) (37,960)
Less treasury stock (7,628 shares in 1996
and 57,038 shares in 1995), at cost 52 805
-------- --------
(11,604) (38,765)
-------- --------
$86,131 $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
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
Sept 26, Sept 28, Sept 26, Sept 28,
1996 1995* 1996 1995*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 29,397 $ 29,952 $ 90,162 $ 90,703
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization 22,854 25,717 71,710 76,871
Selling, general and administrative 2,995 6,843 10,967 15,972
Depreciation and amortization 995 1,087 2,954 3,306
-------- -------- -------- --------
26,844 33,647 85,631 96,149
-------- -------- -------- --------
Operating earnings (loss) 2,553 (3,695) 4,531 (5,446)
-------- -------- -------- --------
Other income (expense):
Interest expense (1,886) (2,621) (5,370) (6,392)
Realized gain on disposal
of available-for-sale securities 328 -- 4,823 --
Other income (expense), net 5 (32) (205) 1
-------- -------- -------- --------
(1,553) (2,653) (752) (6,391)
-------- -------- -------- --------
Earnings (loss) from continuing operations
before income taxes and minority interest 1,000 (6,348) 3,779 (11,837)
Provision for income taxes (37) (36) (87) (35)
Minority interest (359) (223) (169) (671)
-------- -------- -------- --------
Earnings (loss) from continuing operations 604 (6,607) 3,523 (12,543)
Loss from discontinued operations -- (1,402) -- (9,156)
--------
-------- -------- -------- --------
Earnings (loss) before extraordinary credit 604 (8,009) 3,523 (21,699)
Extraordinary credit, net discharge of indebtedness -- -- 9,424 9,113
-------- -------- -------- --------
Net earnings (loss) 604 (8,009) 12,947 (12,586)
Dividends applicable to
redeemable preferred stock (157) (144) (463) (422)
Reduction of retained earnings
applicable to redeemable common stock (92) (84) (297) (246)
-------- -------- -------- --------
Earnings (loss) applicable to common shares $ 355 ($ 8,237) $ 12,187 ($13,254)
======== ======== ======== ========
Earnings (loss) per share:
Continuing operations $ 0.04 ($ 1.02) $ 0.32 ($ 1.96)
Discontinued operations -- (0.20) -- (1.36)
-------- -------- -------- --------
Earnings (loss) before extraordinary credit 0.04 (1.22) 0.32 (3.32)
Extraordinary credit -- -- 1.23 1.35
-------- -------- -------- --------
Net earnings (loss) $ 0.04 ($ 1.22) $ 1.55 ($ 1.97)
======== ======== ======== ========
Weighted average number of shares of common stock and
common stock equivalents outstanding 7,949 6,730 7,870 6,712
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
- --------------------
* 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 -- -- -- -- -- 12,947 -- -- 12,947
Common stock issued
to pay liabilities 125,012 94 362 -- -- -- (120,554) 818 1,274
Common stock as
additional consideration
for short-term borrowings 50,544 38 (398) -- -- -- (99,456) 1,021 661
Increase in receivable from
related party,
including accrued interest -- -- -- -- (1,543) -- -- -- (1,543)
Common stock loaned
by related party -- -- -- -- 587 -- 100,000 (587) --
Repay common stock
loaned by related party 100,000 75 512 -- (587) -- -- -- --
Increase in unrealized
appreciation of investments -- -- -- 13,913 -- -- -- -- 13,913
Exercise of stock options
and warrants 40,000 30 142 -- -- -- (16,900) 109 281
Common stock received
as consideration
for short-term note -- -- -- -- -- -- 87,500 (608) (608)
Reclassification of
redeemable common stock 185,231 -- 996 -- -- -- -- -- 996
Redeemable common
stock accretion -- -- -- -- -- (297) -- -- (297)
Redeemable preferred
stock dividends -- -- -- -- -- (463) -- -- (463)
--------- ------ ------- --------- ------- -------- --------- ------- ---------
Balance at September 26, 1996 7,603,766 $5,777 $40,140 $ 34,960 ($5,861) ($86,568) 7,628 ($ 52) $ (11,604)
========= ====== ======= ========= ======= ========= ========= ======== =========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Nine Months Ended
-------------------------
September 26, September 28,
1996 1995
--------- ---------
Net cash flows used by operating activities, ($ 4,516) ($ 284)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,797) (1,892)
Retail fixtures -- (631)
Proceeds from collection of Welch notes 342 3,000
Proceeds from sale of COMFORCE common stock 3,717 --
Investment in COMFORCE Global -- (753)
Payment of liabilites with restricted cash -- 550
Decrease in unexpended plant construction funds 552 224
Other 91 --
--------- ---------
Net cash flows from investing activities 2,905 498
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term debt (577) 1,564
Proceeds from long-term borrowings 99,497 101,406
Reduction of long-term debt (99,327) (104,813)
Exercise of stock options and warrants 281 --
Redeemable common stock options exercised (510) (70)
Other (1) (289)
--------- ---------
Net cash flows used by financing activities (637) (2,202)
--------- ---------
Decrease in cash and cash equivalents (2,248) (1,988)
Cash and equivalents, beginning of period 2,347 2,070
--------- ---------
Cash and equivalents, end of period $ 99 $ 82
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 4,388 $ 4,793
Income taxes paid, net 8 18
Supplemental schedule of noncash
investing and financing activities:
ARTRA Series E redeemable preferred stock
issued for payment of short-term notes 2,250 --
BCA Holdings redeemable preferred stock
issued in exchange for Bagcraft
redeemable preferred stock 8,135 --
Issue common stock
to pay down current liabilities 1,274 208
Issue common stock as additional
consideration for short-term borrowings 661 --
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 September 26, 1996, and
the results of operations and changes in cash flows for the three and nine month
periods ended September 26, 1996 and September 28, 1995. In recent years, the
Company has suffered recurring losses from operations and has a net capital
deficiency. As a result of these factors, the Company has experienced difficulty
in obtaining adequate financing to replace certain current credit arrangements,
certain of which are in default, to fund its debt service and liquidity
requirements in 1996. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty. See Note
7 Notes Payable, and Note 8 Long Term Debt, for further discussion of the status
of credit arrangements and restrictions on the ability of the Company's
operating subsidiary to fund ARTRA corporate obligations. Due to its limited
ability to receive operating funds from its operating subsidiary, ARTRA has
historically met its operating expenditures with funds generated by alternative
sources, such as private placements of ARTRA common stock and notes, sales of
ARTRA common stock with put options, loans from officers/directors and private
investors, as well as through sales of assets and/or other equity infusions.
ARTRA plans to continue to seek such alternative sources of funds to meet its
future operating expenditures.
ARTRA, through its wholly-owned subsidiary, Bagcraft Corporation of America
("Bagcraft"), currently operates in one industry segment as a manufacturer of
packaging products principally serving the food industry. Prior to September 28,
1995, ARTRA's then majority owned subsidiary, COMFORCE Corporation ("COMFORCE",
formerly The Lori Corporation "Lori"), operated as a designer and distributor of
popular-priced fashion costume jewelry and accessories. In September 1995
COMFORCE adopted a plan to discontinue its jewelry business.
On October 17, 1995, COMFORCE acquired all of the capital stock of COMFORCE
Global Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD
Global. Global provides telecommunications and computer technical staffing
services worldwide to Fortune 500 companies and maintains an extensive, global
database of technical specialists with an emphasis on wireless communications
capability.
Effective July 4, 1995, COMFORCE and ARTRA entered into employment or consulting
services agreements with certain individuals to manage Lori's entry into and
development of the telecommunications and computer technical staffing services
business. As additional compensation, the agreements provided for the issuance
in aggregate of a 35% common stock interest in COMFORCE. After the issuance of
the COMFORCE common shares, plus the effects of the issuance of COMFORCE common
shares sold by private placements and other COMFORCE common shares issued in
conjunction with the Global acquisition, ARTRA's common stock ownership interest
in COMFORCE common stock was reduced to approximately 25% at December 28, 1995.
Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned
subsidiaries were deconsolidated from ARTRA's consolidated financial statements
and ARTRA's investment in COMFORCE was accounted for under the equity method
through the end of fiscal 1995. At September 26, 1996 ARTRA's common stock
ownership interest in COMFORCE common stock was reduced to approximately 19%.
See Notes 2 and 5 for a further discussion of ARTRA's investment in COMFORCE.
Effective October 26, 1995, Bagcraft completed the sale of the business assets,
subject to the buyer's assumption of certain liabilities, of its wholly-owned
subsidiary, Arcar Graphics, Inc. ("Arcar"), for cash of approximately
$20,300,000. The net proceeds, after extinguishment of certain Arcar debt
obligations, of approximately $10,400,000, were used to reduce Bagcraft debt
obligations.
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey, resulting in a gain to ARTRA on the discharge of
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
this indebtedness of $9,424,000 in the first quarter of 1996. The cash payment
due the bank was funded principally with proceeds received from a short-term
loan agreement along with proceeds received from the Bagcraft subsidiary in
conjunction with the issuance of BCA Holdings, Inc. ("BCA" the parent of
Bagcraft) preferred stock. See Notes 6, 7 and 10 for further discussions of
these transactions.
ARTRA intends to continue to negotiate with its creditors to extend due dates to
allow ARTRA to maximize value from possible sale of assets and to explore
various other sources of funding to meet its future operating expenditures. If
ARTRA is unable to negotiate extensions with its creditors and complete certain
transactions, ARTRA could suffer severe adverse consequences, and as a result,
ARTRA may be forced to liquidate its assets or file for protection under the
Bankruptcy Code.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's annual report on Form 10-K for the fiscal year ended December 28,
1995, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 28, 1995 was derived from
the audited consolidated financial statements in the Company's annual report on
Form 10-K.
Reported interim results of operations are based in part on estimates which may
be subject to year-end adjustments. In addition, these quarterly results of
operations are not necessarily indicative of those expected for the year.
The Company has adopted a 52/53 week fiscal year ending the last Thursday of
December.
2. CHANGE OF BUSINESS
Arcar Graphics, Inc.
Effective April 8, 1994, Bagcraft purchased the business assets, subject to
buyer's assumption of certain liabilities, of Arcar, a manufacturer and
distributor of waterbase inks. Effective October 26, 1995, Bagcraft sold the
business assets, subject to the buyer's assumption of certain liabilities, of
Arcar for cash of approximately $20,300,000, resulting in a net gain of
$8,483,000. The net proceeds, after extinguishment of certain Arcar debt
obligations, of approximately $10,400,000, were used to reduce Bagcraft debt
obligations.
COMFORCE
In September, 1995, COMFORCE adopted a plan to discontinue its jewelry business
and recorded a provision of $1,000,000 for the estimated costs to complete the
disposal of its jewelry business.
Effective October 17, 1995, COMFORCE acquired all of the capital stock of
COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a
YIELD Global, for consideration of approximately $6.4 million, net of cash
acquired. This consideration consisted of cash to the seller of approximately
$5.1 million, fees of approximately $700,000, including a fee of $500,000 to a
related party, and 500,000 shares of COMFORCE common stock valued at $843,000
(at a price per share of $1.68) issued as consideration for various fees and
guarantees associated with the transaction. The 500,000 shares of COMFORCE
common stock 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, then the majority stockholder of the Company, in consideration of its
guaranteeing the purchase price to the seller and agreeing to enter into the
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
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
payment of the $6.4 million purchase price to the seller. Additionally, in
conjunction with the Global acquisition, ARTRA entered into an Assumption
Agreement whereby it 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 September 26, 1996, $764,000 of such pre-existing Lori
liabilities were classified in ARTRA's condensed consolidated balance as current
liabilities of discontinued operations.
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, Lori's management agreed to issue up to a 35% common
stock interest in COMFORCE to certain individuals to manage COMFORCE's entry
into the telecommunications and computer technical staffing business. COMFORCE
recognized a non-recurring charge of $3,425,000 related to this stock since
these stock awards were 100% vested when issued, and were neither conditioned
upon these individuals' service to the Company as employees nor the consummation
of the COMFORCE Global acquisition. Accordingly, this compensation charge was
fully recognized in 1995. The shares of COMFORCE common stock issued in
accordance with the above agreements were valued at $.93 per share. COMFORCE's
management valued COMFORCE based on its discussions with market makers and other
advisors, taking into account (i) that the Jewelry Business, which was
discontinued at the end of the second quarter of 1995, had a negligible value,
and (ii) the value of COMFORCE was principally related to the potential effect
that a purchase of COMFORCE Global, if successfully concluded, would have market
value of COMFORCE common stock. COMFORCE's management believes this value of
$.93 per share to be a fair and appropriate value based upon COMFORCE's
financial condition as of the date COMFORCE became obligated to issue these
shares. After the issuance of the COMFORCE common shares, plus the effects of
other transactions, ARTRA's common stock ownership interest in COMFORCE common
stock was reduced to approximately 19% and 25% at September 26, 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.
A disagreement has arisen among ARTRA and COMFORCE regarding interpretations of
the July 4, 1995 agreement, as amended, to issue up to a 35% common stock
interest in COMFORCE to certain individuals to manage COMFORCE's entry into the
telecommunications and computer technical staffing business; the Global
acquisition agreement; and the Assumption Agreement whereby 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. The disputed issues include (i) the
number of COMFORCE common shares issued to the above individuals to manage
COMFORCE's entry into the telecommunications and computer technical staffing
business. Accordingly, ARTRA voted against ratification of the issuance of these
shares at COMFORCE's Annual Meeting of Stockholders held on October 28, 1996;
(ii) the number of COMFORCE common stock options issued to COMFORCE's current
management group subsequent to the Global acquisition; (iii) 100,000 COMFORCE
common shares to be issued to ARTRA in consideration of its guaranteeing the
Global purchase price to the seller and agreeing to assume certain pre-existing
Lori liabilities; (iv) 150,000 COMFORCE common shares to be issued to Peter R.
Harvey for guaranteeing the payment of the Global purchase price to the seller,
and (vi) certain stock options granted in 1993 under provisions of COMFORCE's
Long-Term Stock Investment Plan. As a result of the above disagreements, ARTRA
has not exchanged its Lori Series C preferred stock with a liquidation value of
$19.5 million for 100,000 COMFORCE common shares, as required by the Assumption
Agreement, and will not consummate the exchange until all of the disputes are
resolved. ARTRA's financial statements have reflected the exchange of the Lori
Series C preferred stock for 100,000 COMFORCE common shares in accordance with
the Assumption Agreement. Based on the above disputed matters, ARTRA is
withholding delivery of the Lori Series C preferred shares and is seeking
appropriate resolution in conformity with the Assumption Agreement and
resolution of the other obligations owed by COMFORCE to ARTRA and its employees,
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
or ARTRA will seek to rescind this aspect of the agreement. Additionally,
ARTRA's financial statements have reflected the issuance of 100,000 COMFORCE
common shares to ARTRA as compensation for guaranteeing the Global purchase
price to the seller and entering into the Assumption Agreement. COMFORCE is
withholding issuance of such shares to ARTRA, in violation of the Global
acquisition agreement. ARTRA has aggressively attempted to resolve its dispute
with COMFORCE without success and at this point, ARTRA can not predict the
ultimate resolution, nor whether such dispute can be resolved without
litigation.
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 and the provision for loss on disposal of COMFORCE's discontinued
jewelry business for the three and nine months ended September 28, 1995 consist
of:
Three Months Nine Months
Ended Ended
Sept 28, Sept 28,
1995 1995
-------- ---------
Net sales $ 5,145 $ 16,932
======== =========
Loss from discontinued operations
before income taxes $ (422) $ (8,151)
(Provision) credit for income taxes 20 (5)
-------- ---------
Loss from operations $ (402) $ (8,156)
======== =========
Provision for disposal of COMFORCE's
jewelry business (1,000) (1,000)
Provision for income taxes -- --
-------- ---------
Provision for disposal of business (1,000) (1,000)
-------- ---------
Loss from discontinued operations $ (1,402) $ (9,156)
========== =========
3. CONCENTRATION OF RISK
The accounts receivable of the Company's Bagcraft subsidiary at September 26,
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 September 26, 1996, Bagcraft had 10 customers with
accounts receivable balances that aggregated approximately 29% 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:
September 26, December 28,
1996 1995
Raw materials and supplies $ 5,762 $ 5,645
Work in process 302 40
Finished goods 9,147 10,949
------- -------
$15,211 $16,634
======= =======
5. INVESTMENT IN COMFORCE CORPORATION
In prior years and until October 1995, COMFORCE was a majority-owned subsidiary
of ARTRA and, accordingly, the accounts of COMFORCE and its majority-owned
subsidiaries were included in the consolidated financial statements of ARTRA. As
discussed in Note 2, primarily due to the issuances of COMFORCE common shares in
conjunction with the acquisition of Global, ARTRA's common stock ownership in
COMFORCE was reduced to approximately 25% at December 28, 1995. Accordingly, in
October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were
deconsolidated from ARTRA's consolidated financial statements and ARTRA's
investment in COMFORCE was accounted for under the requirements of APB Opinion
No. 18 "The Equity Method of Accounting for Investments in Common Stock" through
the end of fiscal 1995.
Effective December 28, 1995, John Harvey and Peter R. Harvey, ARTRA's chairman
and president, respectively, resigned as directors of COMFORCE and Peter R.
Harvey resigned as a vice president of COMFORCE. Due to such factors as a lack
of board of directors representation and participation in policy formulation by
ARTRA, as well as a lack of interchange of managerial personnel, ARTRA no longer
was able to exercise significant influence over the operating and financial
policies of COMFORCE. Additionally, assuming contemplated additional issuances
of COMFORCE common shares, on a fully diluted basis ARTRA's ownership interest
in COMFORCE at December 28, 1995 would have been 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 January 1996, the Company's Board of Directors approved the sale of 200,000
of ARTRA's COMFORCE common shares to certain officers, directors and key
employees of ARTRA for non-interest bearing notes totaling $400,000. The notes,
collateralized by the 200,000 COMFORCE common shares sold, are not payable until
the earlier of the registration of these shares under the Securities Act of 1993
or the expiration of the applicable resale waiting period under Securities Act
Rule 144. Additionally, the noteholders have the right to put their COMFORCE
shares back to ARTRA in full payment of the balance of their notes. Based upon
the preceding factors, the Company has concluded that, for reporting purposes,
it has effectively sold options to certain officers, directors and key employees
to acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly, these 200,000
COMFORCE common shares have been removed from the Company's portfolio of
"Available-for-sale securities" and are classified in the Company's condensed
consolidated balance sheet at September 26, 1996 as other current assets with an
aggregate value of $400,000, based upon the value of proceeds to be
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
received upon future exercise of the options. The disposition of these 200,000
COMFORCE common shares will result in a gain which has been deferred and will
not be recognized in the Company's financial statements until the options to
purchase these 200,000 COMFORCE common shares are exercised. As of September 26,
1996, no options to acquire any of the 200,000 COMFORCE common shares had been
exercised.
As additional consideration for a February 1996 short-term loan (see Notes 6 and
7) a lender received 25,000 COMFORCE common shares held by ARTRA. In March 1996,
ARTRA sold 93,000 COMFORCE shares in the market, with the proceeds of
approximately $630,000 used for working capital. The above mentioned 118,000
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 118,000 COMFORCE shares during the quarter ended March
28, 1996 resulted in realized gains of $1,043,000, with cost determined by
average cost.
In June 1996, ARTRA sold 100,000 COMFORCE shares in the market, with the
proceeds of approximately $3,100,000 used principally to pay down debt
obligations. As additional consideration for two short-term loans, in April 1996
the lenders received 20,000 COMFORCE common shares held by ARTRA. The
disposition of these 120,000 COMFORCE shares during the quarter ended June 27,
1996 resulted in additional realized gains of $3,452,000, with cost determined
by average cost.
As additional consideration for a short-term loan, in September 1996 the lender
received 50,000 COMFORCE common shares held by ARTRA resulting in an additional
realized gain of $328,000, with cost determined by average cost.
At September 26, 1996 ARTRA's remaining investment in COMFORCE (1,813,036
shares, currently a common stock ownership interest of approximately 19%) was
classified in the Company's condensed consolidated balance sheet in noncurrent
assets as "Available-for-sale securities." At September 26, 1996 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $34,960,000.
As discussed in Note 7, at September 26, 1996, 1,175,000 shares of COMFORCE
common stock owned by the Company's Fill-Mor subsidiary have been pledged as
collateral for various short-term borrowings.
6. EXTRAORDINARY GAINS
ARTRA Debt Restructuring
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note. ARTRA then discharged $2,150,000 of Mr. Harvey's
prior advances in exchange for its $2,150,000 interest in Mr. Harvey's
$3,000,000 note payable to the bank.. 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. ARTRA recognized a gain on the discharge of this
indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996. The
cash payment due the bank was funded principally with proceeds received from the
Bagcraft subsidiary in conjunction with the issuance of BCA (the parent of
Bagcraft) preferred stock along with proceeds received from a short-term loan
agreement with an unaffiliated company that was subsequently repaid. See Notes 7
and 10 for further discussions of these transactions. As additional compensation
for its loan and for participating in the above discharge of indebtedness the
unaffiliated company received 150,000 shares of ARTRA common stock (with a then
fair market value of $661,000 after a discount for restricted marketability) and
25,000 shares of COMFORCE common stock held by ARTRA (with a then fair market
value of $200,000).
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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
========
COMFORCE Debt Restructuring
Per terms of a debt settlement agreement, borrowings due a bank under the loan
agreements of COMFORCE and its discontinued jewelry business and Fill-Mor
(approximately $25,000,000 as of December 23, 1994), plus amounts due the bank
for accrued interest and fees were reduced to $10,500,000 (of which $7,855,000
pertained to COMFORCE's obligation to the bank and $2,645,000 pertained to
Fill-Mor's obligation to the bank). As a result of the reduction of amounts due
the bank, in December 1994, the Company recognized an extraordinary gain of
$8,965,000 ($1.57 per share) in December 1994.
On March 31, 1995, the bank was paid $750,000 and the remaining indebtedness of
COMFORCE and Fill-Mor was discharged, resulting in an additional extraordinary
gain to the Company of $9,113,000 ($1.35 per share) in the first quarter of
1995.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. NOTES PAYABLE
Notes payable (in thousands) consist of:
September 26, December 28,
1996 1995
-------- --------
ARTRA bank notes payable,
at various interest rates $ 2,500 $ 12,063
ARTRA 12% secured promissory notes 7,575 -
ARTRA 12% convertible
subordinated promissory notes - 2,500
Amounts due to related parties,
interest principally at 10% 3,600 5,675
Other, interest from 10% to 20% 1,843 5,062
-------- --------
$ 15,518 $ 25,300
======== ========
Bank Notes Payable
On August 15, 1996, ARTRA and its 100% owned Fill-Mor subsidiary entered into a
$2,500,000 term loan agreement with a bank. The loan, payable by Fill-Mor in 90
days, bears interest, payable monthly, at the bank's reference rate (8.25% at
September 26, 1996). Fill-Mor has an option to extend the loan for an additional
90 days. The loan, guaranteed by ARTRA, is collateralized by 800,000 shares of
COMFORCE common stock owned by Fill-Mor. If an Event of Default (as defined in
the loan agreement) shall occur, the bank has the right to sell all of its
rights and interest in the loan to an unaffiliated individual for an aggregate
price equal to the outstanding principal balance of the loan plus accrued
interest. The proceeds of the loan were used for working capital.
At December 28, 1995, $12,063,000 of ARTRA notes, plus accrued interest and
fees, were payable to a bank. The notes provided for interest at the prime rate.
These bank notes were collateralized by, among other things, 100% of the common
stock of ARTRA's BCA subsidiary, the parent of Bagcraft, a secondary position on
the assets of BCA and any and all net proceeds arising from its lawsuit against
Salomon Brothers, Inc., Salomon Brothers Holding Company Inc. (collectively,
"Salomon") D.P. Kelly & Associates, L.P. ("Kelly") and all of the directors of
Emerald Acquisition Corporation ("Emerald") for breaches of fiduciary duty by
the directors of Emerald, induced by Salomon and Kelly, in connection with the
reorganization of Envirodyne Industries, Inc. ("Envirodyne") as discussed in
Note 13. Additionally, the bank notes were collateralized by a $5,500,000
personal guaranty of a private investor. As additional compensation, the private
investor received 1,833 shares of ARTRA common stock for each month the guaranty
was outstanding. Among other things, the bank notes prohibited the payment of
cash dividends by ARTRA.
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note, and ARTRA discharged $2,150,000 of Mr. Harvey's
prior advances. ARTRA recognized a gain on the discharge of this indebtedness of
$9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a
receivable for Mr. Harvey's prorata share ($1,089,000) of the debt discharge
funded by the Company. The cash
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
payment due the bank was funded principally with proceeds received from the
Bagcraft subsidiary in conjunction with the issuance of BCA (the parent of
Bagcraft) preferred stock (see Note 10) along with proceeds received from a
short-term loan agreement with an unaffiliated company. As collateral for this
advance and other previous advances (see Note 14), Mr. Harvey provided ARTRA a
$2,150,000 security interest in certain real estate, subordinated to the bank's
$850,000 security interest in this real estate.
Secured Promissory Notes
In April 1996, ARTRA commenced a private placement of $7,575,000 of 12% secured
promissory notes due April 15, 1997. As additional consideration the noteholders
received warrants to purchase an aggregate of 413,750 ARTRA common shares at a
price of $6.00 per share. The warrants expire April 15, 1999. These promissory
notes are collateralized by ARTRA's interest in all of the common stock of BCA
(the parent of Bagcraft). The proceeds from the private placement, completed in
July 1996, were used principally to pay down other debt obligations.
Convertible Subordinated Promissory Notes
In December 1995, ARTRA completed a private placement of $2,500,000 of 12%
convertible subordinated promissory notes due March 21, 1996. As additional
consideration the noteholders received 15,000 ARTRA common shares per each
$100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The
ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the
closing market value of ARTRA common stock on the date of issue, discounted for
restricted marketability. The proceeds from the private placement, held in
escrow at December 28, 1995, were used to pay down other debt obligations in
January, 1996. In March and April 1996 the notes were repaid, principally with
proceeds from the private placement of the secured promissory notes discussed
above.
Amounts Due To Related Parties
At September 26, 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.
In May, 1996, ARTRA borrowed $100,000 from a private investor, evidenced by an
unsecured short-term note, due August 7, 1996, bearing interest at 10%. At the
Company's annual meeting of shareholders, held August 29, 1996, the private
investor was elected to the Company's board of directors. At September 26, 1996,
the $100,000 loan was outstanding.
In August, 1996, ARTRA borrowed $500,000 from a private investor, evidenced by
an short-term note, due December 23, 1996, bearing interest at 10%. The loan is
collateralized by 125,000 shares of COMFORCE common stock owned by the Company's
Fill-Mor subsidiary. As additional compensation for the loan, the lender
received a warrant, expiring in 2001, to purchase 25,000 ARTRA common shares at
a price of $5.00 per share. At the Company's annual meeting of shareholders,
held August 29, 1996, the private investor was elected to the Company's board of
directors. At September 26, 1996, the $500,000 loan was outstanding.
At December 28, 1995, the Company had outstanding borrowings from its Chairman,
John Harvey, of $175,000. John Harvey's borrowings were evidenced by unsecured
short-term notes bearing interest at 12%. As additional compensation
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
the loans provided for the issuance of warrants to purchase ARTRA common shares,
the number of which was determined by the number of days the loans were
outstanding. The warrants expire five years from the date of issuance. John
Harvey received warrants to purchase an aggregate of 66,045 shares of ARTRA
common stock at prices ranging from $3.75 to $6.125 per share as additional
compensation for his loans to ARTRA. In May 1996, ARTRA repaid all borrowings
from John Harvey.
On March 31, 1994, ARTRA entered into a series of agreements with its bank
lender and with a private corporation that had guaranteed $2,500,000 of the
ARTRA bank notes discharged in February 1996 as noted above. A major shareholder
and executive officer of the private corporation is an ARTRA director. Per terms
of the agreements, the private corporation purchased $2,500,000 of ARTRA notes
from ARTRA's bank and the bank released the private corporation from its
$2,500,000 loan guaranty. As consideration for purchasing $2,500,000 of ARTRA
bank notes, the private corporation received a $2,500,000 note payable from
ARTRA bearing interest at the prime rate.
As additional consideration, the private corporation received an option to put
back to ARTRA the 49,980 shares of ARTRA common stock received as compensation
for its former $2,500,000 ARTRA loan guaranty at a price of $15.00 per share.
The put option is exercisable on the later of the day that the $2,500,000 note
payable to the private corporation becomes due or the date the ARTRA bank notes
have been paid in full. The option price increases by $2.25 per share annually
($20.063 per share at September 26, 1996). The $2,500,000 note payable to the
private corporation was reflected in the above table at December 28, 1995 as
amounts due to related parties. During the first quarter of 1996, the $2,500,000
note and related accrued interest was paid in full principally with proceeds
from additional short-term borrowings.
Other
In conjunction with the discharge of bank debt discussed above, the Company
entered into a $1,900,000 short-term loan agreement, due May 26, 1996, with an
unaffiliated company. The loan, with interest at 12%, was collateralized by,
among other things, the common stock of ARTRA's BCA subsidiary. As additional
compensation for its loan and for participating in the above discharge of
indebtedness the unaffiliated company received 150,000 shares of ARTRA common
stock (with a then fair market value of $661,000 after a discount for restricted
marketability) and 25,000 shares of COMFORCE common stock held by ARTRA (with a
then fair market value of $200,000). Additionally, for consideration of
$500,000, the lender purchased an option to acquire up to 40% of the common
stock of Bagcraft for nominal consideration. The borrowings under this
short-term loan agreement were repaid in April, 1996 and, per terms of the loan
agreement, ARTRA repurchased the option for a cash payment of $550,000.
In October 1996 the Company and its Fill-Mor subsidiary entered into a margin
loan agreement with a financial institution under which provided for borrowings
of $600,000, with interest approximating the prime rate. Borrowings under the
loan agreement are collateralized by 125,000 shares of COMFORCE common stock
owned by the Company's Fill-Mor subsidiary.
At September 26, 1996 and December 28, 1995, other notes payable includes
short-term borrowings of $1,843,000 and $5,062,000, respectively, payable under
various short-term loan agreements with unaffiliated companies and private
investors. These loans bear interest at varying rates from 10% to 20%. Certain
of these loans, aggregating $500,000 in outstanding, are collateralized by
125,000 shares of COMFORCE common stock owned by the Company's Fill-Mor
subsidiary.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. LONG-TERM DEBT
Long-term debt (in thousands) consists of:
September 26, 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% 2,800 4,600
Revolving credit loan,
interest at the prime rate plus 1.5% 12,311 9,231
Unamortized discount (847) -
Bagcraft
City of Baxter Springs,
Kansas loan agreements,
interest at varying rates 10,684 11,794
-------- --------
36,948 37,625
Current scheduled maturities (2,407) (3,512)
-------- --------
$ 34,541 $ 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 September 26, 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
September 26, 1996 and December 28, 1995, approximately $1,900,000 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 September
26, 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
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 September 26, 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 September 26, 1996 and December 28, 1995,
Bagcraft had outstanding borrowings of $5,600,000 and $6,300,000,
respectively, 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 September 26, 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 September 26, 1996 and December 28,
1995, Bagcraft had outstanding borrowings of $234,000 and $494,000,
respectively, under this loan agreement.
Borrowings under the above loan agreements are collateralized by a first lien on
the land and building at the Baxter Springs, Kansas production facility and by a
second lien on certain machinery and equipment. Under certain circumstances,
repayment of the borrowings under the above loan agreements is subordinated to
the repayment of obligations under Bagcraft's Credit Agreement. At December 28,
1995, $552,000 of borrowings from the above loan agreements was reflected in the
condensed consolidated balance sheet in current assets as restricted cash and
equivalents. These funds, invested in interest bearing cash equivalents and
restricted for expenditures associated with the Baxter Springs, Kansas project
were expended during the first quarter of 1996.
9. REDEEMABLE COMMON STOCK
ARTRA has entered into various agreements under which it has sold its common
shares along with options that require ARTRA to repurchase these shares at the
option of the holder, principally one year after the date of each agreement. The
difference between the option price and the net proceeds received is amortized
over the life of the options by a charge to retained earnings.
At September 26, 1996 and December 28, 1995 options are outstanding that, if
exercised, would require ARTRA to
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
repurchase 98,734 and 283,965 shares of its common stock for an aggregate amount
of $3,565,000 and $4,774,000, respectively. In September 1996, the Company
settled an obligation that would have required ARTRA to repurchase 66,113 common
shares for a total of $897,000. The option holder received cash payments of
$510,000 and retained the 66,113 ARTRA common shares in settlement of all
obligations due under the option agreement. Additionally, during 1996, the
holder of 100,000 ARTRA common shares with an option that would have required
the Company to repurchase these shares for $500,000 sold these shares in a
private transaction. Accordingly, these 166,113 shares of ARTRA common stock
were removed from redeemable common stock and reclassified to shareholders'
equity.
10. REDEEMABLE PREFERRED STOCK
ARTRA
Effective September 26, 1996, in payment of principal and interest due on ARTRA
notes, the noteholder received 2,250 shares of ARTRA Series E redeemable
preferred stock ($1,000 par value, 10% cumulative, liquidation preference equal
to $1,000 or 200 shares of common stock per share, plus accrued dividends). Each
share of the Series E redeemable preferred stock is convertible, at the holder's
option, into 200 shares of ARTRA common 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 $1,756,000 and $1,519,000 were
accrued at September 26, 1996 and December 28, 1995, respectively.
Bagcraft/BCA Holdings
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.
Accumulated dividends of $633,000 were accrued at September 26, 1996.
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 $1,113,000 were outstanding at
September 26, 1996.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Effective February 15, 1996, BCA, Bagcraft and Ozite entered into an agreement
to exchange certain preferred stock between the Companies. Per terms of the
exchange agreement BCA issued 8,135 shares of BCA Series B preferred stock
(13.5% cumulative, redeemable preferred stock with a liquidation preference
equal to $1,000 per share, or a total carrying value of $8,135,000) to Ozite in
exchange for 41,350 shares of Bagcraft redeemable preferred stock (with a
liquidation preference equal to $100 per share plus accumulated dividends of
$4,838,000, or a total carrying value of $8,973,000). The preferred stock
exchange resulted in a gain of $838,000 which was reflected in the Company's
condensed consolidated statement of operations as minority interest.
The BCA Series B preferred stock is redeemable on June 1, 1997. Accumulated
dividends of $683,000 were accrued at September 26, 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 September 26, 1996, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $33,000,000 available to be applied against
future taxable income, if any. ARTRA's tax loss carryforwards of approximately
$22,000,000 expire principally in 2003 - 2010. Additionally, ARTRA's
discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss
carryforwards of approximately $11,000,000 available to be applied against
future taxable income, if any. In recent years, the Company has issued shares of
its common stock to repay various debt obligations, as consideration for
acquisitions, to fund working capital obligations and as consideration for
various other transactions. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its Federal income tax loss carryforwards
when certain changes in the ownership of a corporation's common stock occurs. In
the opinion of management, the Company is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should the Company continue to issue a significant number of
shares of its common stock, it could trigger a limitation that would prevent it
from utilizing a substantial portion of its Federal income tax loss
carryforwards.
12. EARNINGS PER SHARE
Earnings (loss) per share is computed by dividing net earnings (loss), less
dividends applicable to redeemable preferred stock and redeemable common stock
accretion by the weighted average number of shares of common stock and common
stock equivalents (redeemable common stock, stock options and warrants), unless
anti-dilutive, outstanding during each period. Fully diluted earnings per share
are not presented since the result is equivalent to primary earnings per share.
13. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At September 26, 1996 and December 28,
1995, the Company had accrued $1,900,000 and $1,500,000, respectively, for
business-related litigation and environmental liabilities. While these
litigation and environmental matters involve wide
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ranges of potential liability, management does not believe the outcome of these
matters will have a material adverse effect on the Company's financial
statements. However, ARTRA may not have available funds to pay liabilities
arising out of these business-related litigation and environmental matters or,
in certain instances, to provide for its legal defense.
In November 1993, ARTRA filed suit in the Circuit Court of the Eighteenth
Judicial Circuit for the State of Illinois (the "State Court Action") against
Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K.
Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P.
Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with
DPK), James F. Massey and William Rifkind relating to the acquisition of
Envirodyne in 1989. Envirodyne subsequently filed a Chapter 11 bankruptcy which
provided ARTRA with no value in Envirodyne's parent's stock. On November 22,
1993, ARTRA filed a First Amended Complaint. The defendants removed the case to
the Bankruptcy Court in which the Emerald Chapter 11 case is pending. On July
15, 1994 all but two of ARTRA's causes of action were remanded to the state
court. The Bankruptcy Court retained jurisdiction of ARTRA's claims against the
defendants for breaching their fiduciary duty as directors of Emerald to
Emerald's creditors and interference with ARTRA's contractual relations with
Emerald. On April 7, 1995, the Company's appeal of the Bankruptcy Court's order
retaining jurisdiction over two claims was denied. On July 26, 1995, the
Bankruptcy Court entered an order dismissing these claims. On August 4, 1995,
ARTRA appealed from the Bankruptcy Court's dismissal order. That appeal is still
pending.
On July 18, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court
Action for breach of fiduciary duty, fraudulent misrepresentation, negligent
misrepresentation, breach of contract and promissory estopel. In the State Court
Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of
$408.6 million and approximately $33 million in fees paid to Salomon. The causes
of action for breach of the fiduciary duty of due care were repleaded to reserve
ARTRA's right to appeal the State Court's dismissal of the causes of action in
the Third Amended Complaint. Defendant Kelly was dismissed with prejudice
pursuant to a stipulation between ARTRA and the Kelly Defendants.
On or about March 1, 1996, DPK brought a motion for summary judgment as to
ARTRA's claims for breach of contract and promissory estoppel. DPK's motion is
currently pending.
Effective December 31, 1989, ARTRA completed the disposal of its former
scientific products segment with the sale of its Welch subsidiary, formerly
Sargent-Welch Scientific Company, to a privately held corporation whose
president and sole shareholder was a vice president of Welch prior to the sale.
The consideration received by ARTRA consisted of cash at closing, $2,625,000
payable June 30, 1997, with interest at 10% beginning June 30, 1990, under terms
of a noncompetition agreement and the buyer's subordinated note in the principal
amount of $2,500,000.
In December, 1991 Welch filed a lawsuit against ARTRA alleging that certain
representations, warranties and covenants made by ARTRA, which were contained in
the parties' Stock Purchase Agreement, were false. Welch was seeking
compensatory damages in the amount of $3,800,000. Subsequently, ARTRA had filed
a counterclaim predicated upon Welch's breach of the payment terms of the
parties' Non-Competition Agreement and the Subordinated Note executed by Welch.
ARTRA was seeking damages in the amount of approximately $5,300,000 plus accrued
interest. On November 23, 1994, the Circuit Court of Cook County Law Division in
Chicago granted a judgment in favor of ARTRA affirming the validity of the
amounts due under the Non-Competition Agreement and the Subordinated Note of
$2,625,000 and $2,500,000, respectively.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by
Welch under terms of the noncompetition agreement and the subordinated security.
Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a
subordinated note in the principal amount of $640,000 payable June 30, 2001. In
June 1996 the note was paid in accordance with terms of the settlement agreement
at its present value and ARTRA received proceeds of $342,000.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In January, 1985 the United States Environmental Protection Agency ("EPA")
notified the Company's Bagcraft subsidiary that it was a potentially responsible
party under the Comprehensive Environmental Responsibility Compensation and
Liability Act ("CERCLA") for alleged release of hazardous substances at the
Cross Brothers site near Kankakee, Illinois. Although Bagcraft has denied
liability for the site, it has entered into a settlement agreement with the EPA,
along with the other third party defendants, to resolve all claims associated
with the site except for state claims. In May, 1994 Bagcraft paid $850,000 plus
accrued interest of $29,000 to formally extinguish the EPA claim. Bagcraft filed
suit in 1993 in the United States District Court for the Northern District of
Illinois, against its insurers to recover its liability costs in connection with
the Cross Brothers case. Bagcraft was subsequently reimbursed by its insurers
for its liability costs incurred in connection with the EPA claim. With regard
to the state action, Bagcraft is participating in settlement discussions with
the State and thirteen other potential responsible parties to resolve all claims
associated with the State. The maximum state claim is $1.1 million for all
participants. Bagcraft has accrued $120,000 related to the State action in the
Company's condensed consolidated financial statements at September 26, 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 EPA that it is a potentially responsible party
for the disposal of hazardous substances at the Ninth Avenue site in Gary,
Indiana. This site is listed on the EPA's National Priorities list. A group of
defendant PRPs, known as the Ninth Avenue Remedial Group, settled with the USEPA
and agreed to remediate the site. This Group subsequently sued numerous third
party defendants, including Bagcraft, alleged also to be responsible parties at
the site. The plaintiffs have produced only limited testamentary evidence, and
no documentary evidence, linking Bagcraft to this site, and the Company has
neither discovered any records which indicate, nor located any current or former
employees who have advised, that Bagcraft deposited hazardous substances at the
site. Based on the foregoing, management of the Company does not believe that it
is probable that the Company will have any liability for the costs of the
clean-up of this site. The Company intends to vigorously defend itself in this
case.
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
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
hazardous substances which were stored, disposed of or otherwise released at
this manufacturing facility. This facility was owned by Baltimore Paint and
Chemical Company, formerly a subsidiary of ARTRA from 1968 to 1980.
Sherwin-William's current projection of the cost of clean-up is approximately $5
to $6 million. The Company has filed counterclaims against Sherwin-Williams and
cross claims against other former owners of the property. The Company also is
vigorously defending this action and has raised numerous defenses. Currently,
the case is in its early stages of discovery and the Company cannot determine
what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process.
ARTRA entered into a consent decree with the EPA in which it agreed to pay
$85,000 for one phase of the clean-up costs for this site; however, ARTRA
defaulted on its payment obligation. ARTRA is presently unable to estimate the
total potential liability for clean-up costs at this site, which clean-up is
expected to continue for a number of years. The consent decree, even if it had
been honored by ARTRA, was not intended to release ARTRA from liability for
costs associated with other phases of the clean-up at this site. The Company is
presently unable determine what, if any, additional liability it may incur in
this matter.
In a case titled City of Chicago v. NL Industries, Inc. and ARTRA GROUP
Incorporated, filed in the Circuit Court of Cook County, Illinois, the City of
Chicago alleged that ARTRA (and NL Industries, Inc.) had improperly stored,
discarded and disposed of hazardous substances at the subject site, and that
ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At
the time the suit was filed, the City of Chicago claimed to have expended
$1,000,000 in clean-up costs.
ARTRA and NL Industries, Inc. have counter sued each other and have filed third
party actions against the subsequent owners of the property. The City of Chicago
has made an offer to settle the matter for $350,000 for all parties. The parties
are currently conducting discovery. The Company is presently unable to determine
ARTRA's liability, if any, in connection with this case.
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.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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:
September 26, December 28,
1996 1995
-------- --------
(in thousands)
Total advances, including accrued interest $ 7,232 $ 5,369
Less interest for the period
January 1, 1993 to date,
accrued and fully reserved (1,371) (1,051)
-------- --------
Net advances $ 5,861 $ 4,318
======== ========
ARTRA has total advances due from its president, Peter R. Harvey, of which
$7,232,000 and $5,369,000, including accrued interest, remained outstanding at
September 26, 1996 and December 28, 1995, respectively. The advances bear
interest at the prime rate plus 2% (10.25% at September 26, 1996 and 10.5% at
December 28, 1995, respectively). This receivable from Peter R. Harvey has been
classified as a reduction of common shareholders' equity. See Note 6 for an
additional 1996 advance for Mr. Harvey's prorata share of debt discharged by a
bank funded by ARTRA. Per terms of the debt discharge agreement, as partial
consideration, the bank also received Mr. Harvey's $3,000,000 note payable to
the bank. The bank assigned ARTRA a $2,150,000 interest in the Mr. Harvey's
note, subordinated to the bank's $850,000 interest in Mr.
Harvey's note, and ARTRA discharged $2,150,000 of Mr. Harvey's prior advances.
In June 1996, Peter R. Harvey loaned the Company 100,000 shares of ARTRA common
stock with (with a then fair market value of $587,000). The Company principally
issued these common shares to certain lenders as additional consideration for
short-term loans. In September 1996, after the Company's shareholders approved
an increase in the number of authorized common shares, the Company repaid this
loan. At Peter R. Harvey's direction, the 100,000 shares of the Company's common
stock were issued in blocks of 25,000 shares to the four daughters of the
Company's Chairman of the Board, John Harvey. John Harvey and Peter R. Harvey
are brothers.
In May 1991, ARTRA's Fill-Mor subsidiary made advances to Peter R. Harvey. The
advances, made out of a portion of the proceeds of a short-term bank loan,
provided for interest at the prime rate plus 2%. The amount of these advances at
March 30, 1995 was $1,540,000 (including $398,000 of accrued interest). 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 the advances to Peter R. Harvey
has been accrued and fully reserved. Interest accrued and fully reserved on the
advances to Peter R. Harvey for the nine months ended September 26, 1996 and
September 28, 1995 totaled $320,000 and $325,000, 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 and 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. Additionally, since
December 31, 1986, Peter R. Harvey has guaranteed approximately $40,000,000 of
ARTRA obligations to private and institutional lenders (John Harvey also was a
co-guarantor of a $26,700,000 loan included in that total with Peter R. Harvey)
and has also hypothecated personal assets as security for certain ARTRA
obligations.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania
corporation) is permitted to make loans to officers and directors. Further,
under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is
permitted to make loans to an officer (including any officer who is also a
director, as in the case of Peter R. Harvey), whenever, in the judgment of the
directors, the loan can reasonably be expected to benefit Fill-Mor. At the
September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did not
act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey. The
1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of
Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of
Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan
agreement, a condition of which was the application of a portion of the proceeds
thereof to the payment of certain of Mr. Harvey's loan obligations to the bank.
However, the resolutions did not acknowledge the use of such proceeds for this
purpose and the formal loan documents with the bank did not set forth this
condition (though in fact, the proceeds were so applied by the bank).
As collateral for amounts due from Peter R. Harvey, the Company has received the
pledge of 1,523 shares of ARTRA redeemable preferred stock (with a liquidation
value of $1,523,000, plus accrued dividends) which are owned by Mr. Harvey. In
addition, Mr. Harvey has pledged a 25% interest in Industrial Communication
Company (a private company). Such interest is valued by Mr. Harvey at $800,000
to $1,000,000. During 1995, Peter R. Harvey entered into a pledge agreement with
ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067
shares of ARTRA common stock and 707,281 shares of Pure Tech International,
Inc., a publicly traded corporation. Per terms of a February discharge of bank
indebtedness (see Note 6), ARTRA received additional collateral from Mr. Harvey
consisting of a $2,150,000 security interest in certain real estate,
subordinated to the bank's $850,000 security interest in this real estate.
In conjunction with Lori's October 1995 acquisition of Global (see Note 2),
ARTRA agreed to assume substantially all pre-existing Lori liabilities and
indemnify COMFORCE in the event any future liabilities arise concerning
pre-existing environmental matters and business related litigation. Accordingly,
at September 26, 1996 and December 28, 1995, respectively, $764,000 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 adopted a plan to discontinue its jewelry business
and recorded a provision of $1,000,000 for the estimated costs to complete the
disposal of its jewelry business.
Effective October 17, 1995, COMFORCE acquired all of the capital stock of
COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a
YIELD Global, for consideration of approximately $6.4 million, net of cash
acquired. This consideration consisted of cash to the seller of approximately
$5.1 million, fees of approximately $700,000, including a fee of $500,000 to a
related party, and 500,000 shares of COMFORCE common stock valued at $843,000
(at a price per share of $1.68) issued as consideration for various fees and
guarantees associated with the transaction. The 500,000 shares of COMFORCE
common stock 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, then the majority stockholder of the Company, in consideration of its
guaranteeing the purchase price to the seller and agreeing to enter into the
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 $6.4 million purchase price to the
seller. Additionally, in conjunction with the Global acquisition, ARTRA entered
into an Assumption Agreement whereby it 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 September 26, 1996, $764,000 of such
pre-existing Lori liabilities were classified in ARTRA's condensed consolidated
balance as current liabilities of discontinued operations.
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, Lori's management agreed to issue up to a 35% common
stock interest in COMFORCE to certain individuals to manage COMFORCE's entry
into the telecommunications and computer technical staffing business. COMFORCE
recognized a non-recurring charge of $3,425,000 related to this stock since
these stock awards were 100% vested when issued, and were neither conditioned
upon these individuals' service to the Company as employees nor the consummation
of the COMFORCE Global acquisition. Accordingly, this compensation charge was
fully recognized in 1995. The shares of COMFORCE common stock issued in
accordance with the above agreements were valued at $.93 per share. COMFORCE's
management valued COMFORCE based on its discussions with market makers and other
advisors, taking into account (i) that the Jewelry Business, which was
discontinued at the end of the second quarter of 1995, had a negligible value,
and (ii) the value of COMFORCE was principally related to the potential effect
that a purchase of COMFORCE Global, if successfully concluded, would have market
value of COMFORCE
<PAGE>
common stock. COMFORCE's management believes this value of $.93 per share to be
a fair and appropriate value based upon COMFORCE's financial condition as of the
date COMFORCE became obligated to issue these shares. After the issuance of the
COMFORCE common shares, plus the effects of other transactions, ARTRA's common
stock ownership interest in COMFORCE common stock was reduced to approximately
19% and 25% at September 26, 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.
A disagreement has arisen among ARTRA and COMFORCE regarding interpretations of
the July 4, 1995 agreement, as amended, to issue up to a 35% common stock
interest in COMFORCE to certain individuals to manage COMFORCE's entry into the
telecommunications and computer technical staffing business; the Global
acquisition agreement; and the Assumption Agreement whereby 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. The disputed issues include (i) the
number of COMFORCE common shares issued to the above individuals to manage
COMFORCE's entry into the telecommunications and computer technical staffing
business. Accordingly, ARTRA voted against ratification of the issuance of these
shares at COMFORCE's Annual Meeting of Stockholders held on October 28, 1996;
(ii) the number of COMFORCE common stock options issued to COMFORCE's current
management group subsequent to the Global acquisition; (iii) 100,000 COMFORCE
common shares to be issued to ARTRA in consideration of its guaranteeing the
Global purchase price to the seller and agreeing to assume certain pre-existing
Lori liabilities; (iv) 150,000 COMFORCE common shares to be issued to Peter R.
Harvey for guaranteeing the payment of the Global purchase price to the seller,
and (vi) certain stock options granted in 1993 under provisions of COMFORCE's
Long-Term Stock Investment Plan. As a result of the above disagreements, ARTRA
has not exchanged its Lori Series C preferred stock with a liquidation value of
$19.5 million for 100,000 COMFORCE common shares, as required by the Assumption
Agreement, and will not consummate the exchange until all of the disputes are
resolved. ARTRA's financial statements have reflected the exchange of the Lori
Series C preferred stock for 100,000 COMFORCE common shares in accordance with
the Assumption Agreement. Based on the above disputed matters, ARTRA is
withholding delivery of the Lori Series C preferred shares and is seeking
appropriate resolution in conformity with the Assumption Agreement and
resolution of the other obligations owed by COMFORCE to ARTRA and its employees,
or ARTRA will seek to rescind this aspect of the agreement. Additionally,
ARTRA's financial statements have reflected the issuance of 100,000 COMFORCE
common shares to ARTRA as compensation for guaranteeing the Global purchase
price to the seller and entering into the Assumption Agreement. COMFORCE is
withholding issuance of such shares to ARTRA, in violation of the Global
acquisition agreement. ARTRA has aggressively attempted to resolve its dispute
with COMFORCE without success and at this point, ARTRA can not predict the
ultimate resolution, nor whether such dispute can be resolved without
litigation.
<PAGE>
Results of Operations
The Company's consolidated financial statements have been reclassified to report
separately the results of operations of Arcar and COMFORCE's discontinued
jewelry business prior to the deconsolidation of COMFORCE and its majority-owned
subsidiaries effective October 1995. Accordingly, the following discussion of
results of operations is presented for the Company's continuing operations at
September 26, 1996, which were conducted by the Company's wholly-owned Bagcraft
subsidiary. Bagcraft sells all of its products directly to its customers. On a
very limited basis certain customers may be offered extended payment terms
beyond 30 days depending upon prevailing trade practices and financial strength.
The following table presents, as a percentage of net sales, operating expenses
and other income (expense) included the Company's earnings (loss) from
continuing operations for the three and nine month periods ended September 26,
1996 and September 28, 1995.
Three Months Ended Nine Months Ended
------------------ -----------------
Sept 26, Sept 28, Sept 26, Sept 28,
1996 1995 1996 1995
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Cost of goods sold,
exclusive of depreciation
and amortization 77.7% 85.9% 79.5% 84.8%
Selling, general and administrative 10.2% 22.8% 12.2% 17.6%
Depreciation and amortization 3.4% 3.6% 3.3% 3.6%
----- ----- ----- -----
91.3% 112.3% 95.0% 106.0%
----- ----- ----- -----
Operating earnings (loss) 8.7% -12.3% 5.0% -6.0%
----- ----- ----- -----
Other income (expense):
Interest expense -6.4% -8.8% -6.0% -7.0%
Realized gain on disposal of
available-for-sale securities 1.1% -- 5.3% --
Other income (expense), net -- 0.1% -0.2% --
----- ----- ----- -----
-5.3% -8.9% -0.9% -7.0%
----- ----- ----- -----
Earnings (loss) from
continuing operations
before income taxes
and minority interest 3.4% -21.2% 4.1% -13.0%
Provision for income taxes -0.1% -0.1% -0.1% --
Minority interest -1.2% -0.7% -0.2% -0.7%
----- ----- ----- -----
Earnings (loss) from
continuing operations 2.1% -22.0% 3.8% -13.7%
===== ===== ===== =====
Three Months Ended September 26, 1996 vs. Three Months Ended September 28, 1995
Net sales from continuing operations of $29,397,000 for the three months ended
September 26, 1996 were $555,000, or 1.9%, lower than net sales from continuing
operations for the three months ended September 28, 1995. The 1996 sales
decrease is attributable to an overall volume decrease partially offset by
increased selling prices. The volume decrease is principally attributable to a
1995 promotion by a major fast food customer. The increased 1996 selling prices
were in response to the significant increases in paper costs in 1995.
The Company's cost of sales from continuing operations of $22,854,000 for the
three months ended September 26, 1996 decreased $2,863,000 as compared to the
three months ended September 28, 1995. Cost of sales from continuing operations
<PAGE>
in the three months ended September 26, 1996 was 77.7% of net sales compared to
a cost of sales percentage of 85.9% for the three months ended September 28,
1995. The decrease in cost of sales is primarily attributable to lower paper
costs and decreased sales volume as noted above. The decrease in cost of sales
percentage is primarily attributable to lower paper costs and improved
production efficiencies in 1996.
Selling, general and administrative expenses from continuing operations were
$2,995,000 in the three months ended September 26, 1996 as compared to
$6,843,000 in the three months ended September 28, 1995. Selling, general and
administrative expenses were 10.2% of net sales in the three months ended
September 26, 1996 as compared to 22.8% of net sales in the three months ended
September 28, 1995. The 1996 decrease in selling, general and administrative
expenses is primarily attributable to a third quarter 1995 compensation charge
related to the issuance of a 35% common stock interest in COMFORCE as additional
consideration for certain individuals to enter into employment or consulting
services agreements to manage COMFORCE's entry into and development of the
telecommunications and computer technical business.
Depreciation and amortization expense from continuing operations was $995,000 in
the three months ended September 26, 1996 as compared to $1,087,000 in the three
months ended September 28, 1995. Depreciation and amortization expense was 3.4 %
of net sales in the three months ended September 26, 1996 as compared to 3.6% of
net sales in the three months ended September 28, 1995. The 1996 decrease in
depreciation and amortization expense is primarily attributable to the December,
1995 write-down of idle machinery and equipment dedicated to the production of
microwave popcorn products.
The Company had operating earnings in the three months ended September 26, 1996
of $2,553,000 as compared to operating loss of $3,695,000 in the three months
ended September 28, 1995. The 1996 increase in operating earnings is
attributable to improved operating margins and to the decrease in selling,
general and administrative expenses and depreciation and amortization expense as
noted above.
Interest expense from continuing operations in the three months ended September
26, 1996 decreased $735,000 as compared to the three months ended September 28,
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.
As additional consideration for a short-term loan, in September 1996 the lender
received 50,000 COMFORCE common shares held by ARTRA's Fill-Mor subsidiary,
resulting in an additional realized gain of $328,000, with cost determined by
average cost.
No income tax expense is reflected in the Company's financial statements
resulting from the Company's 1996 earnings from continuing operations due to the
utilization of tax loss carryforwards. Due to the Company's tax loss
carryforwards and the uncertainty of future taxable income, no income tax
benefit was recognized in connection with the Company's 1995 pre-tax loss.
Nine Months Ended September 26, 1996 vs. Nine Months Ended September 28, 1995
Net sales from continuing operations of $90,162,000 for the nine months ended
September 26, were $541,000, or 0.6%, lower than net sales from continuing
operations for the nine months ended September 28, 1995. The volume decrease is
principally attributable to a 1995 promotion by a major fast food customer. The
increased 1996 selling prices were in response to the significant increases in
paper costs in 1995.
The Company's cost of sales from continuing operations of $71,710,000 for the
nine months ended September 26, 1996 decreased $5,161,000 as compared to the
nine months ended September 28, 1995. Cost of sales from continuing operations
in the nine months ended September 26, 1996 was 79.5% of net sales compared to a
cost of sales percentage of 84.8% for the nine months ended September 28, 1995.
The decrease in cost of sales is primarily attributable to lower paper costs and
decreased sales volume as noted above. The decrease in cost of sales percentage
is primarily attributable to lower paper costs and improved production
efficiencies in 1996.
<PAGE>
Selling, general and administrative expenses from continuing operations were
$10,967,000 in the nine months ended September 26, 1996 as compared to
$15,972,000 in the nine months ended September 28, 1995. Selling, general and
administrative expenses were 12.2% of net sales in the nine months ended
September 26, 1996 as compared to 17.6% of net sales in the nine months ended
September 28, 1995. The 1996 decrease in selling, general and administrative
expenses is primarily attributable to a third quarter 1995 compensation charge
related to the issuance of a 35% common stock interest in COMFORCE as additional
consideration for certain individuals to enter into employment or consulting
services agreements to manage COMFORCE's entry into and development of the
telecommunications and computer technical business and to professional fees
incurred in 1995 related to certain consulting projects.
Depreciation and amortization expense from continuing operations was $2,954,000
in the nine months ended September 26, 1996 as compared to $3,306,000 in the
nine months ended September 28, 1995. Depreciation and amortization expense was
3.3 % of net sales in the three months ended September 26, 1996 as compared to
3.6% of net sales in the three months ended September 28, 1995. The 1996
decrease in depreciation and amortization expense is primarily attributable to
the December, 1995 write-down of idle machinery and equipment dedicated to the
production of microwave popcorn products.
The Company had operating earnings in the nine months ended September 26, 1996
of $4,531,000 as compared to operating loss of $5,446,000 in the nine months
ended September 28, 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 nine months ended September
26, 1996 decreased $1,022,000 as compared to the nine months ended September 28,
1995. The 1996 decrease is principally due an overall decrease in borrowings.
During the nine months ended September 26, 1996, ARTRA sold 193,000 COMFORCE
shares in the market. As additional consideration for 1996 short-term loans, the
lenders received 95,000 COMFORCE common shares held by ARTRA's Fill-Mor
subsidiary. The disposition of these 288,000 COMFORCE shares resulted in
realized gains of $4,823,000 during the nine months ended September 26, 1996.
The 1996 and 1995 extraordinary credits represent net gains from discharge of
indebtedness. No income tax expense is reflected in the Company's financial
statements resulting from the extraordinary credits and from the Company's 1996
earnings from continuing operations due to the utilization of tax loss
carryforwards. Due to the Company's tax loss carryforwards and the uncertainty
of future taxable income, no income tax benefit was recognized in connection
with the Company's 1995 pre-tax loss.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Cash and cash equivalents decreased $2,248,000 during the nine months ended
September 26, 1996. Cash flows used by operating activities of $4,516,000 and
cash flows used by financing activities of $637,000 exceeded cash flows from
investing activities of $2,905,000. Cash flows used by operating activities were
principally attributable to funds used to pay down accounts payable and accrued
liabilities. Cash flows used by financing activities were principally
attributable to a net reduction of short-term borrowings. Cash flows from
investing activities principally represent proceeds from the sale of COMFORCE
common stock.
The Company's consolidated working capital deficiency decreased $15,486,000 to
$10,879,000 during the nine months ended September 26, 1996. The decrease in
working capital deficiency is principally attributable to an agreement to
discharge amounts due on ARTRA bank notes and related accrued interest and fees.
<PAGE>
Status of Debt Agreements and Operating Plan
At December 28, 1995 the Company's corporate entity was in default of provisions
of certain of its credit agreements. Under certain debt agreements ARTRA is
limited in the amounts it can withdraw from its Bagcraft operating subsidiary.
In February, 1996, a bank lender agreed to discharge amounts due under bank
notes of the corporate entity ($12,063,000 plus accrued interest and fees) and
certain obligations of the Company's president, Peter R. Harvey. Effective
February 1, 1996, Bagcraft's credit agreement was extended until September 30,
1997. See Notes 6, 7 and 8 to the Company's condensed consolidated financial
statements and discussion below.
ARTRA Corporate
At December 28, 1995, $12,063,000 in ARTRA notes, plus accrued interest and
fees, were payable to a bank. The notes provided for interest at the prime rate.
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note, and ARTRA discharged $2,150,000 of Mr. Harvey's
prior advances. ARTRA recognized a gain on the discharge of this indebtedness of
$9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a
receivable for Mr. Harvey's prorata share ($1,089,000) of the debt discharge
funded by the Company. The cash payment due the bank was funded principally with
proceeds received from the Bagcraft subsidiary in conjunction with the issuance
of BCA (the parent of Bagcraft) preferred stock (see Note 10 to the Company's
condensed consolidated financial statements) along with proceeds received from a
short-term loan agreement with an unaffiliated company.
In conjunction with the discharge of bank debt discussed above, the Company
entered into a $1,900,000 short-term loan agreement, due May 26, 1996, with an
unaffiliated company. The loan, with interest at 12%, was collateralized by,
among other things, the common stock of ARTRA's BCA subsidiary. As additional
compensation for its loan and for participating in the above discharge of
indebtedness the unaffiliated company received 150,000 shares of ARTRA common
stock (with a then fair market value of $661,000 after a discount for restricted
marketability) and 25,000 shares of COMFORCE common stock held by ARTRA (with a
then fair market value of $200,000). Additionally, for consideration of
$500,000, the lender purchased an option to acquire up to 40% of the common
stock of Bagcraft for nominal consideration. The borrowings under this
short-term loan agreement were repaid in April, 1996 and, per terms of the loan
agreement, ARTRA repurchased the option for a cash payment of $550,000.
In December 1995, ARTRA completed a private placement of $2,500,000 of 12%
convertible subordinated promissory notes due March 21, 1996. As additional
consideration the noteholders received 15,000 ARTRA common shares per each
$100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The
ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the
closing market value of ARTRA common stock on the date of issue, discounted for
restricted marketability. The proceeds from the private placement, held in
escrow at December 28, 1995, were used to pay down other debt obligations in
January, 1996. In March and April 1996 the notes were repaid, principally with
proceeds from the private placement of the secured promissory notes discussed
above.
In April 1996, ARTRA commenced a private placement of $7,575,000 of 12% secured
promissory notes due April 15, 1997. As additional consideration the noteholders
received warrants to purchase an aggregate of 413,750 ARTRA common shares at a
price of $6.00 per share. The warrants are exercisable August 15, 1996 and
expire April 15, 1999. These promissory notes are collateralized by ARTRA's
interest in all of the common stock of BCA (the parent of Bagcraft). The
proceeds from the private placement, completed in July 1996, were used
principally to pay down other debt obligations.
As discussed in Note 14 to the Company's condensed consolidated financial
statements, ARTRA has total advances due from its president, Peter R. Harvey, of
which $7,232,000 and $5,369,000, including accrued interest, remained
outstanding at September 26, 1996 and December 28, 1995 The advances bear
interest at the prime rate plus 2% (10.25% at September
<PAGE>
26, 1996 and 10.5% at December 28, 1995, respectively). Commencing January 1,
1993 to date, interest on all advances to Peter R. Harvey has been accrued and
fully reserved. This receivable from Peter R. Harvey has been classified as a
reduction of common shareholders' equity.
In June 1996 Peter R. Harvey loaned the Company 100,000 shares of ARTRA common
stock with (with a then fair market value of $587,000). The Company principally
issued these common shares to certain lenders as additional consideration for
short-term loans. In September 1996, after the Company's shareholders approved
an increase in the number of authorized common shares, the Company repaid this
loan. At Peter R. Harvey's direction, the 100,000 shares of the Company's common
stock were issued in blocks of 25,000 shares to the four daughters of the
Company's Chairman of the Board, John Harvey. John Harvey and Peter R. Harvey
are brothers.
In May 1991, ARTRA's Fill-Mor subsidiary made advances to Peter R. Harvey. The
advances, made out of a portion of the proceeds of a short-term bank loan,
provided for interest at the prime rate plus 2%. The amount of these advances at
March 30, 1995 was $1,540,000 (including $398,000 of accrued interest). In
April, 1995, these advances from ARTRA's Fill-Mor subsidiary to Peter R. Harvey
were transferred to ARTRA as a dividend.
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 and 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. Additionally, since
December 31, 1986, Peter R. Harvey has guaranteed approximately $40,000,000 of
ARTRA obligations to private and institutional lenders (John Harvey also was a
co-guarantor of a $26,700,000 loan included in that total with Peter R. Harvey)
and has also hypothecated personal assets as security for certain ARTRA
obligations.
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania
corporation) is permitted to make loans to officers and directors. Further,
under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is
permitted to make loans to an officer (including any officer who is also a
director, as in the case of Peter R. Harvey), whenever, in the judgment of the
directors, the loan can reasonably be expected to benefit Fill-Mor.
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did
not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey.
The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of
Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of
Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan
agreement, a condition of which was the application of a portion of the proceeds
thereof to the payment of certain of Mr. Harvey's loan obligations to the bank.
However, the resolutions did not acknowledge the use of such proceeds for this
purpose and the formal loan documents with the bank did not set forth this
condition (though in fact, the proceeds were so applied by the bank).
As collateral for amounts due from Peter R. Harvey, the Company has received the
pledge of 1,523 shares of ARTRA redeemable preferred stock (with a liquidation
value of $1,523,000, plus accrued dividends) which are owned by Mr. Harvey. In
addition, Mr. Harvey has pledged a 25% interest in Industrial Communication
Company (a private company). Such interest is valued by Mr. Harvey at $800,000
to $1,000,000. During 1995, Peter R. Harvey entered into a pledge agreement with
ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067
shares of ARTRA common stock and 707,281 shares of Pure Tech International,
Inc., a publicly traded corporation. Per terms of a February discharge of bank
indebtedness (see Note 6 to the Company's condensed consolidated financial
statements), ARTRA received additional collateral from Mr. Harvey consisting of
a $2,150,000 security interest in certain real estate, subordinated to the
bank's $850,000 security interest in this real estate.
ARTRA has entered into various agreements under which it has sold its common
shares along with options that require ARTRA to repurchase these shares at the
option of the holder, principally one year after the date of each agreement. At
September 26, 1996, options are outstanding that, if exercised, would require
ARTRA to repurchase 98,734 shares of its common stock for an aggregate amount of
$3,565,000. 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.
<PAGE>
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 $21,511,000 outstanding at
September 26, 1997. These redeemable preferred stock issues have various
maturity dates commencing in 1997.
In recent years, the Company has suffered recurring losses from operations and,
at September 26, 1996, 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 September 26, 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
September 26, 1996 and December 28, 1995, approximately $1,900,000 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 September
26, 1996 the interest rate on the revolving credit loan was 9.75%.
Effective February 1, 1996, the Credit Agreement was amended whereby, among
other things, the maturity date of the Credit Agreement was extended until
September 30, 1997, certain loan covenants were amended. The principal payments
under Term Loan B were modified to include twenty-three monthly installments of
$200,000 from November 15, 1995 to September 30, 1997, with the remaining
balance payable at maturity (September 30, 1997). Additionally, in conjunction
with a preferred stock exchange agreement between BCA (the parent of Bagcraft),
Bagcraft and the holder of Bagcraft's 13.5% cumulative redeemable preferred
stock, the lender consented to an advance to Bagcraft of $4,135,000 under the
revolving credit loan to be transferred to ARTRA as a dividend (see Note 10 to
the Company's condensed consolidated financial statements).
As additional compensation for borrowings under the Credit Agreement, the lender
received a detachable warrant, expiring in December 1998, allowing the holder to
purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal
value. Under certain conditions Bagcraft is required to repurchase the warrant
from the lender. The determination of the repurchase price of the warrant is to
be based on the warrant's pro rata share of the highest of book value, appraised
value or market value of Bagcraft. In connection with the February 1, 1996
amendment to the Credit Agreement, the warrant agreement was amended to permit
the holder to purchase 13% of the fully diluted common equity of Bagcraft at the
original nominal purchase price and to extend the expiration date to December
17, 1999.
<PAGE>
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 September 26, 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 September 26, 1996 and December 28, 1995,
Bagcraft had outstanding borrowings of $5,600,000 and $6,300,000,
respectively, 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 September 26, 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 September 26, 1996 and December 28,
1995, Bagcraft had outstanding borrowings of $234,000 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.
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 Credit
Agreement will provide Bagcraft with the ability to fund its long-term capital
requirements. Bagcraft is currently negotiating with the lender to extended the
maturity date (September 30, 1997) and increase the amount of borrowiings
available to it under the Credit Agreement.
Bagcraft anticipates that its 1996 capital expenditures, principally for
manufacturing equipment, will be approximately $2,500,000 and will be funded
principally from the above mentioned credit facilities and also from operations.
Investment In COMFORCE Corporation
At December 28, 1995 ARTRA held common stock ownership interest in COMFORCE of
approximately 25%.
In January 1996, the Company's Board of Directors approved the sale of 200,000
of ARTRA's COMFORCE common shares to certain officers, directors and key
employees of ARTRA for non-interest bearing notes totaling $400,000. The notes,
collateralized by the 200,000 COMFORCE common shares sold, are not payable until
the earlier of the registration of these shares under the Securities Act of 1993
or the expiration of the applicable resale waiting period under Securities Act
Rule 144. Additionally, the noteholders have the right to put their COMFORCE
shares back to ARTRA in full payment of the balance of their notes. Based upon
the preceding factors, the Company has concluded that, for reporting purposes,
it has
<PAGE>
effectively sold options to certain officers, directors and key employees to
acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly, these 200,000
COMFORCE common shares have been removed from the Company's portfolio of
"Available-for-sale securities" and are classified in the Company's condensed
consolidated balance sheet September 26, 1996 as other current assets with an
aggregate value of $400,000, based upon the value of proceeds to be received
upon future exercise of the options. The disposition of these 200,000 COMFORCE
common shares will result in a gain which has been deferred and will not be
recognized in the Company's financial statements until the options to purchase
these 200,000 COMFORCE common shares are exercised. As of September 26, 1996, no
options to acquire any of the 200,000 COMFORCE common shares had been exercised.
During the nine months ended September 26, 1996, ARTRA sold 193,000 COMFORCE
shares in the market. As additional consideration for 1996 short-term loans, the
lenders received 95,000 COMFORCE common shares held by ARTRA. The disposition of
these 288,000 COMFORCE shares resulted in realized gains of $4,823,000 during
the nine months ended September 26, 1996.
At September 26, 1996 ARTRA's remaining investment in COMFORCE (1,813,036
shares, currently a common stock ownership interest of approximately 19%) was
classified in the Company's condensed consolidated balance sheet in noncurrent
assets as "Available-for-sale securities." At September 26, 1996 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $34,960,000. Additionally, at
September 26, 1996, 1,175,000 shares of COMFORCE common stock owned by the
Company have been pledged as collateral for various short-term borrowings.
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 September 26, 1996 and December
28, 1995, respectively, $764,000 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 September 26, 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 September 26, 1996 and December 28, 1995, the Company
had accrued $1,900,000 and $1,500,000 respectively, for potential
business-related litigation and environmental liabilities. 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 September 26, 1996, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $33,000,000 available to be applied against
future taxable income, if any. ARTRA's tax loss carryforwards of approximately
$22,000,000 expire principally in 2003 - 2010. Additionally, ARTRA's
discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss
carryforwards of approximately $11,000,000 available to be applied against
future taxable income, if any. In recent years, the Company has issued shares of
its common stock to repay various debt obligations, as consideration for
acquisitions, to fund working capital obligations and as consideration for
various other
<PAGE>
transactions. Section 382 of the Internal Revenue Code of 1986 limits a
corporation's utilization of its Federal income tax loss carryforwards when
certain changes in the ownership of a corporation's common stock occurs. In the
opinion of management, the Company is not currently subject to such limitations
regarding the utilization of its Federal income tax loss carryforwards. Should
the Company continue to issue a significant number of shares of its common
stock, it could trigger a limitation that would prevent it from utilizing a
substantial portion of its Federal income tax loss carryforwards.
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in our economy; however, to the
extent permitted by competition, the Company generally passes increased costs to
its customers by increasing sales prices over time.
Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. This new accounting principle is effective for the
Company's fiscal year ending December 26, 1996. The Company believes that
adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock based
compensation is not mandatory, the pronouncement requires companies that choose
not to adopt the new fair value accounting, to disclose the pro-forma net income
and earnings per share under the new method. This new accounting principle is
effective for the Company's fiscal year ending December 26, 1996. The Company
believes that adoption will not have a material impact on its financial
statements as the Company will not adopt the new fair value accounting, but
instead comply with the disclosure requirements.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT 11
Computation of earnings per share and equivalent share of
common stock for the nine months ended September 26, 1996 and
September 28, 1995.
(b) Reports on Form 8-K:
On August 23, 1996, the Registrant filed Form 8-K to report
that the Registrant and its 100% owned subsidiary, Fill-Mor
Holding, Inc. entered into a $2,500,000 term loan agreement
with a bank..
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ARTRA GROUP INCORPORATED
________________________
Registrant
Dated: November 12, 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)
Nine Months Ended
--------------------
Line Sept 26, Sept 28,
- ---- 1996 1995*
-------- --------
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of
common stock outstanding during the period 7,472 6,712
2 Net additional shares assuming stock options
and warrants exercised and proceeds used
to purchase treasury shares 398 --
-------- --------
3 Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 7,870 6,712
======== ========
EARNINGS (LOSS)
4 Earnings (loss) from continuing operations $ 3,523 ($12,543)
5 Less dividends applicable to
redeemable preferred stock (463) (422)
6 Less redeemable common stock accretion (297) (246)
-------- --------
7 Amount for per share computation $ 2,763 ($13,211)
======== ========
8 Earnings (loss) before extraordinary credit $ 3,523 ($21,699)
9 Less dividends applicable to
redeemable preferred stock (463) (422)
10 Less redeemable common stock accretion (297) (246)
-------- --------
11 Amount for per share computation $ 2,763 ($22,367)
======== ========
12 Net earnings (loss) $ 12,947 ($12,586)
13 Less dividends applicable to
redeemable preferred stock (463) (422)
14 Less redeemable common stock accretion (297) (246)
-------- --------
15 Amount for per share computation $ 12,187 ($13,254)
======== ========
PER SHARE AMOUNTS
Earnings (loss) from continuing operations
(line 7 / line 3) $ 0.32 ($ 1.96)
======== ========
Earnings (loss) before extraordinary credit
(line 11 / line 3) $ 0.32 ($ 3.32)
======== ========
Net earnings (loss)
(line 15 / line 3) $ 1.55 ($ 1.97)
======== ========
Earnings (loss) per share is computed by dividing net earnings (loss),
less redeemable preferred stock dividends and redeemable common stock
accretion, by the weighted average number of shares of common stock and
common stock equivalents (redeemable common stock, stock options and
warrants), unless anti-dilutive, outstanding during the period. Fully
diluted earnings (loss) per share are not presented since the result is
equivalent to primary earnings (loss) per share.
- ---------------
* As reclassified for discontinued operations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 26, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000200243
<NAME> ARTRA GROUP INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-26-1996
<PERIOD-START> DEC-29-1995
<PERIOD-END> SEP-26-1996
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21,511
0
<COMMON> 5,777
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