ARTRA GROUP Incorporated
Supplement dated May 20, 1998 to
Prospectus dated October 23, 1997
Set forth in this Supplement is certain information included in the Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 and the Annual Report
on Form 10-K for the year ended December 31, 1997 of ARTRA GROUP Incorporated
("ARTRA" or the "Company"), including (i) Selected Financial Data for each of
the five fiscal years in the period ended December 31, 1997 (page 2); (ii)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (page 4), and (iii) financial statements for the Company as listed on
page F-1. Capitalized terms not defined herein shall have the meanings set forth
in the Prospectus, as supplemented to date.
<PAGE>
Selected Financial Data.
Following is a consolidated summary of selected financial data of the Company
for the three month periods ended March 31, 1998 and March 27, 1997 and each of
the five fiscal years in the period ended December 31, 1997. The information for
the years ended December 28, 1995 and December 29, 1994 reflects the operations
of Arcar Graphics, Inc. ("Arcar") in discontinued operations. The sale of Arcar
(acquired effective April 9, 1994) was completed on October 26, 1995. Certain
selected financial data for each of the three fiscal years in the period ended
December 28, 1995 reflects the discontinuance of the Company's jewelry business,
effective September 28, 1995, conducted by the former majority-owned subsidiary
COMFORCE Corporation, formerly The Lori Corporation. In October 1995, due to
issuances of COMFORCE common stock, the Company's ownership interest in COMFORCE
common stock was reduced to approximately 25% and the investment in COMFORCE was
accounted for under the equity method during the fourth quarter of 1995.
Effective December 28, 1995, the Company adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." Under this statement, the
Company's investment in COMFORCE is classified as available for sale and is
stated at fair value. See Notes 3 and 6 to the Company's consolidated financial
statements for the year ended December 31, 1997 for a further discussion of the
Company's investment in COMFORCE.
<TABLE>
<CAPTION>
Three Months Ended
--------------------- Fiscal Year Ended (G)
March 31, March 27, ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ----- ------ ------ ------ ------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 30,839 $ 28,461 $ 125,027 $ 120,699 $ 121,879 $ 111,837 $ 113,584
Earnings (loss) from
continuing operations (A) (B) (C) (1,917) (1,353) 773 3,549 (16,943) (13,529) (8,327)
Earnings (loss) from
discontinued operations (D) -- -- -- -- 10 (15,906) (216)
Extraordinary credits (E) -- -- -- 9,424 14,030 8,965 22,057
Net earnings (loss) (1,917) (1,353) 773 12,973 (2,903) (20,470) 13,514
Earnings (loss) per share (F):
Basic
Continuing operations (.26) (.21) (.04) .34 (2.70) (2.52) (1.87)
Discontinued operations -- -- -- -- -- (2.79) (.04)
Extraordinary credits -- -- -- 1.25 2.07 1.57 4.57
Net earnings (loss) (.26) (.21) (.04) 1.59 (.63) (3.74) 2.66
Diluted
Continuing operations (.26) (.21) (.04) .32 (2.70) (2.52) (1.84)
Discontinued operations -- -- -- -- -- (2.79) (.04)
Extraordinary credits -- -- -- 1.19 2.07 1.57 4.49
Net earnings (loss) (.26) (.21) (.04) 1.51 (.63) (3.74) 2.61
Weighted average number of
shares outstanding
Basic 7,952 7,840 7,970 7,525 6,776 5,702 4,823
Diluted 7,952 7,840 7,970 7,939 6,776 5,702 4,908
Total assets 70,016 74,633 73,206 77,379 77,949 93,429 92,774
Long-term debt 46,784 39,934 50,619 34,207 34,113 19,673 29,264
Debt subsequently discharged -- -- -- -- -- 9,750 --
Cash dividends -- -- -- -- -- -- --
2
<PAGE>
<FN>
(A) Earnings from continuing operations for the three months ended March
31, 1998 and March 27, 1997 include realized gains of $53,000 and
$213,000, respectively, from dispositions of COMFORCE common stock.
Earnings from continuing operations for the years ended December 31,
1997 and December 26, 1996 include realized gains of $2,531,000 and
$5,818,000, respectively, from dispositions of COMFORCE common stock.
Earnings from continuing operations for the year ended December 26,
1996 includes a gain of $838,000 from an exchange of redeemable
preferred stock of its Bagcraft subsidiary.
(B) Earnings from continuing operations for the year ended December 31,
1997 includes a gain from settlement of litigation of $10,416,000, net
of related legal fees and other expenses, and net related party
compensation/expense reimbursement costs of $2,816,000 (see Note 19 to
the Company's consolidated financial statements).
(C) Earnings from continuing operations for the year December 26, 1996
includes a gain of $838,000 from an exchange of redeemable preferred
stock of its Bagcraft subsidiary.
(D) The loss from discontinued operations for the year ended December 28,
1995 includes a charge to operations of $6,430,000 to write-off the
remaining goodwill of COMFORCE's jewelry business effective June 29,
1995, and a provision of $1,000,000 for loss on disposal of COMFORCE's
jewelry business. Earnings from discontinued operations for the year
ended December 28, 1995 includes a gain on sale of Bagcraft's Arcar
subsidiary of $8,483,000. The loss from discontinued operations for
the year ended December 31, 1994 includes a charge to operations of
$10,800,000 representing a write-off of New Dimensions goodwill.
(E) The 1996, 1995 and 1994 extraordinary credits represent gains from net
discharge of bank indebtedness. The 1993 extraordinary credit
represents a gain from a net discharge of indebtedness due to the
reorganization of COMFORCE's New Dimensions subsidiary.
(F) In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings
Per Share" and restated prior periods accordingly.
(G) In 1997, the Company changed its fiscal year end to December 31. In
prior years the Company had operated on a 52/53 week fiscal year
ending the last Thursday of December.
</FN>
</TABLE>
3
<PAGE>
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 its products to its customers through its
direct sales force and through independent brokers. 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 Company's consolidated financial statements for the year ended December 28,
1995 were reclassified to report separately the results of operations of Arcar
and COMFORCE's discontinued jewelry business prior to the deconsolidation of
COMFORCE and its majority-owned subsidiaries effective October 1995.
Accordingly, the following discussion of results of operations is presented for
the Company's continuing operations at December 31, 1997, conducted by the
Company's Bagcraft subsidiary.
Three Months Ended March 31, 1998
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 31, 1998 and March
27, 1997.
Three Months Ended
----------------------
March 31, March 27,
1998 1997
---------- ----------
Net sales 100.0% 100.0%
------- -------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization 82.7% 78.7%
Selling, general and administrative 13.5% 13.9%
Depreciation and amortization 2.5% 3.7%
------- -------
98.7% 96.3%
------- -------
Operating earnings (loss) 1.3% 3.7%
------- -------
Other income (expense):
Interest expense -6.1% -6.4%
Amortization of debt discount -.5% -2.4%
Realized gain on disposal of
available-for-sale securities .2% .7%
Other income (expense), net -.3% .1%
------- -------
-6.7% -8.0%
------- -------
Loss before income taxes, minority interest
and extraordinary credit -5.4% -4.3%
Provision for income taxes - .7%
Minority interest -.6% -1.3%
------- -------
Earnings (loss) before extraordinary credit -6.0% -4.9%
======= =======
4
<PAGE>
Three Months Ended March 31, 1998 vs. Three Months Ended March 27, 1997
Net sales of $30,839,000 for the three months ended March 31, 1998 were
$2,378,000, or 8.4%, higher than net sales for the three months ended March 27,
1997. The 1998 increase in net sales is principally attributable to increased
1998 food service sales. During the first quarter of 1997 several customers
deferred certain key promotions until the second quarter of 1997
The Company's cost of sales of $25,511,000 for the three months ended March 31,
1998 increased $3,117,000 as compared to the three months ended March 27, 1997.
Cost of sales for the three months ended March 31, 1998 was 82.7% of net sales
compared to a cost of sales percentage of 78.7% for the three months ended March
27, 1997. The 1998 increase in cost of sales is principally attributable to an
increase in sales volume. The 1998 increase in cost of sales percentage is
principally attributable to competitive market conditions, increased 1998
employee benefit costs and certain 1998 plant consolidation costs.
Selling, general and administrative expenses were $4,171,000 for the three
months ended March 31, 1998 as compared to $3,949,000 for the three months ended
March 27, 1997. Selling, general and administrative expenses were 13.5% of net
sales for the three months ended March 31, 1998 as compared to 13.9% of net
sales for the three months March 27, 1997. The 1998 increase in selling, general
and administrative expenses is principally attributable to increased employee
compensation and benefit costs. The 1998 decrease in as a percentage of net
sales is principally attributable to the 1998 increase in net sales and the
semi-fixed nature of these costs.
Depreciation and amortization expense was $775,000 for the three months ended
March 31, 1998 as compared to $1,061,000 for the three months ended March 27,
1997. Depreciation and amortization expense was 2.5 % of net sales for the three
months ended March 27, 1997 as compared to 3.7% of net sales for the three
months ended March 27, 1997. The 1998 decrease in depreciation and amortization
is primarily attributable to the completion of the amortization period in 1997
of certain assets attributable to the 1990 acquisition of the Bagcraft
subsidiary.
The Company had operating earnings in the three months ended March 31, 1998 of
$382,000 as compared to operating earnings of $1,057,000 in the three months
ended March 27, 1997. The 1998 decrease in operating earnings is attributable to
decreased operating margins as noted above.
Amortization of debt discount was $164,000 for the three months ended March 31,
1998 as compared to $675,000 for the three months ended March 27, 1997. The 1998
decrease is attributable to the February 1998 amendment and restatement of
Bagcraft's Credit Agreement.
No income tax benefit was recognized in connection with the Company's 1998 and
1997 pre-tax losses due to the Company's tax loss carryforwards and the
uncertainty of future taxable income.
5
<PAGE>
Year Ended December 31, 1997
The following table presents, as a percentage of net sales, operating expenses
and other income (expense) included the Company's earnings (loss) from
continuing operations for the three years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
December 31, December 26, December 28,
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of goods sold,
exclusive of depreciation
and amortization 81.2% 78.4% 84.1%
Selling, general and administrative 15.6% 13.0% 15.7%
Depreciation and amortization 3.5% 3.3% 3.6%
Write-down of idle machinery and equipment - - 1.2%
----- ---- -----
100.3% 94.7% 104.6%
----- ---- -----
Operating earnings (loss) -0.3% 5.3% - 4.6%
----- ----- -----
Other income (expense):
Interest expense -7.4% -6.1% -7.7%
Amortization of debt discount -2.2% -0.5% -0.3%
Realized gain on disposal of 2.0% 4.8% -
available-for-sale securities
Litigation settlement 8.3% - -
Gain on sale of idle machinery and 0.7% - -
equipment
Other income (expense), net 0.3% -0.1% -0.1%
Equity in loss of COMFORCE - - -0.4%
----- ----- ----
1.7% -1.9% -8.5%
----- ---- ----
Earnings (loss) from continuing operations
before income taxes and minority interest 1.4% 3.4% -13.1%
Provision for income taxes - -0.1% -
Minority interest -0.9% -0.4% -0.7%
---- ---- ----
Earnings (loss) from continuing operations 0.5% 2.9% -13.8%
==== ==== ====
</TABLE>
Year Ended December 31, 1997 vs. Year Ended December 26, 1996
Net sales of $125,027,000 for the year ended December 31, 1997 were $4,328,000,
or 3.6%, higher than net sales for the year ended December 26, 1996. The 1997
net sales increase is attributable to Bagcraft's January 1997 acquisition of the
business assets of AB Specialty, partially offset by sales during 1996 to a
former food service customer.
The Company's cost of sales of $101,527,000 for the year ended December 31, 1997
increased $6,914,000 as compared to the year ended December 26, 1996. Cost of
sales for the year ended December 31, 1997 was 81.2% of net sales compared to a
cost of sales percentage of 78.4% for the year ended December 26, 1996. The
increase in cost of sales percentage is primarily attributable to competitive
market conditions, certain transition costs relating to the AB Specialty
acquisition and a slightly less favorable product mix in 1997.
6
<PAGE>
Selling, general and administrative expenses were $19,548,000 for the year ended
December 31, 1997 as compared to $15,638,000 for the year ended December 26,
1996. Selling, general and administrative expenses were 15.6% of net sales for
the year ended December 31, 1997 as compared to 13.0% of net sales for year
ended December 26, 1996. The 1997 increase in selling, general and
administrative expenses was principally attributable to net related party
compensation/expense reimbursement costs of $2,816,000 (see discussion of Peter
R. Harvey advances below).
Depreciation and amortization expense was $4,364,000 for the year ended December
31, 1997 as compared to $3,927,000 for the year ended December 26, 1996.
Depreciation and amortization expense was 3.5 % of net sales for the year ended
December 31, 1997 as compared to 3.3% of net sales for year ended December 26,
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 an operating loss in the year ended December 31, 1997 of
$412,000 as compared to operating earnings of $6,521,000 in the year ended
December 26, 1996. The 1997 operating loss is attributable to decreased
operating margins and increased selling, general and administrative expenses as
noted above.
Interest expense for the year ended December 31, 1997 increased $1,851,000 as
compared to the year ended December 26, 1996. The 1997 increase is principally
attributable to an increased level of borrowings and related loan fees incurred.
Amortization of debt discount was $2,702,000 for the year ended December 31,
1997 as compared to $548,000 for the year ended December 26, 1996. The 1997
increase is attributable to the December 1996 amendment and restatement of
Bagcraft's Credit Agreement.
During the year ended December 31, 1997 the Company sold or otherwise disposed
of 302,203 shares of COMFORCE common stock resulting in a realized gain of
$2,531,000. During the year ended December 26, 1996 the Company sold or
otherwise disposed of 331,333 shares of COMFORCE common stock resulting in a
realized gain of $5,818,000.
Effective December 31, 1997, the ARTRA received a settlement from certain
litigation relating to the acquisition of Envirodyne in 1989 by Emerald. ARTRA
recognized a gain from the settlement agreement of $10,416,000, net of related
legal fees and other expenses.
In December 1997 the company sold certain idle machinery and equipment
written-off in prior years resulting in a gain of $932,000.
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 credit due to the utilization
of tax loss carryforwards.
7
<PAGE>
Year Ended December 26, 1996 vs. Year Ended December 28, 1995
Continuing Operations
Net sales of $120,699,000 for the year ended December 26, were $1,180,000, or
1.0%, lower than net sales for the year ended December 28, 1995. The 1996 sales
decrease is attributable to an overall volume decrease partially offset by
increased selling prices. The 1996 volume decrease is principally attributable
to a 1995 promotion by a major fast food customer. The increased 1996 selling
prices were in response to the significant increases in paper costs in 1995.
The Company's cost of sales of $94,613,000 for the year ended December 26, 1996
decreased $7,895,000 as compared to the year ended December 28, 1995. Cost of
sales for the year ended December 26, 1996 was 78.4% of net sales compared to a
cost of sales percentage of 84.1% for the year ended December 28, 1995. The
decrease in cost of sales is primarily attributable to lower paper costs and the
decreased 1996 sales volume as noted above. The decrease in cost of sales
percentage is primarily attributable to lower paper costs and improved
production efficiencies in 1996.
Selling, general and administrative expenses were $15,638,000 in the year ended
December 26, 1996 as compared to $19,131,000 in the year ended December 28,
1995. Selling, general and administrative expenses were 13.0% of net sales in
the year ended December 26, 1996 as compared to 15.7% of net sales in the year
ended December 28, 1995. The 1996 decrease in selling, general and
administrative expenses is primarily attributable to a third quarter 1995
compensation charge related to the issuance of a 35% common stock interest in
COMFORCE as additional consideration for certain individuals to enter into
employment or consulting services agreements to manage COMFORCE's entry into and
development of the telecommunications and computer technical staffing services
business.
Depreciation and amortization expense was $3,927,000 in the year ended December
26, 1996 as compared to $4,330,000 in the year ended December 28, 1995.
Depreciation and amortization expense was 3.3 % of net sales in the year ended
December 26, 1996 as compared to 3.6% of net sales in the year ended December
28, 1995. The 1996 decrease in depreciation and amortization expense is
primarily attributable to the December, 1995 write-down of idle machinery and
equipment dedicated to the production of microwave popcorn products.
In recent years, Bagcraft had experienced a decline in its domestic microwave
popcorn business due to the acquisition of one of its major customers by a
company with its own packaging ability. Accordingly, at December 28, 1995,
Bagcraft incurred a charge to operations of $1,503,000 to write-down the
carrying value of idle machinery and equipment dedicated to the production of
microwave popcorn products.
The Company had operating earnings in the year ended December 26, 1996 of
$6,521,000 as compared to operating loss of $5,593,000 in the year ended
December 28, 1995. The 1996 increase in operating earnings is attributable to
improved operating margins and to the decrease in selling, general and
administrative expenses as noted above.
Interest expense, including amortization of debt discount, for the year ended
December 26, 1996 decreased $1,777,000 as compared to the year ended December
28, 1995. The 1996 decrease is principally due to discharges of bank
indebtedness in the fourth quarter of 1995 and the first quarter of 1996.
During 1996 ARTRA sold 193,000 COMFORCE common shares in the market, with the
net proceeds of approximately $3,7000,000 used for working capital. During 1996
certain lenders received 105,000 COMFORCE common shares held by the Company as
additional consideration for short-term loans. In October 1996, a lender
exercised the conversion rights of a short-term loan and received 33,333
COMFORCE common shares in settlement of the Company's obligation. The
disposition of these 331,333 COMFORCE common shares resulted in realized gains
of $5,818,000 during the year ended December 26, 1996, with cost determined by
average cost.
The 1996 and 1995 extraordinary credits represent net gains from discharge of
indebtedness. No income tax expense is reflected in the Company's financial
statements resulting from the extraordinary credits in due to the utilization of
tax loss carryforwards, except for Federal alternative minimum tax incurred in
1996. Due to the Company's tax loss carryforwards and the uncertainty of future
taxable income, no income tax benefit was recognized in connection with the
Company's 1995 pre-tax loss.
8
<PAGE>
Discontinued Operations
Earnings from discontinued operations of $10,000 for the year ended December 28,
1995 consisted of a charge to operations of $6,430,000 to write-off the
remaining goodwill of COMFORCE's jewelry business, a provision of $1,000,000 for
loss on disposal of COMFORCE's jewelry business and operating losses of
COMFORCE's jewelry business, offset by a gain on sale of Bagcraft's Arcar
subsidiary of $8,483,000 and operating earnings of Bagcraft's Arcar subsidiary.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Cash and cash equivalents decreased $5,920,000 during the three months ended
March 31, 1998. The 1998 decrease in cash is attributable to cash flows used by
operating activities of $2,492,000, cash flows used by investing activities of
$421,000 and cash flows used by financing activities of $3,007,000. Cash flows
used by operating activities were principally attributable to the Company's net
loss for the quarter ended March 31, 1998. Cash flows used by investing
activities principally represent capital expenditures. Cash flows used by
financing activities were principally attributable to a net decrease in
short-term borrowings and the repurchase of common issued to pay down short-
term notes.
Cash and cash equivalents increased $5,820,000 during the year ended December
31, 1997. The increase in cash and cash equivalents is primarily attributable to
December proceeds from a litigation settlement (see Note 18 to the consolidated
financial statements), partially offset by pay downs of certain debt
obligations. During the year ended December 31, 1997, cash flows from financing
activities of $6,222,000 were principally attributable to a net increase in
long-term borrowings. Cash flows used by operating activities of $287,000 during
the year ended December 31, 1997 were principally attributable the Company's
operating loss. Cash flows used by investing activities of $115,000 during the
year ended December 31, 1997 principally represent an increase in the receivable
from a related party as discussed in Note 19 to the consolidated financial
statements, funds expended to complete Bagcraft's acquisition of the business
assets of AB Specialty and capital expenditures, offset by proceeds from
litigation settlement and proceeds from sale of COMFORCE common stock.
The Company had consolidated working capital of $724,000 at March 31, 1998 as
compared to a consolidated working capital deficiency of $435,000 at December
31, 1997. The increase in working capital is principally attributable to the
payment of Peter Harvey's advances with consideration consisting of ARTRA/BCA
redeemable preferred stock held by Mr. Harvey (see Note 11 to the Company's
condensed consolidated financial statements and discussion below), partially
offset by a certain ARTRA notes due in January 1999 reclassified from long-term
debt at December 31, 1997 to current liabilities at March 31, 1998.
The Company's consolidated working capital deficiency decreased $2,957,000 to
$435,000 during the year ended December 31, 1997. The decrease in working
capital deficiency is principally attributable to $4,725,000 of ARTRA short-term
private placement notes, refinanced in January 1998, reclassified as long-term
debt at December 31, 1997.
Status of Debt Agreements and Operating Plan
ARTRA Corporate
At March 31, 1998 the Company's corporate entity had outstanding short-term
indebtedness of $13,601,00 as discussed below.
Promissory Notes
1998 Private Placement
In January 1998, ARTRA commenced a private placement of $5,975,000 of 12%
promissory notes due January 14, 1999. As additional consideration the
noteholders received warrants to purchase an aggregate of 119,500 ARTRA common
9
<PAGE>
shares at a price of $3.00 per share, as amended. The warrants expire January
14, 2000. The warrantholders have the right to put these warrants back to ARTRA
at any time during a six-month period commencing in January 1999 and ending in
July 1999, at a price of $1.50 per share. The cost of this obligation ($179,250
if all warrants are put back to the Company) was accrued in the Company's
financial statements as a charge to interest expense. In the event of a default,
as defined in the note agreements, the promissory notes will bear interest at
37%. The proceeds from the private placement were used principally to pay down
other debt obligations.
1997 Private Placements
In December 1997, ARTRA completed private placements of $5,375,000 of 12%
promissory notes due in December 1998. As additional consideration the
noteholders received warrants to purchase an aggregate of 107,500 ARTRA common
shares at a price of $3.00 per share. The warrants expire in November and
December 1999. The warrantholders have the right to put these warrants back to
ARTRA at any time during a period commencing in December 1998 and ending in May
1999, at a price of $1.50 per share. The cost of this obligation ($161,250 if
all warrants are put back to the Company) was accrued in the Company's financial
statements as a charge to interest expense. In the event of a default, as
defined in the note agreements, the promissory notes will bear interest at 37%.
The proceeds from the private placement were used principally to pay down other
debt obligations.
In July 1997, ARTRA completed private placements of $7,475,000 of 12% promissory
notes due in January 1998. As additional consideration the noteholders received
warrants to purchase an aggregate of 199,311 ARTRA common shares at a price of
$3.75 per share. The warrants expire in July 1998. The warrantholders have the
right to put these warrants back to ARTRA at any time during a period commencing
in January 1998 and ending in August 1999, at a price of $3.00 per share. The
cost of this obligation ($598,000 if all warrants are put back to the Company)
was amortized in the Company's financial statements as a charge to interest
expense over the period July 1997 (the date of the private placement) through
January 1998 (the scheduled maturity date of the notes). The proceeds from the
July 1997 private placement were advanced to Peter R. Harvey as discussed in
Note 11 to the condensed consolidated financial statements for the quarter ended
March 31, 1998.
The July 1997 private placement notes were repaid and /or refinanced with
proceeds of the January 1998 private placement of 12% notes and with proceeds
from the litigation settlement discussed in Note 10 to the condensed
consolidated financial statements for the quarter ended March 31, 1998.
The January 1998 and December 1997 private placement notes are collateralized by
900,000 shares of COMFORCE common stock owned by the Company's Fill-Mor
subsidiary and by ARTRA's interest in all of the common stock of BCA (the parent
of Bagcraft).
Amounts Due To Related Party
At December 26, 1996, ARTRA had outstanding borrowings of $500,000 from an
outside director of the Company evidenced by a short-term note bearing interest
at 10%. As additional compensation for the loan and a December 1996 extension,
the director received five year warrants to purchase an aggregate of 50,000
ARTRA common shares at a prices ranging from $5.00 to $5.875 per share. The
proceeds of the loan were used for working capital.
In January 1997, ARTRA borrowed an additional $300,000 from this director
evidenced by a short-term note, due December 23, 1997, bearing interest at 8%.
As additional compensation for the loan, the director 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 director
evidenced by a short-term note, due May 26, 1997, bearing interest at 12%. 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
certain ARTRA debt obligations.
10
<PAGE>
In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by
a note, due April 20, 1998, bearing interest at 10%. As additional compensation,
the director received a warrant to purchase 333,333 ARTRA common shares at a
price of $5.00 per share. The director 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 was amortized 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 prior borrowings from this
director and pay down other ARTRA debt obligations.
In June 1997, ARTRA borrowed an additional $1,000,000 from the above director
evidenced by a note, due December 10, 1997, bearing interest at 12%. As
additional compensation, the director received a warrant to purchase 40,000
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 December
10, 1997 to June 10, 1998, for a total purchase price of $80,000. The cost of
this obligation was amortized in the Company's financial statements as a charge
to interest expense over the period June 10, 1997 (the date of the loan) through
December 10, 1997 (the date the warrantholder has the right to put the warrant
back to ARTRA).
The proceeds from this loan were used to pay down other ARTRA debt obligations.
In July 1997, borrowings from this lender were reduced to $3,000,000 with
proceeds advanced to ARTRA from a Bagcraft term loan as discussed in Note 9 to
the Company's consolidated financial statements for the year ended December 31,
1998. In December 1997 borrowings from this lender were reduced to $2,000,000
with proceeds from other short-term borrowings.
In April 1998, the $2,000,000 in outstanding borrowings from the above director
was extended by a new note, due October 20, 1998, bearing interest at 12%. As
additional compensation, the director received a warrant to purchase 50,000
ARTRA common shares at a price of $3.25 per share.
The borrowings from this director are collaterallized by a secondary interest in
all of the common stock of BCA (the parent of Bagcraft).
Other
At March 31, 1998 and December 31, 1997, ARTRA also had outstanding short-term
borrowings from other unrelated parties aggregating $251,000 and $601,000, with
interest rates varying between 10 % and 12%.
In October 1997 a lender agreed to accept 357,720 ARTRA common shares in payment
of the principal amount of approximately $1,500,000 due on certain demand notes.
In January 1998 the lender returned the 357,720 ARTRA common shares to the
Company for cash consideration of approximately $1,500,000.
Peter R. Harvey Advances
As discussed in Note 11 to the Company's condensed consolidated financial
statements, ARTRA had total advances due from its president, Peter R. Harvey, of
which $18,226,000 remained outstanding at December 31, 1997. A $7,500,000 July
1997 advance, as discussed below, provided for interest at 12%. The remaining
advances of $10,726,000 at December 31, 1997 provided for interest at the prime
rate plus 2% (10.5% at December 31, 1997). This receivable from Peter R. Harvey
had been classified as a reduction of common shareholders' equity.
Commencing January 1, 1993 to date, interest on the advances to Peter R. Harvey
had been accrued and fully reserved.
In July 1997, ARTRA advanced an additional $7,500,000 to Peter R. Harvey. Mr.
Harvey provided ARTRA with additional collateral for his advances consisting of
652.285 shares of ARTRA redeemable preferred stock (a 18.2% interest at December
31, 1997), 1,784.02 shares of BCA Series A redeemable preferred stock (a 51.6%
interest at December 31, 1997) and 6,488.8 shares of BCA Series B redeemable
preferred stock (a 82.7% interest at December 31, 1997). These ARTRA and BCA
redeemable preferred shares were pledged by ARTRA as partial collateral for the
July 1997 private placement of ARTRA promissory notes that funded the advance to
Mr. Harvey. As of December 31, 1997, this additional collateral had a carrying
value in ARTRA's consolidated balance sheet of approximately $11,200,000. The
advances were funded with the proceeds from the July 1997 private placement of
ARTRA notes as discussed in Note 5.
11
<PAGE>
As collateral for amounts due from Peter R. Harvey, in prior years the Company
had received the pledge of 1,523 shares of ARTRA redeemable preferred stock (a
42.5% interest at December 31, 1997, with a carrying value in ARTRA's
consolidated balance sheet of approximately $2,000,000) which are owned by Mr.
Harvey. In addition, Mr. Harvey had pledged a 25% interest in Industrial
Communication Company (a private company). Such interest was 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, 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.
Peter R. Harvey had received only nominal compensation for his services as an
officer or director of ARTRA or any of its subsidiaries for the period October
1990 through December 1997. Additionally, Mr. Harvey had 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, were fully
satisfied. Additionally, since December 31, 1986, Peter R. Harvey has guaranteed
in excess of $100,000,000 of ARTRA obligations to private and institutional
lenders, and has also incurred significant expenses on behalf of ARTRA in
defending ARTRA against certain litigation.
In March 1998, ARTRA's Board of Directors ratified a proposal to settle Mr.
Harvey's advances as follows:
Effective December 31, 1997, Mr. Harvey's net advances from ARTRA were
offset by $2,816,000 ($5,605,000 net of interest accrued and reserved
for the period 1993 - 1997) to $12,621,000. This offset of Mr.
Harvey's advances represented a combination of compensation for prior
year guarantees of ARTRA obligations to private and institutional
lenders, compensation in excess of the nominal amounts Mr. Harvey
received for the years 1995 - 1997 and reimbursement for expenses
incurred to defend ARTRA against certain litigation.
Effective January 31, 1998, Mr. Harvey's remaining advances totaling
$12,787,000 were paid with consideration consisting of certain
ARTRA/BCA preferred stock held by Mr. Harvey as discussed in Note 11
to the condensed consolidated financial statements.
Redeemable Preferred Stock
As discussed in Note 7 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 $8,991,000 at March 31, 1998.
Redeemable preferred stock issues with an aggregate carrying value of $4,309,000
at March 31, 1998 matured in 1997. The Bagcraft redeemable preferred stock, with
a carrying value of $2,153,000 at March 31, 1998, was payable in June 1997. The
BCA Series B redeemable preferred stock, with a carrying value of $2,156,000 at
March 31, 1998, was also payable in June 1997. ARTRA does not have available
funds to satisfy this obligation in its entirety. The Company is currently
negotiating with the redeemable preferred shareholders to restructure or extend
the maturity date of this obligation.
As discussed in Note 11 to the condensed consolidated financial statements and
above, effective January 31, 1998, Peter R. Harvey exchanged certain ARTRA/BCA
preferred stock to retire advances from ARTRA totaling $12,787,000.
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,
to fund its debt service and to satisfy liquidity requirements. 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.
12
<PAGE>
ARTRA does not currently have available funds to repay amounts due under various
loan arrangements, principally with private investors. As a result, 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 when it matures. If ARTRA is
unable to meet its future operating expenditures and its debt obligations as
they mature, ARTRA may be forced to liquidate its assets.
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 and two
separate term loans.
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%.
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
$3,000,000 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 31, 1998 and December 31, 1997, approximately $6,750,000
and $4,400,000, 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 31, 1998 and December 31, 1997, the interest rate on
the revolving credit loan was 8.5%.
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 31, 1998 Bagcraft was in
compliance with the provisions of its Credit Agreement.
Effective May 5, 1997, the Credit Agreement was amended to provide for a
$5,000,000 term loan (Term Loan B) with interest at the lender's index rate plus
.75%. Term Loan B was scheduled to mature 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 that was
scheduled to mature on May 8, 1998. ARTRA used the proceeds of this loan to
repay certain ARTRA debt obligations.
Effective July 17, 1997, the Credit Agreement was amended to provide for a
$7,500,000 term loan (Term Loan C) with interest at the lender's index rate plus
1%. Term Loan C was scheduled to mature, unless accelerated under terms of the
Credit Agreement. The proceeds of Term Loan C were advanced to ARTRA under terms
of an intercompany note payable to Bagcraft that was scheduled to mature on July
15, 1998. ARTRA used the proceeds of this loan to repay certain ARTRA debt
obligations.
13
<PAGE>
Effective February 27, 1998, the Credit Agreement was amended and restated
whereby, among other things, certain loan covenants were amended and payments
under the Term Loans were modified to provide for annual principal payments
(payable in quarterly installments) as follows:
Term Loan A - $1,200,000 in 1998; $1,800,000 in 1999;
$5,500,000 in 2000 and 2001; and $6,000,000 in 2002.
Term Loan B - $50,000 in 1998 - 2002; and $4,750,000 in 2002.
Term Loan C - $75,000 in 1998 - 2003; and $7,050,000 in 2004.
Amounts outstanding under the Credit Agreement were reflected in current
maturities and long-term debt at December 31, 1997 according to terms of these
amended maturities.
As additional compensation for borrowings under the Credit Agreement, in
December 1993, the lender received a detachable warrant ("Warrant"), originally
expiring in December 1998, allowing the holder to purchase up to 10% of the
fully diluted common equity of Bagcraft at a nominal value. 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. The warrant has been subsequently amended, most recently in
accordance with the February 27, 1998 amendment to the Credit Agreement, 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 warrant's expiration
date to February 27, 2003. Under certain conditions Bagcraft is required to
repurchase the Warrant from the lender.
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 31, 1998 and December 31, 1997,
Bagcraft had outstanding borrowings of $4,900,000 under this loan
agreement.
A $5,000,000 subordinated promissory note payable as follows:
$2,425,000 due June 30, 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 31, 1998 and December 31, 1997, 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 31, 1998 and December 31, 1997,
Bagcraft had outstanding borrowings of $215,000 and $218,000,
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.
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.
14
<PAGE>
Investment in COMFORCE Corporation
ARTRA, along with its wholly owned Fill-Mor subsidiary, owns a significant
minority interest in COMFORCE Corporation ("COMFORCE"), consisting of 1,525,000
shares or approximately 10% of the outstanding common stock of COMFORCE as of
March 31, 1998 with an aggregate value as of that date of $11,823,000.
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 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.
The Company's operating plan for fiscal year 1998 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
are collateralized by the related COMFORCE common shares. 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 had concluded that, for reporting purposes, it had effectively sold
options to certain officers, directors and key employees to acquire 200,000 of
ARTRA's COMFORCE common shares. Accordingly, in January 1996 these 200,000
COMFORCE common shares were removed from the Company's portfolio of
"Available-for-sale securities" and were classified in the Company's condensed
consolidated balance sheet 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 that was 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. During the first quarter of 1998, options to acquire
14,000 of these COMFORCE common shares were exercised resulting in a realized
gain of $53,000. During the fourth quarter of 1997, options to acquire 59,500 of
these COMFORCE common shares were exercised resulting in a realized gain of
$225,000. At March 31, 1998, options to acquire 126,500 COMFORCE common shares
remained unexercised and were classified in the Company's consolidated balance
sheet at December 31, 1997 as other receivables with an aggregate value of
$253,000, based upon the value of proceeds to be received upon future exercise
of the options.
15
<PAGE>
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.
Litigation
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. See Note 10 to the Company's condensed
consolidated financial statements. At March 31, 1998 and December 31, 1997, the
Company had accrued current liabilities of $1,700,000 and $1,800,000,
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. ARTRA could suffer
severe adverse consequences in the event of an unfavorable judgment in any of
these matters.
Net Operating Loss Carryforwards
At March 31, 1998, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $40,000,000 expiring principally in 2002 - 2013,
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
During 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income
Summary," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". In February 1998 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 132 "Employers'
Disclosures about Pensions and other Postretirement Benefits. SFAS No. 130
establishes standards for reporting comprehensive income to present a measure of
all changes in equity that result from renegotiated transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources and includes net income. SFAS No. 131
specifies revised guidelines for determining an entity's operating segments and
the type and level of financial information to be disclosed. This standard
requires that management identify operating segments based on the way that
management disaggregates the entity for making internal operating decisions.
SFAS No. 132 standardizes the disclosure requirements for pension and other
postretirement benefits.
SFAS No. 130, SFAS No. 131 and SFAS No. 132 are effective for the Company's
fiscal year ending December 31, 1998. Management has not determined what impact
these standards, when adopted, will have on the Company's financial statements.
16
<PAGE>
Year 2000 Compliance
The Company has implemented an upgrade to its existing financial, sales,
production and distribution software that is Year 2000 compliant. It is also
conducting a comprehensive review of the balance of its computer systems to
identify those processes that could be adversely affected by the Year 2000 issue
and is developing an implementation plan to resolve any issue that might arise.
In conducting its review, the Company is actively soliciting its suppliers and
customers to assess any Year 2000 issue that might arise from the interaction of
its computer systems with those of its suppliers and customers. The Year 2000
issue refers to the inability of many computer programs and systems to process
accurately dates later than December 31, 1999. Unless these programs are
modified to handle the century change, they will likely interpret the Year 2000
as the year 1900. The Company has not incurred any significant costs for Year
2000 compliance to date and does not expect to incur any significant additional
costs to complete such compliance.
EXPERTS
The consolidated balance sheets of ARTRA GROUP Incorporated and Subsidiaries as
of December 31, 1997 and December 26, 1996, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997 included in this
Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as stated in their report appearing herein which includes an
explanatory paragraph referring to an uncertainty concerning the Company's
abilitiy to continue as a going concern.
The above-referenced financial statements of ARTRA GROUP Incorporated have been
included in reliance upon the report of Coopers & Lybrand L.L.P. given upon the
authority of that firm as experts in accounting and auditing.
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 1998 (Unaudited) F-2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998
and March 27, 1997 (Unaudited) F-4
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Three Months Ended March 31, 1998 (Unaudited) F-5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998
and March 27, 1997(Unaudited) F-6
Notes to Condensed Consolidated Financial Statements F-7
Report of Independent Accountants F-22
Consolidated Balance Sheets as
of December 31, 1997
and December 26, 1996 F-23
Consolidated Statements of Operations
for each of the three fiscal years
in the period ended December 31, 1997 F-25
Consolidated Statements of Changes
in Shareholders' Equity (Deficit)
for each of the three fiscal years
in the period ended December 31, 1997 F-26
Consolidated Statements of Cash Flows
for each of the three fiscal years
in the period ended December 31, 1997 F-28
Notes to Consolidated Financial Statements F-30
Financial Statement Schedules:
I. Condensed Financial Information of Registrant F-63
II. Valuation and Qualifying Accounts F-67
Schedules other than those listed are omitted as they are not applicable or
required or equivalent information has been included in the financial statements
or notes thereto.
F-1
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except sharedata)
March 31, December 31,
1998 1997
----------- ------------
ASSETS
Current assets:
Cash and equivalents $71 $5,991
Receivables, less allowance
for doubtful accounts
of $223 in 1998 and $275 in 1997 10,147 10,004
Inventories 18,662 15,749
Available-for-sale securities 11,823 12,013
Other 1,176 774
----------- ------------
Total current assets 41,879 44,531
----------- ------------
Property, plant and equipment 49,918 49,491
Less accumulated depreciation and amortization 25,093 24,397
----------- ------------
24,825 25,094
----------- ------------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of
$2,464 in 1998 and $2,388 in 1997 2,654 2,729
Other 658 852
----------- ------------
3,312 3,581
----------- ------------
$70,016 $73,206
=========== ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-2
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
1998 1997
----------- ------------
LIABILITIES
Current liabilities:
Notes payable, including amounts due
to related parties of $2,000 $13,601 $10,726
Current maturities of long-term debt 4,462 4,462
Accounts payable 8,642 5,841
Accrued expenses 9,884 11,658
Income taxes 257 324
Redeemable preferred stock 4,309 11,955
----------- ------------
Total current liabilities 41,155 44,966
----------- ------------
Long-term debt 46,784 50,619
Other noncurrent liabilities 4,670 4,675
Commitments and contingencies
Redeemable preferred stock 4,682 9,110
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value;
authorized 20,000,000 shares;
issued 8,302,110 shares in 1998
and 8,297,810 shares in 1997 6,227 6,223
Additional paid-in capital 42,734 42,721
Unrealized appreciation of investments 14,543 14,733
Receivable from related party,
including accrued interest - (12,621)
Accumulated deficit (89,154) (87,113)
----------- ------------
(25,650) (36,057)
Less treasury stock, 438,332 shares in 1998
and 80,612 shares in 1997 1,625 107
----------- ------------
(27,275) (36,164)
----------- ------------
$70,016 $73,206
=========== ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-3
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
Three Months Ended
----------------------
March 31, March 27,
1998 1997
--------- ---------
Net sales $30,839 $28,461
--------- ---------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization 25,511 22,394
Selling, general and administrative 4,171 3,949
Depreciation and amortization 775 1,061
--------- ---------
30,457 27,404
--------- ---------
Operating earnings 382 1,057
--------- ---------
Other income (expense):
Interest expense (1,896) (1,828)
Amortization of debt discount (164) (675)
Realized gain on disposal
of available-for-sale securities 53 213
Other income (expense), net (91) 37
--------- ---------
(2,098) (2,253)
--------- ---------
Loss before income taxes and minority interest (1,716) (1,196)
(Provision) credit for income taxes (12) 201
Minority interest (189) (358)
--------- ---------
Net loss (1,917) (1,353)
Dividends applicable to
redeemable preferred stock (124) (162)
Reduction of retained earnings
applicable to redeemable common stock - (95)
--------- ---------
Loss applicable to common shares ($2,041) ($1,610)
========= =========
Loss per share:
Basic ($0.26) ($0.21)
========= =========
Diluted ($0.26) ($0.21)
========= =========
Weighted average number of shares
of common stock outstanding
Basic 7,952 7,840
========= =========
Diluted 7,952 7,840
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-4
<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 31, 1997 8,297,810 $6,223 $42,721 $14,733 ($12,621) ($87,113) 80,612 ($107) ($36,164)
Net loss - - - - - (1,917) - - (1,917)
Repurchase of common stock
previously issued to
pay down short-term notes - - - - - - 357,720 (1,518) (1,518)
Net decrease in receivable
from related party,
including accrued interest - - - - 12,621 - - - 12,621
Decrease in unrealized
appreciation of investments - - - (190) - - - - (190)
Exercise of stock options 4,300 4 13 - - - - - 17
Redeemable preferred
stock dividends - - - - - (124) - - (124)
---------- -------- -------- ------------ ---------- --------- -------- -------- ---------
Balance at March 31, 1998 8,302,110 $6,227 $42,734 $14,543 $ - ($89,154) 438,332 ($1,625) ($27,275)
========== ======== ======== ============ ========== ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-5
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Three Months Ended
-----------------------
March 31, March 27,
1998 1997
--------- ---------
Net cash flows used by operating activities ($2,492) ($1,631)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (449) (1,008)
Acquisition of AB Specialty, net of deposit - (1,131)
Proceeds from sale of COMFORCE common stock 28 -
--------- ---------
Net cash flows used by investing activities (421) (2,139)
--------- ---------
Cash flows from financing activities:
Net decrease in short-term debt (1,850) (320)
Proceeds from long-term borrowings 36,514 34,325
Reduction of long-term debt (35,788) (29,036)
Repurchase of common stock previously issued
to pay down short-term notes (1,518) -
Redeem detachable put warrant (400) (1,500)
Proceeds from exercise of
stock options and warrants 17 178
Other 18 -
--------- ---------
Net cash flows used by financing activities (3,007) 3,647
--------- ---------
Decrease in cash and cash equivalents (5,920) (123)
Cash and equivalents, beginning of period 5,991 171
--------- ---------
Cash and equivalents, end of period $71 $48
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $1,355 $1,203
Income taxes paid, net 51 24
Supplemental schedule of
noncash investing and financing activities:
ARTRA/BCA redeemable preferred stock
received as payment of
Peter Harvey advances 12,787 -
Issue common stock to pay down liabilities - 214
Issue common stock to pay
redeemable common stock put obligation - 679
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-6
<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 31, 1998, and the results of operations and
changes in cash flows for the three month periods ended March 31, 1998 and March
27, 1997. In recent years, the Company has suffered recurring losses from
operations and has a net capital deficiency. As a result of these factors, the
Company has experienced difficulty in obtaining adequate financing to replace
certain current credit arrangements, to fund its debt service and to satisfy
liquidity requirements. 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 5, Notes Payable, and Note 6, 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 and its debt obligations as they mature. If it is
unable to meet its future operating expenditures and its debt obligations as
they mature, ARTRA may be forced to liquidate its assets.
Reported interim results of operations are based in part on estimates that may
be subject to year-end adjustments. In addition, these quarterly results of
operations are not necessarily indicative of those expected for the year.
During the fourth quarter of 1997, the Company changed its fiscal year end to
December 31. In recent years the Company had operated on 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 31, 1998
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 31, 1998, Bagcraft had 10 customers with accounts
receivable balances that aggregated approximately
F-7
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
42% of the Company's total trade accounts receivable. In fiscal year 1997 no
single customer accounted for 10% or more of Bagcraft's sales.
3. INVENTORIES
Inventories at March 31, 1998 (in thousands) consist of:
Raw materials and supplies $ 7,300
Work in process 569
Finished goods 10,793
--------
$ 18,662
========
4. INVESTMENT IN COMFORCE CORPORATION
At March 31, 1998 ARTRA's investment in COMFORCE Corporation ("COMFORCE"),
1,525,500 shares, currently a common stock ownership interest of approximately
10%, was classified in the Company's condensed consolidated balance sheet in
current assets as "Available-for-sale securities." At March 31, 1998 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $14,543,000.
In January 1996, the Company's Board of Directors approved the sale of 200,000
of ARTRA's COMFORCE common shares to certain officers, directors and key
employees of ARTRA for non-interest bearing notes totaling $400,000. The notes
are collateralized by the related COMFORCE common shares. 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 had concluded that, for reporting purposes, it had effectively sold
options to certain officers, directors and key employees to acquire 200,000 of
ARTRA's COMFORCE common shares. Accordingly, in January 1996 these 200,000
COMFORCE common shares were removed from the Company's portfolio of
"Available-for-sale securities" and were classified in the Company's condensed
consolidated balance sheet 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 that was 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. During the first quarter of 1998, options to acquire
14,000 of these COMFORCE common shares were exercised resulting in a realized
gain of $53,000. During the fourth quarter of 1997, options to acquire 59,500 of
these COMFORCE common shares were exercised resulting in a realized gain of
$225,000. At March 31, 1998, options to acquire 126,500 COMFORCE common shares
remained unexercised and were classified in the Company's condensed consolidated
balance sheet as other receivables with an aggregate value of $253,000, based
upon the value of proceeds to be received upon future exercise of the options.
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.
F-8
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As discussed in Note 5, at March 31, 1998, 900,000 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 525,500 shares of COMFORCE
common stock owned by the Company and its Fill-Mor subsidiary remain
unencumbered.
5. NOTES PAYABLE
Notes payable at March 31, 1998 (in thousands) consist of:
ARTRA 12% promissory notes -
1998 private placements $ 5,975
ARTRA 12% promissory notes -
1997 private placements 5,375
Amounts due to related party,
interest at 10% 2,000
Other, interest from 10% to 15% 251
--------
$ 13,601
========
Promissory Notes
1998 Private Placement
In January 1998, ARTRA commenced a private placement of $5,975,000 of 12%
promissory notes due January 14, 1999. As additional consideration the
noteholders received warrants to purchase an aggregate of 119,500 ARTRA common
shares at a price of $3.00 per share, as amended. The warrants expire January
14, 2000. The warrantholders have the right to put these warrants back to ARTRA
at any time during a six-month period commencing in January 1999 and ending in
July 1999, at a price of $1.50 per share. The cost of this obligation ($179,250
if all warrants are put back to the Company) was accrued in the Company's
financial statements as a charge to interest expense. In the event of a default,
as defined in the note agreements, the promissory notes will bear interest at
37%. The proceeds from the private placement were used principally to pay down
other debt obligations.
1997 Private Placements
In December 1997, ARTRA completed private placements of $5,375,000 of 12%
promissory notes due in December 1998. As additional consideration the
noteholders received warrants to purchase an aggregate of 107,500 ARTRA common
shares at a price of $3.00 per share. The warrants expire in November and
December 1999. The warrantholders have the right to put these warrants back to
ARTRA at any time during a period commencing in December 1998 and ending in May
1999, at a price of $1.50 per share. The cost of this obligation ($161,250 if
all warrants are put back to the Company) was accrued in the Company's financial
statements as a charge to interest expense. In the event of a default, as
defined in the note agreements, the promissory notes will bear interest at 37%.
The proceeds from the private placement were used principally to pay down other
debt obligations.
F-9
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In July 1997, ARTRA completed private placements of $7,475,000 of 12% promissory
notes due in January 1998. As additional consideration the noteholders received
warrants to purchase an aggregate of 199,311 ARTRA common shares at a price of
$3.75 per share. The warrants expire in July 1998. The warrantholders have the
right to put these warrants back to ARTRA at any time during a period commencing
in January 1998 and ending in August 1999, at a price of $3.00 per share. The
cost of this obligation ($598,000 if all warrants are put back to the Company)
was amortized in the Company's financial statements as a charge to interest
expense over the period July 1997 (the date of the private placement) through
January 1998 (the scheduled maturity date of the notes). The proceeds from the
July 1997 private placement were advanced to Peter R. Harvey as discussed in
Note 11. The July 1997 private placement notes were repaid and/or refinanced
principally with proceeds of the 1998 private placement of 12% notes payable in
January 1999.
The January 1998 and December 1997 private placement notes are collateralized by
900,000 shares of COMFORCE common stock owned by the Company's Fill-Mor
subsidiary and by ARTRA's interest in all of the common stock of BCA (the parent
of Bagcraft).
Amounts Due To Related Party
At December 26, 1996, ARTRA had outstanding borrowings of $500,000 from an
outside director of the Company evidenced by a short-term note bearing interest
at 10%. As additional compensation for the loan and a December 1996 extension,
the director received five year warrants to purchase an aggregate of 50,000
ARTRA common shares at a prices ranging from $5.00 to $5.875 per share. The
proceeds of the loan were used for working capital.
In January 1997, ARTRA borrowed an additional $300,000 from this director
evidenced by a short-term note, due December 23, 1997, bearing interest at 8%.
As additional compensation for the loan, the director 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 director
evidenced by a short-term note, due May 26, 1997, bearing interest at 12%. 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
certain ARTRA debt obligations.
In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by a
note, due April 20, 1998, bearing interest at 10%. As additional compensation,
the director received a warrant to purchase 333,333 ARTRA common shares at a
price of $5.00 per share. The director 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 was amortized 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 prior borrowings from this
director and pay down other ARTRA debt obligations.
In June 1997, ARTRA borrowed an additional $1,000,000 from the above director
evidenced by a note, due December 10, 1997, bearing interest at 12%. As
additional compensation, the director received a warrant to purchase 40,000
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 December
10, 1997 to June 10, 1998, for a total purchase price of $80,000. The cost of
this obligation was amortized in the Company's financial statements as a charge
to interest expense over the period June 10, 1997 (the date of the loan) through
December 10, 1997 (the date the warrantholder has the right to put the warrant
back to ARTRA). The proceeds from this loan were used to pay down other ARTRA
debt obligations.
F-10
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In July 1997, borrowings from this lender were reduced to $3,000,000 with
proceeds advanced to ARTRA from a Bagcraft term loan as discussed in Note 6. In
December 1997 borrowings from this lender were reduced to $2,000,000 with
proceeds from other short-term borrowings.
In April 1998, the $2,000,000 in outstanding borrowings from the above director
was extended by a new note, due October 20, 1998, bearing interest at 12%. As
additional compensation, the director received a warrant to purchase 50,000
ARTRA common shares at a price of $3.25 per share.
The borrowings from this director are collaterallized by a secondary interest in
all of the common stock of BCA (the parent of Bagcraft).
Other
At March 31, 1998 ARTRA also had outstanding short-term borrowings from other
unrelated parties aggregating $251,000, with interest rates varying between 10 %
and 12%.
In October 1997 a lender agreed to accept 357,720 ARTRA common shares in payment
of the principal amount of approximately $1,500,000 due on certain demand notes.
In January 1998 the lender returned the 357,720 ARTRA common shares to the
Company for cash consideration of approximately $1,500,000.
6. LONG-TERM DEBT
Long-term debt at March 31, 1998(in thousands) consists of:
Bagcraft:
Credit Agreement:
Term Loan A,
interest at the lender's
index rate plus .25% $ 19,700
Term Loan B,
interest at the lender's
index rate plus .75% 4,988
Term Loan C,
interest at the lender's
index rate plus 1% 7,481
Revolving credit loan,
interest at the lender's index rate 10,373
Unamortized discount (1,261)
City of Baxter Springs, Kansas loan agreements,
interest at varying rates 9,965
--------
51,246
Current scheduled maturities (4,462)
--------
$ 46,784
========
F-11
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Bagcraft
Bagcraft entered into a credit agreement, dated as of December 17, 1993 (the
"Credit Agreement") that initially provided for a revolving credit loan and two
separate term loans.
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%.
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
$3,000,000 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 31, 1998 approximately $6,750,000 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 31, 1998 the interest
rate on the revolving credit loan was 8.5%.
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 31, 1998 Bagcraft was in
compliance with the provisions of its Credit Agreement.
Effective May 5, 1997, the Credit Agreement was amended to provide for a
$5,000,000 term loan (Term Loan B) with interest at the lender's index rate plus
.75%. Term Loan B was scheduled to mature 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 that was
scheduled to mature on May 8, 1998. ARTRA used the proceeds of this loan to
repay certain ARTRA debt obligations.
Effective July 17, 1997, the Credit Agreement was amended to provide for a
$7,500,000 term loan (Term Loan C) with interest at the lender's index rate plus
1%. Term Loan C was scheduled to mature, unless accelerated under terms of the
Credit Agreement. The proceeds of Term Loan C were advanced to ARTRA under terms
of an intercompany note payable to Bagcraft that was scheduled to mature on July
15, 1998. ARTRA used the proceeds of this loan to repay certain ARTRA debt
obligations.
Effective February 27, 1998, the Credit Agreement was amended and restated
whereby, among other things, certain loan covenants were amended and payments
under the Term Loans were modified to provide for annual principal payments
(payable in quarterly installments) as follows:
Term Loan A - $1,200,000 in 1998; $1,800,000 in 1999;
$5,500,000 in 2000 and 2001; and $6,000,000 in 2002.
Term Loan B - $50,000 in 1998 - 2002; and $4,750,000 in 2002.
Term Loan C - $75,000 in 1998 - 2003; and $7,050,000 in 2004.
F-12
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As additional compensation for borrowings under the Credit Agreement, in
December 1993, the lender received a detachable warrant ("Warrant"), originally
expiring in December 1998, allowing the holder to purchase up to 10% of the
fully diluted common equity of Bagcraft at a nominal value. 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. The warrant has been subsequently amended, most recently in
accordance with the February 27, 1998 amendment to the Credit Agreement, 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 warrant's expiration
date to February 27, 2003. Under certain conditions Bagcraft is required to
repurchase the Warrant from the lender.
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 31, 1998 Bagcraft had
outstanding borrowings of $4,900,000 under this loan agreement.
A $5,000,000 subordinated promissory note payable as follows:
$2,425,000 due June 30, 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 31, 1998 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 31, 1998 Bagcraft had outstanding
borrowings of $215,000 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.
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.
F-13
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock at March 31, 1998(in thousands) consists of:
Currently payable:
Bagcraft redeemable preferred stock originally issued
to a related party, cumulative $.01 par value, 13.5%;
including accumulated dividends; redeemable on demand
with a liquidation preference equal to $100 per share;
issued 8,650 shares $ 2,153
BCA Holdings preferred stock, Series B,
$1.00 par value, 6% cumulative,
including accumulated dividends;
redeemable on demand with a liquidation preference
of $1,000 per share; issued and outstanding
1,675.79 shares 2,156
-------
$ 4,309
=======
Noncurrent:
ARTRA redeemable preferred stock, Series A,
$1,000 par value, 6% cumulative payment-in-kind,
including accumulated dividends,
net of unamortized discount of $859;
redeemable March 1, 2000 at $1,000 per share
plus accrued dividends;
authorized 2,000,000 shares all series;
issued and outstanding 1,849.34 shares $ 2,571
BCA Holdings preferred stock, Series A,
$1.00 par value, 6% cumulative,
including accumulated dividends;
liquidation preference of $1,000 per share;
10,000 shares authorized;
issued and outstanding 1,672.15 shares 2,111
-------
$ 4,682
=======
In March 1990, as partial consideration for the acquisition of Bagcraft, ARTRA
issued 3,750 shares of $1,000 par value junior non-convertible payment-in-kind
redeemable Series A Preferred Stock with an estimated fair value of $1,012,000,
net of unamortized discount of $2,738,000.
F-14
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As discussed in Note 11, effective January 31, 1998, Peter R. Harvey exchanged
1,734.28 shares of ARTRA Series A redeemable preferred stock as partial
consideration to retire advances from ARTRA totaling $12,787,000.
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 $1,114,000 and $2,074,000 were
accrued at March 31, 1998 and December 31, 1997, respectively.
Bagcraft/BCA Holdings
During 1992 and 1993, in exchange for cash consideration of $3,675,000, a former
related party received 3,675 shares of BCA Series A preferred stock having a
liquidation value of $3,675,000. Accumulated dividends of $439,000 were accrued
at March 31, 1998.
In 1987, Bagcraft issued to a former related party $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 $1,288,000 were
accrued at March 31, 1998. The Bagcraft preferred stock was originally scheduled
to be redeemable on June 1, 1997 and is currently redeemable on demand.
Effective February 15, 1996, BCA, Bagcraft and a former related party 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 the former related party in exchange for 41,350 shares of Bagcraft redeemable
preferred stock .
The BCA Series B preferred stock was originally scheduled to be redeemable on
June 1, 1997 and is currently redeemable on demand. Accumulated dividends of
$480,000 were accrued at March 31, 1998.
As discussed in Note 11, effective January 31, 1998, Peter R. Harvey exchanged
1,784.03 shares of BCA Series A redeemable preferred stock and 6,172.00 shares
of BCA Series B redeemable preferred stock as partial consideration to retire
advances from ARTRA totaling $12,787,000.
8. INCOME TAXES
No income tax benefit was recognized in connection with the Company's 1998 and
1997 pre-tax losses due to the Company's tax loss carryforwards and the
uncertainty of future taxable income.
At December 31, 1997, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $40,000,000 expiring principally in 2002 -
2013, 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
F-15
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
9. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". Adoption of this pronouncement, which was applied to prior periods
presented, did not have a material impact on the Company's financial statements.
Basic earnings (loss) per share is computed by dividing the income available to
common shareholders, net earnings (loss), less redeemable preferred stock
dividends and redeemable common stock accretion, by the weighted average number
of shares of common stock outstanding during each period.
Diluted earnings (loss) per share is computed by dividing the income available
to common shareholders, 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 (stock options and
warrants), unless anti-dilutive, during each period.
Earnings (loss) per share for the three months ended March 31, 1998 and 1997 was
computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 27, 1997
------------------ ------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
AVERAGE SHARES OUTSTANDING:
Weighted average shares outstanding 7,952 7,952 7,840 7,840
Common stock equivalents
(options/warrants) -- -- -- --
------- ------- ------- -------
7,952 7,952 7,840 7,840
======= ======= ======= =======
EARNINGS (LOSS):
Net loss $(1,917) $(1,917) $(1,353) $(1,353)
Dividends applicable to
redeemable preferred stock (124) (124) (162) (162)
Redeemable common stock accretion -- -- (95) (95)
------- ------- ------- -------
Loss applicable to common shareholders $(2,041) $(2,041) $(1,610) $(1,610)
======= ======= ======= =======
PER SHARE AMOUNTS:
Net loss applicable
to common shares $ (0.26) $ (0.26) $ (0.21) $ (0.21)
======= ======= ======= =======
</TABLE>
F-16
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At March 31, 1998 the Company had accrued
current liabilities of $1,700,000 for potential business-related litigation and
environmental liabilities. While these litigation and environmental matters
involve wide ranges of potential liability, management does not believe the
outcome of these matters will have a material adverse effect on the Company's
financial statements. However, ARTRA may not have available funds to pay
liabilities arising out of these business-related litigation and environmental
matters or, in certain instances, to provide for its legal defense. ARTRA could
suffer severe adverse consequences in the event of an unfavorable judgment in
any of these matters.
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 Industries, Inc. in 1989 by Emerald Acquisition Corp.
Effective December 31, 1997, the above parties reached a settlement agreement
and all pending litigation was dismissed. ARTRA recognized a gain from the
settlement agreement of $10,416,000, net of related legal fees and other
expenses.
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 alleged Bagcraft was
responsible for the costs of cleanup incurred and to be incurred. Although
Bagcraft has denied liability for the site, it has entered into a settlement
agreement with the State, along with the other potential responsible parties, to
resolve all claims associated with the site. In July 1997 Bagcraft paid
approximately $150,000 to formally extinguish the state claim.
Bagcraft had been notified by the EPA that it may have been a potentially
responsible party for the disposal of hazardous substances at the Ninth Avenue
site in Gary, Indiana. In October 1997 Bagcraft paid $40,000 to formally
extinguish this claim.
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. In May 1998 Bagcraft paid $170,000 to formally
extinguish this claim.
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.
F-17
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of hazardous substances which were stored, disposed
of or otherwise released at this manufacturing facility. This facility was owned
by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from
1968 to 1980. Sherwin-William's current projection of the cost of clean-up is
approximately $5 to $6 million. The Company has filed counterclaims against
Sherwin-Williams and cross claims against other former owners of the property.
The Company also is vigorously defending this action and has raised numerous
defenses. Currently, the case is in its early stages of discovery and the
Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process. ARTRA entered into a
consent decree with the EPA in which it agreed to pay $85,000 for one phase of
the clean-up costs for this site; however, ARTRA defaulted on its payment
obligation. ARTRA is presently unable to estimate the total potential liability
for clean-up costs at this site, which clean-up is expected to continue for a
number of years. The consent decree, even if it had been honored by ARTRA, was
not intended to release ARTRA from liability for costs associated with other
phases of the clean-up at this site. The Company is presently unable determine
what, if any, additional liability it may incur in this matter.
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
F-18
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
11. RELATED PARTY TRANSACTIONS
ARTRA had total advances due from its president, Peter R. Harvey, of which
$18,226,000 remained outstanding at December 30, 1997. A $7,500,000 July 1997
advance, as discussed below, provided for interest at 12%. The remaining
advances of $10,726,000 at December 30, 1997 provided for interest at the prime
rate plus 2% (10.5% at December 31, 1997). As discussed below, effective
December 31, 1997, these advances were reduced to $12,621,000. This receivable
from Peter R. Harvey had been classified as a reduction of common shareholders'
equity.
Commencing January 1, 1993 to date, interest on the advances to Peter R. Harvey
had been accrued and fully reserved.
In July 1997, ARTRA advanced an additional $7,500,000 to Peter R. Harvey. Mr.
Harvey provided ARTRA with additional collateral for his advances consisting of
652.285 shares of ARTRA redeemable preferred stock (a 18.2% interest at December
31, 1997), 1,784.02 shares of BCA Series A redeemable preferred stock (a 51.6%
interest at December 31, 1997) and 6,488.8 shares of BCA Series B redeemable
preferred stock (a 82.7% interest at December 31, 1997). These ARTRA and BCA
redeemable preferred shares were pledged by ARTRA as partial collateral for the
July 1997 private placement of ARTRA promissory notes that funded the advance to
Mr. Harvey. As of December 31, 1997, this additional collateral had a carrying
value in ARTRA's consolidated balance sheet of approximately $11,200,000. The
advances were funded with the proceeds from the July 1997 private placement of
ARTRA notes as discussed in Note 5.
As collateral for amounts due from Peter R. Harvey, in prior years the Company
had received the pledge of 1,523 shares of ARTRA redeemable preferred stock (a
42.5% interest at December 31, 1997, with a carrying value in ARTRA's
consolidated balance sheet of approximately $2,000,000) which are owned by Mr.
Harvey. In addition, Mr. Harvey had pledged a 25% interest in Industrial
Communication Company (a private company). Such interest was 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, 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.
Peter R. Harvey had received only nominal compensation for his services as an
officer or director of ARTRA or any of its subsidiaries for the period October
1990 through December 1997. Additionally, Mr. Harvey had 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, were fully
satisfied. Additionally, since December 31, 1986, Peter R. Harvey has guaranteed
in excess of $100,000,000 of ARTRA obligations to private and institutional
lenders, and has also incurred significant expenses on behalf of ARTRA in
defending ARTRA against certain litigation.
F-19
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In March 1998, ARTRA's Board of Directors ratified a proposal to settle Mr.
Harvey's advances as follows:
Effective December 31, 1997, Mr. Harvey's net advances from ARTRA were
offset by $2,816,000 ($5,605,000 net of interest accrued and reserved
for the period 1993 - 1997) to $12,621,000. This offset of Mr.
Harvey's advances represented a combination of compensation for prior
year guarantees of ARTRA obligations to private and institutional
lenders, compensation in excess of the nominal amounts Mr. Harvey
received for the years 1995 - 1997 and reimbursement for expenses
incurred to defend ARTRA against certain litigation.
Effective January 31, 1998, Mr. Harvey's remaining advances totaling
$12,787,000 were paid with consideration consisting of the following
ARTRA/BCA preferred stock held by Mr. Harvey:
Face Value
Plus
Security Accrued Dividends
------------------------------------------------------ -----------------
ARTRA redeemable preferred stock, 1,734.28 shares $ 2,751,000
BCA Holdings Series A preferred stock, 1,784.029 shares 2,234,000
BCA Holdings Series B preferred stock, 6,172 shares 7,802,000
-------------
$ 12,787,000
=============
For a discussion of certain other related party debt obligations see Note 5.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
ARTRA GROUP Incorporated
Northfield, Illinois
We have audited the consolidated financial statements and the financial
statement schedules of ARTRA GROUP Incorporated and Subsidiaries as listed in
the index on page F-1 of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of ARTRA GROUP
Incorporated's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ARTRA
GROUP Incorporated and Subsidiaries as of December 31, 1997 and December 26,
1996, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, 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 its current credit arrangements, to fund its debt service and to satisfy
liquidity requirements. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 26, 1998
F-21
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 26,
1997 1996
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 5,991 $ 171
Receivables, less allowance
for doubtful accounts
of $275 in 1997 and $512 in 1996 10,004 8,267
Inventories 15,749 14,967
Available-for-sale securities 12,013 22,564
Other 774 931
-------- --------
Total current assets 44,531 46,900
-------- --------
Property, plant and equipment
Land 417 417
Buildings 12,742 11,672
Machinery and equipment 35,657 32,346
Construction in progress 675 979
-------- --------
49,491 45,414
Less accumulated depreciation and amortization 24,397 20,480
-------- --------
25,094 24,934
-------- --------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization
of $2,388 in 1997 and $2,083 in 1996 2,729 2,995
Other 852 2,550
-------- --------
3,581 5,545
-------- --------
$ 73,206 $ 77,379
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 26,
1997 1996
-------- --------
LIABILITIES
Current liabilities:
Notes payable, including amounts
due to related parties
of $2,000 in 1997 and $3,600 in 1996 $ 10,726 $ 18,631
Current maturities of long-term debt 4,462 2,712
Accounts payable 5,841 5,129
Accrued expenses 11,440 10,394
Income taxes 324 478
Bagcraft detachable put warrant -- 1,500
Redeemable preferred stock 11,955 11,100
Liabilities of discontinued operations 218 348
-------- --------
Total current liabilities 44,966 50,292
-------- --------
Long-term debt 50,619 34,207
Other noncurrent liabilities 4,675 2,135
Commitments and contingencies
Redeemable common stock, issued 98,734 shares -- 3,657
Redeemable preferred stock 9,110 8,678
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value;
authorized 20,000,000 shares;
issued 8,297,810 shares in 1997
and 7,624,766 shares in 1996 6,223 5,793
Additional paid-in capital 42,721 40,211
Unrealized appreciation of investments 14,733 25,719
Receivable from related party,
including accrued interest (12,621) (6,468)
Accumulated deficit (87,113) (86,793)
-------- --------
(36,057) (21,538)
Less treasury stock, 80,612 shares in 1997
and 7,628 shares in 1996, at cost 107 52
-------- --------
(36,164) (21,590)
-------- --------
$ 73,206 $ 77,379
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-23
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 125,027 $ 120,699 $ 121,879
--------- --------- ---------
Costs and expenses:
Cost of goods sold,
exclusive of depreciation and amortization 101,527 94,613 102,508
Selling, general and administrative 19,548 15,638 19,131
Depreciation and amortization 4,364 3,927 4,330
Write-down of idle machinery and equipment -- -- 1,503
--------- --------- ---------
125,439 114,178 127,472
--------- --------- ---------
Operating earnings (loss) (412) 6,521 (5,593)
--------- --------- ---------
Other income (expense):
Interest expense (9,308) (7,457) (9,447)
Amortization of debt discount (2,702) (548) (335)
Realized gain on disposal
of available-for-sale securities 2,531 5,818 --
Litigation settlement, net 10,416 -- --
Gain on sale of idle machinery and equipment 932 -- --
Other income (expense), net 406 (107) (88)
Equity in loss of COMFORCE -- -- (533)
--------- --------- ---------
2,275 (2,294) (10,403)
--------- --------- ---------
Earnings (loss) from continuing operations
before income taxes and minority interest 1,863 4,227 (15,996)
(Provision) credit for income taxes 19 (152) (51)
Minority interest (1,109) (526) (896)
--------- --------- ---------
Earnings (loss) from continuing operations 773 3,549 (16,943)
Earnings from discontinued operations -- -- 10
--------- --------- ---------
Earnings (loss) before extraordinary credits 773 3,549 (16,933)
Extraordinary credits, net discharge of indebtedness -- 9,424 14,030
--------- --------- ---------
Net earnings (loss) 773 12,973 (2,903)
Dividends applicable to redeemable preferred stock (693) (621) (565)
Reduction of retained earnings applicable
to redeemable common stock (400) (390) (767)
--------- --------- ---------
Earnings (loss) applicable to common shares ($ 320) $ 11,962 ($ 4,235)
========= ========= =========
Earnings (loss) per share:
Basic
Continuing operations ($ 0.04) $ 0.34 $ (2.70)
Discontinued operations -- -- --
--------- --------- ---------
Earnings (loss) before extraordinary credits (0.04) 0.34 (2.70)
Extraordinary credits -- 1.25 2.07
--------- --------- ---------
Net earnings (loss) ($ 0.04) $ 1.59 $ (.63)
========= ========= =========
Weighted average number of shares of common stock outstanding 7,970 7,525 6,776
========= ========= =========
Diluted
Continuing operations ($ 0.04) $ 0.32 $ (2.70)
Discontinued operations -- -- --
--------- --------- ---------
Earnings (loss) before extraordinary credits (0.04) 0.32 (2.70)
Extraordinary credits -- 1.19 2.07
--------- --------- ---------
Net earnings (loss) ($ 0.04) $ 1.51 $ (.63)
========= ========= =========
Weighted average number of shares of common stock and
common stock equivalents outstanding 7,970 7,939 6,776
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized Receivable Total
Common Stock Additional Appreciation From Treasury Stock Shareholders'
------------------- Paid-in of Related Accumulated ----------------- Equity
Shares Dollars Capital Investments Party (Deficit) Shares Dollars (Deficit)
---------- -------- -------- ------------ -------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 29, 1994 6,455,602 $5,052 $36,613 $(4,100) $(94,520) 57,038 $(805) $(57,760)
Net loss - - - - (2,903) - - (2,903)
Reclassification of
redeemable common stock (100,000) - (500) - - - - (500)
Common stock issued
to pay liabilities 243,915 183 857 - - - - 1,040
Common stock as additional
consideration for private
placement ARTRA notes 375,000 281 985 - - - - 1,266
Net increase in receivable
from related party,
including accrued interest - - - (218) - - - (218)
Redeemable common stock
put option exercised - (8) 8 - - - - -
Sale and reclassification
of redeemable common stock 85,714 399 399
Unrealized appreciation
of investments - - - $21,047 - - - - 21,047
Common stock
contributed to ESOP 23,750 18 95 - - - - - 113
Exercise of stock options 12,100 9 39 - - - - - 48
Redeemable preferred
stock dividends - - - - - (565) - - (565)
Redeemable common
stock accretion - - - - - (767) - - (767)
Common stock issued
as compensation 6,898 5 30 - - - - - 35
--------- -------- -------- --------- ------- -------- ------- ------- -------
Balance at December 28, 1995 7,102,979 5,540 38,526 21,047 (4,318) (98,755) 57,038 (805) (38,765)
Net earnings - - - - - 12,973 - - 12,973
Common stock issued
to pay liabilities 125,012 94 362 - - - (120,554) 818 1,274
Common stock issued as
additional consideration
for short-term borrowings 50,544 38 (398) - - - (99,456) 1,021 661
Net increase in receivable
from related party,
including accrued interest - - - - (2,150) - - - (2,150)
Common stock loaned
by related party - - - - 587 - 100,000 (587) -
Repay common stock
loaned by related party 100,000 75 512 - (587) - - - -
Increase in unrealized
appreciation of investments - - - 4,672 - - - - 4,672
Exercise of stock
options and warrants 61,000 46 213 - - - (16,900) 109 368
Common stock received
as consideration for
short-term note - - - - - - 87,500 (608) (608)
Reclassification of
redeemable common stock 185,231 - 996 - - - - - 996
Redeemable preferred
stock dividends - - - - - (621) - - (621)
Redeemable common
stock accretion - - - - - (390) - - (390)
--------- -------- -------- --------- ------- -------- ------- ------- -------
Balance at December 26, 1996 7,624,766 5,793 40,211 25,719 (6,468) (86,793) 7,628 (52) (21,590)
--------- -------- -------- --------- ------- -------- ------- ------- -------
</TABLE>
F-25
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT), continued
(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 - - - - - 773 - - 773
Common stock issued
to pay liabilities 444,717 333 1,606 - - - - - 1,939
Net increase in receivable
from related party,
including accrued interest - - - - (6,153) - - - (6,153)
Decrease in unrealized
appreciation of investments - - - (10,986) - - - - (10,986)
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
Exercise of redeemable common
stock put option 72,984 - 55 - - - 72,984 (55) -
Purchase of redeemable
preferred stock - - 89 - - - - - 89
Redeemable preferred
stock dividends - - - - - (693) - - (693)
Redeemable common
stock accretion - - - - - (400) - - (400)
--------- -------- -------- --------- -------- -------- -------- ------- --------
Balance at December 31, 1997 8,297,810 $6,223 $42,721 $14,733 $(12,621) $(87,113) 80,612 $ (107) $(36,164)
========== ======== ======== ========= ======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
ARTRA GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 773 $ 12,973 ($ 2,903)
Adjustments to reconcile net earnings (loss)
to cash flows from operating activities:
Depreciation of property, plant and equipment 4,059 3,622 4,120
Amortization of excess of cost over net assets acquired 305 305 837
Decrease in receivable from related party 2,816 -- --
Impairment of goodwill -- -- 6,430
Extraordinary gain from net discharge of indebtedness -- (9,424) (14,030)
Gain on disposal of discontinued operations -- -- (8,183)
Amortization of other assets, principally financing costs 4,754 548 689
Inventory valuation reserve 172 191 290
Gain on sale of property, plant and equipment (70) 78 --
Gain on sale of idle machinery and equipment (932) -- --
Write-down of idle equipment and machinery -- -- 1,503
Litigation settlement, net (10,416) -- --
Gain on sale of COMFORCE common stock (2,531) (5,818) --
Equity in loss of COMFORCE -- -- 533
Minority interest 1,109 526 896
Contribution to ARTRA ESOP -- -- 42
Other, principally common stock issued as compensation 454 220 1,300
Changes in assets and liabilities, net of effects of
businesses acquired and discontinued:
(Increase) decrease in receivables (1,631) 2,630 (184)
(Increase) decrease in inventories 132 1,476 453
(Increase) decrease in other current and noncurrent assets 517 (169) 1,421
Increase (decrease) in payables and accrued expenses 321 (5,980) 611
Increase (decrease) in other current and noncurrent liabilities (119) (4,497) 450
-------- -------- --------
Net cash flows used by operating activities (287) (3,319) (5,725)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of COMFORCE common stock 1,821 3,717 --
Net proceeds from litigation settlement 9,761 -- --
Proceeds from sale of property, plant and equipment 537 132 --
Additions to property, plant and equipment (3,066) (2,645) (2,820)
Increase in receivable from related party (8,969) (1,061) (218)
Proceeds from collection of notes receivable -- 342 3,000
Decrease in restricted cash -- 552 772
Acquistion of AB Specialty, net of deposit (1,131) -- --
AB Specialty acquisition deposit -- (1,183) --
Proceeds from sale of idle machinery and equipment 932 -- --
Proceeds from sale of Arcar -- -- 20,318
Retail fixtures -- -- (631)
-------- -------- --------
Net cash flows from (used by) investing activities (115) (146) 20,421
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE>
ARTRA GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in short-term debt $ (1,508) $ 286 $ 5,488
Proceeds from long-term borrowings 146,891 141,896 136,756
Reduction of long-term debt (133,781) (140,850) (156,641)
Proceeds from exercise of stock options and warrants 178 369 48
Exercise of redeemable common stock put options (3,379) (510) --
Redemption of detachable put warrants (1,728) -- --
Purchase of redeemable preferred stock (426) -- --
Other (25) 98 (70)
--------- --------- ---------
Net cash flows from (used by) financing activities 6,222 1,289 (14,419)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 5,820 (2,176) 277
Cash and equivalents, beginning of year 171 2,347 2,070
--------- --------- ---------
Cash and equivalents, end of year $ 5,991 $ 171 $ 2,347
========= ========= =========
Supplemental cash flow information: Cash paid during the year for:
Interest $ 7,058 $ 5,320 $ 5,847
Income taxes paid (refunded), net 177 157 (22)
Supplemental schedule of noncash investing and financing activities:
Issue common stock and redeemable common stock
to pay down current liabilities $ 1,939 $ 1,274 $ 1,040
Issue common stock to pay
redeemable common stock put obligation 679 -- --
Issue common stock as additional consideration
for short-term borrowings -- 661 1,266
COMFORCE common stock given to lenders
as additional consideration for short-term borrowings 169 1,511 --
BCA Holdings redeemable preferred stock issued in exchange for
Bagcraft redeemable preferred stock -- 8,135 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Financial Restructuring
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 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. The consolidated financial
statements do not include any adjustments relating to recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities or other adjustments that might be necessary should ARTRA be unable
to continue as a going concern.
In recent years, the Company has suffered recurring losses from operations and
has a net capital deficiency. As a result of these factors, the Company has
experienced difficulty in obtaining adequate financing to replace certain
current credit arrangements, to fund its debt service and to satisfy liquidity
requirements. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. See Note 8,
Notes Payable, and Note 9, Long-Term Debt, for further discussion of the status
of credit arrangements and restrictions on the ability of operating subsidiaries
to fund ARTRA corporate obligations. Due to its limited ability to receive
operating funds from its 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.
Effective December 31, 1997, the ARTRA received a settlement relating to certain
litigation pending 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 Industries Inc. ("Envirodyne") in 1989
by Emerald Acquisition Corp. ("Emerald"). ARTRA recognized a gain from the
settlement agreement of $10,416,000, net of related legal fees and other
expenses.
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.
In 1997, the Company changed its fiscal year end to December 31. In recent years
the Company had operated on a 52/53 week fiscal year ending the last Thursday of
December.
F-29
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. Intercompany accounts and transactions are
eliminated.
B. Cash Equivalents
Short-term investments with an initial maturity of less than ninety days are
considered cash equivalents.
C. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method.
D. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to operations as incurred and expenditures for major
renovations are capitalized. Depreciation is computed on the basis of estimated
useful lives principally by the straight-line method for financial statement
purposes and principally by accelerated methods for tax purposes. Leasehold
improvements are amortized over the shorter of the estimated useful life of the
asset or the period covered by the lease.
The costs of property retired or otherwise disposed of are applied against the
related accumulated depreciation to the extent thereof, and any profit or loss
on the disposition is recognized in earnings.
E. Investments in Equity Securities
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Under this statement, at December 28, 1995, the Company's
investment in COMFORCE (see Note 6) was classified as available for sale and was
stated at fair value. The adoption of SFAS No. 115 resulted in an increase to
shareholders' equity in the fourth quarter of 1995 of $21,047,000. In prior
years and, until October 1995, COMFORCE was a majority-owned subsidiary included
in the consolidated financial statements of the Company.
F. Intangible Assets
The net assets of a purchased business are recorded at their fair value at the
date of acquisition. The excess of purchase price over the fair value of net
assets acquired (goodwill) is reflected as intangible assets and amortized on a
straight-line basis principally over 40 years.
Effective for the fiscal year ending December 26, 1996 the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ". The pronouncement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events
F-30
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Impairment is evaluated by comparing future cash flows
(undiscounted and without interest charges) expected to result from the use or
sale of the asset and its eventual disposition, to the carrying amount of the
asset. The adoption of SFAS No. 121 did not have a material impact on the
Company's financial statements.
G. Revenue Recognition
Sales to customers are recorded at the time of shipment.
H. Income Taxes
Income taxes are accounted for as prescribed in SFAS No. 109 - Accounting for
Income Taxes. Under the asset and liability method of Statement No. 109, the
Company recognizes the amount of income taxes payable. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years those temporary differences are expected to be recovered or
settled.
I. Use of Estimates In Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
J. Stock-Based Compensation
Effective for the fiscal year ending December 26, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation". The pronouncement
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on new fair value accounting rules. The Company did not adopt the new fair
value accounting, but instead chose to comply with the disclosure requirements
of SFAS No. 123. Accordingly, the adoption of SFAS No. 123 did not have a
material impact on the Company's financial statements.
K. Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share" for the year ended
December 31, 1997. The pronouncement, which specifies the computation,
presentation, and disclosure requirements for earnings per share, did not have a
material impact on the Company's financial statements.
F-31
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
L. Recently Issued Accounting Pronouncements
During 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") SFAS No. 130, "Reporting Comprehensive
Income Summary," and SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". In February 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 132
"Employers' Disclosures about Pensions and other Postretirement Benefits". SFAS
No. 130 establishes standards for reporting comprehensive income to present a
measure of all changes in equity that result from renegotiated transactions and
other economic events of the period other than transactions with owners in their
capacity as owners. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources and includes net income. SFAS No. 131
specifies revised guidelines for determining an entity's operating segments and
the type and level of financial information to be disclosed. This standard
requires that management identify operating segments based on the way that
management disaggregates the entity for making internal operating decisions.
SFAS No. 132 standardizes the disclosure requirements for pension and other
postretirement benefits.
These new accounting principles are effective for the Company's fiscal year
ending December 31, 1998. Management has not determined what impact these
standards, when adopted, will have on the Company's financial statements.
3. CHANGE OF BUSINESS
AB Specialty
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 $2.3 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.
Arcar Graphics
Effective April 8, 1994, Bagcraft purchased the business assets, subject to
buyer's assumption of certain liabilities, of Arcar Graphics, Inc. ("Arcar"), a
manufacturer and distributor of waterbase inks, for consideration of $10,264,000
consisting of cash of $2,264,000 and subordinated promissory notes totaling
$8,000,000. The acquisition of Arcar was accounted for by the purchase method
and, accordingly, the assets and liabilities of Arcar were included in ARTRA's
financial statements at their estimated fair market value at the date of
acquisition.
Effective October 26, 1995, Bagcraft sold the business assets, subject to the
buyer's assumption of certain liabilities, of Arcar for cash of approximately
$20,300,000, resulting in a net gain of $8,483,000. The net proceeds, after
extinguishment of certain Arcar debt obligations, of approximately $10,400,000,
were used to reduce Bagcraft debt obligations.
COMFORCE
Prior to September 28, 1995, ARTRA's then majority owned subsidiary, COMFORCE
Corporation ("COMFORCE", formerly The Lori Corporation "Lori"), operated as a
designer and distributor of popular-priced fashion costume jewelry and
F-32
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
accessories. In September 1995 COMFORCE adopted a plan to discontinue its
jewelry business and recorded a provision of $1,000,000 for the estimated costs
to complete the disposal of the jewelry business.
Effective October 17, 1995, COMFORCE entered the telecommunications and computer
technical staffing and consulting services business with the acquisition of
COMFORCE Telecom Inc. COMFORCE has subsequently expanded this business through
various acquisitions.
Effective July 4, 1995, COMFORCE's management agreed to issue up to a 35% common
stock interest in COMFORCE to certain individuals to manage COMFORCE's entry
into the telecommunications and computer technical staffing and consulting
services business. In 1995, COMFORCE recognized a non-recurring charge of
$3,425,000 related to this stock since these stock awards were 100% vested when
issued, and were neither conditioned upon these individuals' service to the
Company as employees nor the consummation of the COMFORCE Telecom acquisition.
After the issuance of the COMFORCE common shares, plus the effects of other
transactions, ARTRA's ownership interest in COMFORCE common stock was reduced to
approximately 25% at December 28, 1995. Accordingly, in October 1995, the
accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated
from ARTRA's consolidated financial statements. Due to other issuances of
COMFORCE common shares, plus the effects of other transactions, ARTRA's
ownership interest in COMFORCE common stock was reduced to approximately 10% and
14% at December 31, 1997 and December 26, 1996, respectively. See Note 6 for a
further discussion of the accounting treatment of ARTRA's investment in
COMFORCE.
Other
During 1995 the Company was dismissed as party to certain litigation relating to
the former Sargent-Welch Scientific Company ("Welch") subsidiary. Accordingly,
the Company reversed $700,000 of excess liability accruals originally provided
in 1989 to complete the disposal of Welch.
F-33
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's consolidated financial statements have been reclassified to report
separately the results of operations of Arcar and COMFORCE's discontinued
fashion costume jewelry business prior to the deconsolidation of COMFORCE and
its majority-owned subsidiaries effective October 1995. The 1995 operating
results (in thousands) of Bagcraft's discontinued Arcar subsidiary and
COMFORCE's discontinued jewelry business and net gain on disposal of
discontinued operations consist of:
1995
--------
Net sales $ 16,932
========
Loss from operations
before income taxes $ (8,156)
Provision for income taxes (17)
--------
Loss from operations (8,173)
--------
Gain on sale of Arcar subsidiary 8,483
Provision for disposal of business (300)
Provision for income taxes --
--------
Gain on disposal of businesses 8,183
--------
Earnings (loss) from
discontinued operations $ 10
========
4. CONCENTRATION OF RISK
The accounts receivable of the Company's Bagcraft subsidiary at December 31,
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 December 31, 1997, Bagcraft had 10 customers with
accounts receivable balances that aggregated approximately 40% of the Company's
total trade accounts receivable. No single customer accounted for 10% or more of
Bagcraft's 1997 sales.
F-34
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. INVENTORIES
Inventories (in thousands) consist of:
December 31, December 26,
1997 1996
------- -------
Raw materials and supplies $ 5,901 $ 5,582
Work in process 274 287
Finished goods 9,574 9,098
------- -------
$15,749 $14,967
======= =======
6. INVESTMENT IN COMFORCE CORPORATION
In prior years and until October 1995, COMFORCE was a majority-owned subsidiary
of ARTRA and, accordingly, the accounts of COMFORCE and its majority-owned
subsidiaries were included in the consolidated financial statements of ARTRA. As
discussed in Note 3, due to the issuances of COMFORCE common shares in
conjunction with the acquisition of COMFORCE Telecom, ARTRA's ownership interest
in COMFORCE common stock was reduced to approximately 25%. Accordingly, in
October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were
deconsolidated from ARTRA's consolidated financial statements and ARTRA's
investment in COMFORCE was accounted for under the requirements of APB Opinion
No. 18 "The Equity Method of Accounting for Investments in Common Stock" during
the fourth quarter of 1995.
Effective December 28, 1995, John Harvey and Peter R. Harvey, ARTRA's chairman
and president, respectively, resigned as directors of COMFORCE. Due to such
factors as a lack of board of directors representation and participation in
policy formulation by ARTRA, as well as a lack of interchange of managerial
personnel, ARTRA is not able to exercise significant influence over the
operating and financial policies of COMFORCE. Additionally, assuming
contemplated additional issuances of COMFORCE common shares, on a fully diluted
basis ARTRA's ownership interest in COMFORCE common stock was reduced to less
than 20%. In the opinion of the Company, effective December 28, 1995, the
investment in COMFORCE ceased to conform to the requirements of APB Opinion No.
18. Accordingly, the Company adopted SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Under this statement, at December
28, 1995, the Company's investment in COMFORCE is classified as available for
sale and is stated at fair value. The adoption of SFAS No. 115 resulted in an
increase to shareholders' equity in the fourth quarter of 1995 of $21,047,000.
During 1997 ARTRA sold 219,203 COMFORCE common shares in the market, with the
net proceeds of approximately $1,700,000 used for working capital. During 1997 a
lender received 25,000 COMFORCE common shares held by the Company as additional
consideration for a short-term loan. The disposition of these 244,703 COMFORCE
common shares resulted in realized gains of $2,306,000 during the year ended
December 31, 1997, 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 200,000
COMFORCE common shares sold collateralize the notes. 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
F-35
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
employees to acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly,
these 200,000 COMFORCE common shares were removed from the Company's portfolio
of "Available-for-sale securities" and were 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 that was 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. Prior to the fourth quarter of 1997 no
options to acquire any of the 200,000 COMFORCE common shares had been exercised.
During the fourth quarter of 1997, options to acquire 59,500 of these COMFORCE
common shares were exercised resulting in a realized gain of $225,000. At
December 31, 1997, options to acquire 140,500 COMFORCE common shares remained
unexercised and were classified in the Company's consolidated balance sheet at
December 31, 1997 as other receivables with an aggregate value of $281,000,
based upon the value of proceeds to be received upon future exercise of the
options.
During 1996 ARTRA sold 193,000 COMFORCE common shares in the market, with the
net proceeds of approximately $3,700,000 used for working capital. During 1996
certain lenders received 105,000 COMFORCE common shares held by the Company as
additional consideration for short-term loans. In October 1996, a lender
exercised the conversion rights of a short-term loan and received 33,333
COMFORCE common shares in settlement of the Company's obligation. The
disposition of these 331,333 COMFORCE common shares resulted in realized gains
of $5,818,000 during the year ended December 26, 1996, with cost determined by
average cost.
At December 31, 1997 ARTRA's remaining investment in COMFORCE (1,525,500 shares,
currently a common stock ownership interest of approximately 10%) was classified
in the Company's consolidated balance sheet in current assets as
"Available-for-sale securities." At December 31, 1997 the gross unrealized gain
relating to ARTRA's investment in COMFORCE, reflected as a separate component of
shareholders' equity, was $14,733,000.
As discussed in Note 8, at December 31, 1997, 1,390,000 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 135,500 shares of COMFORCE
common stock owned by the Company and its Fill-Mor subsidiary remain
unencumbered.
7. EXTRAORDINARY GAINS
ARTRA Debt Restructuring
In February 1996, a bank agreed to discharge all amounts under its ARTRA notes
($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's
president, Peter R. Harvey for consideration consisting of ARTRA's cash payment
of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000
note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a
$2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000
interest in the Harvey Note. ARTRA then discharged $2,150,000 of Mr. Harvey's
prior advances in exchange for its $2,150,000 interest in Mr. Harvey's
$3,000,000 note payable to the bank. The amount of the $5,050,000 cash payment
to the bank applicable to Peter R. Harvey ($1,089,000) was charged to amounts
due from Peter R. Harvey. ARTRA recognized a gain on the discharge of this
indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996. The
cash payment due the bank was funded principally with proceeds received from the
Bagcraft subsidiary in conjunction with the issuance of BCA (the parent of
Bagcraft) preferred stock along with proceeds received from a short-term loan
agreement with an unaffiliated company that was subsequently repaid. See Note 11
for a further discussion of these transactions. As additional compensation for
its loan and for participating in the above discharge of indebtedness the
unaffiliated company received 150,000 shares of ARTRA common stock (with a then
fair market value of $661,000 after a discount for restricted marketability) and
25,000 shares of COMFORCE common stock held by ARTRA (with a then fair market
value of $200,000).
F-36
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The extraordinary gain resulting from the discharge of bank debt is calculated
(in thousands) as follows:
The extraordinary gain resulting from the discharge of bank debt is calculated
(in thousands) as follows:
Amounts due the bank:
ARTRA notes $ 12,063
Accrued interest 2,656
--------
14,719
Cash payment to the bank $ 5,050
Less amount applicable to
Peter R. Harvey indebtedness (1,089)
--------
(3,961)
--------
Bank debt discharged 10,758
Less fair market value of ARTRA
common stock issued as consideration
for a loan used in par to fund
the discharge of bank debt (661)
Less fair market value of COMFORCE
common stock issued as consideration
for a loan used in par to fund
the discharge of bank debt (200)
Other fees and expenses (473)
--------
Net extraordinary gain $ 9,424
========
In October, 1995 the Company recognized an extraordinary gain of $4,917,000
($.71 per share) as a result of a settlement agreement with a bank whereby a
$3,600,000 note payable due December 31, 1990 plus accrued interest of
$1,467,000 were discharged for a cash payment of $150,000.
COMFORCE Debt Restructuring
Upon the satisfaction of certain conditions of a debt settlement agreement, in
March 1995 certain indebtedness of COMFORCE and Fill-Mor was discharged,
resulting in an extraordinary gain to the Company of $9,113,000 ($1.35 per
share) in the first quarter of 1995 calculated (in thousands) as follows:
Amounts due the bank under loan agreements
of Lori and its operating subsidiaries and Fill-mor $ 10,500
Less amounts due the bank (750)
---------
Bank debt discharged 9,750
Less fair market value of Lori common stock
issued as consideration for the debt restructuring (337)
Other fees and expenses (300)
---------
Net extraordinary gain $ 9,113
=========
F-37
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. NOTES PAYABLE
Notes payable (in thousands) consist of:
December 31, December 26,
1997 1996
------- -------
ARTRA 12% promissory notes -
1997 private placements $ 12,850
ARTRA 12% promissory notes -
1996 private placement -- $ 7,675
Amounts due to related parties,
interest from 10% to 12% 2,000 3,600
ARTRA bank notes payable,
interest at the lender's index rate -- 2,500
Other, interest from 10% to 15% 601 4,856
------- -------
15,451 18,631
Less ARTRA 12% promissory notes
refinanced in January 1998 (4,725) --
------- -------
$ 10,726 $ 18,631
======= =======
Promissory Notes
1997 Private Placements
In December 1997, ARTRA completed private placements of $5,375,000 of 12%
promissory notes due in December 1998. As additional consideration the
noteholders received warrants to purchase an aggregate of 107,500 ARTRA common
shares at a price of $3.00 per share. The warrants expire in November and
December 1999. The warrantholders have the right to put these warrants back to
ARTRA at any time during a period commencing in December 1998 and ending in May
1999, at a price of $1.50 per share. The cost of this obligation ($161,250 if
all warrants are put back to the Company) was accrued in the Company's financial
statements as a charge to interest expense. In the event of a default, as
defined in the note agreements, the promissory notes will bear interest at 37%.
The proceeds from the private placement were used principally to pay down other
debt obligations.
In July 1997, ARTRA completed private placements of $7,475,000 of 12% promissory
notes due in January 1998. As additional consideration the noteholders received
warrants to purchase an aggregate of 199,311 ARTRA common shares at a price of
$3.75 per share. The warrants expire in July 1998. The warrantholders have the
right to put these warrants back to ARTRA at any time during a period commencing
in January 1998 and ending in August 1999, at a price of $3.00 per share. The
cost of this obligation ($598,000 if all warrants are put back to the Company)
was amortized in the Company's financial statements as a charge to interest
expense over the period July 1997 (the date of the private placement) through
January 1998 (the scheduled maturity date of the notes). The promissory notes
were collateralized principally as follows:
A $4,000,000 note is collateralized by 575,000 shares of COMFORCE
common stock owned by the Company's Fill-Mor subsidiary and a secondary
interest in the common stock of ARTRA's BCA subsidiary (the parent of
Bagcraft).
Promissory notes with an aggregate principal amount of $3,475,000 are
collateralized by 652.285 shares of ARTRA redeemable preferred stock
(then a 17.4% interest), 1,784.02 shares of BCA Series A redeemable
preferred stock (then a 48.5% interest) and 6,488.8 shares of BCA
Series B redeemable preferred stock (then a 79.8% interest).
F-38
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The proceeds from the July 1997 private placement were advanced to Peter R.
Harvey as discussed in Note 19.
The July 1997 private placement notes were repaid and /or refinanced with
proceeds of a January 1998 private placement of 12% notes and with proceeds from
the litigation settlement discussed in Note 18. The January 1998 private
placement notes, in the principal amount of $5,925,000, are payable in January
1999. July 1997 private placement notes in the principal amount of $4,725,000
were refinanced by the January 1998 private placement notes and, accordingly,
have been classified as long-term debt at December 31, 1997. As additional
consideration the January 1998 private placement noteholders received warrants
to purchase an aggregate of 116,500 ARTRA common shares at a price of $4.50 per
share. The warrants expire in January 2000. The warrantholders have the right to
put these warrants back to ARTRA at any time during a six-month period
commencing in January 1999 and ending in July 1999, at a price of $1.50 per
share. The cost of this obligation ($175,000 if all warrants are put back to the
Company) will be amortized in the Company's financial statements as a charge to
interest expense.
The December 1997 and January 1998 private placement notes are collateralized by
900,000 shares of COMFORCE common stock owned by the Company's Fill-Mor
subsidiary and by ARTRA's interest in all of the common stock of BCA (the parent
of Bagcraft).
In June 1997, ARTRA completed private placements of $4,975,000 of 12% promissory
notes due in December 1997. As additional consideration the noteholders received
warrants to purchase an aggregate of 228,750 ARTRA common shares at a price of
$3.75 per share. The warrants expire in June 1999. The warrantholders have the
right to put these warrants back to ARTRA at any time during a period commencing
in December 1997 and ending in May 1999, at prices of $2.00 to $2.40 per share.
The cost of this obligation ($517,000 if all warrants are put back to the
Company) was amortized in the Company's financial statements as a charge to
interest expense over the period June 1997 (the commencement date of the private
placement) through December 1997 (the maturity date of the notes). The proceeds
from the private placement were used principally to pay down other debt
obligations. The notes were paid at maturity in December 1997 principally with
proceeds from the December 1997 private placement.
1996 Private Placement
In April 1996, ARTRA commenced a private placement of $7,675,000 of 12%
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 $3.75 per share, as amended. 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, 1998, at a price of $2.00 per
share. The cost of this obligation ($837,500 if all warrants are put back to the
Company) was amortized 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). During 1997, warrants to purchase 50,000 ARTRA common shares were put
back to the Company at a cost of $100,000. These promissory notes were
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. During the second
quarter of 1997, the Company repaid these promissory notes 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 9).
Amounts Due To Related Parties
At December 26, 1996, ARTRA had outstanding borrowings of $500,000 from an
outside director of the Company evidenced by a short-term note 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 and a December 1996 extension, the director received five year warrants to
purchase an aggregate of 50,000 ARTRA common shares at a prices ranging from
$5.00 to $5.875 per share. The proceeds of the loan were used for working
capital.
F-39
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In January 1997, ARTRA borrowed an additional $300,000 from this director
evidenced by a 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 director
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 below.
In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by
a note, due April 20, 1998, bearing interest at 10%. 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 is being
amortized 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 prior borrowings from
this lender and pay down other ARTRA debt obligations.
In June 1997, ARTRA borrowed an additional $1,000,000 from the above director
evidenced by a note, due December 10, 1997, bearing interest at 12%. As
additional compensation, the lender received a warrant to purchase 40,000 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 December 10, 1997
to June 10, 1998, for a total purchase price of $80,000. The cost of this
obligation was amortized in the Company's financial statements as a charge to
interest expense over the period June 10, 1997 (the date of the loan) through
December 10, 1997 (the date the warrantholder has the right to put the warrant
back to ARTRA). The proceeds from this loan were used to pay down other ARTRA
debt obligations.
In July 1997, borrowings from this lender were reduced to $3,000,000 with
proceeds advanced to ARTRA from a Bagcraft term loan as discussed in Note 9. In
December 1997 borrowings from this lender were reduced to $2,000,000 with
proceeds from other short-term borrowings. The borrowings from this director are
collaterallized by 490,000 shares of COMFORCE common stock owned by the
Company's Fill-Mor subsidiary.
At December 26, 1996, ARTRA had outstanding borrowings of $3,000,000 from an
unaffiliated company then holding approximately 7% of ARTRA's outstanding common
stock. The loans were evidenced by 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. Payment on the loans
was due March 31, 1994, however, the lender did not demand 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 June 1997 outstanding borrowings to
the unaffiliated company were reduced to $300,000 with the proceeds from other
short-term borrowings. In July 1997 ARTRA repaid all remaining obligations under
these loans.
In May 1996, ARTRA borrowed $100,000 from a private investor, evidenced by a
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, the private
investor was elected to the Company's board of directors. Effective January 17,
1997, the private investor exercised his conversion rights and received 18,182
shares of ARTRA common stock as payment of the principal balance of his note.
F-40
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Other
At December 31, 1997 and December 26, 1996, ARTRA also had outstanding
short-term borrowings from other unrelated parties aggregating $601,000 and
$1,990,000, with interest rates varying between 10 % and 15%.
At December 26, 1996, ARTRA was the obligor under two demand notes, issued to an
unaffiliated company, in the principal amount of $2,266,000, including accrued
interest. The notes were issued in October, 1990 with interest at 15%. In July
1997, ARTRA paid all outstanding interest on these demand notes and reduced the
principal amount outstanding under the demand notes to approximately $1,500,000.
In October 1997, the lender agreed to accept 357,720 ARTRA common shares in
payment of the principal amount due on these notes. In January 1998 the lender
returned the 357,720 ARTRA common shares to the Company for cash consideration
of approximately $1,600,000.
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.
In March 1997, ARTRA borrowed $1,000,000 from an unaffiliated corporation
evidenced by a short-term note, due May 26, 1997, bearing interest at 12%. The
loan was 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, with the right to
put the option back to ARTRA on or before May 30, 1997 for a put price of
$50,000. Under certain circumstances, ARTRA has the right to repurchase the
option for $50,000. In May 1997, ARTRA repurchased the option for $50,000 and
repaid this loan. The proceeds from this loan were used in part to repay an
ARTRA/Fill-Mor $2,500,000 bank term loan.
The weighted average interest rate on all short-term borrowings at December 31,
1997 and December 26, 1996 was 11.5% and 11.3%, respectively.
F-41
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
9. LONG-TERM DEBT
Long-term debt (in thousands) consists of:
December 31, December 26,
1997 1996
-------- --------
Bagcraft:
Credit Agreement:
Term Loan A, interest at
the lender's index rate plus .25% $ 20,000 $ 20,000
Term Loan B, interest at
the lender's index rate plus .75% 5,000 --
Term Loan C, interest at
the lender's index rate plus 1% 7,500 --
Revolving credit loan, interest at
the lender's index rate 9,313 7,990
Unamortized discount (1,425) (1,752)
City of Baxter Springs, Kansas
loan agreements,
interest at varying rates 9,968 10,681
-------- --------
50,356 36,919
ARTRA 12% promissory notes
refinanced in January 1998 4,725 --
-------- --------
55,081 36,919
Current scheduled maturities (4,462) (2,712)
-------- --------
$ 50,619 $ 34,207
======== ========
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.
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%
(8.75% at December 31, 1997 and 8.5% at 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 $3,000,000 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 December 31, 1997 and December 26, 1996, approximately
F-42
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
$4,400,000 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 December 31, 1997 and December 26, 1996, the interest
rate on the revolving credit loan was 8.5% and 8.25%, respectively.
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 December 31, 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
$5,000,000 term loan (Term Loan B) with interest at the lender's index rate plus
.75%. Term Loan B was scheduled to mature 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 that was
scheduled to mature on May 8, 1998. ARTRA used the proceeds of this loan to
repay certain ARTRA debt obligations.
Effective July 17, 1997, the Credit Agreement was amended to provide for a
$7,500,000 term loan (Term Loan C) with interest at the lender's index rate plus
1%. Term Loan C was scheduled to mature, unless accelerated under terms of the
Credit Agreement. The proceeds of Term Loan C were advanced to ARTRA under terms
of an intercompany note payable to Bagcraft that was scheduled to mature on July
15, 1998. ARTRA used the proceeds of this loan to repay certain ARTRA debt
obligations.
Effective February 27, 1998, the Credit Agreement was amended and restated
whereby, among other things, certain loan covenants were amended and payments
under the Term Loans were modified to provide for annual principal payments
(payable in quarterly installments) as follows:
Term Loan A - $1,200,000 in 1998; $1,800,000 in 1999; $5,500,000 in
2000 and 2001; and $6,000,000 in 2002.
Term Loan B - $50,000 in 1998 - 2002; and $4,750,000 in 2002.
Term Loan C - $75,000 in 1998 - 2003; and $7,050,000 in 2004.
Amounts outstanding under the Credit Agreement have been reflected in current
maturities and long-term debt at December 31, 1997 according to terms of these
amended maturities.
As additional compensation for borrowings under the Credit Agreement, in
December 1993, the lender received a detachable warrant ("Warrant"), originally
expiring in December 1998, allowing the holder to purchase up to 10% of the
fully diluted common equity of Bagcraft at a nominal value. 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. The warrant has been subsequently amended, most recently in
accordance with the February 27, 1998 amendment to the Credit Agreement, 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 warrant's expiration
date to February 27, 2003. Under certain conditions Bagcraft is required to
repurchase the Warrant from the lender.
F-43
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 December 31, 1997 and December 26, 1996,
Bagcraft had outstanding borrowings of $4,900,000 and $5,600,000,
respectively, under this loan agreement.
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 December 31,
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 December 31, 1997 and December 26,
1996, Bagcraft had outstanding borrowings of $218,000 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.
ARTRA
As discussed in Note 8, $7,475,000 of ARTRA 12% promissory notes due in January
1998 were repaid and /or refinanced principally with proceeds of a January 1998
private placement of 12% notes payable in January 1999. Private placement notes
in the principal amount of $4,725,000 refinanced by the January 1998 private
placement notes have been classified as long-term debt at December 31, 1997.
The common stock and virtually all the assets of the Company and its Bagcraft
subsidiary have been pledged as collateral for borrowings under various loan
agreements. Under certain debt agreements the Company is limited in the amounts
it can withdraw from its operating subsidiaries.
At December 31, 1997 the aggregate amount of yearly maturities of long-term
debt, exclusive of debt discharged, is: 1998, $4,462,000; 1999, $9,787,000;
2000, $6,337,000; 2001, $6,337,000; 2002, $16,150,000; thereafter, $13,433,000.
10. REDEEMABLE COMMON STOCK
In recent years ARTRA had entered into various agreements under which it has
sold its common shares along with options that required ARTRA to repurchase
these shares at the option of the holder at a premium over the initial sales
price. The increment in the option price over the initial sales price of
redeemable common stock was reflected in the Company's financial statements by a
charge to retained earnings. At December 26, 1996 options were outstanding that,
if exercised,
F-44
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
would have required ARTRA to repurchase 98,734 shares of its common stock for an
aggregate amount of $3,657,000. At December 31, 1997, there were no outstanding
options which would require ARTRA to repurchase shares of its common stock.
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 had been extended from time to time, most recently in November
1992, to expire on December 31, 1997. 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 increased by an amount equal to 15% per annum
for each day from March 1, 1991 to the date of payment by ARTRA. At December 26,
1996, the option price was $83.45 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 increased by $2.25
per share annually ($21.19 per share at December 26, 1996). During the first
quarter of 1996 the ARTRA bank notes were discharged (see Note 7) 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 December 1997, the private corporation exercised the put options and ARTRA
repurchased 72,984 shares of its common stock for a total of $3,379,000.
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.
F-45
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock (in thousands) consists of:
<TABLE>
<CAPTION>
December 31, 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 $ 2,124 $ 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; issued 7,847.79
shares in 1997 and 8,135 shares in 1996 9,831 9,093
------- -------
$ 11,955 $ 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 $859 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 3,583.62 shares in 1997
and 3,750 shares in 1996 $ 4,799 $ 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 3,456.18 shares in 1997
and 3,675 shares in 1996 4,311 4,363
------- -------
$ 9,110 $ 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 the principal shareholders of Ozite.
Effective March 3, 1990, a wholly-owned subsidiary of ARTRA acquired 100% of
BCA's issued and outstanding common shares for consideration of $5,451,000,
which included 772,000 shares of ARTRA common stock and 3,750 shares of $1,000
par value junior non-convertible payment-in-kind redeemable Series A Preferred
Stock with an estimated fair value of $1,012,000, net of unamortized discount of
$2,738,000.
In August and September 1997 ARTRA repurchased 166.38 shares of ARTRA Series A
redeemable preferred stock with a carrying value of $209,000 for cash of
$120,000. The redeemable preferred stock purchase resulted in a gain of $89,000,
F-46
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
which was reflected in the Company's condensed consolidated financial statements
as a credit to additional paid-in capital. 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 $2,074,000 and $1,836,000 were accrued at December 31, 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 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 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 $854,000 and $688,000
were accrued at December 31, 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 $1,259,000 and
$1,142,000 were accrued at December 31, 1997 and December 26, 1996,
respectively. The Bagcraft preferred stock was originally scheduled to be
redeemable on June 1, 1997 and is currently redeemable on demand.
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 was originally scheduled to be redeemable on
June 1, 1997 and is currently redeemable on demand. Accumulated dividends of
$1,984,000 and $958,000 were accrued at December 31, 1997 and December 26, 1996,
respectively.
In August and September 1997 ARTRA repurchased 218.82 shares of BCA Series A
redeemable preferred stock and 287.21 shares of BCA Series B redeemable
preferred stock with a combined carrying value of $611,000 for cash of $306,000.
The BCA redeemable preferred stock purchase resulted in a gain of $305,000 which
was reflected in the Company's consolidated statement of operations as minority
interest.
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 7.
As discussed in Note 19, effective January 31, 1998, Peter R. Harvey exchanged
certain ARTRA/BCA preferred stock to retire advances from ARTRA totaling
$12,787,000.
F-47
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
12. STOCK OPTIONS AND WARRANTS
Stock Option Plans
In August, 1996, ARTRA's shareholders approved a stock option plan (the "1996
Plan") for certain officers, key employees and others who render services to the
Company or its subsidiaries. The 1996 Plan reserves 2,000,000 shares of the
Company's common stock for the granting of options on or before August 29, 2006.
Options granted under the Plan shall be in the form of incentive stock options
("ISOs"), as defined under the Internal Revenue Code of 1986, as amended (the
"Code") or non-statutory options which do not qualify under such the Code
("NSOs"), or both, at the discretion of the Company. The purchase price of
options granted under the 1996 Plan shall be not less than fair market value at
the date of grant for ISOs, not less than 110% of fair market value on the date
of grant for an ISO granted to a shareholder possessing 10% more of the voting
stock of the Company and the fair market value per share on the date of grant in
the case of NSOs. Effective October 4, 1996, the Company issued certain officers
and key employees of ARTRA options to purchase 532,750 shares of ARTRA common
stock at $5.25 per share, the fair market value on the date of grant.
The options vested immediately and expire ten years from the date of grant.
In August 1996, ARTRA's shareholders also approved a 1996 Disinterested
Directors Stock Option Plan (the "1996 Director Plan") for directors of the
Company who are not employees or officers. The 1996 Director Plan reserves
200,000 shares of the Company's common stock for the granting of NSOs on or
before August 29, 2006 at a price equal to fair market value per share on the
date of grant. No options were granted under the Director Plan during the years
ended December 31, 1997 and December 26, 1996.
In July 1985, ARTRA's shareholders approved a stock option plan (the "1985
Plan") for certain officers and key employees of the Company and its
subsidiaries. The 1985 Plan, as amended, reserved 1,000,000 shares of the
Company's common stock and authorized the granting of options on or before
February 1, 1995. The purchase price of such options granted under the 1985 Plan
was not less than the market value at the date of grant for ISOs and not less
than 110% of the market value on the date of grant for an ISO granted to a
shareholder possessing 10% more of the voting stock of the Company.
Effective for the fiscal year ending December 26, 1996, the Company has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". In 1996 all stock options were granted at an exercise price equal
to fair market value at the date of grant and, accordingly, no compensation
expense has been recognized in connection with the Company's stock option plans.
Had compensation cost for the Company's stock option plan been determined based
on the fair value on the date of grant for awards in 1996 consistent with the
provisions of SFAS No. 123, the Company's earnings applicable to common shares
would have been reduced to the pro forma amounts indicated below:
Year Ended December 26, 1996
----------------------------
As Reported Pro forma
----------- ---------
Earnings applicable to
common shares (in thousands) $11,962 $10,512
======= =======
Earnings per share
Basic $1.59 $1.40
===== =====
Diluted $1.51 $1.32
===== =====
F-48
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The fair value of stock options granted in 1996 was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Expected life (years) 5
Interest rate 6.5%
Volatility 50.0%
Dividend yield -
Information regarding stock option plans for the three years in the period ended
December 31, 1997 is as follows:
1997 1996 1995
---------- ---------- ----------
Options outstanding
at beginning of year 917,850 431,500 445,460
Options granted -- 532,750 --
Options exercised (4,800) (40,400) (12,100)
Options canceled -- (6,000) (1,860)
---------- ---------- ----------
Options outstanding
at end of year 913,050 917,850 431,500
========== ========== ==========
Options exercisable
at end of year 913,050 917,850 431,500
========== ========== ==========
Options available for grant
at end of year 1,467,250 1,467,250 --
========== ========== ==========
Weighted average option prices:
Outstanding at beginning of year $ 4.61 $ 3.89 $ 5.80
Options granted -- $ 5.25 --
Options exercised $ 3.70 $ 5.01 $ 4.00
Options canceled -- $10.00 $20.50
Outstanding at end of year $ 4.61 $ 4.61 $ 3.89
Exercisable at end of year $ 4.61 $ 4.61 $ 3.89
Significant option groups outstanding at December 31, 1997 and related weighted
average price and remaining life information are as follows:
Remaining
Options Options Exercise Life
Grant Date Outstanding Exercisable Price (Years)
---------- ----------- ----------- -------- -------
10-04-96 532,750 532,750 $ 5.25 8
01-08-93 145,800 145,800 $ 3.75 5
06-22-92 6,000 6,000 $ 5.25 4
09-19-91 52,967 52,967 $ 3.65 3
12-19-90 176,033 176,033 $ 3.65 2
F-49
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Warrants
At December 31, 1997, warrants were outstanding to purchase a total of 1,711,032
common shares at prices ranging from $3.00 per share to $8.00 per share. The
warrants, exercisable from the date of issue, expire at various dates through
2003. These warrants were issued principally as additional compensation for
various short-terms loans.
During 1997 ARTRA issued warrants to purchase an aggregate of 1,196,894 shares
of its common stock at prices ranging from $3.00 per share to $5.75 per share,
principally to certain lenders as additional compensation for short-term loans.
The warrants expire at various dates from 1998 to 2001. The warrantholders have
the right to put these warrants back to ARTRA at prices from $1.50 to $3.00 per
share during certain six month periods as defined (see Note 8). At December 31,
1997, warrantholders had the right to put warrants to purchase 1,213,644 shares
of ARTRA common stock back to the Company for total consideration of $2,966,000.
Additionally, during 1997 warrants to purchase 35,000 shares of ARTRA common
stock at prices ranging from $4.00 per share to $6.00 per share were exercised,
warrants to purchase 114,000 shares of ARTRA common stock at prices ranging from
$5.00 per share to $6.00 per share were put back to ARTRA for total
consideration of $228,000 and warrants to purchase 159,193 shares of ARTRA
common stock at prices ranging from $5.00 per share to $9.875 per share expired
unexercised.
During 1996 ARTRA issued warrants to purchase an aggregate of 632,583 shares of
its common stock at prices ranging from $4.00 per share to $8.00 per share,
principally to certain lenders as additional compensation for short-term loans.
The warrants expire at various dates from 1999 to 2001. Additionally during 1996
warrants to purchase 37,500 shares of ARTRA common stock at prices ranging from
$3.75 per share to $5.00 per share were exercised and warrants to purchase
32,600 shares of ARTRA common stock at prices ranging from $5.375 per share to
$10.50 per share expired unexercised.
During 1995, ARTRA issued warrants to purchase an aggregate of 140,507 shares of
its common stock at prices ranging from $3.75 per share to $6.125 per share,
principally to certain lenders as additional compensation for short-term loans.
The warrants expire at various dates in 2000. Additionally during 1996 warrants
to purchase 48,331 shares of ARTRA common stock at prices ranging from $6.75 per
share to $11.375 per share expired unexercised.
13. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease certain buildings and equipment, which
are used in its manufacturing and distribution operations. At December 31, 1997,
future minimum lease payments under operating leases that have an initial or
remaining noncancellable term of more than one year (in thousands) are:
Year
----
1998 $ 880
1999 502
2000 265
2001 252
2002 219
After 2002 619
-------
$ 2,737
=======
Rental expense was $1,295,000, $975,000 and $861,000 in fiscal years 1997, 1996
and 1995, respectively. Effective December 1995, John Harvey, the Company's
Chairman of the board of directors purchased the building in which the Company
leases office space for its corporate headquarters. The lease expired in
December 1997 and has been extended on a month-to-month basis. Rental expense
for this lease was $126,000 annually for the years ended December 31, 1997 and
December 26, 1996.
F-50
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In October 1995, Bagcraft entered into an agreement for the purchase of various
ink products for a period of five years. Under terms of the agreement, Bagcraft
is required to purchase a minimum supply of ink based on market prices in effect
at the time of each purchase. For the contract year ended September 30, 1996,
Bagcraft had a short-fall of approximately $126,000. The shortfall for the
contract year ended September 30, 1996 was incorporated into the purchase
requirement for the contract year the contract year ended September 30, 1997. In
January 1997 the agreement was amended to revise the original minimum purchase
requirements and the annual contract period. The minimum dollar amounts required
for each of the remaining years ending October 31 are $4,500,000 in 1998;
$3,375,000 in 1999; and $2,250,000 in 2000. Bagcraft has issued a letter of
credit of $1,000,000 in conjunction with this agreement. Ink purchases for the
contract year the contract year ended September 30, 1997 exceeded the minimum
requirement. In conjunction with a prior self-insurance plan, Bagcraft
maintained a $875,000 letter of credit at December 31, 1997.
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At December 31, 1997 and December 26,
1996, the Company had accrued current liabilities of $1,800,000 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 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 alleged Bagcraft was
responsible for the costs of cleanup incurred and to be incurred. Although
Bagcraft has denied liability for the site, it has entered into a settlement
agreement with the State, along with the other potential responsible parties, to
resolve all claims associated with the site. In July 1997 Bagcraft paid
approximately $150,000 to formally extinguish the state claim.
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. In October 1997 Bagcraft paid $40,000 to formally extinguish this claim.
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 currently attempting to negotiate a
settlement.
F-51
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
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.
F-52
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA and NL Industries, Inc. have counter sued each other and have filed third
party actions against the subsequent owners of the property. The 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.
14. INCOME TAXES
The provision (credit) for income taxes (in thousands) is included in the
statements of operations as follows:
1997 1996 1995
----- ----- -----
Continuing operations $ (19) $ 152 $ 51
Extraordinary credit -- 200 --
Discontinued operations -- -- 17
----- ----- -----
$ (19) $ 352 $ 68
===== ===== =====
A summary of the provision (credit) for income taxes (in thousands) is as
follows:
1997 1996 1995
----- ----- -----
Current:
Federal $-- $ 200 $--
State (19) 152 68
----- ----- -----
$ (19) $ 352 $ 68
===== ===== =====
The 1996 and 1995 extraordinary credits represent net gains from discharge of
indebtedness. No income tax expense is reflected in the Company's financial
statements resulting from the extraordinary credit in 1996 due to the
utilization of tax loss carryforwards, except for Federal alternative minimum
tax incurred in 1996.
F-53
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. INCOME TAXES, continued
In 1997, 1996 and 1995, the effective tax rates from operations, including
discontinued operations were 1.0%, 2.5% and (3.9)%, respectively, as compared to
the statutory Federal rate, which are reconciled (in thousands) as follows:
1997 1996 1995
------- ------- -------
Provision (credit) for income taxes
using statutory rate $ 633 $ 4,709 $ (600)
State and local taxes,
net of Federal benefit (19) 152 68
Current year tax loss not utilized (1,680) -- --
Deferred finance fee 919 127 --
Amortization of goodwill 104 104 155
Previously unrecognized benefit
from utilizing tax loss
carryforwards -- (4,767) (2,136)
Effect of not including all subsidiaries
in the consolidated tax return -- -- 2,546
Other 24 27 35
------- ------- -------
$ (19) $ 352 $ 68
======= ======= =======
F-54
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. INCOME TAXES, continued
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax liabilities and deferred tax assets at December 31, 1997 and December 26,
1996 and their approximate tax effects (in thousands) are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Temporary Tax Temporary Tax
Difference Difference Difference Difference
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Trade accounts receivable $ -- $ -- $ -- $ 100
Investment in Emerald Acquisition Corporation -- -- 10,600 4,100
Investment in COMFORCE Corporation 36,000 14,000 39,500 15,400
Accrued personnel costs 1,200 500 1,600 600
Restructuring reserve 600 200 100 --
Environmental reserve 300 100 500 200
Other 3,400 1,300 600 200
Capital loss carryforward 3,500 1,400 2,100 800
Net operating loss 40,000 15,600 35,900 14,000
-------- --------
Total deferred tax assets 33,100 35,300
-------- --------
Inventories (1,900) (700) (4,500) (1,700)
Accumulated depreciation (5,100) (2,000) (6,400) (2,500)
Other (800) (300) (1,000) (300)
-------- --------
Total deferred tax liabilities 3,000 (4,500)
-------- --------
Valuation allowance (30,100) (30,800)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
</TABLE>
The Company has recorded a valuation allowance with respect to the future tax
benefits and the net operating loss reflected in deferred tax assets as a result
of the uncertainty of their ultimate realization.
At December 31, 1997, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $40,000,000 expiring principally in 2002 -
2013, 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.
F-56
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401 (k) plan covering substantially
all employees. Both employee and employer contributions are generally determined
as a percentage of the covered employee's annual compensation. The total expense
charged to operations relating to this plan amounted to $609,000, $513,000 and
$477,000 in 1997, 1996 and 1995, respectively.
Effective January 1, 1996, Bagcraft established an unfunded deferred
compensation plan for certain key executives providing for payments upon
retirement, death or permanent disability. Under the plan, retirement payments
are determined as a percentage of the value of Bagcraft and the extent of
participation in the plan. Participants vest on a pro-rata basis over four years
from the plan's origination date. At December 31, 1997, Bagcraft recorded other
noncurrent assets and other noncurrent liabilities of $426,000, and $850,000,
respectively related to the deferred compensation plan. Deferred compensation
expense relating to this plan amounted to $263,000 and $170,000 for the years
ended December 31, 1997 and December 26, 1996, respectively.
Effective June 1, 1990, the Company adopted an Employee Stock Ownership Plan
("ESOP") which covered eligible employees of ARTRA and certain of its
subsidiaries. Employer contributions to the Plan were at the discretion of
ARTRA's Board of Directors. Employee contributions were not permitted. Effective
August 1, 1995, the Company terminated the ESOP and subsequently distributed the
related Employee accounts to participants. The Company contributed 8,750 ARTRA
common shares to the Plan with a fair market value of $42,000 ($4.75 per share)
for the plan year ending December 28, 1995.
The Company typically does not offer the types of benefit programs that fall
under the guidelines of Statement of Financial Accounting Standards No. 106 -
Employers Accounting for Post Retirement Benefits Other Than Pensions.
16. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share," for the year ended
December 31, 1997. Adoption of this pronouncement, which was applied to prior
periods presented, did not have a material impact on the Company's financial
statements.
Basic earnings (loss) per share is computed by dividing the income available to
common shareholders, net earnings (loss), less redeemable preferred stock
dividends and redeemable common stock accretion, by the weighted average number
of shares of common stock outstanding during each period.
Diluted earnings (loss) per share is computed by dividing the income available
to common shareholders, 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, during each period.
F-57
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Earnings (loss) per share for each of the three fiscal years in the period ended
December 31, 1997 was computed as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 26, 1996 December 28, 1995
-------------------- -------------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
-------- -------- -------- -------- -------- --------
AVERAGE SHARES OUTSTANDING:
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares outstanding 7,970 7,970 7,525 7,525 6,776 6,776
Common stock equivalents
(options/warrants) -- -- -- 414 -- --
-------- -------- -------- -------- -------- --------
7,970 7,970 7,525 7,939 6,776 6,776
======== ======== ======== ======== ======== ========
EARNINGS (LOSS):
Earnings (loss) from continuing
operations $ 773 $ 773 $ 3,549 $ 3,549 $(16,943) $(16,943)
Dividends applicable to
redeemable preferred stock (693) (693) (621) (621) (565) (565)
Redeemable common stock accretion (400) (400) (390) (390) (767) (767)
-------- -------- -------- -------- -------- --------
Earnings (loss) from continuing
operations applicable to
common shareholders (320) (320) 2,538 2,538 (18,275) (18,275)
Earnings from discontinued operations -- -- -- -- 10 10
-------- -------- -------- -------- -------- --------
Earnings (loss) before
extraordinary credit (320) (320) 2,538 2,538 (18,265) (18,265)
Extraordinary credit -- -- 9,424 9,424 14,030 14,030
======== ======== ======== ======== ======== ========
Net earnings (loss) $ (320) $ (320) $ 11,962 $ 11,962 $ (4,235) $ (4,235)
======== ======== ======== ======== ======== ========
PER SHARE AMOUNTS:
Earnings (loss) from
continuing operations
applicable to common shares $ (0.04) $ (0.04) $ 0.34 $ 0.32 $ (2.70) $ (2.70)
Earnings (loss) from
discontinue operations -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Earnings (loss) before
extraordinary credit (0.04) (0.04) 0.34 0.32 (2.70) (2.70)
Extraordinary credits -- -- 1.25 1.19 2.07 2.07
======== ======== ======== ======== ======== ========
Net earnings (loss) applicable
to common shares $ (0.04) $ (0.04) $ 1.59 $ 1.51 $ (0.63) $ (0.63)
======== ======== ======== ======== ======== ========
</TABLE>
17. INDUSTRY SEGMENT INFORMATION
At December 31, 1997, the Company, through its Bagcraft subsidiary operates in
one industry segment as a manufacturer of packaging products principally serving
the food industry.
Prior to September 28, 1995, ARTRA's then majority owned subsidiary, COMFORCE,
operated as a designer and distributor of popular-priced fashion costume jewelry
and accessories. In September 1995, COMFORCE adopted a plan to discontinue its
jewelry business.
As discussed in Note 3, effective October 17, 1995, COMFORCE entered the
telecommunications and computer technical staffing and consulting services
business with the acquisition of COMFORCE Telecom Inc. COMFORCE has subsequently
expanded this business through various acquisitions.
F-58
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Due to the issuances of COMFORCE common shares in conjunction with the
acquisition of COMFORCE Telecom, ARTRA's common stock ownership in COMFORCE was
reduced to approximately 25%. Accordingly, in October 1995, the accounts of
COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's
consolidated financial statements and ARTRA's investment in COMFORCE was
accounted for under the equity method during the fourth quarter of 1995. As
discussed in Note 5, effective December 28, 1995, the Company adopted SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities." Under
this statement, at December 28, 1995, the Company's investment in COMFORCE is
classified as available for sale and is stated at fair value.
No single customer accounted for more than 10% of consolidated net sales in
1997, 1996 and 1995.
18. LITIGATION
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 had a right to appeal the District Court's decision. This appeal had 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, and breach of contract and promissory estoppel. In the State
Court Action, ARTRA sought compensatory damages of $136.2 million, punitive
damages of $408.6 million and the 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 appealed this decision.
Effective December 31, 1997, the above parties reached a settlement agreement
and all pending litigation was dismissed. ARTRA recognized a gain from the
settlement agreement of $10,416,000, net of related legal fees and other
expenses.
The Company and its subsidiaries are the defendants in various other
business-related litigation and environmental matters (see Note 13). Management
does not believe the outcome of these matters will have a material adverse
effect on the Company's financial statements.
F-59
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
19. RELATED PARTY TRANSACTIONS
Advances to Peter R. Harvey, ARTRA's president, classified in the condensed
consolidated balance sheet as a reduction of common shareholders' equity, (in
thousands) consist of:
December 31, December 26,
1997 1996
-------- --------
Total advances, including accrued interest $ 18,226 $ 7,998
Less interest for the period
January 1,1993 to date,
accrued and fully reserved (2,789) (1,530)
-------- --------
15,437 6,468
Less compensation/expense reimbursement (2,816) --
-------- --------
Net advances $ 12,621 $ 6,468
======== ========
ARTRA had total advances due from its president, Peter R. Harvey, of which
$18,226,000 and $7,998,000, including accrued interest, remained outstanding at
December 30, 1997 and December 26, 1996, respectively. A $7,500,000 July 1997
advance, as discussed below, provided for interest at 12%. The remaining
advances of $10,726,000 and $7,998,000 at December 31, 1997 and December 26,
1996, respectively, bear interest at the prime rate plus 2% (10.5% at December
31, 1997 and 10.25% December 26, 1996, respectively). As discussed below,
effective December 31, 1997, these advances were reduced to $12,621,000. This
receivable from Peter R. Harvey has been classified as a reduction of common
shareholders' equity.
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 years ended December 31, 1997 and December
26, 1996 totaled $1,259,000 and $479,000, respectively.
In July 1997, ARTRA advanced an additional $7,500,000 to Peter R. Harvey. Mr.
Harvey provided ARTRA with additional collateral for his advances consisting of
652.285 shares of ARTRA redeemable preferred stock (a 18.2% interest at December
31, 1997), 1,784.02 shares of BCA Series A redeemable preferred stock (a 51.6%
interest at December 31, 1997) and 6,488.8 shares of BCA Series B redeemable
preferred stock (a 82.7% interest at December 31, 1997). These ARTRA and BCA
redeemable preferred shares were pledged by ARTRA as partial collateral for the
July 1997 private placement of ARTRA promissory notes that funded the advance to
Mr. Harvey. As of December 31, 1997, this additional collateral had a carrying
value in ARTRA's consolidated balance sheet of approximately $11,200,000. The
advances were funded with the proceeds from the July 1997 private placement of
ARTRA notes as discussed in Note 8.
In June 1996, Peter R. Harvey loaned the Company 100,000 shares of ARTRA common
stock with (with a then fair market value of $587,000). The Company principally
issued these common shares to certain lenders as additional consideration for
short-term loans. In September 1996, after the Company's shareholders approved
an increase in the number of authorized common shares, the Company repaid this
loan. At Peter R. Harvey's direction, the 100,000 shares of the Company's common
stock were issued in blocks of 25,000 shares to the four daughters of the
Company's Chairman of the Board, John Harvey.
John Harvey and Peter R. Harvey are brothers.
As collateral for amounts due from Peter R. Harvey, in prior years the Company
had received the pledge of 1,523 shares of ARTRA redeemable preferred stock (a
42.5% interest at December 31, 1997, with a carrying value in ARTRA's
consolidated balance sheet of approximately $2,000,000) 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
F-60
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 received only nominal compensation for his services as an
officer or director of ARTRA or any of its subsidiaries for the period October
1990 through December 1997. Additionally, Mr. Harvey had 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, were fully
satisfied. Additionally, since December 31, 1986, Peter R. Harvey has guaranteed
in excess of $100,000,000 of ARTRA obligations to private and institutional
lenders, and has also incurred significant expenses on behalf of ARTRA in
defending ARTRA against certain litigation.
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).
In March 1998, ARTRA's Board of Directors ratified a proposal to settle Mr.
Harvey's advances as follows:
Effective December 31, 1997, Mr. Harvey's net advances from ARTRA were
offset by $2,816,000 ($5,605,000 net of interest accrued and reserved
for the period 1993 - 1997) to $12,621,000. This offset of Mr.
Harvey's advances represented a combination of compensation for prior
year guarantees of ARTRA obligations to private and institutional
lenders, compensation in excess of the nominal amounts Mr. Harvey
received for the years 1995 - 1997 and reimbursement for expenses
incurred to defend ARTRA against certain litigation.
F-61
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Effective January 31, 1998, Mr. Harvey's remaining advances totaling
$12,787,000 were paid with consideration consisting of the following
ARTRA/BCA preferred stock held by Mr. Harvey:
Face Value
Plus
Security Accrued Dividends
------------------------------------------------------ -----------------
ARTRA redeemable preferred stock, 1,734.28 shares $ 2,751,000
BCA Holdings Series A preferred stock, 1,784.029 shares 2,234,000
BCA Holdings Series B preferred stock, 6,172 shares 7,802,000
------------
$ 12,787,000
============
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 December 31, 1997 and December 26, 1996, respectively, $218,000 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 8.
F-62
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ARTRA GROUP INCORPORATED
BALANCE SHEETS
(Registrant Only In Thousands)
December 31, December 26,
1997 1996
-------- --------
ASSETS
Current assets:
Cash $ 5,986 $ 162
Receivables 362 430
Other current assets 397 453
-------- --------
6,745 1,045
-------- --------
Property, plant and equipment 41 33
Less accumulated depreciation and amortization 41 33
-------- --------
-- --
-------- --------
Investments in and advances to (from) affiliates (15,274) 8,266
-------- --------
$ 6,745 $ 9,311
======== ========
LIABILITIES
Current liabilities:
Notes payable $ 15,451 $ 16,131
Accounts payable 35 25
Accrued expenses 7,096 6,508
Income taxes 254 265
-------- --------
22,836 22,929
-------- --------
Investments in and advances from affiliates 15,274 --
-------- --------
Redeemable common stock -- 3,657
-------- --------
Redeemable preferred stock 4,799 4,315
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 6,223 5,793
Additional paid-in capital 42,721 40,211
Unrealized appreciation of investments 14,733 25,719
Receivable from related party,
including accrued interest (12,621) (6,468)
Accumulated deficit (87,113) (86,793)
-------- --------
(36,057) (21,538)
Less treasury stock, at cost 107 52
-------- --------
(36,164) (21,590)
-------- --------
$ 6,749 $ 9,311
======== ========
The accompanying notes are an integral part of the condensed financial
information.
F-63
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ARTRA GROUP INCORPORATED
STATEMENTS OF OPERATIONS
(Registrant Only In Thousands)
Fiscal Year
------------------------------
1997 1996 1995
-------- -------- --------
Selling, general and administrative expenses $ 5,661 $ 1,998 $ 1,760
Depreciation and amortization 7 19 27
Interest expense 6,130 3,997 4,953
Equity in (earnings) loss of affiliates (863) (7,745) 7,817
Litigation settlement (10,416) -- --
Other expense, net (11) 1 424
-------- -------- --------
Earnings (loss) from continuing operations
before income taxes (508) 1,730 (14,981)
Benefit (charge) equivalent to income taxes 1,281 1,819 (1,962)
-------- -------- --------
Earnings (loss) from continuing operations 773 3,549 (16,943)
Equity in earnings of discontinued affiliate -- -- 10
-------- -------- --------
Loss before extraordinary credits 773 3,549 (16,933)
-------- -------- --------
Extraordinary credits,
net discharge of indebtedness -- 9,424 14,030
-------- -------- --------
Net earnings (loss) $ 773 $ 12,973 ($ 2,903)
======== ======== ========
The accompanying notes are an integral part of the condensed financial
information.
F-64
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ARTRA GROUP INCORPORATED
STATEMENTS OF CASH FLOWS
(Registrant Only In Thousands)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 773 $ 12,973 ($ 2,903)
Adjustments to reconcile net loss
to cash flows from operating activities:
Decrease in receivable from related party 2,816 -- --
Extraordinary gain from net discharge of indebtedness -- (9,424) (14,030)
Equity in loss of affiliates (863) (7,745) 7,817
Litigation settlement (10,416) -- --
Equity in (earnings) loss of discontinued operations -- -- (10)
Other, principally common stock issued as compensation 462 239 1,370
Changes in assets and liabilities:
Increase (decrease) in other current and noncurrent assets 2,294 (1,315) 32
Increase in other current and noncurrent liabilities (1,114) 1,696 1,738
-------- -------- --------
Net cash flows used by operating activities (6,048) (3,576) (5,986)
-------- -------- --------
Cash flows from investing activities:
Increase in receivable from related party (8,969) (1,061) (218)
Proceeds from litigation settlement 9,761 -- --
Proceeds from collection of notes receivable -- 342 3,000
Dividends and advances from (to) subsidiaries 13,417 4,473 --
Additions to property, plant and equipment (8) (8) (6)
-------- -------- --------
Net cash flows from investing activities 14,201 3,746 2,776
-------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 178 369 48
Net increase (decrease) in short-term borrowings 992 (2,214) 5,488
Purchase of redeemable preferred stock (120) -- --
Exercise of redeemable common stock options (3,379) (510) (70)
-------- -------- --------
Net cash flows from (used by) financing activities (2,329) (2,355) 5,466
-------- -------- --------
Net increase (decrease) in cash 5,824 (2,185) 2,256
Cash balance beginning of year 162 2,347 91
-------- -------- --------
Cash balance end of year $ 5,986 $ 162 $ 2,347
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Issue common stock and redeemable common stock
to pay down current liabilities $ 1,672 $ 1,274 $ 1,040
Issue common stock as additional consideration
for short-term borrowings -- 661 1,266
Issue common stock to pay
redeemable common stock obligation 679 -- --
</TABLE>
The accompanying notes are an integral part of the condensed financial
information.
F-65
<PAGE>
ARTRA GROUP INCORPORATED AND SUB AND SUBSIDIARIES
SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(Cont.)
ARTRA GROUP INCORPORATED
NOTES TO FINANCIAL INFORMATION
(Registrant Only)
1. Presentation
The condensed financial information of the Registrant has been prepared in
accordance with the instructions for Schedule I to Form10-K. The Registrant's
investments in subsidiaries and affiliates are presented on the equity method.
2. Commitments and Contingencies
See Note 13 of the consolidated financial statements.
3. Restricted Assets
The terms of several agreements place certain restrictions on the net assets of
certain operating subsidiaries. See Notes 8 and 9 of the consolidated financial
statements for additional information.
4. Notes Payable and Long-Term Debt
See Notes 8 and 9 of the consolidated financial statements.
5. Redeemable Common and Preferred Stock and Stock Options
See Notes 10, 11 and 12 of the consolidated financial statements.
6. Income Taxes
The Registrant and its majority owned subsidiaries file a consolidated income
tax return. For financial reporting purposes, the Registrant's charge or benefit
equivalent to income tax represents the difference between the aggregate of
income taxes computed on a separate return basis for each of the subsidiaries
and affiliates and the income taxes computed on a consolidated basis.
7. Related Party Transactions
See Notes 8 and 19 of the consolidated financial statements.
F-66
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
for each of the three fiscal years in the period ended December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
---------------- --------------- ----------------------------- ----------- ------------
Additions
-----------------------------
(1) (2)
Balance at Charged to Charged to
Beginning of Costs and Other Deductions Balance at
Description Period Expenses Accounts (Describe) nd of Period
--------------- --------------- --------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
For the fiscal year ended December 26, 1996:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 249 $ 172 $ (144)(B) $ 277
========= ========== ======== =========
Allowance for doubtful accounts $ 512 $ 63 $ (300)(A) $ 275
========= ========== ======== =========
For the fiscal year ended December 26, 1996:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 290 $ 191 $ (232)(B) $ 249
========= ========== ======== =========
Allowance for doubtful accounts $ 250 $ 365 $ (103)(A) $ 512
========= ========== ======== =========
For the fiscal year ended December 28, 1995:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 207 $ 315 $ (232)(C) $ 290
========= ========== ======== =========
Allowance for markdowns $ 835 $ 291 $ (1,126)(C) $ -
Allowance for doubtful accounts 819 487 (1,056)(C) 250
--------- ---------- -------- ---------
$ 1,654 $ 778 $ (2,182) $ 250
========= ========== ======== =========
</TABLE>
(A) Principally markdowns taken.
(B) Principally inventory written off, net of recoveries.
(C) Principally amounts of discontinued operations.
F-67
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this supplement to the Form S-1 (File No.
333-38101) of our report dated March 26, 1998 on our audits of the consolidated
financial statements and financial statement schedules of ARTRA GROUP
Incorporated. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
May 20, 1998
