SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-3916
ARTRA GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1095978
--------------------------- ---------------
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
500 Central Avenue, Northfield, IL 60093
---------------------------------- --------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (847) 441-6650
Not Applicable
--------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
--------------------------- ---------------------------
Common stock, without par value 7,863,778
<PAGE>
ARTRA GROUP INCORPORATED
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998 and March 27, 1997 4
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Three Months Ended March 31, 1998 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and March 27, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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.
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.
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.
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.
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.
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.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's annual report on Form 10-K for the fiscal year ended December 31,
1997, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 31, 1997 was derived from
the audited consolidated financial statements in the Company's annual report on
Form 10-K.
Reported interim results of operations are based in part on estimates 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
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 (in thousands) consist of:
March 31, December 31,
1998 1997
-------- --------
Raw materials and supplies $ 7,300 $ 5,901
Work in process 569 274
Finished goods 10,793 9,574
-------- --------
$ 18,662 $ 15,749
======== ========
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.
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 (in thousands) consist of:
March 31, December 31,
1998 1997
-------- --------
ARTRA 12% promissory notes -
1998 private placements $ 5,975 --
ARTRA 12% promissory notes -
1997 private placements 5,375 $ 12,850
Amounts due to related party,
interest at 10% 2,000 2,000
Other, interest from 10% to 15% 251 601
-------- --------
13,601 15,451
Less ARTRA 12% promissory notes
refinanced in January 1998 -- (4,725)
-------- --------
$ 13,601 $ 10,726
======== ========
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.
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.
Private placement notes in the principal amount of $4,725,000, refinanced by the
January 1998 private placement notes, classified as long-term debt at December
31, 1997 were reclassified to current notes payable at 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.
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.
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 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.
6. LONG-TERM DEBT
Long-term debt (in thousands) consists of:
March 31, December 31,
1998 1997
-------- --------
Bagcraft:
Credit Agreement:
Term Loan A,
interest at the lender's
index rate plus .25% $ 19,700 $ 20,000
Term Loan B,
interest at the lender's
index rate plus .75% 4,988 5,000
Term Loan C,
interest at the lender's
index rate plus 1% 7,481 7,500
Revolving credit loan,
interest at the lender's index rate 10,373 9,313
Unamortized discount (1,261) (1,425)
City of Baxter Springs, Kansas loan agreements,
interest at varying rates 9,965 9,968
-------- --------
51,246 50,356
ARTRA 12% promissory notes
refinanced in January 1998 -- 4,725
-------- --------
51,246 55,081
Current scheduled maturities (4,462) (4,462)
-------- --------
$ 46,784 $ 50,619
======== ========
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 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.
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.
12
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
ARTRA
As discussed in Note 5, $7,475,000 of ARTRA 12% promissory notes due in January
1998 were repaid and/or refinanced principally with proceeds of a 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 and classified as long-term debt at December 31, 1997, were reclassified
to current notes payable at March 31, 1998.
13
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
7. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock (in thousands) consists of:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
<S> <C> <C>
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 $ 2,124
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 in 1998 and 7,847.79 shares in 1997 2,156 9,831
------- -------
$ 4,309 $11,955
======= =======
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 1998 and 1,271 in 1997;
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 in
1998 and 3,583.62 shares in 1997 $ 2,571 $ 4,799
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 in 1998 and 3,456.18 shares in 1997 2,111 4,311
------- -------
$ 4,682 $ 9,110
======= =======
</TABLE>
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.
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 and $854,000
were accrued at March 31, 1998 and December 31, 1997, respectively.
In 1987, Bagcraft issued to a former related $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 and
$1,259,000 were accrued at March 31, 1998 and December 31, 1997, 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 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 and $1,984,000 were accrued at March 31, 1998 and December 31, 1997,
respectively.
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
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, he 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>
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 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.
In November, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth
Judicial Circuit for the state of Illinois 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.
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
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 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.
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.
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.
20
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion supplements the information found in the financial
statements and related notes:
Results of Operations
The Company, through its wholly-owned Bagcraft subsidiary, currently operates in
one industry segment as a manufacturer of packaging products principally serving
the food industry. Bagcraft sells 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 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%
======= =======
21
<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 net
sales 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.
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.
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.
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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
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.
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.
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).
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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.
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 x. 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.
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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.
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.
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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.
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
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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.
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:
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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.
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
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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.
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.
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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.
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.
30
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Part II, Item 1 of Form 10-Q is hereby
incorporated by reference to Note 10 to the Company's condensed
consolidated financial statements for the quarter ended March 31, 1998
included in Part I, Item 1 of this Form 10-Q.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ARTRA GROUP INCORPORATED
------------------------
Registrant
Dated: May 15, 1998 JAMES D. DOERING
------------- ------------------------------------------
Vice President and Chief Financial Officer
32
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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