SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-3916
ARTRA GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1095978
-------------------------------- -----------------
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
500 Central Avenue, Northfield, IL 60093
-------------------------------------- --------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (847) 441-6650
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1997
------------------------------- -------------------------------
Common stock, without par value 7,885,420
<PAGE>
ARTRA GROUP INCORPORATED
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 27, 1997 and December 26, 1996 2
Condensed Consolidated Statements of Operations
Three Months Ended March 27, 1997
and March 28, 1996 4
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Three Months Ended March 27, 1997 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 27, 1997
and March 28, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
PART II OTHER INFORMATION
Item 1. LegalProceedings 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
March 27, December 26,
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and equivalents $48 $171
Receivables, less allowance for
doubtful accounts and markdowns of
$497 in 1997 and $512 in 1996 9,224 8,267
Inventories 19,356 14,967
Available-for-sale securities 14,612 22,564
Other 985 931
----------- -----------
Total current assets 44,225 46,900
----------- -----------
Property, plant and equipment 47,678 45,414
Less accumulated depreciation and amortization 21,464 20,480
----------- -----------
26,214 24,934
----------- -----------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of
$2,159 in 1997 and $2,083 in 1996 2,979 2,995
Other 1,215 2,550
----------- -----------
4,194 5,545
----------- -----------
$74,633 $77,379
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
March 27, December 26,
1997 1996
----------- -----------
LIABILITIES
Current liabilities:
Notes payable, including amounts
due to related parties of
$4,800 in 1997 and $3,600 in 1996 $18,158 $18,631
Current maturities of long-term debt 2,712 2,712
Accounts payable 7,296 5,129
Accrued expenses 10,386 10,394
Income taxes 316 478
Bagcraft detachable put warrant - 1,500
Redeemable preferred stock 11,403 11,100
Liabilities of discontinued operations 321 348
----------- -----------
Total current liabilities 50,592 50,292
----------- -----------
Long-term debt 39,934 34,207
Other noncurrent liabilities 2,551 2,135
Commitments and contingencies
Redeemable common stock,
issued 72,984 shares in 1997
and 98,734 shares in 1996 3,073 3,657
Redeemable preferred stock 8,895 8,678
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value;
authorized 20,000,000 shares;
issued 7,820,064 shares in 1997
and 7,624,766 shares in 1996 5,920 5,793
Additional paid-in capital 41,155 40,211
Unrealized appreciation of investments 17,722 25,719
Receivable from related party,
including accrued interest (6,754) (6,468)
Accumulated deficit (88,403) (86,793)
----------- -----------
(30,360) (21,538)
Less treasury stock, 7,628 shares, at cost 52 52
----------- -----------
(30,412) (21,590)
----------- -----------
$74,633 $77,379
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
Three Months Ended
-----------------------
March 27, March 28,
1997 1996
---------- ----------
Net sales $28,461 $28,402
---------- ----------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization 22,394 23,141
Selling, general and administrative 3,949 3,800
Depreciation and amortization 1,061 976
---------- ----------
27,404 27,917
---------- ----------
Operating earnings 1,057 485
---------- ----------
Other income (expense):
Interest expense (1,828) (1,737)
Amortization of debt discount (675) (10)
Realized gain on disposal
of available-for-sale securities 213 1,043
Other income (expense), net 37 (131)
---------- ----------
(2,253) (835)
---------- ----------
Loss before income taxes,
minority interest and extraordinary credit (1,196) (350)
Credit for income taxes 201 -
Minority interest (358) 553
---------- ----------
Earnings (loss) before extraordinary credit (1,353) 203
Extraordinary credit,
net discharge of indebtedness - 9,424
---------- ----------
Net earnings (loss) (1,353) 9,627
Dividends applicable to
redeemable preferred stock (162) (148)
Reduction of retained earnings
applicable to redeemable common stock (95) (86)
---------- ----------
Earnings (loss) applicable to common shares ($1,610) $9,393
========== ==========
Earnings (loss) per share:
Loss before extraordinary credit ($0.21) ($0.01)
Extraordinary credit - 1.23
---------- ----------
Net earnings ($0.21) $1.22
========== ==========
Weighted average number of shares
of common stock and common stock
equivalents outstanding 7,840 7,673
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited 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 26, 1996 7,624,766 $5,793 $40,211 $25,719 ($6,468) ($86,793) 7,628 ($52) ($21,590)
Net earnings - - - - - (1,353) - - (1,353)
Common stock issued
to pay liabilities 39,955 30 184 - - - - - 214
Increase in receivable
from related party,
including accrued interest - - - - (286) - - - (286)
Decrease in unrealized
appreciation of investments - - - (7,997) - - - - (7,997)
Exercise of stock options
and warrants 39,800 30 148 - - - - - 178
Redeemable common stock
obligation paid by the issuance
of additional common shares 115,543 67 612 - - - - - 679
Redeemable common
stock accretion - - - - - (95) - - (95)
Redeemable preferred
stock dividends - - - - - (162) - - (162)
---------- ------- ------- --------- -------- -------- ------ ----- ----------
Balance at March 27, 1997 7,820,064 $5,920 $41,155 $17,722 ($6,754) ($88,403) 7,628 ($52) ($30,412)
========== ======= ======= ========= ======== ======== ====== ===== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Three Months Ended
-----------------------
March 27, March 28,
1997 1996
---------- ----------
Net cash flows used by operating activities ($1,631) ($648)
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,008) (719)
Acquisition of AB Specialty, net of deposit (1,131) -
Proceeds from sale of COMFORCE common stock - 633
Decrease in unexpended plant construction funds - 552
Other - 37
---------- ----------
Net cash flows from (used by) investing activities (2,139) 503
---------- ----------
Cash flows from financing activities:
Net decrease in short-term debt (320) (5,571)
Proceeds from long-term borrowings 34,325 35,914
Reduction of long-term debt (29,036) (32,557)
Redeem detachable put warrant (1,500) -
Exercise stock options and warrants 178 83
---------- ----------
Net cash flows from (used by) financing activities 3,647 (2,131)
---------- ----------
Decrease in cash and cash equivalents (123) (2,276)
Cash and equivalents, beginning of period 171 2,347
---------- ----------
Cash and equivalents, end of period $48 $71
========== ==========
Supplemental cash flow information:
Cash paid during the period for:
Interest $1,203 $1,755
Income taxes paid, net 24 8
Supplemental schedule of noncash
investing and financing activities:
BCA Holdings redeemable preferred stock
issued in exchange for
Bagcraft redeemable preferred stock - 8,135
Issue common stock
to pay down liabilities 214 280
Issue common stock to
pay redeemable common stock put obligation 679 -
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
ARTRA GROUP Incorporated ("ARTRA" or the "Company"), 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.
The Company's condensed consolidated financial statements are presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. In the opinion of
the Company, the accompanying condensed consolidated financial statements
reflect all normal recurring adjustments necessary to present fairly the
financial position as of March 27, 1997, and the results of operations and
changes in cash flows for the three month periods ended March 27, 1997 and March
28, 1996. 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 credit arrangements, certain of which are in default, and to fund its
debt service and liquidity requirements in 1997. 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 6, Notes Payable, and Note 7, Long-Term Debt, for
further discussion of the status of credit arrangements and restrictions on the
ability of operating subsidiaries to fund ARTRA corporate obligations. Due to
its limited ability to receive operating funds from its subsidiaries, ARTRA has
historically met its operating expenditures with funds generated by alternative
sources, such as private placements of ARTRA common stock and notes, sales of
ARTRA common stock with put options, loans from officers/directors and private
investors, as well as through sales of assets and/or other equity infusions.
ARTRA plans to continue to seek such alternative sources of funds to meet its
future operating expenditures.
ARTRA 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 26,
1996, 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 26, 1996 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. CONCENTRATION OF RISK
The accounts receivable of the Company's Bagcraft subsidiary at March 27, 1997
consist primarily of amounts due from companies in the food industry. As a
result, the collectibility of these receivables is dependent, to an extent, upon
the economic condition and financial stability of the food industry. Credit risk
is minimized as a result of the large number and diverse nature of Bagcraft's
customer base. Bagcraft's major customers include some of the largest companies
in the food industry. At March 27, 1997, Bagcraft had 10 customers with accounts
receivable balances that aggregated approximately 35% of the Company's total
trade accounts receivable. In fiscal year 1996 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)
3. INVENTORIES
Inventories (in thousands) consist of:
March 27, December 26,
1997 1996
------- -------
Raw materials and supplies $ 5,822 $ 5,582
Work in process 341 287
Finished goods 13,193 9,098
------- -------
$ 19,356 $ 14,967
======= =======
4. INVESTMENT IN COMFORCE CORPORATION
At March 27, 1997 ARTRA's investment in COMFORCE Corporation ("COMFORCE",
formerly the Lori Corporation, "Lori"), 1,744,703 shares held by the Company and
its Fill-Mor Holding, Inc. ("Fill-Mor") subsidiary, represented approximately
14% of COMFORCE's outstanding common shares. The investment in COMFORCE common
stock is accounted for under the provisions of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." Under this statement ARTRA's
investment in COMFORCE is classified as available for sale securities and is
stated at fair value. The Company's operating plan for fiscal year 1997
anticipates the sale of these marketable securities, with proceeds to be used
principally to pay down Corporate debt obligations and fund working capital
requirements. Accordingly, ARTRA's investment in COMFORCE common stock is
classified in the Company's condensed consolidated balance as a current asset.
At March 27, 1997 the gross unrealized gain relating to ARTRA's investment in
COMFORCE, reflected as a separate component of shareholders' equity, was
$17,722,000.
As discussed in Note 6, at March 27, 1997, 1,690,000 shares of COMFORCE common
stock owned by the Company and its Fill-Mor subsidiary have been pledged as
collateral for various short-term borrowings and 54,703 shares of COMFORCE
common stock owned by the Company and its Fill-Mor subsidiary remain
unencumbered.
In conjunction with COMFORCE's 1995 acquisition of its COMFORCE Telecom
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 March 27, 1997 and
December 26, 1996, $321,000 and $348,000, respectively, of such pre-existing
Lori liabilities were classified in ARTRA's consolidated balance as current
liabilities of discontinued operations.
Effective December 19, 1996, ARTRA and COMFORCE agreed to settle various
differences in the interpretation of certain agreements relating to the COMFORCE
Telecom acquisition pursuant to which COMFORCE agreed to include in a proposed
underwritten public offering 380,000 shares of COMFORCE common stock held by
ARTRA and its Fill-Mor subsidiary and ARTRA agreed to a Lock-up agreement which
limits its ability to sell its remaining COMFORCE common shares for a period of
360 days after the effective date of COMFORCE's proposed underwritten public
offering. COMFORCE did not retain an underwriter for the proposed underwritten
public offering and, accordingly, effective April 30, 1997 ARTRA was released
from the provisions of the Lock-up Agreement.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In March 1997, a lender received 25,000 COMFORCE common shares held by ARTRA as
additional consideration for a short-term loan. The disposition of these 25,000
COMFORCE common shares resulted in a realized gain of $213,000, with cost
determined by average cost.
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 consolidated
balance sheet at December 26, 1996 as other receivables 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
resulted 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 March 27, 1997, 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, the lender
received 25,000 COMFORCE common shares held by ARTRA. In March 1996, ARTRA sold
93,000 COMFORCE shares in the market, with the proceeds of approximately
$630,000 used for working capital. The disposition of these 118,000 COMFORCE
common shares during the quarter ended March 28, 1996 resulted in realized gains
of $1,043,000, with cost determined by average cost.
5. 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 (see Note 9) along with proceeds received from a
short-term loan agreement with an unaffiliated company that was subsequently
repaid in April 1996. 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
========
6. NOTES PAYABLE
Notes payable (in thousands) consist of:
March 27, December 26,
1997 1996
------- -------
ARTRA bank notes payable,
interest at the lender's index rate $ - $ 2,500
ARTRA 12% secured promissory notes 7,675 7,675
Amounts due to related parties,
interest principally at 10% 4,800 3,600
Other, interest from 10% to 20%
5,683 4,856
------- -------
$ 18,158 $ 18,631
======= =======
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, which provided for
interest payable monthly at the bank's reference rate, was guaranteed by ARTRA
and was collateralized by 1,265,000 shares of COMFORCE common stock. Proceeds of
the loan were used for working capital. In March 1997, the loan was repaid with
proceeds from other short-term borrowings as discussed below.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Secured Promissory Notes
In April 1996, ARTRA commenced a private placement of $7,675,000 of 12% secured
promissory notes due April 15, 1997. As additional consideration the noteholders
received warrants to purchase an aggregate of 418,750 ARTRA common shares at a
price of $6.00 per share. The warrants expire April 15, 1999. The warrantholders
have the right to put these warrants back to ARTRA at any time during the period
April 15, 1997 to October 15, 1997, at a price of $2.00 per share. The cost of
this obligation ($837,500 if all warrants are put back to the Company) is being
accrued in the Company's financial statements as a charge to interest expense
over the period April 15, 1996 (the commencement date of the private placement)
through April 15, 1997 (the maturity date of the notes as well as the date the
warrantholders have the right to put their warrants back to ARTRA). 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. Through May 6, 1997, the Company has repaid secured promissory
notes with an aggregate principal balance of $4,175,000. The note payments were
funded with the proceeds of additional short-term borrowings and with funds
received from the Company's Bagcraft subsidiary in accordance with a May 1997
amendment to its credit agreement (see Note 7). The maturity date of the
remaining unpaid secured promissory notes, with an aggregate principal balance
of $3,500,000, has been extended by the noteholders until May 15, 1997. The
Company is currently negotiating with several potential lenders to refinance
these notes and other ARTRA debt obligations.
Amounts Due To Related Parties
At March 27, 1997 and December 26, 1996, 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. The proceeds of this loan were used to pay down various ARTRA
short-term loans and other debt obligations. In December 1995 the unaffiliated
company received 126,222 shares of ARTRA common in payment of past due interest
through October 31, 1995. Interest on the loans has been paid through March,
1997. Payment on the loans was due March 31, 1994, however, the lender has not
demanded payment. In February 1997, the lender received a warrant to purchase an
additional 100,000 ARTRA common shares at $5.625 per share as consideration for
not demanding payment of this obligation. In April 1997, the lender received a
warrant to purchase an additional 100,000 ARTRA common shares at $5.00 per share
as consideration for not demanding payment of this obligation.
In August, 1996, ARTRA borrowed $500,000 from a private investor, evidenced by a
short-term note, due December 23, 1996, bearing interest at 10%. The loan was
collateralized by 125,000 shares of COMFORCE common stock owned by the Company's
Fill-Mor subsidiary. As additional compensation for the loan, the private
investor received a warrant, expiring in 2001, to purchase 25,000 ARTRA common
shares at a price of $5.00 per share. The proceeds of the loan were used for
working capital. At the Company's annual meeting of shareholders, held August
29, 1996, the private investor was elected to the Company's board of directors.
In December 1996, the loan was extended until April 23, 1997 and the lender
received, as additional compensation, a warrant, expiring in 2001, to purchase
25,000 ARTRA common shares at a price of $5.875 per share. In January, 1997,
ARTRA borrowed an additional $300,000 from this lender evidenced by an
short-term note, due December 23, 1997, bearing interest at 8%. The loan was
collateralized by 100,000 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 2002, to purchase 25,000 ARTRA common shares at
a price of $5.75 per share. In March 1997, ARTRA borrowed an additional
$1,000,000 from this lender evidenced by a short-term note, due May 26, 1997,
bearing interest at 12%. The loan was collateralized by 585,000 shares of
COMFORCE common stock owned by the Company's Fill-Mor subsidiary. As additional
compensation, the lender received an option to purchase 25,000 shares of
COMFORCE common stock, owned by the Company's Fill-Mor subsidiary, at a price of
$4.00 per share. The proceeds from this loan were used in
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
part to repay the ARTRA/Fill-Mor $2,500,000 bank term loan described above. As
of March 27, 1997, ARTRA had total outstanding borrowings of $1,800,000 from
this lender collateralized by 810,000 shares of COMFORCE common stock.
In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by a
note, due April 20, 1998, bearing interest at 12%. The lender is holding 810,000
shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary as
collateral for this loan. As additional compensation, the lender received a
warrant to purchase 333,333 ARTRA common shares at a price of $5.00 per share.
The warrantholder has the right to put this warrant back to ARTRA at any time
during the period April 21, 1998 to April 20, 2000, for a total purchase price
of $1,000,000. The cost of this obligation will be accrued in the Company's
financial statements as a charge to interest expense over the period April 21,
1997 (the date of the loan) through April 21, 1998 (the date the warrantholder
has the right to put the warrant back to ARTRA). The proceeds from this loan
were used to repay $1,800,000 of borrowings from this lender outstanding at
March 27, 1997 and pay down other ARTRA debt obligations.
In May, 1996, ARTRA borrowed $100,000 from a private investor, evidenced by an
unsecured short-term note, due August 7, 1996, and renewed to February 6, 1997,
bearing interest at 10%. The proceeds of the loan were used for working capital.
At the Company's annual meeting of shareholders, held August 29, 1996, private
investor was elected to the Company's board of directors. Effective January 17,
1997, private investor exercised his conversion rights and received 18,182
shares of ARTRA common stock as payment of the principal balance of his note.
Other
In March 1997, ARTRA borrowed $1,000,000 from an unaffiliated corporation
evidenced by an short-term note, due May 26, 1997, bearing interest at 12%. The
loan is collateralized by 630,000 shares of COMFORCE common stock owned by the
Company's Fill-Mor subsidiary. As additional compensation, the lender received
an option to purchase 25,000 shares of COMFORCE common stock owned by the
Company's Fill-Mor subsidiary at a price of $4.00 per share. If the note is not
paid at maturity, the option price is reduced to $2.00 per share and, for every
30 days the note is outstanding past June 26, 1997, the lender will receive an
option to purchase an additional 5,000 COMFORCE common shares at a price of
$2.00 per share. The proceeds from this loan were used in part to repay the
ARTRA/Fill-Mor $2,500,000 bank term loan described above.
At March 27, 1997 and December 26, 1996, ARTRA was the obligor under two demand
notes issued to an unaffiliated company, in the amount of $2,266,000, including
accrued interest. The notes were issued in October, 1990 with interest at 15
percent. ARTRA is currently negotiating with the noteholder to extend or
refinance this obligation.
At March 27, 1997 and December 26, 1996, ARTRA also had outstanding short-term
borrowings from other unrelated parties aggregating approximately $2,400,000 and
$2,000,000, respectively, of which $500,000 and $650,000, respectively were past
due. The remaining amounts come due at various times in 1997 and 1998. The notes
were issued at various times during the period October 1990 to March 1997, with
interest rates varying between 8 % and 15%. At March 27, 1997 short-term loans
aggregating $800,000 included above were collateralized by 225,000 shares of
COMFORCE common stock.
In October 1996 the Company and its Fill-Mor subsidiary entered into a margin
loan agreement with a financial institution which provided for borrowings of
$600,000, with interest approximating the prime rate. Borrowings under the loan
agreement were collateralized by 215,000 shares of COMFORCE common stock owned
by the Company's Fill-Mor subsidiary. The proceeds of the loan were used for
working capital. In January 1997, the loan was repaid with proceeds from other
short-term borrowings.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. LONG-TERM DEBT
Long-term debt (in thousands) consists of:
March 27, December 26,
1997 1996
------- -------
Bagcraft:
Credit Agreement:
Term loan, interest at
the lender's index rate plus .25% $ 20,000 $ 20,000
Revolving credit loan,
interest at the lender's index 13,282 7,990
Unamortized discount (1,314) (1,752)
City of Baxter Springs,
Kansas loan agreements,
interest at varying rates 10,678 10,681
------- -------
42,646 36,919
Current scheduled maturities (2,712) (2,712)
------- -------
$ 39,934 $ 34,207
======= =======
Bagcraft entered into a credit agreement, dated as of December 17, 1993 (the
"Credit Agreement") that initially provided for a revolving credit loan with
interest at the lender's index rate plus 1.5% and two separate term loans. The
term loans were 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. The Credit Agreement, as amended, had been extended
to mature on September 30, 1997.
In December 1996, the Credit Agreement was amended and restated whereby, among
other things, the maturity date of the Credit Agreement was extended to
September 30, 2002 and certain loan covenants were amended. Term Loan A and Term
Loan B, as previously defined in the Credit Agreement were consolidated into a
new $20,000,000 term loan with interest at the lender's index rate plus .25%
(8.5% at March 27, 1997 and December 26, 1996). Principal payments under the
term loan were modified to provide for annual principal payments (payable in
quarterly installments) in the amount of $2,000,000 in 1997 through 1999;
$3,000,000 in 2000 and 2001; and $8,000,000 in 2002. The amended and restated
Credit Agreement reduced the interest on the revolving credit loan to the
lender's index rate and also provided for a $3,00,000 capital expenditures line
of credit with interest at the lender's index rate plus .25%.
The amount available to Bagcraft under the revolving credit loan is subject to a
borrowing base, as defined in the Credit Agreement, up to a maximum of
$18,000,000. At March 27, 1997 and December 26, 1996, approximately $4,700,000
and $6,200,000, respectively, was available and unused by Bagcraft under the
revolving credit loan. Borrowings under the revolving credit loan are payable
upon maturity of the Credit Agreement, unless accelerated under terms of the
Credit Agreement. At March 27, 1997 and December 26, 1996, the interest rate on
the revolving credit loan was 8.25%.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Borrowings under the Credit Agreement are collateralized by the common stock and
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 limit future capital expenditures and restricts additional loans, dividend
payments and payments to related parties. In addition, the Credit Agreement
prohibits changes in ownership of Bagcraft. At March 27, 1997 Bagcraft was in
compliance with the provisions of its Credit Agreement.
Effective May 5, 1997, the Credit Agreement was amended to provide for a
$3,000,000 term loan (Term Loan B) with interest at the lender's index rate plus
.75%. Term Loan B is payable on May 8, 1998, unless accelerated under terms of
the Credit Agreement. The proceeds of Term Loan B were advanced to ARTRA under
terms of an intercompany note payable to Bagcraft on May 8, 1998. ARTRA used the
proceeds of this loan to repay certain ARTRA debt obligations.
As additional compensation for borrowings under the Credit Agreement, in
December 1993, the lender received a detachable warrant ("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. In January 1997, in accordance
with the December 1996 amendment to the Credit Agreement, Bagcraft repurchased
50% of the Warrant (6.5% of the fully diluted common equity of Bagcraft) for
$1,500,000. Bagcraft can repurchase the remaining 50% of the Warrant on or after
December 17, 1997 for an amount based upon the Warrant's pro rata share of the
highest of book value, appraised value or market value of Bagcraft as noted
above. In accordance with the May 5, 1997 amendment to the Credit Agreement the
Warrant was amended. In the event there is a change in Bagcraft's ownership
through May 30, 1998, the lender is entitled to receive an amount equal to 6.5%
of the fully diluted common equity of Bagcraft, based upon the fair value of
Bagcraft at the date of a change of ownership, less the $1,500,000 the lender
received in January 1997 when Bagcraft repurchased 50% of the Warrant.
In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a
$12,500,000 financing package associated with the construction of a new 265,000
sq. ft. production facility in Baxter Springs, Kansas. The financing package,
funded by a combination of Federal, state and local funds, consists of the
following loan agreements payable by Bagcraft directly to the City of Baxter
Springs:
A $7,000,000 promissory note payable in ten installments of $700,000
due annually on July 21 of each year beginning in 1995 through maturity
on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is
payable semi-annually. At March 27, 1997 and December 26, 1996,
Bagcraft had outstanding borrowings of $5,600,000 under this loan
agreement.
A $5,000,000 subordinated promissory note payable as follows: $150,000
due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The
subordinated promissory note is non-interest bearing, subject to
certain repayment provisions as defined in the agreement (as amended).
At March 27, 1997 and December 26, 1996, Bagcraft had outstanding
borrowings of $4,850,000 under this loan agreement.
Two separate $250,000 subordinated promissory notes payable in varying
installments through January 20, 2025. The subordinated promissory
notes are non-interest bearing, subject to certain repayment provisions
as defined in the agreement. At March 27, 1997 and December 26, 1996,
Bagcraft had outstanding borrowings of $228,000 and $231,000,
respectively, under this loan agreement.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
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.
8. REDEEMABLE COMMON STOCK
In recent years ARTRA has entered into various agreements under which it has
sold its common shares along with options that require ARTRA to repurchase these
shares at the option of the holder, principally one year after the date of each
agreement. The difference between the option price and the net proceeds received
is amortized over the life of the options by a charge to retained earnings. At
March 27, 1997 and December 26, 1996 options were outstanding that, if
exercised, would require ARTRA to repurchase 72,984 and 98,734 shares of its
common stock for an aggregate amount of $3,073,000 and $3,657,000, respectively.
During 1987, ARTRA entered into an agreement with a private corporation under
which it sold its common shares along with a put option that required ARTRA to
repurchase these shares at the option of the holder. A major shareholder and
executive officer of the private corporation is an ARTRA director. The put
option agreement has been extended from time to time, most recently in November
1992. The private corporation received the right to sell to ARTRA 23,004 shares
of ARTRA common stock at an initial put price of $56.76 pre share. The option
price increases by an amount equal to 15% per annum for each day from March 1,
1991 to the date of payment by ARTRA, which option expires December 31, 1997. At
March 27, 1997, the option price was $86.34 per share.
As additional consideration for its guaranty of $2,500,000 of ARTRA bank notes
during the period March 1989 through March 1994, the private corporation noted
above received 49,980 ARTRA common shares. On March 31, 1994, ARTRA entered into
a series of agreements with its bank lender and with the above private
corporation. 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
ARTRA note payable and an option to put back to ARTRA its 49,980 shares of ARTRA
common stock at a price of $15.00 per share. The option price increases by $2.25
per share annually ($21.75 per share at March 27, 1997). During the first
quarter of 1996 the ARTRA bank notes were discharged (see Note 5 ) and the
$2,500,000 note payable to the private corporation and related accrued interest
was paid in full principally with proceeds from additional short-term
borrowings.
In January 1997, the Company settled an obligation that would have required
ARTRA to repurchase 25,750 common shares for a total of $679,000. The option
holder retained the 25,750 ARTRA common shares subject to the option agreement
and received an additional 89,793 ARTRA common shares in settlement of all
obligations due under the option agreement. Accordingly, the 25,750 shares of
ARTRA common stock subject to the option agreement were removed from redeemable
common stock and reclassified to shareholders' equity.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
9. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock (in thousands) consists of:
<TABLE>
<CAPTION>
March 27, December 26,
1997 1996
------- -------
<S> <C> <C>
Currently payable:
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 $ 2,036 $ 2,007
BCA Holdings preferred stock, Series B,
$1.00 par value, 6% cumulative,
including accumulated dividends;
redeemable in 1997 with a liquidation
preference of $1,000 per share;
8,135 shares authorized and issued 9,367 9,093
------- -------
$ 11,403 $ 11,100
======= =======
Noncurrent:
ARTRA redeemable preferred stock,
Series A, $1,000 par value,
6% cumulative payment-in-kind,
including accumulated dividends,
net of unamortized discount
of $1,190 in 1997 and $1,271 in 1996;
redeemable March 1, 2000
at $1,000 per share plus accrued dividends;
authorized 2,000,000 shares all series;
issued 3,750 shares $ 4,477 $ 4,315
BCA Holdings preferred stock, Series A,
$1.00 par value, 6% cumulative,
including accumulated dividends;
redeemable in 1997 with a liquidation
preference of $1,000 per share;
10,000 shares authorized; issued 3,675 shares 4,418 4,363
------- -------
$ 8,895 $ 8,678
======= =======
</TABLE>
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
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 $1,917,000 and $1,836,000 were accrued at March 27,
1997 and December 26, 1996, 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 Series A preferred stock
having a liquidation value of $3,000,000. Accumulated dividends of $743,000 and
$688,000 were accrued at March 27, 1997 and December 26, 1996, respectively.
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 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 $1,171,000 and
$1,142,000 were accrued at March 27, 1997 and December 26, 1996, respectively.
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
consolidated statement of operations as minority interest.
The BCA Series B preferred stock is redeemable on June 1, 1997. Accumulated
dividends of $1,232,000 and $958,000 were accrued at March 27, 1997 and December
26, 1996, respectively.
In conjunction with the preferred stock exchange agreement, Bagcraft's lender
consented to an advance of $4,135,000 under Bagcraft's revolving credit loan 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
Note 5.
10. INCOME TAXES
No income tax benefit was recognized in connection with the Company's 1997
pre-tax loss due to the Company's tax loss carryforwards and the uncertainty of
future taxable income. The 1996 extraordinary credit represents a net gain from
discharge of indebtedness. No income tax expense is reflected in the Company's
financial statements resulting from the 1996 extraordinary due to the
utilization of tax loss carryforwards.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
At March 27, 1997, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $36,000,000, expiring principally in 2002 - 2010,
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.
11. 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.
12. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At March 27, 1997 and December 26, 1996,
the Company had accrued current liabilities of $2,000,000 and $1,900,000,
respectively, for potential business-related litigation and environmental
liabilities. While these litigation and environmental matters involve wide
ranges of potential liability, management does not believe the outcome of these
matters will have a material adverse effect on the Company's financial
statements. However, ARTRA may not have available funds to pay liabilities
arising out of these business-related litigation and environmental matters or,
in certain instances, to provide for its legal defense.
In November, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth
Judicial Circuit for the state of Illinois (the "State Court Action") against
Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K.
Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P.
Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with
DPK), James F. Massey and William Rifkind relating to the acquisition of
Envirodyne in 1989 by Emerald Acquisition Corp. ("Emerald"). Envirodyne had
filed a Chapter 11 bankruptcy on January 7, 1993 which provided ARTRA with no
value in the Emerald stock and junior debentures received in connection with the
acquisition. 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 was denied on October 31, 1996 by the United States District Court.
ARTRA has a right to appeal the District Court's decision. This appeal has been
filed in the United States Court of Appeals for the Seventh Circuit.
On July 18, 1995, ARTRA filed a Fourth Amended Complaint in the State Court
Action for breach of fiduciary duty, fraudulent misrepresentation, negligent
misrepresentation, breach of contract and promissory estoppel. In the State
Court Action, ARTRA seeks compensatory damages of $136.2 million, punitive
damages of $408.6 million and the
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
repayment of 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. The cause of action against 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 was
granted on June 4, 1996. The Company has appealed this decision.
Effective December 31, 1989, ARTRA completed the disposal of its former
scientific products segment with the sale of its Welch subsidiary, formerly
Sargent-Welch Scientific Company, to a privately held corporation whose
president and sole shareholder was a vice president of Welch prior to the sale.
The consideration received by ARTRA consisted of cash at closing, $2,625,000
payable June 30, 1997, with interest at 10% beginning June 30, 1990, under terms
of a noncompetition agreement and the buyer's subordinated note in the principal
amount of $2,500,000.
In December, 1991 Welch filed a lawsuit against ARTRA alleging that certain
representations, warranties and covenants made by ARTRA, which were contained in
the parties' Stock Purchase Agreement, were false. Welch was seeking
compensatory damages in the amount of $3,800,000. Subsequently, ARTRA had filed
a counterclaim predicated upon Welch's breach of the payment terms of the
parties' Non-Competition Agreement and the Subordinated Note executed by Welch.
ARTRA was seeking damages in the amount of approximately $5,300,000 plus accrued
interest. On November 23, 1994, the Circuit Court of Cook County Law Division in
Chicago granted a judgment in favor of ARTRA affirming the validity of the
amounts due under the Non-Competition Agreement and the Subordinated Note of
$2,625,000 and $2,500,000, respectively.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by
Welch under terms of the noncompetition agreement and the subordinated security.
Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a
subordinated note in the principal amount of $640,000 payable June 30, 2001. In
June 1996 the note was paid in accordance with terms of the settlement agreement
at its present value and ARTRA received proceeds of $342,000.
In January, 1985 the United States Environmental Protection Agency ("EPA")
notified the Company's Bagcraft subsidiary that it was a potentially responsible
party ("PRP") 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 to
formally extinguish the EPA claim. In September 1989, Bagcraft was served with a
complaint filed by the State of Illinois against seventeen parties for alleged
involvement with the Cross Brothers site. The complaint alleges Bagcraft is
responsible for the costs of cleanup incurred and to be incurred. Bagcraft
denies the material allegations an is participating in settlement discussions
with the State and thirteen other potential responsible parties to resolve all
claims associated with the State. An agreement has been reached in principal to
settle the State claim, pending resolution of the terms of an appropriate
consent order. Bagcraft's share of the proposed settlement is approximately
$150,000.
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.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Bagcraft's Chicago facility has also been the subject of allegations that it
violated laws and regulations associated with the Clean Air Act. The facility
has numerous sources of air emissions of volatile organic materials ("VOMs")
associated with its printing operations and is required to maintain and comply
with permits and emissions regulations with regard to each of these emission
sources.
In November of 1995, the EPA issued a Notice of Violation ("NOV") against
Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act
and related regulations. The NOV alleges that the facility installed and
operated emission sources without permits, that it failed to operate air
pollution control equipment at required efficiencies and that there were
releases of VOMs above permitted limits. In April 1997, the EPA filed an
administrative complaint and has proposed a $250,000 civil penalty. Bagcraft has
filed a response to the complaint and is attempting to negotiate a settlement.
Bagcraft reported a release associated with solvent tanks located in a vault at
its Chicago manufacturing facility. After seeking approval from the Illinois
Environmental Protection Agency ("IEPA"), Bagcraft installed and is currently
operating a soil vapor gas extraction system designed to achieve remedial
objectives which the IEPA has determined to be appropriate to the site. Bagcraft
has since received a No Further Recommendation Letter from the IEPA.
Bagcraft has been notified that it may have responsibility with respect to a
clean-up site on Basket Creek Road, Georgia. Bagcraft presently has no
indication of its liability, if any or whether it is a responsible party.
In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of hazardous substances which were stored, disposed
of or otherwise released at this manufacturing facility. This facility was owned
by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from
1968 to 1980. Sherwin-William's current projection of the cost of clean-up is
approximately $5 to $6 million. The Company has filed counterclaims against
Sherwin-Williams and cross claims against other former owners of the property.
The Company also is vigorously defending this action and has raised numerous
defenses. Currently, the case is in its early stages of discovery and the
Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
Several cases have arisen from ARTRA's purchase of Dutch Boy Paints which owned
a facility in Chicago which it purchased from NL Industries. 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 brought a
nuisance action and alleged that ARTRA (and NL Industries, Inc.) had improperly
stored, discarded and disposed of hazardous substances at the Dutch Boy 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 that it would
cost $1,000,000 to remediate the site.
ARTRA and NL Industries, Inc. have counter sued each other and have filed third
party actions against the subsequent owners of the property. The Company is
presently unable to determine its liability, if any, in connection with this
case. The parties were conducting discovery but the case was stayed pending the
resolution of the EPA action described below.
In 1986, in a case titled People of the State of Illinois v. NL Industries,
Inc., ARTRA GROUP Incorporated, et al., the Cook County State's attorney filed
suit seeking response costs in excess of $2,000,000 and treble punitive damages
for costs expended by IEPA in remediating contamination at the Dutch Boy site,
alleging that all former owners contributed to the contamination. In 1989, the
Circuit Court dismissed the action, holding that the state had failed to exhaust
its administrative procedures. In 1992, this holding was reversed by the
Illinois Supreme Court. In 1996, the Illinois Appellate Court affirmed the
District Court's decision to dismiss the case based on lack of due diligence on
the part of the State of Illinois. The State of Illinois has filed a Petition
for Rehearing which was granted. The Company is presently unable to determine
ARTRA's liability, if any, in connection with this case.
On November 17, 1995, the EPA issued letters to ARTRA, NL Industries and others
alleging that they were potentially responsible parties with respect to releases
at the Dutch Boy facility in Chicago and demanding that they remediate the site.
NL Industries entered into a consent decree with EPA in which it agreed to
remediate the site. The Company is presently unable to determine its liability,
if any, in connection with this case.
13. RELATED PARTY TRANSACTIONS
Advances to Peter R. Harvey, ARTRA's president, classified in the condensed
consolidated balance sheet as a reduction of common shareholders' equity,
(in thouands) consist of:
March 27, December 26,
1997 1996
-------- --------
Total advances, including accrued interest $ 8,449 $ 7,998
Less interest for the period January 1, 1993
to date, accrued and fully reserved (1,695) (1,530)
-------- --------
Net advances $ 6,754 $ 6,468
======== ========
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA has total advances due from its president, Peter R. Harvey, of which
$8,449,000 and $7,998,000, including accrued interest, remained outstanding at
March 27, 1997 and December 26, 1996, respectively. The advances bear interest
at the prime rate plus 2% (10.25% at March 27, 1997 and December 26, 1996,
respectively). This receivable from Peter R. Harvey has been classified as a
reduction of common shareholders' equity.
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%. In April 1995 advances from
ARTRA's Fill-Mor subsidiary to Peter R. Harvey totaling $1,540,000 (including
$398,000 of accrued interest) 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 three months ended March 27, 1997 and March
28, 1996 totaled $165,000 and $106,000, respectively.
Peter R. Harvey has not received other than nominal compensation for his
services as an officer or director of ARTRA or any of its subsidiaries since
October of 1990. Additionally, Mr. Harvey has agreed not to accept any
compensation for his services as an officer or director of ARTRA or any of its
subsidiaries until his obligations to ARTRA, described above, are fully
satisfied.
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania
corporation) is permitted to make loans to officers and directors. Further,
under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is
permitted to make loans to an officer (including any officer who is also a
director, as in the case of Peter R. Harvey), whenever, in the judgment of the
directors, the loan can reasonably be expected to benefit Fill-Mor.
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did
not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey.
The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of
Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of
Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan
agreement, a condition of which was the application of a portion of the proceeds
thereof to the payment of certain of Mr. Harvey's loan obligations to the bank.
However, the resolutions did not acknowledge the use of such proceeds for this
purpose and the formal loan documents with the bank did not set forth this
condition (though in fact, the proceeds were so applied by the bank).
As 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 1996 discharge of
bank indebtedness (see Note 5), 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
March 1997, the bank sold its interest in Mr. Harvey's note and the related
collateral to a private investor. ARTRA retained its $2,150,000 security
interest the real estate, subordinated to the noteholder's $850,000 security
interest in this real estate.
In conjunction with COMFORCE's October 1995 acquisition of COMFORCE Telecom,
ARTRA agreed to assume substantially all pre-existing COMFORCE liabilities and
indemnify COMFORCE in the event any future liabilities arise concerning
pre-existing environmental matters and business related litigation. Accordingly,
at March 27, 1997 and December 26, 1996, respectively, $321,000 and $348,000 of
such pre-existing Lori liabilities were classified in ARTRA's consolidated
balance sheet at as current liabilities of discontinued operations.
For a discussion of certain other related party debt obligations see Note 6.
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
14. OTHER INFORMATION
Effective January 2, 1997, Bagcraft purchased the business assets, subject to
buyer's assumption of certain liabilities, of AB Specialty Holding Company, Inc.
("AB") for consideration consisting of cash of approximately $2.4 million. The
purchased assets consisted principally of plant and equipment of approximately
$1.3 million and inventory of approximately $1.1 million. The acquisition of AB,
funded through borrowings under Bagcraft's Credit Agreement, has been accounted
for by the purchase method and, accordingly, the assets and liabilities of AB
were included in the Company's financial statements at their estimated fair
market value at the date of acquisition. The results of operations of AB are not
considered material to the Company's consolidated financial statements. The
acquisition of AB is expected to enhance Bagcraft's specialty bag business. At
December 26, 1996, other noncurrent assets included a deposit of approximately
$1.2 million related to the acquisition of AB.
<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:
Results of Operations
The Company, through its wholly-owned Bagcraft subsidiary, currently operates in
one industry segment as a manufacturer of packaging products principally serving
the food industry. 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) before
extraordinary credit for the three month periods ended March 27, 1997 and March
28, 1996.
Three Months Ended
-----------------------
March 26, March 28,
1997 1996
-------- --------
Net sales 100.0% 100.0%
------ ------
Costs and expenses:
Cost of goods sold, exclusive of
depreciation and amortization 78.7% 81.5%
Selling, general and administrative 13.9% 13.4%
Depreciation and amortization 3.7% 3.4%
------ ------
96.3% 98.3%
------ ------
Operating earnings (loss) 3.7% 1.7%
------ ------
Other income (expense):
Interest expense -6.4% -6.1%
Amortization of debt discount -2.4% -
Realized gain on disposal of
available-for-sale securities .7% 3.7%
Other income (expense), net .1% -.5%
------ ------
-8.0% -2.9%
------ ------
Loss before income taxes,
minority interest
and extraordinary credit -4.3% -1.2%
Provision for income taxes .7% -
Minority interest -1.3% 1.9%
------ ------
Earnings (loss)
before extraordinary credit -4.9% .7%
====== ======
Three Months Ended March 27, 1997 vs. Three Months Ended March 28, 1996
Net sales of $28,461,000 for the three months ended March 27, 1997 were $59,000,
or .2%, higher than net sales for the three months ended March 28, 1996.
Incremental 1997 sales attributable to Bagcraft's January 1997 acquisition of
<PAGE>
the business assets of AB Specialty were principally offset by decreased food
service sales. The 1997 decrease in food service sales is attributable to
customer deferrals of certain key promotions until the second quarter of 1997.
The Company's cost of sales of $22,394,000 for the three months ended March 27,
1997 decreased $747,000 as compared to the three months ended March 28, 1996.
Cost of sales for the three months ended March 28, 1996 was 78.7% of net sales
compared to a cost of sales percentage of 81.5% for the three months ended March
28, 1996. The decrease in cost of sales and cost of sales percentage is
primarily attributable to improved production efficiencies in 1997.
Selling, general and administrative expenses were $3,949,000 for the three
months ended March 27, 1997 as compared to $3,800,000 for the three months ended
March 28, 1996. Selling, general and administrative expenses were 13.9% of net
sales for the three months ended March 27, 1997 as compared to 13.4% of net
sales for the three months ended March 28, 1996. The 1997 increase in selling,
general and administrative expenses is primarily attributable to Bagcraft's
January 1997 acquisition of the business assets of AB Specialty.
Depreciation and amortization expense was $1,061,000 for the three months ended
March 27, 1997 as compared to $976,000 for the three months ended March 28,
1996. Depreciation and amortization expense was 3.7 % of net sales for the three
months ended March 27, 1997 as compared to 3.4% of net sales for the three
months ended March 28, 1996. The 1997 increase in depreciation and amortization
is primarily attributable to Bagcraft's January 1997 acquisition of the business
assets of AB Specialty.
The Company had operating earnings in the three months ended March 27, 1997 of
$1,057,000 as compared to operating earnings of $485,000 in the three months
ended March 28, 1996. The 1997 increase in operating earnings is attributable to
improved operating margins as noted above, partially offset by increased
selling, general and administrative expenses and increased depreciation and
amortization.
Interest expense for the three months ended March 27, 1997 increased $91,000 as
compared to the three months ended March 28, 1996. The 1997 increase is
principally attributable to overall increase in the level of borrowings,
partially offset by lower interest rates attributable to the December 1996
amendment and restatement of Bagcraft's Credit Agreement.
Amortization of debt discount was $675,000 for the three months ended March 27,
1997 as compared to $10,000 for the three months ended March 28, 1996. The 1997
increase is attributable to the December 1996 amendment and restatement of
Bagcraft's Credit Agreement.
No income tax benefit was recognized in connection with the Company's 1997
pre-tax loss due to the Company's tax loss carryforwards and the uncertainty of
future taxable income. The 1996 extraordinary credit represents a net gain from
discharge of indebtedness. No income tax expense is reflected in the Company's
financial statements resulting from the 1996 extraordinary due to the
utilization of tax loss carryforwards.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Cash and cash equivalents decreased $123,000 during the three months ended March
27, 1997. Cash flows used by operating activities of $1,631,000 and cash flows
used by investing activities of $2,139,000 exceeded cash flows from financing
activities of $3,647,000. Cash flows used by operating activities were
principally attributable to the Company's net loss for the quarter ended March
27, 1997 . Cash flows from investing activities principally represent funds
expended to complete Bagcraft's acquisition of the business assets of AB
Specialty and capital expenditures. Cash flows from financing activities were
principally attributable to a net increase in long-term borrowings.
The Company's consolidated working capital deficiency increased $2,975,000 to
$6,367,000 during the three months ended March 27, 1997. The increase in working
capital deficiency is principally attributable to unrealized depreciation of
available-for-sale securities (COMFORCE common stock), partially offset by a
planned inventory build-up and working capital purchased in Bagcraft's January
1997 acquisition of the business assets of AB Specialty.
<PAGE>
Status of Debt Agreements and Operating Plan
At March 27, 1997 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. See Notes
6 and 7 to the Company's condensed consolidated financial statements and
discussion below.
ARTRA Corporate
As of March 27, 1997, the Company's corporate entity had outstanding short-term
indebtedness of approximately $18,200,000, of which $3,500,000 was past due.
At December 26, 1996, 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. The
proceeds of this loan were used to pay down various ARTRA short-term loans and
other debt obligations. In December 1995 the unaffiliated company received
126,222 shares of ARTRA common in payment of past due interest through October
31, 1995. Interest on the loans has been paid through March, 1997. Payment on
the loans was due March 31, 1994, however, the lender has not demanded payment.
In February 1997, the lender received a warrant to purchase an additional
100,000 ARTRA common shares at $5.625 per share as consideration for not
demanding payment of this obligation. In April 1997, the lender received a
warrant to purchase an additional 100,000 ARTRA common shares at $5.00 per share
as consideration for not demanding payment of this obligation.
In April 1996, ARTRA commenced a private placement of $7,675,000 of 12% secured
promissory notes due April 15, 1997. As additional consideration the noteholders
received warrants to purchase an aggregate of 418,750 ARTRA common shares at a
price of $6.00 per share. The warrants expire April 15, 1999. The warrantholders
have the right to put these warrants back to ARTRA at any time during the period
April 15, 1997 to October 15, 1997, at a price of $2.00 per share. The cost of
this obligation ($837,500 if all warrants are put back to the Company) is being
accrued in the Company's financial statements as a charge to interest expense
over the period April 15, 1996 (the commencement date of the private placement)
through April 15, 1997 (the maturity date of the notes as well as the date the
warrantholders have the right to put their warrants back to ARTRA). 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. Through May 6, 1997, the Company has repaid secured promissory
notes with an aggregate principal balance of $4,175,000. The note payments were
funded with the proceeds of additional short-term borrowings and with funds
received from the Company's Bagcraft subsidiary in accordance with a May 1997
amendment to its credit agreement. The maturity date of the remaining unpaid
secured promissory notes, with an aggregate principal balance of $3,500,000, has
been extended by the noteholders until May 15, 1997. The Company is currently
negotiating with several potential lenders to refinance these notes and other
ARTRA debt obligations.
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, which provided for
interest payable monthly at the bank's reference rate was guaranteed by ARTRA
and was collateralized by 1,265,000 shares of COMFORCE common stock. Proceeds of
the loan were used for working capital. In March 1997, the loan was repaid with
proceeds from other short-term borrowings as discussed below.
In August, 1996, ARTRA borrowed $500,000 from a private investor, evidenced by a
short-term note, due December 23, 1996, bearing interest at 10%. The loan was
collateralized by 125,000 shares of COMFORCE common stock owned by the Company's
Fill-Mor subsidiary. As additional compensation for the loan, the private
investor received a warrant, expiring in 2001, to purchase 25,000 ARTRA common
shares at a price of $5.00 per share. The proceeds of the loan were used for
working capital. At the Company's annual meeting of shareholders, held August
29, 1996, the private investor was elected to the Company's board of directors.
In December 1996, the loan was extended until April 23, 1997 and the lender
received, as additional compensation, a warrant , expiring in 2001, to purchase
25,000 ARTRA common shares at a price of $5.875 per share. In January, 1997,
ARTRA borrowed an additional $300,000 from this lender evidenced by an
short-term note,
<PAGE>
due December 23, 1997, bearing interest at 8%. The loan was collateralized by
100,000 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 2002, to purchase 25,000 ARTRA common shares at a price of
$5.75 per share. In March 1997, ARTRA borrowed an additional $1,000,000 from
this lender evidenced by a short-term note, due May 26, 1997, bearing interest
at 12%. The loan was collateralized by 585,000 shares of COMFORCE common stock
owned by the Company's Fill-Mor subsidiary. As additional compensation, the
lender received an option to purchase 25,000 shares of COMFORCE common stock,
owned by the Company's Fill-Mor subsidiary, at a price of $4.00 per share. The
proceeds from this loan were used in part to repay the ARTRA/Fill-Mor $2,500,000
bank term loan described above. As of March 27, 1997, ARTRA had total
outstanding borrowings of $1,800,000 from this lender collateralized by 810,000
shares of COMFORCE common stock.
In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by a
note, due April 20, 1998, bearing interest at 12%. The lender is holding 810,000
shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary as
collateral for this loan. As additional compensation, the lender received a
warrant to purchase 333,333 ARTRA common shares at a price of $5.00 per share.
The warrantholder has the right to put this warrant back to ARTRA at any time
during the period April 21, 1998 to April 20, 2000, for a total purchase price
of $1,000,000. The cost of this obligation will be accrued in the Company's
financial statements as a charge to interest expense over the period April 21,
199 (the date of the loan) through April 21, 1998 (the date the warrantholder
has the right to put the warrant back to ARTRA). The proceeds from this loan
were used to repay $1,800,000 of borrowings from this lender outstanding at
March 27, 1997 and pay down other ARTRA debt obligations.
In March 1997, ARTRA borrowed $1,000,000 from an unaffiliated corporation
evidenced by an short-term note, due May 26, 1997, bearing interest at 12%. The
loan is collateralized by 630,000 shares of COMFORCE common stock owned by the
Company's Fill-Mor subsidiary. As additional compensation, the lender received
an option to purchase 25,000 shares of COMFORCE common stock owned by the
Company's Fill-Mor subsidiary at a price of $4.00 per share. If the note is not
paid at maturity, the option price is reduced to $2.00 per share and, for every
30 days the note is outstanding past June 26, 1997, the lender will receive an
option to purchase an additional 5,000 COMFORCE common shares at a price of
$2.00 per share. The proceeds from this loan were used in part to repay the
ARTRA/Fill-Mor $2,500,000 bank term loan described above.
In May, 1996, ARTRA borrowed $100,000 from a private investor, evidenced by an
unsecured short-term note, due August 7, 1996, and renewed to February 6, 1997,
bearing interest at 10%. The proceeds of the loan were used for working capital.
At the Company's annual meeting of shareholders, held August 29, 1996, private
investor was elected to the Company's board of directors. Effective January 17,
1997, private investor exercised his conversion rights and received 18,182
shares of ARTRA common stock as payment of the principal balance of his note.
At March 27, 1997, ARTRA was the obligor under two demand notes issued to an
unaffiliated company, in the amount of $2,266,000, including accrued interest.
The notes were issued in October, 1990 with interest at 15 percent. ARTRA is
currently negotiating with the noteholder to extend or refinance this
obligation.
At March 27, 1997, ARTRA also had outstanding short-term borrowings from other
unrelated parties aggregating approximately $2,400,000, of which $500,000 was
past due. The remaining amounts come due at various times in 1997 and 1998. The
notes were issued at various times during the period October 1990 to March 1997,
with interest rates varying between 8 % and 15%. At March 27, 1997 short-term
loans aggregating $800,000 included above were collateralized by 225,000 shares
of COMFORCE common stock.
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
<PAGE>
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 9 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.
As discussed in Note 13 to the Company's condensed consolidated financial
statements, ARTRA has total advances due from its president, Peter R. Harvey, of
which $8,449,000 and $7,998,000, including accrued interest, remained
outstanding at March 27, 1997 and December 26, 1996 The advances bear interest
at the prime rate plus 2% (10.25% at March 27, 1997 and December 26, 1996).
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 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%. In April 1995 advances from
ARTRA's Fill-Mor subsidiary to Peter R. Harvey totaling $1,540,000 (including
$398,000 of accrued interest) 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).
<PAGE>
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 1996 discharge of bank indebtedness (see
Note 5 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. In March 1997, the bank sold its interest
in Mr. Harvey's note and the related collateral to a private investor. ARTRA
retained its $2,150,000 security interest the real estate, subordinated to the
noteholder'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
March 27, 1997, options were outstanding that, if exercised, would require ARTRA
to repurchase 72,984 shares of its common stock for an aggregate amount of
$3,073,000. ARTRA does not have available funds to satisfy its obligations if
these options were exercised. However the holders of redeemable common stock
have the option to sell their shares in the market subject to the limitations of
Securities Act Rule 144. At its discretion and subject to its financial ability,
ARTRA could reimburse the optionholders for any short-fall resulting from such
sale.
As discussed in Note 9 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 $20,298,000 at March 27, 1997.
Redeemable preferred stock issues with an aggregate carrying value of
$11,403,000 at March 27, 1997, mature in 1997. The Bagcraft redeemable preferred
stock, with a carrying value of $2,036,000 at March 27, 1997, is payable in June
1997. Bagcraft anticipates it will fund this payment with funds available under
its revolving credit loan. The BCA Series B redeemable preferred stock, with a
carrying value of $9,367,000 at March 27, 1997, is also payable in June 1997.
ARTRA does not have available funds to satisfy this obligation. The Company is
currently negotiating with the redeemable preferred shareholders to restructure
or extend the maturity date of this obligation beyond 1997.
The Company has suffered recurring losses from operations and has a net capital
deficiency. As a result of these factors, the Company has experienced difficulty
in obtaining adequate financing to replace certain current credit arrangements,
certain of which are in default, to fund its debt service and liquidity
requirements in 1997. 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 is currently negotiating with several potential
lenders to refinance certain outstanding debt obligations. However, there can be
no assurance that ARTRA will be able to successfully refinance the above
referenced indebtedness. The Company 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 also continues 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 entered into a credit agreement, dated as of December 17, 1993 (the
"Credit Agreement") that initially provided for a revolving credit loan with
interest at the lender's index rate plus 1.5% and two separate term loans. The
term loans were 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. The Credit Agreement, as amended, had been extended
to mature on September 30, 1997.
<PAGE>
In December 1996, the Credit Agreement was amended and restated whereby, among
other things, the maturity date of the Credit Agreement was extended to
September 30, 2002 and certain loan covenants were amended. Term Loan A and Term
Loan B, as previously defined in the Credit Agreement were consolidated into a
new $20,000,000 term loan with interest at the lender's index rate plus .25%
(8.5% at March 27, 1997 and December 26, 1996). Principal payments under the
term loan were modified to provide for annual principal payments (payable in
quarterly installments) in the amount of $2,000,000 in 1997 through 1999;
$3,000,000 in 2000 and 2001; and $8,000,000 in 2002. The amended and restated
Credit Agreement reduced the interest on the revolving credit loan to the
lender's index rate and also provided for a $3,00,000 capital expenditures line
of credit with interest at the lender's index rate plus .25%.
The amount available to Bagcraft under the revolving credit loan is subject to a
borrowing base, as defined in the Credit Agreement, up to a maximum of
$18,000,000. At March 27, 1997 and December 26, 1996, approximately $4,700,000
and $6,200,000, respectively, was available and unused by Bagcraft under the
revolving credit loan. Borrowings under the revolving credit loan are payable
upon maturity of the Credit Agreement, unless accelerated under terms of the
Credit Agreement. At March 27, 1997 and December 26, 1996, the interest rate on
the revolving credit loan was 8.25%.
Borrowings under the Credit Agreement are collateralized by the common stock and
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 limit future capital expenditures and restricts additional loans, dividend
payments and payments to related parties. In addition, the Credit Agreement
prohibits changes in ownership of Bagcraft. At March 27, 1997 Bagcraft was in
compliance with the provisions of its Credit Agreement.
Effective May 5, 1997, the Credit Agreement was amended to provide for a
$3,000,000 term loan (Term Loan B) with interest at the lender's index rate plus
.75%. Term Loan B is payable on May 8, 1998, unless accelerated under terms of
the Credit Agreement. The proceeds of Term Loan B were advanced to ARTRA under
terms of an intercompany note payable to Bagcraft on May 8, 1998. ARTRA used the
proceeds of this loan to repay certain ARTRA debt obligations.
As additional compensation for borrowings under the Credit Agreement, in
December 1993, the lender received a detachable warrant ("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. In January 1997, in accordance
with the December 1996 amendment to the Credit Agreement, Bagcraft repurchased
50% of the Warrant (6.5% of the fully diluted common equity of Bagcraft) for
$1,500,000. Bagcraft can repurchase the remaining 50% of the Warrant on or after
December 17, 1997 for an amount based upon the Warrant's pro rata share of the
highest of book value, appraised value or market value of Bagcraft as noted
above. In accordance with the May 5, 1997 amendment to the Credit Agreement the
Warrant was amended. In the event there is a change in Bagcraft's ownership
through May 30, 1998, the lender is entitled to receive an amount equal to 6.5%
of the fully diluted common equity of Bagcraft, based upon the fair value of
Bagcraft at the date of a change of ownership, less the $1,500,000 the lender
received in January 1997 when Bagcraft repurchased 50% of the Warrant.
In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a
$12,500,000 financing package associated with the construction of a new 265,000
sq. ft. production facility in Baxter Springs, Kansas. The financing package,
funded by a combination of Federal, state and local funds, consists of the
following loan agreements payable by Bagcraft directly to the City of Baxter
Springs:
A $7,000,000 promissory note payable in ten installments of $700,000
due annually on July 21 of each year beginning in 1995 through
maturity on July 21, 2004. Interest, at varying rates from 4.6% to
6.6%, is payable semi-annually. At March 27, 1997 and December 26,
1996, Bagcraft had outstanding borrowings of $5,600,000 under this
loan agreement.
<PAGE>
A $5,000,000 subordinated promissory note payable as follows:
$2,425,000 due in 1998; and $2,425,000 due in 1999. The subordinated
promissory note is non-interest bearing, subject to certain repayment
provisions as defined in the agreement (as amended). At March 27, 1997
and December 26, 1996, Bagcraft had outstanding borrowings of
$4,850,000 under this loan agreement.
Two separate $250,000 subordinated promissory notes payable in varying
installments through January 20, 2025. The subordinated promissory
notes are non-interest bearing, subject to certain repayment
provisions as defined in the agreement. At March 27, 1997 and December
26, 1996, Bagcraft had outstanding borrowings of $228,000 and
$231,000, 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.
Bagcraft has historically funded its capital requirements with cash flow from
operations and funds available under its revolving credit loan. These sources
should provide sufficient cash flow to fund Bagcraft's short-term capital
requirements. As discussed above, it is anticipated that Bagcraft's recently
amended Credit Agreement will provide Bagcraft with the ability to fund its
long-term capital requirements.
Bagcraft anticipates that its 1997 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.
As discussed in Note 14 to the condensed consolidated financial statements
effective January 2, 1997, Bagcraft completed the purchase of the business
assets, subject to buyer's assumption of certain liabilities, of AB Specialty
Holding Company, Inc. ("AB"). The consideration consisted of cash of
approximately $2.4 million, funded through borrowings under Bagcraft's Credit
Agreement, of which approximately $1.2 million was paid as a deposit in December
1996. The acquisition of AB, is expected to enhance Bagcraft's specialty bag
business.
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.
Investment In COMFORCE Corporation
ARTRA, along with its wholly owned Fill-Mor subsidiary, owns a significant
minority interest in COMFORCE, consisting of 1,744,703 shares or approximately
14% of the outstanding common stock of COMFORCE as of March 27, 1997 with an
aggregate value as of that date of $14,612,000.
The COMFORCE shares constitute unregistered securities under the Securities Act
of 1933 (the "Act"). As a result of ARTRA's former involvement in the operations
and management of COMFORCE, ARTRA was considered an "affiliate" of COMFORCE
under the Act, and because of this, the number of shares that ARTRA could sell
without registration under the Act within any three-month period was limited.
For the reasons set forth below, the Company believes that an exemption from
registration under Rule 144(k) promulgated under the Act is now available to it,
and therefore the limitations under Rule 144 on the number of restricted shares
that ARTRA could sell within any three-month period without registrations are no
longer applicable to it.
Rule 144(k) of the Act permits the sale without registration under the Act of
restricted shares of an issuer that have been held in excess of three years (two
years as of April 29, 1997) by persons who have not been "affiliates" of the
issuer for the preceding three months. Since December 28, 1995, ARTRA, Fill-Mor
and their respective officers, directors, affiliates and employees have held no
managerial or executive positions with COMFORCE nor have any of the above served
in the
<PAGE>
capacity of directors, nor have any of them had the right under any agreement or
otherwise to serve in such capacity since December 28, 1995. Likewise, neither
ARTRA, Fill-Mor nor any of the above had the right under any agreement or
otherwise to serve in such capacity since December 28, 1995. Finally, since that
time, neither ARTRA, Fill-Mor nor any of their respective officers, directors,
affiliates and employees have had any material involvement in, nor have they
been able to exercise any control over, COMFORCE, either individually or
together with any other person or entity. Because of this, the Company and
COMFORCE believe that ARTRA and Fill-Mor are not "affiliates" of COMFORCE and,
since they have held their shares in excess of three years, qualify for the
exemption under Rule 144(k) set forth above.
There can be no assurance that the Securities and Exchange Commission would
concur with the Company's position. Notwithstanding this, ARTRA does not believe
that its ability to sell COMFORCE shares, or eventually to realize on the value
of its COMFORCE shares, will be affected in a material adverse way, although it
may not be able to sell its COMFORCE shares as quickly as it could if it were to
use Rule 144(k), and in any event, an attempt to sell a large number of its
COMFORCE shares over a limited period could be expected to result in a reduction
in the value of such shares. Effective December 19, 1996, ARTRA and COMFORCE
entered into a Settlement Agreement pursuant to which COMFORCE agreed to include
in a proposed underwritten public offering 380,000 shares of COMFORCE common
stock held by ARTRA and its Fill-Mor subsidiary and ARTRA agreed to a Lock-up
agreement which limits its ability to sell its remaining COMFORCE common shares
for a period of 360 days after the effective date of COMFORCE's proposed
underwritten public offering. COMFORCE did not retain an underwriter for the
proposed underwritten public offering and, accordingly, effective April 30, 1997
ARTRA was released from the provisions of the Lock-up Agreement.
The Company's operating plan for fiscal year 1997 anticipates the sale of these
marketable securities, with proceeds to be used principally to pay down
Corporate debt obligations and fund working capital requirements.
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 consolidated
balance sheet at December 26, 1996 as other receivables 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 March 27, 1997, no options to
acquire any of the 200,000 COMFORCE common shares had been exercised.
In March 1997, a lender received 25,000 COMFORCE common shares held by ARTRA as
additional consideration for a short-term loan. The disposition of these 25,000
COMFORCE common shares resulted in a realized gain of $213,000, with cost
determined by average cost.
As additional consideration for a February 1996 short-term loan, the lender
received 25,000 COMFORCE common shares held by ARTRA. In March 1996, ARTRA sold
93,000 COMFORCE shares in the market, with the proceeds of approximately
$630,000 used for working capital. The disposition of these 118,000 COMFORCE
common shares during the quarter ended March 28, 1996 resulted in realized gains
of $1,043,000, with cost determined by average cost.
At March 27, 1997 ARTRA's remaining investment in COMFORCE (1,744,703 shares,
currently a common stock ownership interest of approximately 14%) was classified
in the Company's consolidated balance sheet in current assets as
"Available-for-sale securities." At March 27, 1997 the gross unrealized gain
relating to ARTRA's investment in COMFORCE, reflected as a separate component of
shareholders' equity, was $17,722,000.
<PAGE>
Litigation
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. See Note 12 to the Company's condensed
consolidated financial statements. At December 26, 1996 and December 28, 1995,
the Company had accrued $2,000,000 and $1,900,000 respectively, for potential
business-related litigation and environmental liabilities. However, as discussed
above ARTRA may not have available funds to pay liabilities arising out of these
business-related litigation and environmental matters or, in certain instances,
to provide for its legal defense. ARTRA could suffer severe adverse consequences
in the event of an unfavorable judgment in any of these matters.
Net Operating Loss Carryforwards
At March 27, 1997, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $36,000,000, expiring principally in 2002 - 2010,
available to be applied against future taxable income, if any. In recent years,
the Company has issued shares of its common stock to repay various debt
obligations, as consideration for acquisitions, to fund working capital
obligations and as consideration for various other transactions. Section 382 of
the Internal Revenue Code of 1986 limits a corporation's utilization of its
Federal income tax loss carryforwards when certain changes in the ownership of a
corporation's common stock occurs. In the opinion of management, the Company is
not currently subject to such limitations regarding the utilization of its
Federal income tax loss carryforwards. Should the Company continue to issue a
significant number of shares of its common stock, it could trigger a limitation
that would prevent it from utilizing a substantial portion of its Federal income
tax loss carryforwards.
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in our economy; however, to the
extent permitted by competition, the Company generally passes increased costs to
its customers by increasing sales prices over time.
Recently Issued Accounting Pronouncements
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 specifies the computation, presentation, and disclosure requirements for
earnings per share. This new accounting principle is effective for the Company's
fiscal year ending December 25, 1997. The Company believes that adoption will
not have a material impact on its financial statements.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Part II, Item 1 of Form 10-Q is hereby
incorporated by reference to Note 12 to the Company's condensed
consolidated financial statements for the quarter ended March 27, 1997
included in Part I, Item 1 of this Form 10-Q.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
EXHIBIT 10 Material contracts
10.1 TERM PROMISSORY NOTE , dated as of April 21,
1997, between ARTRA GROUP Incorporated and
Howard R. Conant.
10.2 AMENDED AND RESTATED STOCK PLEDGE AGREEMENT,
dated as of April 21, 1997, between Fill-Mor
Holding, Inc., a wholly-owned subsidiary of
ARTRA GROUP Incorporated and Howard R.
Conant.
10.3 WARRANT TO PURCHASE COMMON STOCK of ARTRA
GROUP Incorporated, dated April 21, 1997,
issued to Howard R. Conant.
10.4 FIRST AMENDMENT TO AMENDED AND RESTATED
CREDIT AGREEMENT, dated as of May 5, 1997,
by and between BAGCRAFT CORPORATION OF
AMERICA, as Borrower and GENERAL ELECTRIC
CAPITAL CORPORATION, as Agent and as Lender.
10.5 SECOND AMENDMENT TO WARRANT dated as of May
5, 1997, by and between BAGCRAFT CORPORATION
OF AMERICA and GENERAL ELECTRIC CAPITAL
CORPORATION.
EXHIBIT 11
Computation of earnings per share and equivalent share of
common stock for the three months ended March 27, 1997 and
March 28, 1996.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ARTRA GROUP INCORPORATED
------------------------
Registrant
Dated: May 8, 1997 JAMES D. DOERING
- -------------------- ------------------------------------------
Vice President and Chief Financial Officer
EXHIBIT 10.1
TERM PROMISSORY NOTE
$5,000,000.00 Chicago, Illinois
April 21, 1997
FOR VALUE RECEIVED, the undersigned, ARTRA GROUP Incorporated, a
Pennsylvania corporation, ("Borrower"), HEREBY PROMISES TO PAY to the order of
HOWARD R. CONANT ("Lender"), at the address of the Lender 445 North Wells
Street, Suite 403, Chicago, Illinois 60610, or at such other place as Lender may
designate from time to time in writing, in lawful money of the United States of
America and in immediately available funds, the principal amount of FIVE MILLION
DOLLARS AND NO CENTS ($5,000,000.00) plus interest, on the terms hereinafter
provided.
Borrower promises to pay interest on the unpaid principal balance of
this Note, payable quaterly, calculated at a rate equal to twelve percent (12%)
per annum.
Borrower promises to pay to the Lender the entire unpaid principal
balance of this Note plus all accrued and unpaid interest hereon on April 20,
1998 (the "Maturity Date"),.
All computations in interest shall be made by Lender on the basis of a
three hundred sixty (360) day year in each case for the actual number of days
occurring in the period for which such interest is payable.
Borrower may prepay the obligations under this Note in full or in part,
without penalty, during the term of this Note.
If any payment on this Note becomes due and payable on a day other than
a Business Day, the maturity thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at a per annum rate equal to twelve percent (12%) during such
extension.
This Note may not be amended, modified or changed nor shall any waiver
of any of the provisions hereof be effective, except only by an instrument in
writing, signed by the party against whom enforcement of any waiver, amendment,
change, modification or discharge is sought.
The provisions of this Note shall be binding upon Borrower, its
successors and assigns, and shall inure to the benefit of and extend to the
Lender and any holder hereof.
Borrower hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
1
<PAGE>
Each of the following shall constitute an event of default hereunder:
(a) Borrower shall fail to pay when due any principal or interest due on this
Note, and such failure shall not be fully cured within ten (10) business days
thereafter; (b) an Event of Default occurs under that certain Amended and
Restated Stock Pledge Agreement, dated as of the date hereof, executed by
Fill-Mor Holding, Inc., a wholly owned subsidiary of Borrower, in favor of
Lender.
Upon the occurrence of any Event of Default described hereunder, the
holder or holders of the Note by written notice to Borrower, may declare the
unpaid principal amount of this Note to be, and the same shall forthwith become,
due and payable, together with the interest accrued thereon, in respect of such
principal amount, without presentment, demand, protest, or other notice or other
requirements of any kind, all of which are hereby expressly waived by the
Borrower and Borrower shall also be liable for all reasonable expenses
(including attorneys fees) incurred by Lender in the enforcement of the terms of
this Note.
In no event whatsoever shall the amount of interest paid or agreed to
be paid to Lender pursuant to this Note exceed the highest lawful rate of
interest permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision of this Note shall involve exceeding
the lawful rate of interest which a court of competent jurisdiction may deem
applicable hereto, then ipso facto, the obligation to be fulfilled shall be
reduced to the highest rate of interest permissible under such law and if Lender
shall receive, as interest, an amount which would be deemed unlawful under such
applicable law, such interest shall be applied to the principal amount of this
Note (whether or not due and payable), and not to the payment of interest, or
refunded to Borrower if the Note has been paid in full.
This Note has been delivered at Chicago, Illinois and shall be construed
according to the laws of the State of Illinois, in which State it shall be
performed by the Borrower. The Borrower agrees that all legal actions or
proceedings in any manner or respect arising out of or related to this Note
shall be brought and litigated only in courts having situs in Cook County,
Illinois; and the Borrower hereby consents to and submits to the jurisdiction of
any local, state or federal court located within Cook County, and the Borrower
hereby waives any right the Borrower may have to transfer or change the venue of
any such legal action or proceeding.
The Borrower waives irrevocably the right to a trial by jury in any
action or proceeding to enforce or defend any rights under this Note or under
any amendment, instrument, document or agreement delivered or which may in the
future be delivered in connection herewith, and agrees that any such action or
proceeding shall be tried before a court and not before a jury.
ARTRA GROUP Incorporated
By: Peter R. Harvey
---------------------
Title: President
---------------------
2
EXHIBIT 10.2
AMENDED AND RESTATED
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Agreement") is entered into as of
the 21st day of April, 1997 by and between Fill-Mor Holding, Inc. ("Pledgor" or
"Fill-Mor), a Delaware corporation and wholly-owned subsidiary of ARTRA GROUP
Incorporated, a Pennsylvania corporation ("ARTRA" ), AND Howard R. Conant
("Lender").
WITNESSETH:
WHEREAS, THE PARTIES HERETO ARE parties to a Stock Pledge
Agreement dated as of March 26, 1996 (the "Prior Pledge Agreement") pursuant to
which the Parties agreed to certain terms regarding the Pledged Shares as
defined therein;
WHEREAS, the parties hereto desire to amend and restate the Prior Pledge
Agreement, subject to the terms and conditions set forth herein;
WHEREAS, Pledgor is the owner of those shares of common stock more
fully described on Exhibit A attached hereto and by this reference incorporated
herein (the "Pledged Shares");
WHEREAS, Lender has agreed to make a loan in the amount of $5,000,000
(the "Loan"), to ARTRA to be evidenced by ARTRA's Promissory Note of even date
herewith in said principal amount, payable to the order of Lender with interest
as therein described (such Term Loan Promissory Note, together with any and all
renewals, extensions, replacements, supplements or additional notes are
hereinafter collectively referred to as the "Note"); and
WHEREAS, Lender has required as a condition, among others, to making
the Loan, and in order to secure the prompt and complete payment, observance and
performance of all of Pledgor's obligations and liabilities hereunder, ARTRA's
obligations and liabilities under the Note and under all of the other
instruments, documents and agreements executed and delivered by ARTRA and
Pledgor to Lender from time to time in connection with the Loan, that Pledgor
execute and deliver to Lender, this Stock Pledge Agreement pledging to Lender as
security for the Loan the Pledged Shares; and
WHEREAS, Pledgor has a material interest in, and will derive a material
benefit from, Lender making the Loan to ARTRA.
1
<PAGE>
NOW, THEREFORE, for and in consideration of the foregoing premises, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Grant of Security Interest.
To secure the prompt payment and performance of the following
(hereinafter collectively, the "Obligations"): (a) the prompt payment and
performance of the Note (and all extensions, renewals, modifications or
refinancings thereof or thereto), and all other amounts, liabilities and
obligations now or hereafter owed by ARTRA under the Note; and (b) the prompt
performance, observance and accuracy of Pledgor's covenants, warranties and
representations contained herein, Pledgor hereby pledges, assigns and delivers
to Lender and grants to Lender a first priority security interest in the Pledged
Shares and in all cash, securities, distributions, share dividends, payments,
rights and other property at any time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged Shares,
including, without limitation, shares issued as a result of any
reclassifications, split-up or any other corporate reorganization, and all
proceeds of the foregoing described collateral, of every kind and nature
whatsoever (hereinafter, all of the foregoing shall be referred to collectively
as the "Pledged Collateral"). Pledgor shall deliver promptly to Lender, in the
exact form received, all such securities or other property which comes into the
possession, custody or control of Pledgor. Pledgor agrees to execute and deliver
to Lender (i) stock powers appropriately endorsed in blank, with respect to the
Pledged Shares and (ii) such other documents of transfer as Lender may from time
to time request to enable Lender to transfer the Pledged Shares and the other
Pledged Collateral into its name or the name of its nominee.
2. Perfection of Security Interest.
Pledgor agrees (i) immediately to deliver to Lender all certificates
evidencing any of the Pledged Collateral which may at any time come into the
possession of Pledgor and (ii) to take such other steps as Lender may from time
to time reasonably request to perfect Lender's security interest in the Pledged
Collateral under applicable law. Each certificate shall be, accompanied by a
blank stock power executed by an authorized officer of FILL-MOR with signatures
guaranteed in form sufficient for transfer and accompanied by a certified
resolution of the Board of Directors of FILL-MOR authorizing such signatures.
3. Voting Rights.
During the term of this Agreement, Pledgor shall have the right to vote
the Pledged Shares and exercise any voting rights pertaining to the Pledged
Collateral, and to give consents, ratifications and waivers with respect
2
<PAGE>
thereto, on all corporate questions for all purposes not inconsistent with the
terms of any agreements and documents executed in connection with the
transactions contemplated thereby. The Lender shall, at the request of Pledgor,
provide Pledgor with appropriate proxies and any other documents necessary or
appropriate to permit Pledgor to exercise the rights set forth in the preceding
sentence.
4. Dividends and Other Distributions.
With respect to cash dividends, Lender shall apply such dividends to
the Obligations of Pledgor in such manner as Lender, in its sole discretion,
shall determine. With respect to dividends or distributions other than cash,
such dividend or distribution shall be held by Lender as additional collateral;
and shall, upon receipt by Lender, become part of the Pledged Collateral.
Pledgor shall promptly remit to Lender any such dividend or other distribution
paid to Pledgor, and until so paid to Lender, Pledgor shall hold such dividend
or other distribution in trust for Lender.
5. Representations.
Pledgor warrants and represents to Lender as follows:
(a) Pledgor is, and at the time of delivery of the Pledged
Shares to Lender pursuant to Section 1 hereof will be, the sole holder of record
and the sole beneficial owner of the Pledged Collateral free and clear of any
lien (except for the lien created by this Agreement), claim, encumbrance,
covenant or restrictions of any kind (except restrictions imposed by the terms
of that certain Lock-up Agreement dated as of December 19, 1996, the terms of
which provide for the expiration of such restrictions on April 30, 1997, and
restrictions imposed by Federal and state securities laws applicable on the sale
of the Pledged Shares) thereon or affecting the title thereto;
(b) All of the Pledged Shares have been duly authorized,
validly issued are fully paid and non-assessable;
(c) Pledgor has the right and requisite authority and has
taken all required corporate actions to pledge, assign, transfer, deliver,
deposit and set over the Pledged Collateral to Lender as provided herein;
(d) No consent, approval, authorization or other order of any
person and no consent, authorization, approval, or other action by, and no
notice to or filing with, any governmental authority is required for the pledge
by Pledgor of the Pledged Collateral pursuant to this Agreement or for the
execution, delivery or performance of this Agreement by Pledgor;
(e) This Agreement has been duly authorized, executed and
delivered by Pledgor and constitutes the legal, valid and binding obligation of
Pledgor enforceable in according with its terms;
(f) Pledgor is a corporation duly organized, validly existing,
and in good standing in the State of Delaware, has full corporate power to own
its properties, to carry on its businesses, to execute, deliver and perform the
transactions under this Agreement and is duly qualified to do business and in
good standing in each jurisdiction in which the character of its properties or
transactions material to its business makes such qualification necessary;
(g) The stock powers delivered in connection with the Pledged
Shares are duly executed and give Lender the authority they purport to confer.
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<PAGE>
6. Pledged Shares Adjustments.
In the event that, during the term of this Agreement, any stock
dividend, reclassification, readjustment or other change is declared or made in
the capital structure of any issuer of the Pledged Shares (including, without
limitation, the issuance of additional shares of capital stock by any such
issuer), then Lender shall have a security interest in all new, substituted and
additional shares or other securities so issued, or acquired by Pledgor by
reason of any such change or exercise, and such shares or other securities shall
become part of the Pledged Collateral.
7. Events of Defaults.
Each of the following shall constitute an "Event of
Default" hereunder:
(a) ARTRA shall fail to pay when due any of the Obligations, including
any principal or interest due on the Note, and such failure shall not be fully
cured within seven (7) Business Days thereafter;.
(b) Lender shall fail to have an enforceable first lien on, or security
interest in, any of the Pledged Collateral.
(c) Any of the representations and warranties of Pledgor contained
herein shall be false or misleading.
(d) Pledgor fails or neglects to perform, keep or observe any of its
covenants, conditions or agreements contained in this Agreement and such failure
to perform, keep, or observe, as the case may be, shall not be fully cured
within seven (7) Business Days thereafter.
8. Event of Default Remedies.
Lender may, upon or at any time after the occurrence and during the
continuance of an Event of Default, at its option, transfer or register the
Pledged Collateral or any part thereof into its name with or without any
indication that such Pledged Collateral is subject to the security interest
hereunder. In addition, following the occurrence and during the continuance of
an Event of Default, Lender shall have such powers of sale and other powers as
may be conferred by applicable law. With respect to the Pledged Collateral or
any part thereof which shall then be in or shall thereafter come into the
possession or custody of Lender or which Lender shall otherwise have the ability
to transfer under applicable law, Lender may, in its sole discretion, without
notice following the occurrence and during the continuance of an Event of
Default, sell or cause the same to be sold at any exchange or broker's board or
at public or private sale, in one or more sales or lots, at such price as is
reasonable, for cash.
Any cash held by Lender as Pledged Collateral and all cash proceeds
received by Lender in respect of any sale of, collection from, or other
realization upon all or any part of the Pledged Collateral may, in the
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<PAGE>
discretion of Lender, be applied by Lender against all or any part of the
Obligations including all reasonable costs (including attorney's fees) incurred
by Lender in the enforcement of this Agreement, the Note, or the Option after
Borrower's default. Any surplus remaining after application of cash proceeds and
payments in full of the Obligations shall be paid to Pledgor.
9. Term.
This Agreement shall remain in full force and effect until all
of the Obligations shall have been paid in full, at which time Lender, at the
request of Pledgor, will execute and deliver to Pledgor a proper instrument or
instruments acknowledging the satisfaction and termination of this Agreement,
and will duly assign, transfer and deliver to Pledgor such of the Pledged
Collateral as may be in the possession of Lender and has not theretofore been
sold or otherwise applied or released pursuant to this Agreement, together with
any moneys at the time held by Lender hereunder.
10. Covenants.
Pledgor covenants and agrees that up to and through the date on which
this Agreement terminates:
(a)Without the prior written consent of Lender, Pledgor will not sell,
assign, transfer, pledge, exchange or otherwise encumber or restrict any of its
rights in or to the Pledged Collateral pledged or any unpaid dividends or other
distributions or payments with respect thereto or grant a security interest in
any therein except to Lender.
(b)Pledgor has and will defend the title to the Pledged Collateral and
the lien of Lender thereon against the claim of any person and will maintain and
preserve such lien until the termination of the pledge hereunder.
11. Definitions.
The singular shall include the plural and vice versa and any gender
shall include any other gender as the context may require.
12. Successors and Assigns.
This Agreement and all obligations of Pledgor hereunder shall be
binding upon its successors and shall, together with the rights and remedies of
Lender hereunder, inure to the benefit of Lender, all future holders of any
instrument evidencing any of the Obligations and its successors and assigns.
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<PAGE>
13. Applicable Law.
This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Illinois. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be held to be
prohibited or invalid under applicable law, such provision shall be ineffective
only to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
14. Further Assurances.
Pledgor agrees that it will cooperate with Lender and will
execute and deliver, or cause to be executed and delivered, all such other stock
powers, proxies, instruments, and documents, and will take all such other
reasonable action as Lender may reasonably request from time to time in order to
carry out the provisions and purposes hereof. In addition to the foregoing,
Pledgor shall execute and deliver to Lender appropriate UCC Financing Statements
with respect to the Pledged Collateral.
15 Notices.
Except as otherwise provided herein, whenever it is provided herein
that any notice, demand, request, consent, approval, declaration or other
communication shall or may be given to or served upon any of the parties by any
other party, or whenever any of the parties desires to give or serve upon any
other a communication with respect to this Agreement, each such notice, demand,
request, consent, approval, declaration or other communication shall be in
writing and either shall be delivered in person with receipt acknowledged or
sent by registered or certified mail, return receipt requested, postage prepaid,
or by facsimile and confirmed by facsimile answerback addressed as below:
If to Pledgor:
Fill-Mor Holding, Inc.
c/o ARTRA GROUP Incorporated
500 Central Avenue
Northfield, IL 60093
Attn: Peter R. Harvey
telephone: (847) 441-6650
fax (847) 441-6959
with a copy to:
Kwiatt, Silverman & Ruben, Ltd.
500 N. Central Avenue
Northfield, IL 60093
Attn: Philip E. Ruben, Esq.
telephone (847) 441-7676
fax (847) 441-7696
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If to Lender:
Howard R. Conant
445 North Wells Street
Suite 403
Chicago, IL 60610
16. Counterparts.
This Agreement may be executed in any number of separate counterparts,
which shall collectively constitute one and the same agreement.
17. Section Headings.
The descriptive headings of the sections of this Agreement are inserted
for convenience of reference only and shall not control or affect the meaning or
construction of any provisions hereof.
18. Consent to Jurisdiction.
The parties hereto agree that all legal actions or proceedings in any manner or
respect arising out of or related to this Agreement shall be brought and
litigated only in courts having situs in Cook County, Illinois; and the parties
hereto hereby consent to and submit to the jurisdiction of any local, state or
federal court located within Cook County, and the parties hereto hereby waives
any right the parties may have to transfer or change the venue of any such legal
action or proceeding.
19. Waiver of Jury Trial.
The parties hereto waive irrevocably the right to a trial by jury in any action
or proceeding to enforce or defend any rights under this Agreement or under any
amendment, instrument, document or agreement delivered or which may in the
future be delivered in connection herewith and agree that any such action or
proceeding shall be tried before a court and not before a jury.
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<PAGE>
IN WITNESS WHEREOF, Pledgor and Lender have executed this Agreement as
of the date first above written.
PLEDGOR:
FILL-MOR HOLDING, INC.:
By: _______________________________
Its: _______________________________
LENDER:
_______________________________
Howard R. Conant
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<PAGE>
EXHIBIT A
to
PLEDGE AGREEMENT
Description of Pledged Shares
Issuer No. of Shares Class of Shares Certificate No.
- ------ ------------- --------------- ---------------
Comforce Corporation 585,000 Common CCO144, CC0145, CC0379,
CC0380 CC0381, CC0382,
CC0383, CC0384, CC0385,
CC0387, CC0390
9
EXHIBIT 10.3
WARRANT NO. 1997-45
ARTRA GROUP INCORPORATED
WARRANT TO PURCHASE COMMON STOCK
(No Par Value)
April 21, 1997
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED OR QUALIFIED FOR SALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, HYPOTHECATED OR
OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO THE ACT AND QUALIFIED UNDER
APPLICABLE STATE LAW OR, IN THE OPINION OF COUNSEL TO ARTRA GROUP INCORPORATED,
AN EXEMPTION THEREFROM IS AVAILABLE.
FOR VALUE RECEIVED, Howard R. Conant (the "Holder") is entitled to purchase,
subject to the provisions of this Warrant, from ARTRA GROUP Incorporated, a
Pennsylvania corporation ("ARTRA" or the "Company"), at a price of $5.00 per
share (the "Exercise Price") of no par common stock of the Company, ("Common
Stock"), at any time from April 21, 1997 (the "First Exercise Date") to the time
of expiration of this Warrant at 5:00 p.m., Chicago, Illinois time, on April 20,
2000 (the "Expiration Date"), 333,333 shares of Common Stock, and the Holder
shall be governed and bound by all of the covenants, terms and conditions
contained herein. The number of shares of Common Stock to be received upon the
exercise of this Warrant and the price to be paid for a share of Common Stock
may be adjusted from time to time as hereinafter set forth. The shares of Common
Stock deliverable upon such exercise and as adjusted from time to time are
hereinafter sometimes referred to as "Warrant Shares", and the exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price".
1. Exercise of Warrant. This Warrant may be exercised in whole or in
part at any time after the First Exercise Date and on or before the Expiration
Date of this Warrant, or if such day is a day on which banking institutions are
authorized by law to close in Chicago, Illinois, then on the next succeeding
business day, by presentation and surrender hereof to the Company at its office
at 500 Central Avenue, Northfield, Illinois, with the purchase form annexed
hereto duly executed and accompanied by payment of the Exercise Price for the
number of shares of Common Stock specified in such form. If this Warrant should
be exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the rights of the
Holder to purchase the balance of the Warrant Shares purchasable hereunder. Upon
receipt by the Company of this Warrant at its office in proper form for
exercise, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder.
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<PAGE>
2. Reservation of Shares, Fractional Shares.
(a) ARTRA hereby agrees that at all times it shall reserve for issue
and delivery upon exercise of this Warrant such number of shares of its Common
Stock as shall be required for issue and delivery upon exercise of this Warrant.
(b) No fractional shares or scrip representing fractional shares
shall be issued upon the exercise of this Warrant. With respect to any fraction
of a share called for upon exercise hereof, ARTRA shall pay to the Holder an
amount in cash equal to such fraction multiplied by the then current market
value of a share of Common Stock, determined as follows:
(i) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange the current
value shall be the last reported sale price of the Common Stock on such exchange
on the last business day prior to the date of exercise of this Warrant or if no
such sale is made on such day, the average closing bid and asked prices for such
day on such exchange; or
(ii) If the Common Stock is not listed or admitted to
unlisted trading privileges the current value shall be the mean of the last
reported bid and ask prices reported by the National Quotation Bureau, Inc., on
the last business day prior to the date of the exercise of this Warrant; or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and ask prices are not so reported, the
current value shall be an amount, not less than book value, determined in such
reasonable manner as may be prescribed by the Board of Directors of the ARTRA.
3. Exchange, Assignment, or Loss of Warrant. This Warrant is
exchangeable, without expense to the Holder, at the option of the Holder, upon
presentation and surrender hereof to the ARTRA for other Warrants of different
denominations entitling the Holder hereof to purchase in the aggregate the same
number of shares of Common Stock purchasable hereunder. Any such exchange shall
be made by surrender of this Warrant to ARTRA or at the office of its agent, if
any, with the assignment form annexed duly executed. Subject to compliance with
the provisions of applicable law, ARTRA, without charge to the Holder, shall
execute and deliver a new Warrant in the name of any assignee named in such
instrument or assignment, and this Warrant shall promptly be canceled. This
Warrant may be divided or combined with other Warrants which carry the same
rights upon presentation hereof at the office of ARTRA or at the office of its
agent, if any, together with a written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
hereof. The term "Warrant" as used herein includes any Warrants into which this
Warrant may be divided or exchanged. Upon receipt by ARTRA of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, ARTRA will execute and deliver a new Warrant of like
tenor and date. Any such new Warrant executed and delivered shall constitute an
additional contractual obligation on the part of ARTRA whether or not this
Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable
by anyone.
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<PAGE>
4. Rights of the Holder. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of ARTRA. No
provision of this Warrant, in the absence of affirmative action by the Holder to
purchase shares of Common Stock, and no mere enumeration herein of the rights or
privileges of the Holder, shall give rise to any liability of the Holder for the
warrant purchase price or as a stockholder of ARTRA, whether such liability is
asserted by ARTRA or by creditors of ARTRA. The rights of the Holder are limited
to those expressed in this Warrant and are not enforceable against ARTRA except
to the extent set forth herein.
5. Stock Dividends; Reclassification, Reorganization, Anti-Dilution
Provisions. This Warrant is subject to the following further provisions:
(a) In case, prior to the expiration of this Warrant by exercise or
by its terms, ARTRA shall issue any shares of Common Stock as a stock dividend
or subdivide the number of outstanding shares of Common Stock into a greater
number of shares, then in either of such cases, the Exercise Price per share of
the Warrant Shares purchasable pursuant to this Warrant in effect at the time of
such action shall be proportionately reduced, and the number of Warrant Shares
at that time purchasable pursuant to this Warrant shall be proportionately
increased; and conversely, in the event ARTRA shall contract the number of
outstanding shares of Common Stock by combining such shares into a smaller
number of shares, then, in such case, the Exercise Price per share of the
Warrant Shares purchasable pursuant to this Warrant in effect at the time of
such action shall be proportionately increased, and the number of Warrant Shares
at the time purchasable pursuant to this Warrant shall be proportionally
decreased. Any dividend paid or distributed upon the Common Stock in stock of
any other class or securities convertible into shares of Common Stock shall be
treated as a dividend paid in Common Stock to the extent that shares of Common
Stock are issuable upon the conversion thereof.
(b) In case, prior to the expiration of this Warrant by exercise or
by its terms, ARTRA shall be recapitalized by reclassifying its Common Stock
into stock with par value, or the Company or a successor corporation shall
consolidate or merge
with or convey all or substantially all of its or of any successor corporation's
property and assets to any other corporation or corporations (any such
corporation being included within the meaning of the term "successor
corporation" in the event of any consolidation or merger of any such corporation
with, or the sale of all or substantially all of the property of any such
corporation to another corporation or corporations), in exchange for stock or
securities of a successor corporation, the Holder of this Warrant shall
thereafter have the right to purchase, upon the terms and conditions and during
the time specified in this Warrant, in lieu of the Warrant Shares theretofore
purchasable upon the exercise of this Warrant, the kind and number of shares of
stock and other securities receivable upon such recapitalization or
consolidation, merger or conveyance by a holder of the number of shares of
Common Stock which the Holder of this Warrant might have purchased immediately
prior to such recapitalization or consolidation, merger or conveyance.
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<PAGE>
(c) Upon the occurrence of each event requiring an adjustment of the
Exercise Price and of the number of Warrant Shares purchasable pursuant to this
Warrant in accordance with and as required by, the terms of subdivision (a) of
this Section 5, ARTRA shall compute the adjusted Exercise Price and the adjusted
number of Warrant Shares purchasable at such adjusted Exercise Price by reason
of such event in accordance with the provisions of subdivision (a) and shall
prepare an officer's certificate setting forth such adjusted Exercise Price and
the adjusted number of Warrant Shares and showing in detail the facts upon which
such conclusions are based. ARTRA shall forthwith mail a copy of such
certificate to each Holder of this Warrant at the Holder's address shown in the
Company's Warrant Registry, and thereafter such certificate shall be conclusive
and binding upon such Holder unless contested by such Holder by written notice
to ARTRA ten (10) days after receipt of the certificate.
(d) In case:
(i) ARTRA shall take a record of the holders of its Common Stock
for the purpose of entitling them to receive a dividend or any other
distribution in respect of the Common Stock (including cash) pursuant to,
without limitation, any spin-off, split-off or distribution of ARTRA's assets;
or
(ii) ARTRA shall take a record of the holders of its Common Stock
for the purpose of entitling them to subscribe for or purchase any shares of
stock of any class or to receive any other rights; or (iii) of a classification,
reclassification or other reorganization of the capital stock of ARTRA,
consolidation or merger of ARTRA with or into another corporation or conveyance
of all or substantially all of the assets of ARTRA; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of ARTRA,
then, and in any such case, ARTRA shall mail to the Holder of this Warrant at
the Holder's address shown in ARTRA's Warrant Registry a notice stating the date
or expected date (the "Record Date") on which a record is to be taken for the
purpose of such dividend, distribution or rights, on which such classification,
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up is to take place, as the case may be.
Such notice shall then specify the date or expected date, if any is to be fixed,
as of which holders of Common Stock of record shall be entitled to participate
in said dividend, distribution or rights, or shall be entitled to exchange
shares of Common Stock for securities or other property deliverable upon such
liquidation or winding up, as the case may be. Such notice shall be provided at
least fifteen (15) days prior to the Record Date.
(e) In case ARTRA at any time while this Warrant shall remain
unexpired and unexercised shall dissolve, liquidate or wind up its affairs, the
Holder of this Warrant may receive, upon exercise hereof prior to the Record
Date, in lieu of each share of Common Stock of ARTRA which it would have been
entitled to receive, the same number of any securities or assets as may be
issuable, distributable or payable upon any such dissolution, liquidation or
winding up with respect to each share of Common Stock of ARTRA.
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<PAGE>
6. Restriction on Transferability. (a) This Warrant and the shares of
ARTRA issuable upon the exercise of this Warrant have not been registered under
the Securities Act of 1933, as amended (the "Act"). By acceptance hereof, the
Holder covenants, agrees and represents that:
(i) This Warrant has been acquired for, and such shares, if
acquired upon the exercise of this Warrant, shall be acquired for, investment
and may not be sold, offered for sale, pledged, hypothecated or otherwise
transferred, in the absence of an effective registration statement for such
securities under the Act or an opinion of counsel reasonably satisfactory to
ARTRA to the effect that registration is not required under the Act, and the
Holder has the capacity to protect his interests in connection with the purchase
of this Warrant.
(ii) The Holder has had the opportunity to ask questions and
receive answers from ARTRA about ARTRA's business and the purchase by him of
these securities, and he has been given the opportunity to make any inquiries
that he may desire of any personnel of ARTRA concerning the proposed operation
of ARTRA and has been furnished with all of the information he has requested. No
advertisement has been used in connection with the offer or sale of this Warrant
to the Holder.
(iii) The Holder will not offer, sell, transfer, mortgage, assign
or otherwise dispose of this Warrant or the shares of Common Stock issuable upon
the exercise of this Warrant except pursuant to a registration statement under
the Act and qualification under applicable state securities laws or pursuant to
an opinion of counsel reasonably satisfactory to ARTRA that such registration
and qualification are not required, and that the transaction (if it involves a
sale in the over-the-counter market or on a securities exchange) does not
violate any provision of the Act. The Holder understands that a stop-transfer
order will be placed on the books of ARTRA respecting this Warrant and any
certificates representing the shares of Common Stock issuable upon the exercise
of this Warrant and that this Warrant and any such certificates shall bear a
restrictive legend and a stop transfer order shall be placed with the transfer
agent prohibiting any such transfer until such time as the securities
represented by such certificates shall have been registered under the Act or
shall have been transferred in accordance with an opinion of counsel reasonably
satisfactory to ARTRA that such registration is not required; and
(iv) The Holder understands that he must hold the shares issuable
upon the exercise of this Warrant indefinitely unless they are registered under
the Act or an exemption from registration becomes available. Although ARTRA
files reports pursuant to the Securities Act of 1934 and accordingly makes
available to the public the information required by Rule 144, nothing contained
in this Warrant shall require ARTRA to continue to make available to the public
such information.
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<PAGE>
(b) Each certificate for the shares issued upon the exercise of
the Warrant shall bear a legend in substantially the following form:
"The shares represented by this Certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act") and may not be sold, offered for sale, pledged,
hypothecated or otherwise transferred except pursuant to a
registration statement under the Act or an exemption from
registration under the Act or the rules and regulations
thereunder."
7. Registration of Warrant Shares for Distribution. ARTRA hereby
covenants and agrees with the Holder that if, at any time before the time this
Warrant expires, ARTRA proposes to file with the Securities and Exchange
Commission ("SEC") on its own behalf and/or on behalf of any of the holders of
its Common Stock, a Registration Statement under the Act, on any form permitting
the resale of Warrant Shares under a "shelf registration" or on any other form
for the general registration of the Common Stock of ARTRA for cash, then ARTRA
shall give notice to the Holder, at least 20 days before the filing, with the
SEC, of such proposed Registration Statement. The notice shall offer to include
in such filing, to the extent then permissible under the Act, all of the Warrant
Shares on behalf of Holders of such shares. The Holder shall then have a period
of up to 10 days after the date of the mailing of such notice by ARTRA within
which to advise ARTRA of his election to include all or any part of his Warrant
Shares in such Registration Statement, setting forth the number of Warrant
Shares for which registration is being requested. ARTRA shall thereupon include
in such filing, subject to the limitation hereinafter referred to, such Warrant
Shares proposed to be offered for sale and shall use its best efforts to effect
registration under the Act of such Warrant Shares. The Holder may elect to
include Warrant Shares in such Registration Statement which have not yet been
acquired by exercise of the Warrants, provided, however, that in such event, the
Holder shall exercise the Warrants with respect to such shares, and shall pay
the Exercise Price of such Warrant Shares in the manner provided in Section 1
hereof, prior to any sale of such shares.
The right of the Holder to include such Warrant Shares in a Registration
Statement provided for herein shall be subject to the following conditions:
(a) ARTRA, in its sole discretion, shall select the underwriter
or underwriters, if any, who are to undertake the sale and distribution of the
Warrant Shares to be included in a Registration Statement filed under the
provisions of this Section 7; and
(b) ARTRA shall have the right to require, in any offering to be
made solely, or in part, for its own account, that the Holder delay any offering
of Warrant Shares to be included on behalf of the Holder for a period of ninety
(90) days after the first effective date of such Registration Statement, upon
ARTRA first having delivered to the Holder the written opinion of its
underwriter to the effect that the inclusion of such securities in the
Registration Statement may have an adverse effect on the marketing of such
offering; provided, however, that in the event of such delay, ARTRA shall
maintain the effectiveness of the Registration Statement, for which purpose
ARTRA shall prepare and file such amendments and supplements to the Registration
Statement and Prospectus used in connection therewith as may be necessary to
keep the Registration Statement effective for a period of ninety (90) days after
the effective date of the post-effective amendment pursuant to which the Holder
is entitled to sell the Warrant Shares.
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The Holder agrees to cooperate with ARTRA in the preparation and
filing of any Registration Statement hereunder and shall promptly provide to
ARTRA such information as it may reasonably request to enable it to comply with
any applicable law or regulation to facilitate the preparation of the
Registration Statement. ARTRA shall bear the legal, accounting and printing
expenses in connection with the preparation and filing of any Registration
Statement provided herein, together with all other expenses incidental thereto,
except (i) the expense of the underwriter or underwriters selected by the Holder
(if other than the underwriters selected by ARTRA), (ii) the legal fees and
expenses of the Holder's counsel, (iii) brokerage commissions and transfer
taxes, if any, in connection with the sale or distribution of the Shares by the
Holder; and (iv) the expense of registering, or obtaining (or determining the
availability of) an exemption from the registration of shares of ARTRA's Common
Stock for sale in any state or other jurisdiction other than New York,
California, Illinois or such other jurisdiction in which ARTRA registers Shares
or obtains an exemption from registration at the request of another holder or
other holders of warrants, provided that, if the Holder and another holder or
other holders of warrants each request that ARTRA register Shares or obtain an
exemption in such other jurisdiction, the expense thereof may be allocated on an
equitable basis between or among the Holder and such other holder or holders who
make such request.
ARTRA shall furnish to the Holder, without charge, a copy of the
Registration Statement and of each amendment and supplement thereto, including
all financial statements and exhibits, and such number of conformed copies of
the Registration Statement and of each amendment thereto, including all
financial statements, but excluding exhibits, as the Holder may reasonably
request.
ARTRA shall furnish to the Holder, as soon as possible after the
effective date of such Registration Statement or post-effective Amendment
thereto and thereafter, from time to time, during the period or ninety (90)
days, as many copies of the prospectus (and of any amended or supplemental
prospectus) as the Holder may reasonably request. If, during such period, any
event occurs as a result of which the prospectus, as then amended or
supplemented, would include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading, or it shall be
necessary to amend or supplement the prospectus to comply with the law or with
the rules and regulations promulgated by the SEC, ARTRA shall forthwith notify
the Holder thereof and at the request of Holder, prepare and furnish to the
Holder, in such quantity as the Holder may reasonably request, an amendment or
supplement which shall correct such statement or omission or cause the
prospectus to comply with the law and with said rules and regulations.
ARTRA shall use its best efforts to cause such Registration Statement
to become effective and shall promptly advise the Holder (i) when such
Registration Statement, or any post-effective amendment thereto, shall have
become effective, and when any amendment of, or supplement to, the prospectus is
filed with the SEC, (ii) when the SEC shall make a request or suggestion for any
amendment to such Registration Statement or the prospectus or for additional
information and by the nature and substance thereof, and (iii) of the issuance
by the SEC of a stop order suspending the effectiveness of such Registration
Statement or the suspension of the order suspending the effectiveness of such
Registration Statement or the suspension of the qualification of ARTRA's shares
for sale in any jurisdiction, or of the initiation or threatening of any
proceedings for that purpose, and shall use its best efforts to prevent the
issuance of any such stop orders, or, if such order shall be issued, to obtain
the withdrawal thereof.
7
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ARTRA, when and as requested by the Holder, shall take all action
necessary to permit the offering of the Warrant Shares as contemplated hereby
under the securities laws of such states as the Holder shall designate at the
sole expense of the Holder (except that ARTRA shall pay all costs for Illinois,
New York and California); provided, however, that ARTRA shall not be required to
qualify as a foreign corporation or to file a consent to service of process in
any state in which it is not then so qualified or in which it has not then filed
such consent notwithstanding the Holder's agreement to pay the costs thereof.
Except as set forth below, ARTRA, on the one hand, and the Holder, on
the other hand, shall each indemnify and hold harmless the other and any
officer, director, employee, agent or attorney thereof from and against any
losses, claims, actions, damages or liabilities to which the other may become
subject, under the Act or any State Act (as hereinafter defined) or otherwise,
insofar as such losses, claims, damages or liabilities arise out of, or are
based upon, any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, or any Prospectus, whether final
or preliminary, forming a part thereof, or any amendment or supplement thereto,
or any blue sky application or other document filed in any state or other
jurisdiction in order to qualify any shares for offer or sale under the laws of
any such state or other jurisdiction ("State Act") (all of the foregoing
referred to herein as "Registration Material"), or the omission or alleged
omission of any material fact required to be stated therein or necessary to make
the statements therein not misleading, or in breach, or non-compliance with, any
duty of disclosure imposed upon such party under the Act or any State Act in
connection with such Registration Material; provided, however, that the Holder's
obligation to indemnify ARTRA and any officer, director, employee, agent or
attorney thereof shall be limited to any losses, claims, actions, damages or
liabilities which are based on written information supplied to ARTRA by the
Holder (or the failure of the Holder to supply material information requested by
ARTRA) specifically for inclusion in the Registration Material, and ARTRA's
obligation to indemnify the Holder shall be discharged to the extent of the
foregoing.
The Holder further agrees to indemnify and hold harmless ARTRA and any
officer, director, employee, agent or attorney thereof from and against any
losses, claims, damages, fines, penalties, costs, expenses or liabilities
arising out of or based on the offer or sale or alleged offer or sale by the
Holder of any shares in, or to any person residing in any state in which the
shares have not been qualified for offer or sale, or otherwise in violation of
the Act or any State Act or of the terms and conditions of this Warrant.
Promptly after receipt by an indemnified party of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof may be made against any indemnifying party pursuant to this Agreement,
notify each indemnifying party in writing of the commencement thereof; and the
omission so to notify each indemnifying party will relieve such party from any
liability pursuant to this Agreement as to the particular item for which
indemnification is then being sought. In case any such action is brought against
any indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and, to
the extent that it may wish, jointly with any other indemnifying party similarly
8
<PAGE>
notified, to assume the defense thereof, with counsel who shall be reasonably
satisfactory to the indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation. An indemnifying party shall not be liable to any indemnified
party on account of any settlement of any claim or action effected without the
consent of an indemnifying party.
The Holder shall execute and deliver to the underwriter or
underwriters an indemnification agreement in such form as may reasonably be
requested and refusal of a Holder to comply with this obligation shall nullify
ARTRA's obligation to register the Warrant shares.
The inclusion of the Warrant Shares in any Registration Statement
shall not be required if counsel of ARTRA shall render an opinion, in writing,
that all of the Holder's Warrant Shares, proposed to be included in such
Registration Statement, may be publicly distributed by the Holder without
registration under the Act in which case the restrictive legend and stop
transfer shall be removed.
8. Registration on the Books of ARTRA. ARTRA shall keep, or cause to
be kept, at its office at 500 Central Avenue, Northfield, Illinois, a register
in which ARTRA shall register this Warrant. No transfer of this Warrant shall be
valid unless made at such office and noted on the Warrant register upon
satisfaction of all conditions for transfer. When presented for transfer or
payment, this Warrant shall be accompanied by a written instrument or
instruments of transfer or surrender, in form satisfactory to ARTRA, duly
executed by the registered Holder or by his duly authorized attorney. ARTRA may
deem and treat the registered Holder hereof as the absolute owner of this
Warrant for all purposes, and ARTRA shall not be affected by any notice to the
contrary.
9. Put of Warrant. The Holder shall have a one time option to require
ARTRA to purchase this Warrant from Holder for a total purchase price of
$1,000,000.00 (the "Put Option") upon the earlier of the following:
(a) on or after the date of April 21, 1998, but on or before the
date of April 20, 2000;
(b) the closing of the sale of the stock or assets of Bagcraft
Corporation of America.
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The Holder shall exercise the Put Option by giving Artra five (5) days written
notice (which shall be in the form of Exhibit "B" attached hereto and made a
part hereof) prior to the date of April 20, 2000.
9. Governing Law. This Warrant has been executed and delivered in the
State of Illinois and shall be construed in accordance with the internal laws of
the State of Illinois, and not its conflict of laws provisions.
IN WITNESS WHEREOF, ARTRA has caused this Warrant to be executed by
its duly authorized officer.
ARTRA GROUP Incorporated
By: __________________________
Title: __________________________
Agreed to and accepted.
HOLDER
_________________________________________
Howard R. Conant Date:
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<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED _________________________________________ hereby
sells, assigns and transfers unto
Name_____________________________________________________________
(Please typewrite or print in block letters)
Address__________________________________________________________ the right to
purchase Common Stock, represented by this Warrant, to the extent of
______________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint _____________________________ attorney, to
transfer the same on the books of ARTRA with full power of substitution in the
premises.
Signature__________________________
Date:__________________, ____
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
ONLY BE SOLD OR TRANSFERRED PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR, AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT, PROVIDED THAT IN THE EVENT THAT ANY RESALE OF THIS SECURITY IS MADE
PURSUANT TO SUCH AN EXEMPTION AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY
AND ITS LEGAL COUNSEL, WILL BE PROVIDED TO THE EFFECT THAT SUCH TRANSFER IS MADE
PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933.
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<PAGE>
PURCHASE FORM
Dated_________________, ____
The undersigned hereby irrevocably elects to exercise the within Warrant to the
extent of purchasing __________ shares of Common Stock and hereby makes payment
of $__________ in payment of the exercise price thereof.
-----------------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name__________________________________________________________________
(Please typewrite or print in block letters)
Address_______________________________________________________________
Social Security or other Taxpayer Identification Number_______________
Signature_____________________________
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
ONLY BE SOLD OR TRANSFERRED PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR, AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT, PROVIDED THAT IN THE EVENT THAT ANY RESALE OF THIS SECURITY IS MADE
PURSUANT TO SUCH AN EXEMPTION AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY
AND ITS LEGAL COUNSEL, WILL BE PROVIDED TO THE EFFECT THAT SUCH TRANSFER IS MADE
PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933.
12
EXHIBIT 10.4
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment") dated as of May 5, 1997 is by and between BAGCRAFT
CORPORATION OF AMERICA, a Delaware corporation ("Borrower"), and GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation (in its individual
capacity, "GE Capital"), for itself, as Lender, and as Agent for Lenders.
R E C I T A L S:
WHEREAS, Borrower, Agent and Lenders are parties to an Amended
and Restated Credit Agreement dated as of December 30, 1996 (as from time to
time amended, restated, supplemented or otherwise modified, the "Credit
Agreement"), pursuant to which Lenders have agreed to make loans and other
extensions of credit to Borrower in accordance with the terms thereof;
WHEREAS, Borrower wishes, and Agent and Lenders are willing,
to amend the Credit Agreement, subject the terms and conditions of this
Amendment; and
WHEREAS, this Amendment shall constitute a Loan Document,
these Recitals shall be construed as part of this Amendment and capitalized
terms used but not otherwise defined in this Amendment shall have the meanings
ascribed to them in Annex A to the Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing and the
agreements, promises and covenants set forth below, and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Amendment. The Credit Agreement is hereby amended as
follows:
(a) The following text is inserted as subsections 1 .2(d) through
(f) of the Credit Agreement:
"(d) Upon and subject to the terms and conditions hereof, each
Lender agrees to provide its Pro Rata Share of a term loan to Borrower
on the Effective Date, in the amount of Three Million Dollars
($3,000,000) ("Term Loan B"). Amounts repaid under Term Loan B may not
thereafter be reborrowed.
(e) Borrower shall pay the entire unpaid balance of Term Loan
B upon the first to occur of the (i) May 8, 1998, (ii) Commitment
Termination Date and (iii) acceleration of the Revolving Credit Loan.
(f) Borrower shall execute and deliver to each Lender a note
to evidence Term Loan B, such note to be in a principal amount equal to
the amount of Term Loan B provided by such Lender, dated the Effective
Date and substantially in the form of Exhibit D-1 (each, as executed
and as it may be amended, restated, supplemented or otherwise modified
and in effect from time to time, a "Term Loan B Note" and,
collectively, the "Term Loan B Notes"). The Term Loan B Notes shall
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represent the obligation of Borrower to pay the amount of Term Loan B
and all other obligations with interest thereon as prescribed in
Section 1.8. The date and amount of each payment of principal and
interest on Term Loan B shall be recorded on the books and records of
Agent, which books and records shall constitute prima facie evidence of
the accuracy of the information therein recorded."
(b) The following text is inserted as the third sentence of
subsection 1.5(c) of the Credit Agreement:
"Any prepayments of less than all of the outstanding balance of Term
Loan B shall be applied to the then remaining outstanding balance of
Term Loan B until paid in full."
(c) The initial set of clauses (ii) and (iii) of subsection 1.5(d) of
the Credit Agreement are renamed clauses (iii) and (iv) respectively, and the
following text is inserted as initial clause (ii) of such subsection:
"(ii) to the then remaining outstanding balance of Term Loan B,"
(d) Clauses (ii) and (iii) of subsection 1.5(e) of the Credit Agreement
are renamed clauses (iii) and (iv) respectively, and the following text is
inserted as clause (ii) of such subsection:
"(ii) to the then remaining outstanding balance of Term Loan B,"
(e) The following text is inserted as the final sentence of Section 1.7
of the Credit Agreement:
"Borrower shall utilize the proceeds of Term Loan B to finance an
intercompany demand loan to ARTRA on the Effective Date in an aggregate
amount not in excess of $3,000,000, which loan shall be payable in full
not later than May 8, 1998 and shall be evidenced by a demand
promissory note in the form of Appendix B to the First Amendment (the
"ARTRA Note") and pledged to Agent as additional Collateral securing
the Obligations."
(f) The following text is inserted as the final column of the grid
contained in subsection 1.8(c) of the Credit Agreement:
"Term Loan B
LIBOR Margin Index Margin
------------ ------------
3.50 0.75
3.50 0.75
3.50 0.75"
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<PAGE>
(g) Clauses (ii), (iii) and (iv) of subsection 1.8(g) of the Credit
Agreement are renamed clauses (iii), (iv) and (v) respectively, and the
following text is inserted as new clause (ii) of such subsection:
"(ii) to any interest due and not yet paid hereunder in respect of
Term Loan B,"
(h) Clauses (v), (vi), (vii) and (viii) of subsection 1.8(g) of the
Credit Agreement are renamed clauses (vii), (viii), (ix) and (x) respectively,
and the following text is inserted as new clause (vi) of such subsection:
"(vi) to the then remaining outstanding balance of Term Loan B,"
(i) The following text is inserted as the final paragraph of Section
6.15 of the Credit Agreement:
"Borrower may change its method of Inventory accounting from a last-in
first-out method to a first-in first-out method, provided that (a) such
change shall not result in obligations of Borrower under the Tax
Sharing Agreement in excess of $2,700,000 (the "Accounting
Obligations") and (b) all potential tax liabilities associated with
such accounting change and the Accounting Obligations shall be offset
in their entirety with a tax loss carryforward (the "Carryforward")
available to ARTRA. Borrower shall be entitled to offset (the "Offset")
against the then outstanding aggregate balance of all intercompany
accounts owing to Borrower (the "Intercompany Account") as indicated on
Borrower's financial statements prepared in accordance with this
Agreement (which balance, in any event, shall not exceed $1,820,000) an
amount not exceeding that portion of the Carryforward successfully
applied to the Accounting Obligations in accordance herewith, provided
that (i) the entire amount of the Carryforward not applied to the
Intercompany Account in accordance herewith shall be retained by the
Borrower and indicated on its financial statement as a shareholder
contribution to Borrower's equity, (ii) prior to the consummation of
the Offset, Borrower shall provide to Agent a statement, certified by
Borrower's chief financial officer, setting forth the amount of the
Accounting Obligations, the Carryforward and the Intercompany Account
immediately prior to the consummation of the Offset, (iii) within
fifteen (15) Business Days after consummation of the Offset Borrower
shall provide to Agent (A) an unaudited balance sheet of Borrower,
certified by Borrower's chief financial officer as true, accurate,
complete and prepared in accordance with GAAP (subject to the absence
of footnotes and normally occurring year-end adjustment not relating to
the transactions described herein)) indicating the affect of such
transactions on Borrower's financial position and (B) an amendment to
the Tax Sharing Agreement solely permitting such transactions, all of
the foregoing deliveries to be in form and substance satisfactory to
Agent."
(j) The following definitions are inserted into Annex A to the Credit
Agreement in appropriate alphabetical order among the definitions contained
therein:
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<PAGE>
""Effective Date" shall have the meaning ascribed thereto in
the First Amendment.
"First Amendment" shall mean the First Amendment to Amended
and Restated Credit Agreement dated as of May 5, 1997 among the
Borrower, the Agent and the Lenders.
"Term Loan B" shall have the meaning assigned to it in Section
1.2(d).
"Term Loan B Commitment" shall mean (a) as to any Lender with
a Term Loan B Commitment, the aggregate commitment of such Lender to
make Term Loan B as set forth on the signature page to the Agreement or
in the most recent Lender Addition Agreement executed by such Lender
and (b) as to all Lenders with a Term Loan B Commitment, the aggregate
commitment of all Lenders to make Term Loan B, which maximum aggregate
commitment shall be Three Million Dollars ($3,000,000).
"Term Loan B Note" shall have the meaning assigned to it in
Section 1.2(f)."
(k) The definition of ""Commitment" or "Commitments"" contained in
Annex A to the Credit Agreement is replaced with the following definition:
""Commitment" or "Commitments" shall mean (a) as to any
Lender, the aggregate of such Lender's Revolving Loan Commitment, Term
Loan Commitment, Term Loan B Commitment and Capital Expenditure Loan
Commitment as set forth on the signature page to the Agreement or in
the most recent Assignment Agreement executed by such Lender and (b) as
to all Lenders, the aggregate of all Lenders' Revolving Loan
Commitments, Term Loan Commitments, Term Loan B Commitments and Capital
Expenditure Loan Commitments, which aggregate commitment shall not
exceed Forty-One Million Dollars ($41,000,000) on the Effective Date,
as such amount may be adjusted, if at all, from time to time in
accordance with the Agreement."
(l) Clauses (b) and (c) of the definition of "Pro Rata Share" contained
in Annex A to the Credit Agreement are renamed clauses (c) and (d) respectively,
and the following text is inserted as new clause (b) of such definition:
"(b) a Lender's portion of Term Loan B, the percentage obtained by
dividing (i) the portion of Term Loan B held by such Lender, by (ii)
the outstanding amount of Term Loan B,"
(m) The text "Term Loan B," "Term Loan B Commitment" and "Term Loan B
Note" is inserted immediately after each respective reference to "Term Loan,"
"Term Loan Commitment" and "Term Loan Note" contained in the Credit Agreement,
any other Loan Document and each Annex, Exhibit or Schedule or other attachment
to any thereof, except (i) as
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<PAGE>
expressly stated otherwise in this Amendment and (ii) in Agent's determination,
as intended otherwise, and all textual revisions necessary to maintain proper
grammatical structure while accomplishing the foregoing shall be deemed made.
(n) Appendix A to this Amendment is hereby included as Exhibit D-1 to
the Credit Agreement.
2. Conditions to Effectiveness. This Amendment shall become
effective on the date (the "Effective Date") that each of the following
conditions has been satisfied in accordance with its terms, all in a manner
satisfactory to Agent:
(a) Warranties and Representations. All of the warranties and
representations of Borrower contained in the Credit Agreement and in
the other Loan Documents (including, without limitation, this
Amendment) shall be true and correct in all material respects, except
those representations and warranties which expressly relate to an
earlier date.
(b) No Material Adverse Change. No event shall have occurred
(and neither Agent nor Lenders shall have become aware of any facts or
conditions not previously known) or be continuing which Agent shall
determine has, or could be expected to have, a Material Adverse Effect.
(c) No Default or Event of Default. Neither a Default nor an
Event of Default shall have occurred and be continuing or would result
herefrom.
(d) No Litigation. No litigation, investigation or proceeding
before any court, governmental agency, or arbitrator shall be pending
or threatened against Borrower, any Subsidiary of Borrower, or any
officer, director, or executive of Borrower or such Subsidiary (A) in
connection with the Credit Agreement or the other Loan Documents or (B)
which, if adversely determined, would, in the sole and absolute opinion
of Agent, have a Material Adverse Effect, and no injunction, writ,
restraining order or other order of any material nature adverse to
Borrower or any of its Subsidiaries shall have been issued or
threatened by any court or governmental agency.
(e) Agreement. Agent shall have received a duly executed
original of this Amendment.
(f) Term Loan B Note. Agent shall have received a duly
executed original of the Term Loan B Note.
(g) Second Amendment to Warrant. Agent shall have received a
duly executed original of a Second Amendment to Warrant of even date
herewith between Borrower and GE Capital.
(h) ARTRA Note. Agent shall have received a duly executed
original of the
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<PAGE>
ARTRA Note, duly endorsed to Agent as additional Collateral securing
the Obligations.
(i) Officer's Certificate. Agent shall have received a duly
executed original certificate dated as of the date hereof by Borrower's
chief financial officer stating, and Borrower hereby represents and
warrants, that (1) since the Closing Date, there has been (i) no
Material Adverse Effect on the business, operations, financial
condition, prospects or projections of Borrower, the industries in
which it operates, or any of its Subsidiaries, (ii) no litigation which
has commenced which could be expected to have any such Material Adverse
Effect or challenge any of the transactions contemplated by the
Agreement and the other Loan Documents, (iii) except as expressly
permitted by the Credit Agreement, as amended hereby, no dividends,
distributions, payments, loans, contributions, fees or other transfers
of cash, property or other assets to any stockholder or Affiliate of
Borrower, including, without limitation, ARTRA or its employees,
directors, officers or Affiliates, (iv) except as expressly permitted
by the Credit Agreement, as amended hereby, no material increase in
liabilities, liquidated or contingent, and no material decrease in
assets of Borrower or any of its Subsidiaries and (v) no Event of
Default which has occurred and is continuing and (2) consents and
acknowledgments have been obtained from all Persons whose consents and
acknowledgments may be required, including, but not limited to,
Borrower's and Parent's stockholders and all requisite Governmental
Authorities, to the terms, and to the execution and delivery, of this
Amendment and the other documents and agreements executed in connection
herewith or pursuant hereto to which Borrower is a party, and the
transactions to be consummated in connection herewith and therewith.
(j) Secretary's Certificate. Agent shall have a duly executed
original certificate dated the date hereof by Borrower's corporate
secretary or an assistant secretary stating that (i) since the Closing
Date, there has been no amendment or other modification (nor any
proposal therefor) to Borrower's certificate or articles of
incorporation or bylaws and that each of the foregoing is in full force
and effect, (ii) the resolutions attached thereto are of its Board of
Directors and, as required, stockholders, approving and authorizing the
execution, delivery and performance of this Amendment and the other
documents and agreements executed in connection herewith or pursuant
hereto to which Borrower is a party, and the transactions to be
consummated in connection herewith and therewith and that each of the
foregoing resolutions is in full force and effect without any
modification or amendment, (iii) the officers of Borrower executing
this Amendment and the other documents and agreements executed in
connection herewith or pursuant hereto to which Borrower is a party are
the incumbent officers of the Borrower and, as such, are authorized to
execute each of such documents and (iv) Borrower is in good standing in
its state of incorporation and in good standing and qualified to
conduct business in each jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualification.
(k) Opinion of Counsel. Agent shall have received a duly
executed opinion of counsel for Borrower and ARTRA with respect to the
transactions contemplated hereby.
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<PAGE>
(l) Prohibitive Actions. Agent shall have received evidence
that no action has been taken by any competent authority which
restrains, prevents or imposes material adverse conditions upon the
consummation of all or any part of such transactions contemplated by
this Amendment, nor has any judgment, order, injunction or other
restraint been issued or filed, nor is any hearing seeking injunctive
relief or other restraint pending or noticed which prohibits or
imposing material adverse conditions upon all or any part of the
transactions contemplated by this Amendment.
(m) Fees, Costs and Expenses; Amendment Fee. Agent shall have
received payment of all fees, costs and expenses, including, without
limitation, attorney's fees and expenses and as otherwise due pursuant
to Section 11.3 of the Credit Agreement, incurred by Agent through the
date hereof, together with a fully earned and non-refundable amendment
fee in the amount of $100,000 as consideration for the execution and
delivery of this Amendment by Agent and Lenders, which amendment fee
Borrower hereby acknowledges as being due and payable by Borrower to
Agent as of the Effective Date.
(n) Other Requirements. Agent shall have received all
certificates, orders, authorizations, consents, affidavits, schedules,
instruments, security agreements, financing statements, mortgages,
guarantees, opinions, pledges and other documents or instruments which
are provided for hereunder, or which Agent may at any time request.
3. Releases; Indemnities. In further consideration of Agent's
and Lenders' execution of this Amendment, Borrower, individually and on behalf
of its successors (including, without limitation, any trustee acting on its
behalf and any debtor-in-possession with respect to it), assigns, subsidiaries
and affiliates, hereby forever releases Agent and Lenders and their respective
successors, assigns, parents, subsidiaries, affiliates, officers, employees,
directors, agents and attorneys (collectively, the "Releasees") from any and all
debts, claims, demands, liabilities, responsibilities, disputes, actions and
causes of action (whether at law or in equity) and obligations of every nature
whatsoever, whether liquidated or unliquidated, whether known or unknown,
matured or unmatured, fixed or contingent (collectively, "Claims") that Borrower
may have against the Releasees which arise from or relate to any actions which
the Releasees may have taken or omitted to take on or prior to the date hereof
with respect to the Obligations, any Collateral, the Credit Agreement, any Loan
Document and any third parties liable in whole or in part for the Obligations.
Borrower hereby agrees to indemnify and hold the Releasees harmless with respect
to any and all liabilities, obligations, losses, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever
incurred by the Releasees, or any of them, whether direct, indirect or
consequential, as a result of or arising from or relating to any proceeding by,
or on behalf of any Person, including, without limitation, officers, directors,
agents, trustees, creditors, partners or shareholders of Borrower, whether
threatened or initiated, asserting any claim for legal or equitable remedy under
any statute, regulation or common law principle arising from or in connection
with the negotiation, preparation, execution, delivery, performance,
administration and enforcement of the Credit Agreement, any other Loan Document
or any other document executed in connection therewith. The foregoing indemnity
shall survive the payment in full of the Obligations and the termination of the
Credit Agreement and the other Loan Documents.
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<PAGE>
4. Status of Loan Documents; Reference to Credit Agreement.
Except as specifically modified and amended hereby, the Credit Agreement and the
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed. Upon the effectiveness of this Amendment each reference
in (a) the Credit Agreement to "this Amendment," "hereunder," "hereof," or words
of similar import and (b) any other Loan Document to "the Credit Agreement"
shall, in each case and except as otherwise specifically stated therein, mean
and be a reference to the Credit Agreement, as amended and modified hereby
pursuant to the terms hereof.
5. No Amendments. No amendment or modification of any
provision of this Amendment shall be effective without the written agreement of
Agent and Borrower, and no termination or waiver of any provision of this
Amendment, or consent to any departure by Borrower therefrom, shall in any event
be effective without the written concurrence of Agent. Any waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which it was given.
6. Benefit of Agreement; Relationship Between Parties. This
Amendment is solely for the benefit of the parties hereto and their respective
successors and assigns, and no other Person shall have any right, benefit or
interest under or because of the existence of this Amendment. The relationship
of Agent and Lenders, on the one hand, and Borrower, on the other hand, has been
and shall continue to be, at all times, that of creditor and debtor and not as
joint venturers or partners. Nothing contained in the Credit Agreement or any
other Loan Document, or any instrument, document or agreement delivered in
connection therewith, shall be deemed or construed to create a fiduciary
relationship between or among the parties hereto.
7. No Assignment. The terms and provisions of this Amendment
are for the purpose of defining the relative rights and obligations of Borrower,
Agent and Lenders with respect to the transactions contemplated hereby and there
shall be no third party beneficiaries of any of the terms and provisions of this
Amendment. Borrower may not assign, transfer, hypothecate or otherwise convey
its rights, benefits, obligations or duties hereunder without the prior express
written consent of Agent and Requisite Lenders.
8. Section Titles. The Section and subsection titles contained
in this Amendment are included for the sake of convenience only, shall be
without substantive meaning or content of any kind whatsoever, and are not a
part of the agreement among the parties.
9. Counterparts. This Amendment may be executed in any number
of counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
10. Severability. Wherever possible, each provision of this
Amendment shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Amendment shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Amendment.
-8-
<PAGE>
11. Incorporation by Reference. Sections 10.10 and 10.14 of
the Credit Agreement are hereby incorporated herein by reference in their
entirety with the same effect as if set forth herein in full.
[signature page follows]
-9-
<PAGE>
IN WITNESS WHEREOF, this First Amendment to Credit Agreement
has been duly executed as of the date first written above.
BAGCRAFT CORPORATION OF AMERICA
By:___________________________
Title:________________________
GENERAL ELECTRIC CAPITAL
CORPORATION
By:___________________________
Title: Duly Authorized Signatory
-10-
<PAGE>
Appendix A
EXHIBIT D-1
to
AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF DECEMBER 30, 1996
FORM OF TERM LOAN B NOTE
Chicago, Illinois
$3,000,000.00 May 5, 1997
FOR VALUE RECEIVED, the undersigned, BAGCRAFT CORPORATION OF
AMERICA, a Delaware corporation ("Borrower"), HEREBY PROMISES TO PAY to the
order of GENERAL ELECTRIC CAPITAL CORPORATION ("Lender"), at the address of
General Electric Capital Corporation, as Agent for Lenders, 201 High Ridge Road,
Stamford, CT 06927-5100, or at such other place as Agent may designate from time
to time in writing, in lawful money of the United States of America and in
immediately available funds, the amount of THREE MILLION DOLLARS AND NO CENTS
($3,000,000.00). Capitalized terms, unless otherwise defined herein, shall have
the respective meanings assigned to such terms in the Credit Agreement (as
hereinafter defined) and Schedule A thereof.
This Term Loan B Note (this "Note") is issued pursuant to that
certain Amended and Restated Credit Agreement, dated as of December 30, 1996, by
and between Borrower, GE Capital, as Agent, and the Lenders named therein (as
amended, restated, supplemented or otherwise modified from time to time, the
"Credit Agreement"), and is entitled to the benefit and security of the Credit
Agreement, the Security Agreement and all of the other Loan Documents referred
to therein. Reference is hereby made to the Credit Agreement for a statement of
all of the terms and conditions under which the loan evidenced hereby was made
and is to be repaid.
The principal amount of the indebtedness evidenced hereby
shall be payable in the amounts and on the dates specified in the Credit
Agreement, the terms of which are hereby incorporated herein by reference.
Interest thereon shall be paid until such principal amount is paid in full at
such interest rates and at such times as are specified in the Credit Agreement.
If any payment on this Note becomes due and payable on a day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension.
Upon and after the occurrence of any Event of Default, this
Note may, as provided in the Credit Agreement, and without demand, notice or
legal process of any kind, be declared, and immediately shall become, due and
payable.
-1-
<PAGE>
Demand, presentment, protest and notice of nonpayment and
protest are hereby waived by Borrower.
THIS NOTE HAS BEEN EXECUTED, DELIVERED AND ACCEPTED AT
CHICAGO, ILLINOIS AND SHALL BE INTERPRETED, GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS)
AND DECISIONS OF THE STATE OF ILLINOIS.
BAGCRAFT CORPORATION OF AMERICA
By: _______________________
Title: _______________________
-2-
<PAGE>
Appendix B
FORM OF INTERCOMPANY DEMAND NOTE
Chicago, Illinois
$3,000,000.00 May 5, 1997
FOR VALUE RECEIVED, ARTRA GROUP INCORPORATED, a Pennsylvania
corporation (the "Payor"), hereby promises to pay to the order of BAGCRAFT
CORPORATION OF AMERICA, a Delaware corporation, or its registered assigns (the
"Payee"), in lawful money of the United States of America in immediately
available funds, at such location in the United States of America as the Payee
shall from time to time designate, the amount of (a) THREE MILLION DOLLARS AND
NO CENTS ($3,000,000.00) and (b) interest thereon until paid at the rate from
time to time payable with respect to Term Loan B under that certain Credit
Agreement dated December 30, 1996 (as amended, restated, supplemented or
otherwise modified from time to time, the "Credit Agreement"; capitalized terms
used herein without definition are so used as defined in the Credit Agreement)
among the Payee, Agent and the parties signatory thereto as Lenders.
The principal balance hereof, together with all accrued
interest then due and payable thereon, shall be due and payable in full on the
first to occur of (i) May 8, 1998, (ii) the Commitment Termination Date, (iii)
the acceleration of the Revolving Credit Loan and (iv) demand by Payee
hereunder. Payor may prepay all or any part of the principal or accrued interest
at any time and from time to time, without premium or penalty. All partial
prepayments shall be applied first to accrued and unpaid interest and then to
the unpaid principal amount hereof. Interest due hereunder shall be paid at such
times as are specified in the Credit Agreement for interest payable with respect
to Term Loan B.
Upon the commencement of any bankruptcy, reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar proceeding of any jurisdiction relating to the Payor, the
unpaid principal amount hereof shall become immediately due and payable without
presentment, demand, protest or notice of any kind in connection herewith.
The Payee is hereby directed to record the loan evidenced
hereby, and all repayments or prepayments thereof, in its books and records,
such books and records constituting prima facie evidence of the accuracy of the
information contained therein.
All payments hereunder shall be made without offset,
counterclaim or deduction of any kind.
-1-
<PAGE>
THIS INTERCOMPANY DEMAND NOTE SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS (WITHOUT REGARD
TO CONFLICTS OF LAW PROVISIONS THEREOF).
ARTRA GROUP INCORPORATED
By: ___________________
Title: ___________________
ACKNOWLEDGMENT
The Payee hereby waives all rights of set-off, defalcation or similar
rights it may otherwise have against the Payor or any amounts at any time owing
by the Payee to the Payor as a result of amounts owing by the Payor to the Payee
under this Intercompany Demand Note.
This Intercompany Demand Note and all of the rights of the Payee
hereunder have been pledged to General Electric Capital Corporation, as Agent
("Agent"), as additional Collateral securing the Obligations pursuant to the
terms of that certain Stock Pledge Agreement dates as of December 17, 1993 (as
amended, restated, supplemented or otherwise modified from time to time) among
the Payee and Agent.
Acknowledged and Agreed:
BAGCRAFT CORPORATION OF AMERICA
By: _______________________
Title: ______________________
-2-
EXHIBIT 10.5
SECOND AMENDMENT TO WARRANT
This SECOND AMENDMENT TO WARRANT dated as of May 5, 1997 (this
"Amendment") is by and between BAGCRAFT CORPORATION OF AMERICA, a Delaware
corporation ("Company"), and GENERAL ELECTRIC CAPITAL CORPORATION ("GE
Capital"), a New York corporation.
R E C I T A L S:
WHEREAS, GE Capital is the holder of Warrant No. 2 issued by Company on
December 30, 1996 (as from time to time amended, restated, supplemented or
otherwise modified, the "Warrant");
WHEREAS, GE Capital and Company wish to amend the Warrant as
set forth herein; and
NOW THEREFORE, for and in consideration of the terms set forth herein
and in the premises, the parties hereto agree as follows:
1. Definitions. Except as otherwise set forth herein, all defined terms
herein shall have the respective meanings ascribed thereto in the Warrant and
the Loan Agreement.
2. Amendment to Warrant. The Warrant is hereby amended by replacing
subsection 14.1(b) thereof with the following text:
"(b) Notwithstanding the provisions of Section 14.1(a), if, at any time
during the period between (A) the date on which any Holder shall have
exercised its rights under Section 14.1 to cause Company to repurchase
all or a portion of such Holder's Warrant through and including (B) May
30, 1998, Company shall consolidate or merge with, or sell all or
substantially all of its property and assets to, any Person and the
consideration received by stockholders in connection with such merger,
consolidation or sale shall consist solely of cash, then such Holder
shall (whether or not such Holder shall have previously surrendered
such Holder's Warrant for repurchase by Company pursuant to this
Section 14) be entitled to receive, on the date of such consolidation,
merger or sale, the higher of (i) the amount payable to such Holder as
determined pursuant to Section 14.1(a) and (ii) an amount equal to the
amount of cash such Holder would have received upon such consolidation,
merger or sale had such Holder's Warrant (or the portion thereof being
repurchased) been fully exercised immediately prior thereto less the
aggregate Current Warrant Price payable at the time of such
consolidation, merger or sale for the purchase of the shares of Common
Stock then subject to such Holder's Warrant (or the portion thereof
being repurchased)."
3. Miscellaneous. Upon the effectiveness of this Amendment:
(a) as amended hereby, the Warrant remains in full force
and effect and is hereby
<PAGE>
ratified and confirmed;
(b) the terms of this Amendment shall be binding upon and
inure to the benefit of the successors of Company and the successors
and assigns of GE Capital and any Subsequent Holder;
(c) this Amendment shall be governed by the internal laws of
the State of Illinois without regard to conflicts of laws provisions;
and
(d) this Amendment may be executed in counterparts which when
taken together shall be considered one and the same document.
[signature page follows]
<PAGE>
WHEREAS, each of the undersigned has caused this Second Amendment to
Warrant to be executed by its duly authorized officer as of the date first
written above.
BAGCRAFT CORPORATION OF AMERICA
By: ___________________________________
Title: _________________________________
GENERAL ELECTRIC CAPITAL CORPORATION
By: ___________________________________
Title: _________________________________
EXHIBIT 11
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
AND EQUIVALENT SHARE OF COMMON STOCK
(Unaudited in thousands except per share amounts)
Three Months Ended
--------------------
Line March 27, March 28,
- ---- 1997 1996
-------- --------
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of
common stock outstanding during the period 7,840 7,401
2 Net additional shares assuming stock options
and warrants exercised and proceeds used
to purchase treasury shares -- 272
-------- --------
3 Weighted average number of shares and
equivalent shares of common stock
outstanding during the period 7,840 7,673
======== ========
EARNINGS (LOSS)
4 Earnings (loss) before extraordinary credit $ (1,353) $ 203
5 Less dividends applicable to
redeemable preferred stock (162) (148)
6 Less redeemable common stock accretion (95) (86)
-------- --------
7 Amount for per share computation $ (1,610) $ (31)
======== ========
8 Net earnings (loss) $ (1,353) $ 9,627
9 Less dividends applicable to
redeemable preferred stock (162) (148)
10 Less redeemable common stock accretion (95) (86)
-------- --------
11 Amount for per share computation $ (1,610) $ 9,393
======== ========
PER SHARE AMOUNTS
Earnings (loss) before extraordinary credit
(line 7 / line 3) $ (.21) $ (.01)
======== ========
Net earnings (loss)
(line 11 / line 3) $ (.21) $ 1.22
======== ========
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000200243
<NAME> ARTRA GROUP INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-25-1997
<PERIOD-START> DEC-27-1996
<PERIOD-END> MAR-27-1997
<EXCHANGE-RATE> 1.000
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 9,721
<ALLOWANCES> 497
<INVENTORY> 19,356
<CURRENT-ASSETS> 44,225
<PP&E> 47,678
<DEPRECIATION> 21,464
<TOTAL-ASSETS> 74,633
<CURRENT-LIABILITIES> 50,592
<BONDS> 0
8,895
0
<COMMON> 5,920
<OTHER-SE> (36,332)
<TOTAL-LIABILITY-AND-EQUITY> 74,633
<SALES> 28,461
<TOTAL-REVENUES> 28,461
<CGS> 22,394
<TOTAL-COSTS> 22,394
<OTHER-EXPENSES> 7,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,503
<INCOME-PRETAX> (1,554)
<INCOME-TAX> (201)
<INCOME-CONTINUING> (1,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,353)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> 0
</TABLE>
