-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CAcjYX+8sQYUAwBUsoMagtBakV+nc+ZATrRHyiwmBCxHRDZv4FjOjBi0AxlGHUtg jINUg0sDGOXNuSeuh+aRnQ== 0000200243-96-000013.txt : 19961113 0000200243-96-000013.hdr.sgml : 19961113 ACCESSION NUMBER: 0000200243-96-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960926 FILED AS OF DATE: 19961112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTRA GROUP INC CENTRAL INDEX KEY: 0000200243 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 251095978 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03916 FILM NUMBER: 96659320 BUSINESS ADDRESS: STREET 1: 500 CENTRAL AVE CITY: NORTHFIELD STATE: IL ZIP: 60093 BUSINESS PHONE: 7084416650 MAIL ADDRESS: STREET 1: 500 CENTRAL AVE CITY: NORTHFIELD STATE: IL ZIP: 60093 FORMER COMPANY: FORMER CONFORMED NAME: TELEPRO INDUSTRIES INC DATE OF NAME CHANGE: 19820225 FORMER COMPANY: FORMER CONFORMED NAME: ELT INC DATE OF NAME CHANGE: 19760503 FORMER COMPANY: FORMER CONFORMED NAME: DUTCH BOY INC DATE OF NAME CHANGE: 19750630 10-Q 1 FOR THE QUARTERLY PERIOD ENDED 9/26/96 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 26, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-3916 ARTRA GROUP INCORPORATED (Exact name of registrant as specified in its charter) Pennsylvania 25-1095978 -------------------------------- ----------------- State or other jurisdiction I.R.S. Employer of incorporation or organization Identification No. 500 Central Avenue, Northfield, IL 60093 -------------------------------------- -------- Address of principal executive offices Zip Code Registrant's telephone number, including area code: (847) 441-6650 Not Applicable - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 1996 ------------------------------- ------------------------------- Common stock, without par value 7,694,872 ARTRA GROUP INCORPORATED INDEX Page Number ------ PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets September 26, 1996 and December 28, 1995 2 Condensed Consolidated Statements of Operations Three Months and Nine Months Ended September 26, 1996 and September 28, 1995 4 Condensed Consolidated Statement of Changes in Shareholders' Equity (Deficit) Nine Months Ended September 26, 1996 5 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 26, 1996 and September 28, 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 37 SIGNATURES 38 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited in thousands) September 26, December 28, 1996 1995 -------- -------- ASSETS Current assets: Cash and equivalents $ 99 $2,347 Restricted cash and equivalents -- 552 Receivables, less allowance for doubtful accounts of $301 in 1996 and $250 in 1995 9,071 10,897 Inventories 15,211 16,634 Available-for-sale securities -- 1,427 Other 1,108 324 -------- ------- Total current assets 25,489 32,181 -------- ------- Property, plant and equipment 45,645 44,273 Less accumulated depreciation and amortization 19,795 17,335 -------- ------- 25,850 26,938 -------- ------- Other assets: Available -for-sale securities 31,728 15,519 Excess of cost over net assets acquired, net of accumulated amortization of $2,007 in 1996 and $1,778 in 1995 3,029 3,258 Other 35 53 -------- ------- 34,792 18,830 -------- ------- $86,131 $77,949 ======== ======= The accompanying notes are an integral part of the condensed consolidated financial statements. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited in thousands) September 26, December 28, 1996 1995 -------- -------- LIABILITIES Current liabilities: Notes payable, including amounts due to related parties of $3,600 in 1996 and $5,675 in 1995 $15,518 $25,300 Current maturities of long-term debt 2,407 3,512 Accounts payable, including amounts due to a related party of $399 in 1995 7,645 10,925 Accrued expenses 9,667 14,106 Income taxes 367 203 Liabilities of discontinued operations 764 4,500 ------- ------- Total current liabilities 36,368 58,546 ------- ------- Long-term debt 34,541 34,113 Other noncurrent liabilities 1,750 650 Commitments and contingencies Redeemable common stock, issued 98,734 shares in 1996 and 283,965 shares in 1995 3,565 4,774 ARTRA redeemable preferred stock: Series A, $1,000 par value, 6% cumulative payment-in-kind, including accumulated dividends, net of unamortized discount of $1,349 in 1996 and $1,575 in 1995; redeemable March 1, 2000 at $1,000 per share plus accrued dividends; authorized 2,000,000 shares all series; issued 3,750 shares 4,157 3,694 Series E, $1,000 par value, 10% cumulative, liquidation preference equal to $1,000 or 200 shares of common stock per share, plus accrued dividends; convertible, at the holder's option into 200 shares of common stock per share 2,250 -- Bagcraft redeemable preferred stock payable to a related party, cumulative $.01 par value, 13.5%; including accumulated dividends; redeemable in 1997 with a liquidation preference equal to $100 per share; issued 8,650 shares in 1996 and 50,000 shares in 1995 1,978 10,794 BCA Holdings preferred stock: Series A, $1.00 par value, 6% cumulative, including accumulated dividends; liquidation preference of $1,000 per share; 10,000 shares authorized; issued 3,675 shares 4,308 4,143 Series B payable to a related party, $1.00 par value, 13.5% cumulative, including accumulated dividends; redeemable in 1997 with a liquidation preference of $1,000 per share; 8,135 shares authorized and issued 8,818 -- SHAREHOLDERS' EQUITY (DEFICIT) Common stock, no par value; authorized 20,000,000 shares in 1996 and 7,500,000 shares in 1995; issued 7,603,766 shares in 1996 and 7,102,979 shares in 1995 5,777 5,540 Additional paid-in capital 40,140 38,526 Unrealized appreciation of investments 34,960 21,047 Receivable from related party, including accrued interest (5,861) (4,318) Accumulated deficit (86,568) (98,755) -------- -------- (11,552) (37,960) Less treasury stock (7,628 shares in 1996 and 57,038 shares in 1995), at cost 52 805 -------- -------- (11,604) (38,765) -------- -------- $86,131 $77,949 ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited in thousands, except per share data)
Three Months Ended Nine Months Ended ---------------------- --------------------- Sept 26, Sept 28, Sept 26, Sept 28, 1996 1995* 1996 1995* -------- -------- -------- -------- Net sales $ 29,397 $ 29,952 $ 90,162 $ 90,703 -------- -------- -------- -------- Costs and expenses: Cost of goods sold, exclusive of depreciation and amortization 22,854 25,717 71,710 76,871 Selling, general and administrative 2,995 6,843 10,967 15,972 Depreciation and amortization 995 1,087 2,954 3,306 -------- -------- -------- -------- 26,844 33,647 85,631 96,149 -------- -------- -------- -------- Operating earnings (loss) 2,553 (3,695) 4,531 (5,446) -------- -------- -------- -------- Other income (expense): Interest expense (1,886) (2,621) (5,370) (6,392) Realized gain on disposal of available-for-sale securities 328 -- 4,823 -- Other income (expense), net 5 (32) (205) 1 -------- -------- -------- -------- (1,553) (2,653) (752) (6,391) -------- -------- -------- -------- Earnings (loss) from continuing operations before income taxes and minority interest 1,000 (6,348) 3,779 (11,837) Provision for income taxes (37) (36) (87) (35) Minority interest (359) (223) (169) (671) -------- -------- -------- -------- Earnings (loss) from continuing operations 604 (6,607) 3,523 (12,543) Loss from discontinued operations -- (1,402) -- (9,156) -------- -------- -------- -------- -------- Earnings (loss) before extraordinary credit 604 (8,009) 3,523 (21,699) Extraordinary credit, net discharge of indebtedness -- -- 9,424 9,113 -------- -------- -------- -------- Net earnings (loss) 604 (8,009) 12,947 (12,586) Dividends applicable to redeemable preferred stock (157) (144) (463) (422) Reduction of retained earnings applicable to redeemable common stock (92) (84) (297) (246) -------- -------- -------- -------- Earnings (loss) applicable to common shares $ 355 ($ 8,237) $ 12,187 ($13,254) ======== ======== ======== ======== Earnings (loss) per share: Continuing operations $ 0.04 ($ 1.02) $ 0.32 ($ 1.96) Discontinued operations -- (0.20) -- (1.36) -------- -------- -------- -------- Earnings (loss) before extraordinary credit 0.04 (1.22) 0.32 (3.32) Extraordinary credit -- -- 1.23 1.35 -------- -------- -------- -------- Net earnings (loss) $ 0.04 ($ 1.22) $ 1.55 ($ 1.97) ======== ======== ======== ======== Weighted average number of shares of common stock and common stock equivalents outstanding 7,949 6,730 7,870 6,712 ======== ======== ======== ======== The accompanying notes are an integral part of the condensed consolidated financial statements.
- -------------------- * As reclassified for discontinued operations. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data)
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) --------- ------- ------- ----------- -------- --------- --------- --------- --------- Balance at December 28, 1995 7,102,979 $5,540 $38,526 $ 21,047 ($4,318) ($98,755) 57,038 ($ 805) ($ 38,765) Net earnings -- -- -- -- -- 12,947 -- -- 12,947 Common stock issued to pay liabilities 125,012 94 362 -- -- -- (120,554) 818 1,274 Common stock as additional consideration for short-term borrowings 50,544 38 (398) -- -- -- (99,456) 1,021 661 Increase in receivable from related party, including accrued interest -- -- -- -- (1,543) -- -- -- (1,543) Common stock loaned by related party -- -- -- -- 587 -- 100,000 (587) -- Repay common stock loaned by related party 100,000 75 512 -- (587) -- -- -- -- Increase in unrealized appreciation of investments -- -- -- 13,913 -- -- -- -- 13,913 Exercise of stock options and warrants 40,000 30 142 -- -- -- (16,900) 109 281 Common stock received as consideration for short-term note -- -- -- -- -- -- 87,500 (608) (608) Reclassification of redeemable common stock 185,231 -- 996 -- -- -- -- -- 996 Redeemable common stock accretion -- -- -- -- -- (297) -- -- (297) Redeemable preferred stock dividends -- -- -- -- -- (463) -- -- (463) --------- ------ ------- --------- ------- -------- --------- ------- --------- Balance at September 26, 1996 7,603,766 $5,777 $40,140 $ 34,960 ($5,861) ($86,568) 7,628 ($ 52) $ (11,604) ========= ====== ======= ========= ======= ========= ========= ======== ========= The accompanying notes are an integral part of the condensed consolidated financial statements.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited in thousands) Nine Months Ended ------------------------- September 26, September 28, 1996 1995 --------- --------- Net cash flows used by operating activities, ($ 4,516) ($ 284) --------- --------- Cash flows from investing activities: Additions to property, plant and equipment (1,797) (1,892) Retail fixtures -- (631) Proceeds from collection of Welch notes 342 3,000 Proceeds from sale of COMFORCE common stock 3,717 -- Investment in COMFORCE Global -- (753) Payment of liabilites with restricted cash -- 550 Decrease in unexpended plant construction funds 552 224 Other 91 -- --------- --------- Net cash flows from investing activities 2,905 498 --------- --------- Cash flows from financing activities: Net increase (decrease) in short-term debt (577) 1,564 Proceeds from long-term borrowings 99,497 101,406 Reduction of long-term debt (99,327) (104,813) Exercise of stock options and warrants 281 -- Redeemable common stock options exercised (510) (70) Other (1) (289) --------- --------- Net cash flows used by financing activities (637) (2,202) --------- --------- Decrease in cash and cash equivalents (2,248) (1,988) Cash and equivalents, beginning of period 2,347 2,070 --------- --------- Cash and equivalents, end of period $ 99 $ 82 ========= ========= Supplemental cash flow information: Cash paid during the period for: Interest $ 4,388 $ 4,793 Income taxes paid, net 8 18 Supplemental schedule of noncash investing and financing activities: ARTRA Series E redeemable preferred stock issued for payment of short-term notes 2,250 -- BCA Holdings redeemable preferred stock issued in exchange for Bagcraft redeemable preferred stock 8,135 -- Issue common stock to pay down current liabilities 1,274 208 Issue common stock as additional consideration for short-term borrowings 661 -- The accompanying notes are an integral part of the condensed consolidated financial statements. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND FINANCIAL RESTRUCTURING ARTRA GROUP Incorporated's ("ARTRA" or the "Company") condensed consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In the opinion of the Company, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position as of September 26, 1996, and the results of operations and changes in cash flows for the three and nine month periods ended September 26, 1996 and September 28, 1995. In recent years, the Company has suffered recurring losses from operations and has a net capital deficiency. As a result of these factors, the Company has experienced difficulty in obtaining adequate financing to replace certain current credit arrangements, certain of which are in default, to fund its debt service and liquidity requirements in 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 7 Notes Payable, and Note 8 Long Term Debt, for further discussion of the status of credit arrangements and restrictions on the ability of the Company's operating subsidiary to fund ARTRA corporate obligations. Due to its limited ability to receive operating funds from its operating subsidiary, ARTRA has historically met its operating expenditures with funds generated by alternative sources, such as private placements of ARTRA common stock and notes, sales of ARTRA common stock with put options, loans from officers/directors and private investors, as well as through sales of assets and/or other equity infusions. ARTRA plans to continue to seek such alternative sources of funds to meet its future operating expenditures. ARTRA, through its wholly-owned subsidiary, Bagcraft Corporation of America ("Bagcraft"), currently operates in one industry segment as a manufacturer of packaging products principally serving the food industry. Prior to September 28, 1995, ARTRA's then majority owned subsidiary, COMFORCE Corporation ("COMFORCE", formerly The Lori Corporation "Lori"), operated as a designer and distributor of popular-priced fashion costume jewelry and accessories. In September 1995 COMFORCE adopted a plan to discontinue its jewelry business. On October 17, 1995, COMFORCE acquired all of the capital stock of COMFORCE Global Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global. Global provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists with an emphasis on wireless communications capability. Effective July 4, 1995, COMFORCE and ARTRA entered into employment or consulting services agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business. As additional compensation, the agreements provided for the issuance in aggregate of a 35% common stock interest in COMFORCE. After the issuance of the COMFORCE common shares, plus the effects of the issuance of COMFORCE common shares sold by private placements and other COMFORCE common shares issued in conjunction with the Global acquisition, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 25% at December 28, 1995. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the equity method through the end of fiscal 1995. At September 26, 1996 ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 19%. See Notes 2 and 5 for a further discussion of ARTRA's investment in COMFORCE. Effective October 26, 1995, Bagcraft completed the sale of the business assets, subject to the buyer's assumption of certain liabilities, of its wholly-owned subsidiary, Arcar Graphics, Inc. ("Arcar"), for cash of approximately $20,300,000. The net proceeds, after extinguishment of certain Arcar debt obligations, of approximately $10,400,000, were used to reduce Bagcraft debt obligations. In February 1996, a bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's president, Peter R. Harvey, resulting in a gain to ARTRA on the discharge of ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) this indebtedness of $9,424,000 in the first quarter of 1996. The cash payment due the bank was funded principally with proceeds received from a short-term loan agreement along with proceeds received from the Bagcraft subsidiary in conjunction with the issuance of BCA Holdings, Inc. ("BCA" the parent of Bagcraft) preferred stock. See Notes 6, 7 and 10 for further discussions of these transactions. ARTRA intends to continue to negotiate with its creditors to extend due dates to allow ARTRA to maximize value from possible sale of assets and to explore various other sources of funding to meet its future operating expenditures. If ARTRA is unable to negotiate extensions with its creditors and complete certain transactions, ARTRA could suffer severe adverse consequences, and as a result, ARTRA may be forced to liquidate its assets or file for protection under the Bankruptcy Code. These condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required in the Company's annual report on Form 10-K. Accordingly, the Company's annual report on Form 10-K for the fiscal year ended December 28, 1995, as filed with the Securities and Exchange Commission, should be read in conjunction with the accompanying consolidated financial statements. The condensed consolidated balance sheet as of December 28, 1995 was derived from the audited consolidated financial statements in the Company's annual report on Form 10-K. Reported interim results of operations are based in part on estimates which may be subject to year-end adjustments. In addition, these quarterly results of operations are not necessarily indicative of those expected for the year. The Company has adopted a 52/53 week fiscal year ending the last Thursday of December. 2. CHANGE OF BUSINESS Arcar Graphics, Inc. Effective April 8, 1994, Bagcraft purchased the business assets, subject to buyer's assumption of certain liabilities, of Arcar, a manufacturer and distributor of waterbase inks. Effective October 26, 1995, Bagcraft sold the business assets, subject to the buyer's assumption of certain liabilities, of Arcar for cash of approximately $20,300,000, resulting in a net gain of $8,483,000. The net proceeds, after extinguishment of certain Arcar debt obligations, of approximately $10,400,000, were used to reduce Bagcraft debt obligations. COMFORCE In September, 1995, COMFORCE adopted a plan to discontinue its jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of its jewelry business. Effective October 17, 1995, COMFORCE acquired all of the capital stock of COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, for consideration of approximately $6.4 million, net of cash acquired. This consideration consisted of cash to the seller of approximately $5.1 million, fees of approximately $700,000, including a fee of $500,000 to a related party, and 500,000 shares of COMFORCE common stock valued at $843,000 (at a price per share of $1.68) issued as consideration for various fees and guarantees associated with the transaction. The 500,000 shares of COMFORCE common stock consisted of (I) 100,000 shares issued to an unrelated party for guaranteeing the purchase price to the seller, (ii) 100,000 shares issued to ARTRA, then the majority stockholder of the Company, in consideration of its guaranteeing the purchase price to the seller and agreeing to enter into the Assumption Agreement, as discussed below, (iii) 150,000 issued to two unrelated parties for advisory services in connection with the acquisition, and (iv) 150,000 shares issued to Peter R. Harvey, then a Vice President and director of COMFORCE for guaranteeing the ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) payment of the $6.4 million purchase price to the seller. Additionally, in conjunction with the Global acquisition, ARTRA entered into an Assumption Agreement whereby it agreed to assume substantially all pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, at September 26, 1996, $764,000 of such pre-existing Lori liabilities were classified in ARTRA's condensed consolidated balance as current liabilities of discontinued operations. Global provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists with an emphasis on wireless communications capability. Effective July 4, 1995, Lori's management agreed to issue up to a 35% common stock interest in COMFORCE to certain individuals to manage COMFORCE's entry into the telecommunications and computer technical staffing business. COMFORCE recognized a non-recurring charge of $3,425,000 related to this stock since these stock awards were 100% vested when issued, and were neither conditioned upon these individuals' service to the Company as employees nor the consummation of the COMFORCE Global acquisition. Accordingly, this compensation charge was fully recognized in 1995. The shares of COMFORCE common stock issued in accordance with the above agreements were valued at $.93 per share. COMFORCE's management valued COMFORCE based on its discussions with market makers and other advisors, taking into account (i) that the Jewelry Business, which was discontinued at the end of the second quarter of 1995, had a negligible value, and (ii) the value of COMFORCE was principally related to the potential effect that a purchase of COMFORCE Global, if successfully concluded, would have market value of COMFORCE common stock. COMFORCE's management believes this value of $.93 per share to be a fair and appropriate value based upon COMFORCE's financial condition as of the date COMFORCE became obligated to issue these shares. After the issuance of the COMFORCE common shares, plus the effects of other transactions, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 19% and 25% at September 26, 1996 and December 28, 1995, respectively. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements. See Note 5 for a further discussion of the accounting treatment of ARTRA's investment in COMFORCE. A disagreement has arisen among ARTRA and COMFORCE regarding interpretations of the July 4, 1995 agreement, as amended, to issue up to a 35% common stock interest in COMFORCE to certain individuals to manage COMFORCE's entry into the telecommunications and computer technical staffing business; the Global acquisition agreement; and the Assumption Agreement whereby ARTRA agreed to assume substantially all pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. The disputed issues include (i) the number of COMFORCE common shares issued to the above individuals to manage COMFORCE's entry into the telecommunications and computer technical staffing business. Accordingly, ARTRA voted against ratification of the issuance of these shares at COMFORCE's Annual Meeting of Stockholders held on October 28, 1996; (ii) the number of COMFORCE common stock options issued to COMFORCE's current management group subsequent to the Global acquisition; (iii) 100,000 COMFORCE common shares to be issued to ARTRA in consideration of its guaranteeing the Global purchase price to the seller and agreeing to assume certain pre-existing Lori liabilities; (iv) 150,000 COMFORCE common shares to be issued to Peter R. Harvey for guaranteeing the payment of the Global purchase price to the seller, and (vi) certain stock options granted in 1993 under provisions of COMFORCE's Long-Term Stock Investment Plan. As a result of the above disagreements, ARTRA has not exchanged its Lori Series C preferred stock with a liquidation value of $19.5 million for 100,000 COMFORCE common shares, as required by the Assumption Agreement, and will not consummate the exchange until all of the disputes are resolved. ARTRA's financial statements have reflected the exchange of the Lori Series C preferred stock for 100,000 COMFORCE common shares in accordance with the Assumption Agreement. Based on the above disputed matters, ARTRA is withholding delivery of the Lori Series C preferred shares and is seeking appropriate resolution in conformity with the Assumption Agreement and resolution of the other obligations owed by COMFORCE to ARTRA and its employees, ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) or ARTRA will seek to rescind this aspect of the agreement. Additionally, ARTRA's financial statements have reflected the issuance of 100,000 COMFORCE common shares to ARTRA as compensation for guaranteeing the Global purchase price to the seller and entering into the Assumption Agreement. COMFORCE is withholding issuance of such shares to ARTRA, in violation of the Global acquisition agreement. ARTRA has aggressively attempted to resolve its dispute with COMFORCE without success and at this point, ARTRA can not predict the ultimate resolution, nor whether such dispute can be resolved without litigation. The Company's consolidated financial statements have been reclassified to report separately the results of operations of Arcar and COMFORCE's discontinued jewelry business prior to the deconsolidation of COMFORCE and its majority-owned subsidiaries effective October 1995. The operating results (in thousands) of Bagcraft's discontinued Arcar subsidiary and COMFORCE's discontinued jewelry business and the provision for loss on disposal of COMFORCE's discontinued jewelry business for the three and nine months ended September 28, 1995 consist of: Three Months Nine Months Ended Ended Sept 28, Sept 28, 1995 1995 -------- --------- Net sales $ 5,145 $ 16,932 ======== ========= Loss from discontinued operations before income taxes $ (422) $ (8,151) (Provision) credit for income taxes 20 (5) -------- --------- Loss from operations $ (402) $ (8,156) ======== ========= Provision for disposal of COMFORCE's jewelry business (1,000) (1,000) Provision for income taxes -- -- -------- --------- Provision for disposal of business (1,000) (1,000) -------- --------- Loss from discontinued operations $ (1,402) $ (9,156) ========== ========= 3. CONCENTRATION OF RISK The accounts receivable of the Company's Bagcraft subsidiary at September 26, 1996 consist primarily of amounts due from companies in the food industry. As a result, the collectibility of these receivables is dependent, to an extent, upon the economic condition and financial stability of the food industry. Credit risk is minimized as a result of the large number and diverse nature of Bagcraft's customer base. Bagcraft's major customers include some of the largest companies in the food industry. At September 26, 1996, Bagcraft had 10 customers with accounts receivable balances that aggregated approximately 29% of the Company's total trade accounts receivable. In fiscal year 1995 no single customer accounted for 10% or more of Bagcraft's sales. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) 4. INVENTORIES Inventories (in thousands) consist of: September 26, December 28, 1996 1995 Raw materials and supplies $ 5,762 $ 5,645 Work in process 302 40 Finished goods 9,147 10,949 ------- ------- $15,211 $16,634 ======= ======= 5. INVESTMENT IN COMFORCE CORPORATION In prior years and until October 1995, COMFORCE was a majority-owned subsidiary of ARTRA and, accordingly, the accounts of COMFORCE and its majority-owned subsidiaries were included in the consolidated financial statements of ARTRA. As discussed in Note 2, primarily due to the issuances of COMFORCE common shares in conjunction with the acquisition of Global, ARTRA's common stock ownership in COMFORCE was reduced to approximately 25% at December 28, 1995. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the requirements of APB Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock" through the end of fiscal 1995. Effective December 28, 1995, John Harvey and Peter R. Harvey, ARTRA's chairman and president, respectively, resigned as directors of COMFORCE and Peter R. Harvey resigned as a vice president of COMFORCE. Due to such factors as a lack of board of directors representation and participation in policy formulation by ARTRA, as well as a lack of interchange of managerial personnel, ARTRA no longer was able to exercise significant influence over the operating and financial policies of COMFORCE. Additionally, assuming contemplated additional issuances of COMFORCE common shares, on a fully diluted basis ARTRA's ownership interest in COMFORCE at December 28, 1995 would have been reduced to less than 20%. In the opinion of the Company, effective December 28, 1995, ARTRA's investment in COMFORCE ceased to conform to the requirements of APB Opinion No. 18. Accordingly, ARTRA adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, at December 28, 1995, ARTRA's investment in COMFORCE was reclassified as available for sale and was stated at fair value. The adoption of SFAS No. 115 resulted in an increase to shareholders' equity in the fourth quarter of 1995 of $21,047,000. In January 1996, the Company's Board of Directors approved the sale of 200,000 of ARTRA's COMFORCE common shares to certain officers, directors and key employees of ARTRA for non-interest bearing notes totaling $400,000. The notes, collateralized by the 200,000 COMFORCE common shares sold, are not payable until the earlier of the registration of these shares under the Securities Act of 1993 or the expiration of the applicable resale waiting period under Securities Act Rule 144. Additionally, the noteholders have the right to put their COMFORCE shares back to ARTRA in full payment of the balance of their notes. Based upon the preceding factors, the Company has concluded that, for reporting purposes, it has effectively sold options to certain officers, directors and key employees to acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly, these 200,000 COMFORCE common shares have been removed from the Company's portfolio of "Available-for-sale securities" and are classified in the Company's condensed consolidated balance sheet at September 26, 1996 as other current assets with an aggregate value of $400,000, based upon the value of proceeds to be ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) received upon future exercise of the options. The disposition of these 200,000 COMFORCE common shares will result in a gain which has been deferred and will not be recognized in the Company's financial statements until the options to purchase these 200,000 COMFORCE common shares are exercised. As of September 26, 1996, no options to acquire any of the 200,000 COMFORCE common shares had been exercised. As additional consideration for a February 1996 short-term loan (see Notes 6 and 7) a lender received 25,000 COMFORCE common shares held by ARTRA. In March 1996, ARTRA sold 93,000 COMFORCE shares in the market, with the proceeds of approximately $630,000 used for working capital. The above mentioned 118,000 COMFORCE common shares were classified in the Company's consolidated balance sheet at December 28, 1995 in current assets as "Available-for-sale securities." The disposition of these 118,000 COMFORCE shares during the quarter ended March 28, 1996 resulted in realized gains of $1,043,000, with cost determined by average cost. In June 1996, ARTRA sold 100,000 COMFORCE shares in the market, with the proceeds of approximately $3,100,000 used principally to pay down debt obligations. As additional consideration for two short-term loans, in April 1996 the lenders received 20,000 COMFORCE common shares held by ARTRA. The disposition of these 120,000 COMFORCE shares during the quarter ended June 27, 1996 resulted in additional realized gains of $3,452,000, with cost determined by average cost. As additional consideration for a short-term loan, in September 1996 the lender received 50,000 COMFORCE common shares held by ARTRA resulting in an additional realized gain of $328,000, with cost determined by average cost. At September 26, 1996 ARTRA's remaining investment in COMFORCE (1,813,036 shares, currently a common stock ownership interest of approximately 19%) was classified in the Company's condensed consolidated balance sheet in noncurrent assets as "Available-for-sale securities." At September 26, 1996 the gross unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a separate component of shareholders' equity, was $34,960,000. As discussed in Note 7, at September 26, 1996, 1,175,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary have been pledged as collateral for various short-term borrowings. 6. EXTRAORDINARY GAINS ARTRA Debt Restructuring In February 1996, a bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's president, Peter R. Harvey for consideration consisting of ARTRA's cash payment of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000 note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a $2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000 interest in the Harvey Note. ARTRA then discharged $2,150,000 of Mr. Harvey's prior advances in exchange for its $2,150,000 interest in Mr. Harvey's $3,000,000 note payable to the bank.. The amount of the $5,050,000 cash payment to the bank applicable to Peter R. Harvey ($1,089,000) was charged to amounts due from Peter R. Harvey. ARTRA recognized a gain on the discharge of this indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996. The cash payment due the bank was funded principally with proceeds received from the Bagcraft subsidiary in conjunction with the issuance of BCA (the parent of Bagcraft) preferred stock along with proceeds received from a short-term loan agreement with an unaffiliated company that was subsequently repaid. See Notes 7 and 10 for further discussions of these transactions. As additional compensation for its loan and for participating in the above discharge of indebtedness the unaffiliated company received 150,000 shares of ARTRA common stock (with a then fair market value of $661,000 after a discount for restricted marketability) and 25,000 shares of COMFORCE common stock held by ARTRA (with a then fair market value of $200,000). ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) The extraordinary gain resulting from the discharge of bank debt is calculated (in thousands) as follows: Amounts due the bank: ARTRA notes $ 12,063 Accrued interest 2,656 -------- 14,719 Cash payment to the bank $ 5,050 Less amount applicable to Peter R. Harvey indebtedness (1,089) -------- (3,961) -------- Bank debt discharged 10,758 Less fair market value of ARTRA common stock issued as consideration for a loan used in par to fund the discharge of bank debt (661) Less fair market value of COMFORCE common stock issued as consideration for a loan used in par to fund the discharge of bank debt (200) Other fees and expenses (473) -------- Net extraordinary gain $ 9,424 ======== COMFORCE Debt Restructuring Per terms of a debt settlement agreement, borrowings due a bank under the loan agreements of COMFORCE and its discontinued jewelry business and Fill-Mor (approximately $25,000,000 as of December 23, 1994), plus amounts due the bank for accrued interest and fees were reduced to $10,500,000 (of which $7,855,000 pertained to COMFORCE's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank). As a result of the reduction of amounts due the bank, in December 1994, the Company recognized an extraordinary gain of $8,965,000 ($1.57 per share) in December 1994. On March 31, 1995, the bank was paid $750,000 and the remaining indebtedness of COMFORCE and Fill-Mor was discharged, resulting in an additional extraordinary gain to the Company of $9,113,000 ($1.35 per share) in the first quarter of 1995. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) 7. NOTES PAYABLE Notes payable (in thousands) consist of: September 26, December 28, 1996 1995 -------- -------- ARTRA bank notes payable, at various interest rates $ 2,500 $ 12,063 ARTRA 12% secured promissory notes 7,575 - ARTRA 12% convertible subordinated promissory notes - 2,500 Amounts due to related parties, interest principally at 10% 3,600 5,675 Other, interest from 10% to 20% 1,843 5,062 -------- -------- $ 15,518 $ 25,300 ======== ======== Bank Notes Payable On August 15, 1996, ARTRA and its 100% owned Fill-Mor subsidiary entered into a $2,500,000 term loan agreement with a bank. The loan, payable by Fill-Mor in 90 days, bears interest, payable monthly, at the bank's reference rate (8.25% at September 26, 1996). Fill-Mor has an option to extend the loan for an additional 90 days. The loan, guaranteed by ARTRA, is collateralized by 800,000 shares of COMFORCE common stock owned by Fill-Mor. If an Event of Default (as defined in the loan agreement) shall occur, the bank has the right to sell all of its rights and interest in the loan to an unaffiliated individual for an aggregate price equal to the outstanding principal balance of the loan plus accrued interest. The proceeds of the loan were used for working capital. At December 28, 1995, $12,063,000 of ARTRA notes, plus accrued interest and fees, were payable to a bank. The notes provided for interest at the prime rate. These bank notes were collateralized by, among other things, 100% of the common stock of ARTRA's BCA subsidiary, the parent of Bagcraft, a secondary position on the assets of BCA and any and all net proceeds arising from its lawsuit against Salomon Brothers, Inc., Salomon Brothers Holding Company Inc. (collectively, "Salomon") D.P. Kelly & Associates, L.P. ("Kelly") and all of the directors of Emerald Acquisition Corporation ("Emerald") for breaches of fiduciary duty by the directors of Emerald, induced by Salomon and Kelly, in connection with the reorganization of Envirodyne Industries, Inc. ("Envirodyne") as discussed in Note 13. Additionally, the bank notes were collateralized by a $5,500,000 personal guaranty of a private investor. As additional compensation, the private investor received 1,833 shares of ARTRA common stock for each month the guaranty was outstanding. Among other things, the bank notes prohibited the payment of cash dividends by ARTRA. In February 1996, a bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's president, Peter R. Harvey for consideration consisting of ARTRA's cash payment of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000 note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a $2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000 interest in the Harvey Note, and ARTRA discharged $2,150,000 of Mr. Harvey's prior advances. ARTRA recognized a gain on the discharge of this indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a receivable for Mr. Harvey's prorata share ($1,089,000) of the debt discharge funded by the Company. The cash ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) payment due the bank was funded principally with proceeds received from the Bagcraft subsidiary in conjunction with the issuance of BCA (the parent of Bagcraft) preferred stock (see Note 10) along with proceeds received from a short-term loan agreement with an unaffiliated company. As collateral for this advance and other previous advances (see Note 14), Mr. Harvey provided ARTRA a $2,150,000 security interest in certain real estate, subordinated to the bank's $850,000 security interest in this real estate. Secured Promissory Notes In April 1996, ARTRA commenced a private placement of $7,575,000 of 12% secured promissory notes due April 15, 1997. As additional consideration the noteholders received warrants to purchase an aggregate of 413,750 ARTRA common shares at a price of $6.00 per share. The warrants expire April 15, 1999. These promissory notes are collateralized by ARTRA's interest in all of the common stock of BCA (the parent of Bagcraft). The proceeds from the private placement, completed in July 1996, were used principally to pay down other debt obligations. Convertible Subordinated Promissory Notes In December 1995, ARTRA completed a private placement of $2,500,000 of 12% convertible subordinated promissory notes due March 21, 1996. As additional consideration the noteholders received 15,000 ARTRA common shares per each $100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the closing market value of ARTRA common stock on the date of issue, discounted for restricted marketability. The proceeds from the private placement, held in escrow at December 28, 1995, were used to pay down other debt obligations in January, 1996. In March and April 1996 the notes were repaid, principally with proceeds from the private placement of the secured promissory notes discussed above. Amounts Due To Related Parties At September 26, 1996 and December 28, 1995, ARTRA had outstanding borrowings of $3,000,000 from an unaffiliated company currently holding approximately 7% of ARTRA's outstanding common stock.. The loans are evidenced by unsecured short-term notes bearing interest at 10%. As additional compensation for the above loans, the lender received five year warrants expiring in 1998 to purchase an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00 to $7.00 per share. In December 1995 the unaffiliated company received 126,222 shares of ARTRA common in payment of past due interest through October 31, 1995. In May, 1996, ARTRA borrowed $100,000 from a private investor, evidenced by an unsecured short-term note, due August 7, 1996, bearing interest at 10%. At the Company's annual meeting of shareholders, held August 29, 1996, the private investor was elected to the Company's board of directors. At September 26, 1996, the $100,000 loan was outstanding. In August, 1996, ARTRA borrowed $500,000 from a private investor, evidenced by an short-term note, due December 23, 1996, bearing interest at 10%. The loan is collateralized by 125,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. As additional compensation for the loan, the lender received a warrant, expiring in 2001, to purchase 25,000 ARTRA common shares at a price of $5.00 per share. At the Company's annual meeting of shareholders, held August 29, 1996, the private investor was elected to the Company's board of directors. At September 26, 1996, the $500,000 loan was outstanding. At December 28, 1995, the Company had outstanding borrowings from its Chairman, John Harvey, of $175,000. John Harvey's borrowings were evidenced by unsecured short-term notes bearing interest at 12%. As additional compensation ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) the loans provided for the issuance of warrants to purchase ARTRA common shares, the number of which was determined by the number of days the loans were outstanding. The warrants expire five years from the date of issuance. John Harvey received warrants to purchase an aggregate of 66,045 shares of ARTRA common stock at prices ranging from $3.75 to $6.125 per share as additional compensation for his loans to ARTRA. In May 1996, ARTRA repaid all borrowings from John Harvey. On March 31, 1994, ARTRA entered into a series of agreements with its bank lender and with a private corporation that had guaranteed $2,500,000 of the ARTRA bank notes discharged in February 1996 as noted above. A major shareholder and executive officer of the private corporation is an ARTRA director. Per terms of the agreements, the private corporation purchased $2,500,000 of ARTRA notes from ARTRA's bank and the bank released the private corporation from its $2,500,000 loan guaranty. As consideration for purchasing $2,500,000 of ARTRA bank notes, the private corporation received a $2,500,000 note payable from ARTRA bearing interest at the prime rate. As additional consideration, the private corporation received an option to put back to ARTRA the 49,980 shares of ARTRA common stock received as compensation for its former $2,500,000 ARTRA loan guaranty at a price of $15.00 per share. The put option is exercisable on the later of the day that the $2,500,000 note payable to the private corporation becomes due or the date the ARTRA bank notes have been paid in full. The option price increases by $2.25 per share annually ($20.063 per share at September 26, 1996). The $2,500,000 note payable to the private corporation was reflected in the above table at December 28, 1995 as amounts due to related parties. During the first quarter of 1996, the $2,500,000 note and related accrued interest was paid in full principally with proceeds from additional short-term borrowings. Other In conjunction with the discharge of bank debt discussed above, the Company entered into a $1,900,000 short-term loan agreement, due May 26, 1996, with an unaffiliated company. The loan, with interest at 12%, was collateralized by, among other things, the common stock of ARTRA's BCA subsidiary. As additional compensation for its loan and for participating in the above discharge of indebtedness the unaffiliated company received 150,000 shares of ARTRA common stock (with a then fair market value of $661,000 after a discount for restricted marketability) and 25,000 shares of COMFORCE common stock held by ARTRA (with a then fair market value of $200,000). Additionally, for consideration of $500,000, the lender purchased an option to acquire up to 40% of the common stock of Bagcraft for nominal consideration. The borrowings under this short-term loan agreement were repaid in April, 1996 and, per terms of the loan agreement, ARTRA repurchased the option for a cash payment of $550,000. In October 1996 the Company and its Fill-Mor subsidiary entered into a margin loan agreement with a financial institution under which provided for borrowings of $600,000, with interest approximating the prime rate. Borrowings under the loan agreement are collateralized by 125,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. At September 26, 1996 and December 28, 1995, other notes payable includes short-term borrowings of $1,843,000 and $5,062,000, respectively, payable under various short-term loan agreements with unaffiliated companies and private investors. These loans bear interest at varying rates from 10% to 20%. Certain of these loans, aggregating $500,000 in outstanding, are collateralized by 125,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) 8. LONG-TERM DEBT Long-term debt (in thousands) consists of: September 26, December 28, 1996 1995 -------- -------- Bagcraft Credit Agreement: Term loan A, interest at the prime rate plus 1.75% $ 12,000 $ 12,000 Term loan B, interest at the prime rate plus 3% 2,800 4,600 Revolving credit loan, interest at the prime rate plus 1.5% 12,311 9,231 Unamortized discount (847) - Bagcraft City of Baxter Springs, Kansas loan agreements, interest at varying rates 10,684 11,794 -------- -------- 36,948 37,625 Current scheduled maturities (2,407) (3,512) -------- -------- $ 34,541 $ 34,113 ======== ======== Bagcraft Bagcraft's Credit Agreement that provides for a revolving credit loan and two separate term loans. The term loans are separate facilities initially totaling $12,000,000 (Term Loan A) and $8,000,000 (Term Loan B), bearing interest at the lender's index rate plus 1.75% and 3%, respectively. At September 26, 1996, interest rates on Term Loan A and Term Loan B were 10 % and 11.25% respectively. The amount available to Bagcraft under the revolving credit loan is subject to a borrowing base, as defined in the agreement, up to a maximum of $18,000,000. At September 26, 1996 and December 28, 1995, approximately $1,900,000 and $6,600,000, respectively, was available and unused by Bagcraft under the revolving credit loan. Borrowings under the revolving credit loan bear interest at the lender's index rate plus 1.5% and are payable upon maturity of the Credit Agreement, unless accelerated under terms of the Credit Agreement. At September 26, 1996 the interest rate on the revolving credit loan was 9.75%. Effective February 1, 1996, the Credit Agreement was amended whereby, among other things, the maturity date of the Credit Agreement was extended until September 30, 1997, certain loan covenants were amended. The principal payments under Term Loan B were modified to include twenty-three monthly installments of $200,000 from November 15, 1995 to September 30, 1997, with the remaining balance payable at maturity (September 30, 1997). Additionally, in conjunction with a preferred stock exchange agreement between BCA (the parent of Bagcraft), Bagcraft and the holder of Bagcraft's 13.5% cumulative redeemable preferred stock, the lender consented to an advance to Bagcraft of $4,135,000 under the revolving credit loan to be transferred to ARTRA as a dividend (see Note 10). As additional compensation for borrowings under the Credit Agreement, the lender received a detachable warrant, expiring in December 1998, allowing the holder to purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) value. Under certain conditions Bagcraft is required to repurchase the warrant from the lender. The determination of the repurchase price of the warrant is to be based on the warrant's pro rata share of the highest of book value, appraised value or market value of Bagcraft. In connection with the February 1, 1996 amendment to the Credit Agreement, the warrant agreement was amended to permit the holder to purchase 13% of the fully diluted common equity of Bagcraft at the original nominal purchase price and to extend the expiration date to December 17, 1999. Borrowings under the Credit Agreement are collateralized by substantially all of the assets of Bagcraft. The Credit Agreement, as amended, contains various restrictive covenants, that among other restrictions, require Bagcraft to maintain minimum levels of tangible net worth and liquidity levels, and limits capital expenditures and restricts additional loans, dividend payments and payments to related parties. In addition, the Credit Agreement prohibits changes in ownership of Bagcraft. At September 26, 1996 Bagcraft was in compliance with the provisions of its Credit Agreement. In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a $12,500,000 financing package associated with the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The financing package, funded by a combination of Federal, state and local funds, consists of the following loan agreements payable by Bagcraft directly to the City of Baxter Springs: A $7,000,000 promissory note payable in ten installments of $700,000 due annually on July 21 of each year beginning in 1995 through maturity on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is payable semi-annually. At September 26, 1996 and December 28, 1995, Bagcraft had outstanding borrowings of $5,600,000 and $6,300,000, respectively, under this loan agreement. A $5,000,000 subordinated promissory note payable as follows: $150,000 due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The subordinated promissory note is non-interest bearing, subject to certain repayment provisions as defined in the agreement (as amended). At September 26, 1996 and December 28, 1995, Bagcraft had outstanding borrowings of $4,850,000 and $5,000,000, respectively, under this loan agreement. Two separate $250,000 subordinated promissory notes payable in varying installments through January 20, 2025. The subordinated promissory notes are non-interest bearing, subject to certain repayment provisions as defined in the agreement. At September 26, 1996 and December 28, 1995, Bagcraft had outstanding borrowings of $234,000 and $494,000, respectively, under this loan agreement. Borrowings under the above loan agreements are collateralized by a first lien on the land and building at the Baxter Springs, Kansas production facility and by a second lien on certain machinery and equipment. Under certain circumstances, repayment of the borrowings under the above loan agreements is subordinated to the repayment of obligations under Bagcraft's Credit Agreement. At December 28, 1995, $552,000 of borrowings from the above loan agreements was reflected in the condensed consolidated balance sheet in current assets as restricted cash and equivalents. These funds, invested in interest bearing cash equivalents and restricted for expenditures associated with the Baxter Springs, Kansas project were expended during the first quarter of 1996. 9. REDEEMABLE COMMON STOCK ARTRA has entered into various agreements under which it has sold its common shares along with options that require ARTRA to repurchase these shares at the option of the holder, principally one year after the date of each agreement. The difference between the option price and the net proceeds received is amortized over the life of the options by a charge to retained earnings. At September 26, 1996 and December 28, 1995 options are outstanding that, if exercised, would require ARTRA to ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) repurchase 98,734 and 283,965 shares of its common stock for an aggregate amount of $3,565,000 and $4,774,000, respectively. In September 1996, the Company settled an obligation that would have required ARTRA to repurchase 66,113 common shares for a total of $897,000. The option holder received cash payments of $510,000 and retained the 66,113 ARTRA common shares in settlement of all obligations due under the option agreement. Additionally, during 1996, the holder of 100,000 ARTRA common shares with an option that would have required the Company to repurchase these shares for $500,000 sold these shares in a private transaction. Accordingly, these 166,113 shares of ARTRA common stock were removed from redeemable common stock and reclassified to shareholders' equity. 10. REDEEMABLE PREFERRED STOCK ARTRA Effective September 26, 1996, in payment of principal and interest due on ARTRA notes, the noteholder received 2,250 shares of ARTRA Series E redeemable preferred stock ($1,000 par value, 10% cumulative, liquidation preference equal to $1,000 or 200 shares of common stock per share, plus accrued dividends). Each share of the Series E redeemable preferred stock is convertible, at the holder's option, into 200 shares of ARTRA common stock. On September 27, 1989, ARTRA received a proposal to purchase BCA, the parent of Bagcraft, from Sage Group, Inc. ("Sage"), a privately-owned corporation that owned 100% of the outstanding common stock of BCA. Sage was merged with and into Ozite Corporation ("Ozite") on August 24, 1990. Peter R. Harvey, ARTRA's President, and John Harvey, ARTRA's Chairman of the Board of Directors, were the principal shareholders of Sage and are the principal shareholders of Ozite. Effective March 3, 1990, a wholly-owned subsidiary of ARTRA acquired 100% of BCA's issued and outstanding common shares for consideration of $5,451,000, which included 772,000 shares of ARTRA common stock and 3,750 shares of $1,000 par value junior non-convertible payment-in-kind redeemable Series A Preferred Stock with an estimated fair value of $1,012,000, net of unamortized discount of $2,738,000. The Series A Preferred Stock accrues dividends at the rate of 6% per annum and is redeemable by ARTRA on March 1, 2000 at a price of $1,000 per share plus accrued dividends. Accumulated dividends of $1,756,000 and $1,519,000 were accrued at September 26, 1996 and December 28, 1995, respectively. Bagcraft/BCA Holdings In 1987, Bagcraft obtained financing from a subsidiary of Ozite through the issuance of a $5,000,000 unsecured subordinated note, due June 1, 1997. During 1992, per agreement with the noteholder, the interest payments were remitted to ARTRA and the noteholder received 675 shares of BCA Series A preferred stock ($1.00 par value, 6% cumulative with a liquidation preference equal to $1,000 per share) with a liquidation value of $675,000. In December, 1993, the unsecured subordinated note and accrued interest thereon were paid in full from proceeds of Bagcraft's Credit Agreement. Per agreement with the noteholder, the accrued interest outstanding on the note of $3,000,000 was remitted to ARTRA and the noteholder received an additional 3,000 shares BCA preferred stock having a liquidation value of $3,000,000. Accumulated dividends of $633,000 were accrued at September 26, 1996. In 1987, Bagcraft issued to a subsidiary of Ozite $5,000,000 of preferred stock (50,000 shares of 13.5% cumulative, redeemable preferred stock with a liquidation preference equal to $100 per share) redeemable by Bagcraft in 1997 at a price of $100 per share plus accrued dividends. Dividends, which accrue and are payable semiannually on June 1 and December 1 of each year, are reflected in the Company's condensed consolidated statement of operations as minority interest. The holder has agreed to forego dividend payments as long as such payments are prohibited by Bagcraft's lenders. Accumulated dividends of $5,794000 were accrued at December 28, 1995. After giving effect to the preferred stock exchange discussed below, 8,650 shares of Bagcraft redeemable preferred stock with accumulated dividends of $1,113,000 were outstanding at September 26, 1996. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) Effective February 15, 1996, BCA, Bagcraft and Ozite entered into an agreement to exchange certain preferred stock between the Companies. Per terms of the exchange agreement BCA issued 8,135 shares of BCA Series B preferred stock (13.5% cumulative, redeemable preferred stock with a liquidation preference equal to $1,000 per share, or a total carrying value of $8,135,000) to Ozite in exchange for 41,350 shares of Bagcraft redeemable preferred stock (with a liquidation preference equal to $100 per share plus accumulated dividends of $4,838,000, or a total carrying value of $8,973,000). The preferred stock exchange resulted in a gain of $838,000 which was reflected in the Company's condensed consolidated statement of operations as minority interest. The BCA Series B preferred stock is redeemable on June 1, 1997. Accumulated dividends of $683,000 were accrued at September 26, 1996. In conjunction with the preferred stock exchange agreement, Bagcraft's lender consented to advance of $4,135,000 under Bagcraft's revolving credit to be transferred to ARTRA as a dividend. ARTRA used the funds from this dividend plus funds from a short-term loan agreement to fund a payment to its bank lender in accordance with provisions of its debt discharge agreement as discussed in Notes 6 and 7. 11. INCOME TAXES The 1996 and 1995 extraordinary credits represent net gains from discharge of indebtedness. No income tax expense is reflected in the Company's financial statements resulting from the extraordinary credits and from the Company's 1996 earnings from continuing operations due to the utilization of tax loss carryforwards. At September 26, 1996, the Company and its subsidiaries had Federal income tax loss carryforwards of approximately $33,000,000 available to be applied against future taxable income, if any. ARTRA's tax loss carryforwards of approximately $22,000,000 expire principally in 2003 - 2010. Additionally, ARTRA's discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss carryforwards of approximately $11,000,000 available to be applied against future taxable income, if any. In recent years, the Company has issued shares of its common stock to repay various debt obligations, as consideration for acquisitions, to fund working capital obligations and as consideration for various other transactions. Section 382 of the Internal Revenue Code of 1986 limits a corporation's utilization of its Federal income tax loss carryforwards when certain changes in the ownership of a corporation's common stock occurs. In the opinion of management, the Company is not currently subject to such limitations regarding the utilization of its Federal income tax loss carryforwards. Should the Company continue to issue a significant number of shares of its common stock, it could trigger a limitation that would prevent it from utilizing a substantial portion of its Federal income tax loss carryforwards. 12. EARNINGS PER SHARE Earnings (loss) per share is computed by dividing net earnings (loss), less dividends applicable to redeemable preferred stock and redeemable common stock accretion by the weighted average number of shares of common stock and common stock equivalents (redeemable common stock, stock options and warrants), unless anti-dilutive, outstanding during each period. Fully diluted earnings per share are not presented since the result is equivalent to primary earnings per share. 13. LITIGATION The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. At September 26, 1996 and December 28, 1995, the Company had accrued $1,900,000 and $1,500,000, respectively, for business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. However, ARTRA may not have available funds to pay liabilities arising out of these business-related litigation and environmental matters or, in certain instances, to provide for its legal defense. In November 1993, ARTRA filed suit in the Circuit Court of the Eighteenth Judicial Circuit for the State of Illinois (the "State Court Action") against Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K. Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P. Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with DPK), James F. Massey and William Rifkind relating to the acquisition of Envirodyne in 1989. Envirodyne subsequently filed a Chapter 11 bankruptcy which provided ARTRA with no value in Envirodyne's parent's stock. On November 22, 1993, ARTRA filed a First Amended Complaint. The defendants removed the case to the Bankruptcy Court in which the Emerald Chapter 11 case is pending. On July 15, 1994 all but two of ARTRA's causes of action were remanded to the state court. The Bankruptcy Court retained jurisdiction of ARTRA's claims against the defendants for breaching their fiduciary duty as directors of Emerald to Emerald's creditors and interference with ARTRA's contractual relations with Emerald. On April 7, 1995, the Company's appeal of the Bankruptcy Court's order retaining jurisdiction over two claims was denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these claims. On August 4, 1995, ARTRA appealed from the Bankruptcy Court's dismissal order. That appeal is still pending. On July 18, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court Action for breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation, breach of contract and promissory estopel. In the State Court Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of $408.6 million and approximately $33 million in fees paid to Salomon. The causes of action for breach of the fiduciary duty of due care were repleaded to reserve ARTRA's right to appeal the State Court's dismissal of the causes of action in the Third Amended Complaint. Defendant Kelly was dismissed with prejudice pursuant to a stipulation between ARTRA and the Kelly Defendants. On or about March 1, 1996, DPK brought a motion for summary judgment as to ARTRA's claims for breach of contract and promissory estoppel. DPK's motion is currently pending. Effective December 31, 1989, ARTRA completed the disposal of its former scientific products segment with the sale of its Welch subsidiary, formerly Sargent-Welch Scientific Company, to a privately held corporation whose president and sole shareholder was a vice president of Welch prior to the sale. The consideration received by ARTRA consisted of cash at closing, $2,625,000 payable June 30, 1997, with interest at 10% beginning June 30, 1990, under terms of a noncompetition agreement and the buyer's subordinated note in the principal amount of $2,500,000. In December, 1991 Welch filed a lawsuit against ARTRA alleging that certain representations, warranties and covenants made by ARTRA, which were contained in the parties' Stock Purchase Agreement, were false. Welch was seeking compensatory damages in the amount of $3,800,000. Subsequently, ARTRA had filed a counterclaim predicated upon Welch's breach of the payment terms of the parties' Non-Competition Agreement and the Subordinated Note executed by Welch. ARTRA was seeking damages in the amount of approximately $5,300,000 plus accrued interest. On November 23, 1994, the Circuit Court of Cook County Law Division in Chicago granted a judgment in favor of ARTRA affirming the validity of the amounts due under the Non-Competition Agreement and the Subordinated Note of $2,625,000 and $2,500,000, respectively. In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by Welch under terms of the noncompetition agreement and the subordinated security. Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a subordinated note in the principal amount of $640,000 payable June 30, 2001. In June 1996 the note was paid in accordance with terms of the settlement agreement at its present value and ARTRA received proceeds of $342,000. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) In January, 1985 the United States Environmental Protection Agency ("EPA") notified the Company's Bagcraft subsidiary that it was a potentially responsible party under the Comprehensive Environmental Responsibility Compensation and Liability Act ("CERCLA") for alleged release of hazardous substances at the Cross Brothers site near Kankakee, Illinois. Although Bagcraft has denied liability for the site, it has entered into a settlement agreement with the EPA, along with the other third party defendants, to resolve all claims associated with the site except for state claims. In May, 1994 Bagcraft paid $850,000 plus accrued interest of $29,000 to formally extinguish the EPA claim. Bagcraft filed suit in 1993 in the United States District Court for the Northern District of Illinois, against its insurers to recover its liability costs in connection with the Cross Brothers case. Bagcraft was subsequently reimbursed by its insurers for its liability costs incurred in connection with the EPA claim. With regard to the state action, Bagcraft is participating in settlement discussions with the State and thirteen other potential responsible parties to resolve all claims associated with the State. The maximum state claim is $1.1 million for all participants. Bagcraft has accrued $120,000 related to the State action in the Company's condensed consolidated financial statements at September 26, 1996 and December 28, 1995. Bagcraft was listed as a de minimis contributor at the American Chemical Services, Inc. off-site disposal location in Griffith, Indiana and the Duane Marine off-site disposal location in Perth Amboy, New Jersey. These sites are included in the EPA's National Priorities List. Bagcraft is presently unable to determine its liability, if any, with respect to this site. Bagcraft has been notified by the EPA that it is a potentially responsible party for the disposal of hazardous substances at the Ninth Avenue site in Gary, Indiana. This site is listed on the EPA's National Priorities list. A group of defendant PRPs, known as the Ninth Avenue Remedial Group, settled with the USEPA and agreed to remediate the site. This Group subsequently sued numerous third party defendants, including Bagcraft, alleged also to be responsible parties at the site. The plaintiffs have produced only limited testamentary evidence, and no documentary evidence, linking Bagcraft to this site, and the Company has neither discovered any records which indicate, nor located any current or former employees who have advised, that Bagcraft deposited hazardous substances at the site. Based on the foregoing, management of the Company does not believe that it is probable that the Company will have any liability for the costs of the clean-up of this site. The Company intends to vigorously defend itself in this case. Bagcraft is presently undertaking a soil remediation project for solvent-contaminated soil at its Chicago manufacturing facility. The environmental firm responsible for implementing the remediation has recommended that a soil vapor extraction process be used, at an estimated cost of $175,000. Although there can be no assurances that remediation costs will not exceed this estimate, in the opinion of management, no material additional costs are anticipated. In April 1994, the EPA notified the Company that it was a potentially responsible party for the disposal of hazardous substances (principally waste oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing facility formerly operated by the Clearshield Plastics Division ("Clearshield") of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In 1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been included on the EPA's National Priorities List. In February 1983, Harvel sold the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in 1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA for indemnification in connection with this proceeding. The cost of clean-up at the Palmer, Massachusetts site has been estimated to be approximately $7 million according to proofs of claim filed in the adversary proceeding. A committee formed by the named potentially responsible parties has estimated the liability respecting the activities of Clearshield to be $400,000. ARTRA has not made any independent investigation of the amount of its potential liability and no assurances can be given that it will not substantially exceed $400,000. In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in 1991 in the United States District Court for Maryland, Sherwin-Williams Company ("Sherwin-Williams") brought suit against ARTRA and other former owners of a paint manufacturing facility in Baltimore, Maryland for recovery of costs of investigation and clean-up of ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) hazardous substances which were stored, disposed of or otherwise released at this manufacturing facility. This facility was owned by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from 1968 to 1980. Sherwin-William's current projection of the cost of clean-up is approximately $5 to $6 million. The Company has filed counterclaims against Sherwin-Williams and cross claims against other former owners of the property. The Company also is vigorously defending this action and has raised numerous defenses. Currently, the case is in its early stages of discovery and the Company cannot determine what, if any, its liability may be in this matter. ARTRA was named as a defendant in United States v. Chevron Chemical Company brought in the United States District Court for the Central District of California respecting Operating Industries, Inc. site in Monterey Park, California. This site is included on the EPA's National Priorities List. ARTRA's involvement stemmed from the alleged disposal of hazardous substances by The Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling paste, wall coatings and related products, certain of which generated hazardous substances as a by-product of the manufacturing process. ARTRA entered into a consent decree with the EPA in which it agreed to pay $85,000 for one phase of the clean-up costs for this site; however, ARTRA defaulted on its payment obligation. ARTRA is presently unable to estimate the total potential liability for clean-up costs at this site, which clean-up is expected to continue for a number of years. The consent decree, even if it had been honored by ARTRA, was not intended to release ARTRA from liability for costs associated with other phases of the clean-up at this site. The Company is presently unable determine what, if any, additional liability it may incur in this matter. In a case titled City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in the Circuit Court of Cook County, Illinois, the City of Chicago alleged that ARTRA (and NL Industries, Inc.) had improperly stored, discarded and disposed of hazardous substances at the subject site, and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At the time the suit was filed, the City of Chicago claimed to have expended $1,000,000 in clean-up costs. ARTRA and NL Industries, Inc. have counter sued each other and have filed third party actions against the subsequent owners of the property. The City of Chicago has made an offer to settle the matter for $350,000 for all parties. The parties are currently conducting discovery. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case. In a case titled Illinois Environmental Protection Agency v. NL Industries, Inc., ARTRA GROUP Incorporated, et al, the Illinois Environmental Protection Agency filed suit alleging all former owners contributed to the contamination of the site. The suit was dismissed, but subject to possible appeal. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case. The EPA has identified ARTRA GROUP Incorporated as a potentially responsible party in an action involving the former manufacturing facility. The EPA is currently investigating the site to determine the extent and type of contamination, if any. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) 14. RELATED PARTY TRANSACTIONS Advances to Peter R. Harvey, ARTRA's president, classified in the condensed consolidated balance sheet as a reduction of common shareholders' equity, consist of: September 26, December 28, 1996 1995 -------- -------- (in thousands) Total advances, including accrued interest $ 7,232 $ 5,369 Less interest for the period January 1, 1993 to date, accrued and fully reserved (1,371) (1,051) -------- -------- Net advances $ 5,861 $ 4,318 ======== ======== ARTRA has total advances due from its president, Peter R. Harvey, of which $7,232,000 and $5,369,000, including accrued interest, remained outstanding at September 26, 1996 and December 28, 1995, respectively. The advances bear interest at the prime rate plus 2% (10.25% at September 26, 1996 and 10.5% at December 28, 1995, respectively). This receivable from Peter R. Harvey has been classified as a reduction of common shareholders' equity. See Note 6 for an additional 1996 advance for Mr. Harvey's prorata share of debt discharged by a bank funded by ARTRA. Per terms of the debt discharge agreement, as partial consideration, the bank also received Mr. Harvey's $3,000,000 note payable to the bank. The bank assigned ARTRA a $2,150,000 interest in the Mr. Harvey's note, subordinated to the bank's $850,000 interest in Mr. Harvey's note, and ARTRA discharged $2,150,000 of Mr. Harvey's prior advances. In June 1996, Peter R. Harvey loaned the Company 100,000 shares of ARTRA common stock with (with a then fair market value of $587,000). The Company principally issued these common shares to certain lenders as additional consideration for short-term loans. In September 1996, after the Company's shareholders approved an increase in the number of authorized common shares, the Company repaid this loan. At Peter R. Harvey's direction, the 100,000 shares of the Company's common stock were issued in blocks of 25,000 shares to the four daughters of the Company's Chairman of the Board, John Harvey. John Harvey and Peter R. Harvey are brothers. In May 1991, ARTRA's Fill-Mor subsidiary made advances to Peter R. Harvey. The advances, made out of a portion of the proceeds of a short-term bank loan, provided for interest at the prime rate plus 2%. The amount of these advances at March 30, 1995 was $1,540,000 (including $398,000 of accrued interest). In April, 1995, these advances from ARTRA's Fill-Mor subsidiary to Peter R. Harvey were transferred to ARTRA as a dividend. Commencing January 1, 1993 to date, interest on the advances to Peter R. Harvey has been accrued and fully reserved. Interest accrued and fully reserved on the advances to Peter R. Harvey for the nine months ended September 26, 1996 and September 28, 1995 totaled $320,000 and $325,000, respectively. Peter R. Harvey has not received other than nominal compensation for his services as an officer or director of ARTRA or any of its subsidiaries since October of 1990 and Mr. Harvey has agreed not to accept any compensation for his services as an officer or director of ARTRA or any of its subsidiaries until his obligations to ARTRA, described above, are fully satisfied. Additionally, since December 31, 1986, Peter R. Harvey has guaranteed approximately $40,000,000 of ARTRA obligations to private and institutional lenders (John Harvey also was a co-guarantor of a $26,700,000 loan included in that total with Peter R. Harvey) and has also hypothecated personal assets as security for certain ARTRA obligations. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania corporation) is permitted to make loans to officers and directors. Further, under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is permitted to make loans to an officer (including any officer who is also a director, as in the case of Peter R. Harvey), whenever, in the judgment of the directors, the loan can reasonably be expected to benefit Fill-Mor. At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey. The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan agreement, a condition of which was the application of a portion of the proceeds thereof to the payment of certain of Mr. Harvey's loan obligations to the bank. However, the resolutions did not acknowledge the use of such proceeds for this purpose and the formal loan documents with the bank did not set forth this condition (though in fact, the proceeds were so applied by the bank). As collateral for amounts due from Peter R. Harvey, the Company has received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr. Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial Communication Company (a private company). Such interest is valued by Mr. Harvey at $800,000 to $1,000,000. During 1995, Peter R. Harvey entered into a pledge agreement with ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067 shares of ARTRA common stock and 707,281 shares of Pure Tech International, Inc., a publicly traded corporation. Per terms of a February discharge of bank indebtedness (see Note 6), ARTRA received additional collateral from Mr. Harvey consisting of a $2,150,000 security interest in certain real estate, subordinated to the bank's $850,000 security interest in this real estate. In conjunction with Lori's October 1995 acquisition of Global (see Note 2), ARTRA agreed to assume substantially all pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, at September 26, 1996 and December 28, 1995, respectively, $764,000 and $4,500,000 of such pre-existing Lori liabilities were classified in ARTRA's condensed consolidated balance at as current liabilities of discontinued operations. For a discussion of certain other related party debt obligations see Note 7. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion supplements the information found in the financial statements and related notes: Changes in Business Arcar As discussed in Note 2 to the Company's condensed consolidated financial statements, effective April 8, 1994, Bagcraft purchased the business assets, subject to buyer's assumption of certain liabilities, of Arcar, a manufacturer and distributor of waterbase inks. Effective October 26, 1995, Bagcraft sold the business assets, subject to the buyer's assumption of certain liabilities, of Arcar for cash of approximately $20,300,000, resulting in a net gain of $8,483,000. The net proceeds, after extinguishment of certain Arcar debt obligations, of approximately $10,400,000, were used to reduce Bagcraft debt obligations. COMFORCE In September, 1995, COMFORCE adopted a plan to discontinue its jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of its jewelry business. Effective October 17, 1995, COMFORCE acquired all of the capital stock of COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, for consideration of approximately $6.4 million, net of cash acquired. This consideration consisted of cash to the seller of approximately $5.1 million, fees of approximately $700,000, including a fee of $500,000 to a related party, and 500,000 shares of COMFORCE common stock valued at $843,000 (at a price per share of $1.68) issued as consideration for various fees and guarantees associated with the transaction. The 500,000 shares of COMFORCE common stock consisted of (I) 100,000 shares issued to an unrelated party for guaranteeing the purchase price to the seller, (ii) 100,000 shares issued to ARTRA, then the majority stockholder of the Company, in consideration of its guaranteeing the purchase price to the seller and agreeing to enter into the Assumption Agreement, as discussed below, (iii) 150,000 issued to two unrelated parties for advisory services in connection with the acquisition, and (iv) 150,000 shares issued to Peter R. Harvey, then a Vice President and director of COMFORCE for guaranteeing the payment of the $6.4 million purchase price to the seller. Additionally, in conjunction with the Global acquisition, ARTRA entered into an Assumption Agreement whereby it agreed to assume substantially all pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, at September 26, 1996, $764,000 of such pre-existing Lori liabilities were classified in ARTRA's condensed consolidated balance as current liabilities of discontinued operations. Global provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists with an emphasis on wireless communications capability. Effective July 4, 1995, Lori's management agreed to issue up to a 35% common stock interest in COMFORCE to certain individuals to manage COMFORCE's entry into the telecommunications and computer technical staffing business. COMFORCE recognized a non-recurring charge of $3,425,000 related to this stock since these stock awards were 100% vested when issued, and were neither conditioned upon these individuals' service to the Company as employees nor the consummation of the COMFORCE Global acquisition. Accordingly, this compensation charge was fully recognized in 1995. The shares of COMFORCE common stock issued in accordance with the above agreements were valued at $.93 per share. COMFORCE's management valued COMFORCE based on its discussions with market makers and other advisors, taking into account (i) that the Jewelry Business, which was discontinued at the end of the second quarter of 1995, had a negligible value, and (ii) the value of COMFORCE was principally related to the potential effect that a purchase of COMFORCE Global, if successfully concluded, would have market value of COMFORCE common stock. COMFORCE's management believes this value of $.93 per share to be a fair and appropriate value based upon COMFORCE's financial condition as of the date COMFORCE became obligated to issue these shares. After the issuance of the COMFORCE common shares, plus the effects of other transactions, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 19% and 25% at September 26, 1996 and December 28, 1995, respectively. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements. See Note 5 for a further discussion of the accounting treatment of ARTRA's investment in COMFORCE. A disagreement has arisen among ARTRA and COMFORCE regarding interpretations of the July 4, 1995 agreement, as amended, to issue up to a 35% common stock interest in COMFORCE to certain individuals to manage COMFORCE's entry into the telecommunications and computer technical staffing business; the Global acquisition agreement; and the Assumption Agreement whereby ARTRA agreed to assume substantially all pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. The disputed issues include (i) the number of COMFORCE common shares issued to the above individuals to manage COMFORCE's entry into the telecommunications and computer technical staffing business. Accordingly, ARTRA voted against ratification of the issuance of these shares at COMFORCE's Annual Meeting of Stockholders held on October 28, 1996; (ii) the number of COMFORCE common stock options issued to COMFORCE's current management group subsequent to the Global acquisition; (iii) 100,000 COMFORCE common shares to be issued to ARTRA in consideration of its guaranteeing the Global purchase price to the seller and agreeing to assume certain pre-existing Lori liabilities; (iv) 150,000 COMFORCE common shares to be issued to Peter R. Harvey for guaranteeing the payment of the Global purchase price to the seller, and (vi) certain stock options granted in 1993 under provisions of COMFORCE's Long-Term Stock Investment Plan. As a result of the above disagreements, ARTRA has not exchanged its Lori Series C preferred stock with a liquidation value of $19.5 million for 100,000 COMFORCE common shares, as required by the Assumption Agreement, and will not consummate the exchange until all of the disputes are resolved. ARTRA's financial statements have reflected the exchange of the Lori Series C preferred stock for 100,000 COMFORCE common shares in accordance with the Assumption Agreement. Based on the above disputed matters, ARTRA is withholding delivery of the Lori Series C preferred shares and is seeking appropriate resolution in conformity with the Assumption Agreement and resolution of the other obligations owed by COMFORCE to ARTRA and its employees, or ARTRA will seek to rescind this aspect of the agreement. Additionally, ARTRA's financial statements have reflected the issuance of 100,000 COMFORCE common shares to ARTRA as compensation for guaranteeing the Global purchase price to the seller and entering into the Assumption Agreement. COMFORCE is withholding issuance of such shares to ARTRA, in violation of the Global acquisition agreement. ARTRA has aggressively attempted to resolve its dispute with COMFORCE without success and at this point, ARTRA can not predict the ultimate resolution, nor whether such dispute can be resolved without litigation. Results of Operations The Company's consolidated financial statements have been reclassified to report separately the results of operations of Arcar and COMFORCE's discontinued jewelry business prior to the deconsolidation of COMFORCE and its majority-owned subsidiaries effective October 1995. Accordingly, the following discussion of results of operations is presented for the Company's continuing operations at September 26, 1996, which were conducted by the Company's wholly-owned Bagcraft subsidiary. Bagcraft sells all of its products directly to its customers. On a very limited basis certain customers may be offered extended payment terms beyond 30 days depending upon prevailing trade practices and financial strength. The following table presents, as a percentage of net sales, operating expenses and other income (expense) included the Company's earnings (loss) from continuing operations for the three and nine month periods ended September 26, 1996 and September 28, 1995. Three Months Ended Nine Months Ended ------------------ ----------------- Sept 26, Sept 28, Sept 26, Sept 28, 1996 1995 1996 1995 ------- ------- ------- ------- Net sales 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Costs and expenses: Cost of goods sold, exclusive of depreciation and amortization 77.7% 85.9% 79.5% 84.8% Selling, general and administrative 10.2% 22.8% 12.2% 17.6% Depreciation and amortization 3.4% 3.6% 3.3% 3.6% ----- ----- ----- ----- 91.3% 112.3% 95.0% 106.0% ----- ----- ----- ----- Operating earnings (loss) 8.7% -12.3% 5.0% -6.0% ----- ----- ----- ----- Other income (expense): Interest expense -6.4% -8.8% -6.0% -7.0% Realized gain on disposal of available-for-sale securities 1.1% -- 5.3% -- Other income (expense), net -- 0.1% -0.2% -- ----- ----- ----- ----- -5.3% -8.9% -0.9% -7.0% ----- ----- ----- ----- Earnings (loss) from continuing operations before income taxes and minority interest 3.4% -21.2% 4.1% -13.0% Provision for income taxes -0.1% -0.1% -0.1% -- Minority interest -1.2% -0.7% -0.2% -0.7% ----- ----- ----- ----- Earnings (loss) from continuing operations 2.1% -22.0% 3.8% -13.7% ===== ===== ===== ===== Three Months Ended September 26, 1996 vs. Three Months Ended September 28, 1995 Net sales from continuing operations of $29,397,000 for the three months ended September 26, 1996 were $555,000, or 1.9%, lower than net sales from continuing operations for the three months ended September 28, 1995. The 1996 sales decrease is attributable to an overall volume decrease partially offset by increased selling prices. The volume decrease is principally attributable to a 1995 promotion by a major fast food customer. The increased 1996 selling prices were in response to the significant increases in paper costs in 1995. The Company's cost of sales from continuing operations of $22,854,000 for the three months ended September 26, 1996 decreased $2,863,000 as compared to the three months ended September 28, 1995. Cost of sales from continuing operations in the three months ended September 26, 1996 was 77.7% of net sales compared to a cost of sales percentage of 85.9% for the three months ended September 28, 1995. The decrease in cost of sales is primarily attributable to lower paper costs and decreased sales volume as noted above. The decrease in cost of sales percentage is primarily attributable to lower paper costs and improved production efficiencies in 1996. Selling, general and administrative expenses from continuing operations were $2,995,000 in the three months ended September 26, 1996 as compared to $6,843,000 in the three months ended September 28, 1995. Selling, general and administrative expenses were 10.2% of net sales in the three months ended September 26, 1996 as compared to 22.8% of net sales in the three months ended September 28, 1995. The 1996 decrease in selling, general and administrative expenses is primarily attributable to a third quarter 1995 compensation charge related to the issuance of a 35% common stock interest in COMFORCE as additional consideration for certain individuals to enter into employment or consulting services agreements to manage COMFORCE's entry into and development of the telecommunications and computer technical business. Depreciation and amortization expense from continuing operations was $995,000 in the three months ended September 26, 1996 as compared to $1,087,000 in the three months ended September 28, 1995. Depreciation and amortization expense was 3.4 % of net sales in the three months ended September 26, 1996 as compared to 3.6% of net sales in the three months ended September 28, 1995. The 1996 decrease in depreciation and amortization expense is primarily attributable to the December, 1995 write-down of idle machinery and equipment dedicated to the production of microwave popcorn products. The Company had operating earnings in the three months ended September 26, 1996 of $2,553,000 as compared to operating loss of $3,695,000 in the three months ended September 28, 1995. The 1996 increase in operating earnings is attributable to improved operating margins and to the decrease in selling, general and administrative expenses and depreciation and amortization expense as noted above. Interest expense from continuing operations in the three months ended September 26, 1996 decreased $735,000 as compared to the three months ended September 28, 1995. The 1996 decrease is principally due to the February 1996 discharge of ARTRA bank indebtedness, partially offset by loan fees on 1996 short-term borrowings used to pay down certain debt obligations. As additional consideration for a short-term loan, in September 1996 the lender received 50,000 COMFORCE common shares held by ARTRA's Fill-Mor subsidiary, resulting in an additional realized gain of $328,000, with cost determined by average cost. No income tax expense is reflected in the Company's financial statements resulting from the Company's 1996 earnings from continuing operations due to the utilization of tax loss carryforwards. Due to the Company's tax loss carryforwards and the uncertainty of future taxable income, no income tax benefit was recognized in connection with the Company's 1995 pre-tax loss. Nine Months Ended September 26, 1996 vs. Nine Months Ended September 28, 1995 Net sales from continuing operations of $90,162,000 for the nine months ended September 26, were $541,000, or 0.6%, lower than net sales from continuing operations for the nine months ended September 28, 1995. The volume decrease is principally attributable to a 1995 promotion by a major fast food customer. The increased 1996 selling prices were in response to the significant increases in paper costs in 1995. The Company's cost of sales from continuing operations of $71,710,000 for the nine months ended September 26, 1996 decreased $5,161,000 as compared to the nine months ended September 28, 1995. Cost of sales from continuing operations in the nine months ended September 26, 1996 was 79.5% of net sales compared to a cost of sales percentage of 84.8% for the nine months ended September 28, 1995. The decrease in cost of sales is primarily attributable to lower paper costs and decreased sales volume as noted above. The decrease in cost of sales percentage is primarily attributable to lower paper costs and improved production efficiencies in 1996. Selling, general and administrative expenses from continuing operations were $10,967,000 in the nine months ended September 26, 1996 as compared to $15,972,000 in the nine months ended September 28, 1995. Selling, general and administrative expenses were 12.2% of net sales in the nine months ended September 26, 1996 as compared to 17.6% of net sales in the nine months ended September 28, 1995. The 1996 decrease in selling, general and administrative expenses is primarily attributable to a third quarter 1995 compensation charge related to the issuance of a 35% common stock interest in COMFORCE as additional consideration for certain individuals to enter into employment or consulting services agreements to manage COMFORCE's entry into and development of the telecommunications and computer technical business and to professional fees incurred in 1995 related to certain consulting projects. Depreciation and amortization expense from continuing operations was $2,954,000 in the nine months ended September 26, 1996 as compared to $3,306,000 in the nine months ended September 28, 1995. Depreciation and amortization expense was 3.3 % of net sales in the three months ended September 26, 1996 as compared to 3.6% of net sales in the three months ended September 28, 1995. The 1996 decrease in depreciation and amortization expense is primarily attributable to the December, 1995 write-down of idle machinery and equipment dedicated to the production of microwave popcorn products. The Company had operating earnings in the nine months ended September 26, 1996 of $4,531,000 as compared to operating loss of $5,446,000 in the nine months ended September 28, 1995. The 1996 increase in operating earnings is attributable to improved operating margins and to the decrease in selling, general and administrative expenses as noted above. Interest expense from continuing operations in the nine months ended September 26, 1996 decreased $1,022,000 as compared to the nine months ended September 28, 1995. The 1996 decrease is principally due an overall decrease in borrowings. During the nine months ended September 26, 1996, ARTRA sold 193,000 COMFORCE shares in the market. As additional consideration for 1996 short-term loans, the lenders received 95,000 COMFORCE common shares held by ARTRA's Fill-Mor subsidiary. The disposition of these 288,000 COMFORCE shares resulted in realized gains of $4,823,000 during the nine months ended September 26, 1996. The 1996 and 1995 extraordinary credits represent net gains from discharge of indebtedness. No income tax expense is reflected in the Company's financial statements resulting from the extraordinary credits and from the Company's 1996 earnings from continuing operations due to the utilization of tax loss carryforwards. Due to the Company's tax loss carryforwards and the uncertainty of future taxable income, no income tax benefit was recognized in connection with the Company's 1995 pre-tax loss. Liquidity and Capital Resources Cash and Cash Equivalents and Working Capital Cash and cash equivalents decreased $2,248,000 during the nine months ended September 26, 1996. Cash flows used by operating activities of $4,516,000 and cash flows used by financing activities of $637,000 exceeded cash flows from investing activities of $2,905,000. Cash flows used by operating activities were principally attributable to funds used to pay down accounts payable and accrued liabilities. Cash flows used by financing activities were principally attributable to a net reduction of short-term borrowings. Cash flows from investing activities principally represent proceeds from the sale of COMFORCE common stock. The Company's consolidated working capital deficiency decreased $15,486,000 to $10,879,000 during the nine months ended September 26, 1996. The decrease in working capital deficiency is principally attributable to an agreement to discharge amounts due on ARTRA bank notes and related accrued interest and fees. Status of Debt Agreements and Operating Plan At December 28, 1995 the Company's corporate entity was in default of provisions of certain of its credit agreements. Under certain debt agreements ARTRA is limited in the amounts it can withdraw from its Bagcraft operating subsidiary. In February, 1996, a bank lender agreed to discharge amounts due under bank notes of the corporate entity ($12,063,000 plus accrued interest and fees) and certain obligations of the Company's president, Peter R. Harvey. Effective February 1, 1996, Bagcraft's credit agreement was extended until September 30, 1997. See Notes 6, 7 and 8 to the Company's condensed consolidated financial statements and discussion below. ARTRA Corporate At December 28, 1995, $12,063,000 in ARTRA notes, plus accrued interest and fees, were payable to a bank. The notes provided for interest at the prime rate. In February 1996, a bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest and fees) and certain obligations of ARTRA's president, Peter R. Harvey for consideration consisting of ARTRA's cash payment of $5,050,000, Mr. Harvey's cash payment of $100,000 and Mr. Harvey's $3,000,000 note payable to the bank (the "Harvey Note"). The bank assigned ARTRA a $2,150,000 interest in the Harvey Note, subordinated to the bank's $850,000 interest in the Harvey Note, and ARTRA discharged $2,150,000 of Mr. Harvey's prior advances. ARTRA recognized a gain on the discharge of this indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a receivable for Mr. Harvey's prorata share ($1,089,000) of the debt discharge funded by the Company. The cash payment due the bank was funded principally with proceeds received from the Bagcraft subsidiary in conjunction with the issuance of BCA (the parent of Bagcraft) preferred stock (see Note 10 to the Company's condensed consolidated financial statements) along with proceeds received from a short-term loan agreement with an unaffiliated company. In conjunction with the discharge of bank debt discussed above, the Company entered into a $1,900,000 short-term loan agreement, due May 26, 1996, with an unaffiliated company. The loan, with interest at 12%, was collateralized by, among other things, the common stock of ARTRA's BCA subsidiary. As additional compensation for its loan and for participating in the above discharge of indebtedness the unaffiliated company received 150,000 shares of ARTRA common stock (with a then fair market value of $661,000 after a discount for restricted marketability) and 25,000 shares of COMFORCE common stock held by ARTRA (with a then fair market value of $200,000). Additionally, for consideration of $500,000, the lender purchased an option to acquire up to 40% of the common stock of Bagcraft for nominal consideration. The borrowings under this short-term loan agreement were repaid in April, 1996 and, per terms of the loan agreement, ARTRA repurchased the option for a cash payment of $550,000. In December 1995, ARTRA completed a private placement of $2,500,000 of 12% convertible subordinated promissory notes due March 21, 1996. As additional consideration the noteholders received 15,000 ARTRA common shares per each $100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the closing market value of ARTRA common stock on the date of issue, discounted for restricted marketability. The proceeds from the private placement, held in escrow at December 28, 1995, were used to pay down other debt obligations in January, 1996. In March and April 1996 the notes were repaid, principally with proceeds from the private placement of the secured promissory notes discussed above. In April 1996, ARTRA commenced a private placement of $7,575,000 of 12% secured promissory notes due April 15, 1997. As additional consideration the noteholders received warrants to purchase an aggregate of 413,750 ARTRA common shares at a price of $6.00 per share. The warrants are exercisable August 15, 1996 and expire April 15, 1999. These promissory notes are collateralized by ARTRA's interest in all of the common stock of BCA (the parent of Bagcraft). The proceeds from the private placement, completed in July 1996, were used principally to pay down other debt obligations. As discussed in Note 14 to the Company's condensed consolidated financial statements, ARTRA has total advances due from its president, Peter R. Harvey, of which $7,232,000 and $5,369,000, including accrued interest, remained outstanding at September 26, 1996 and December 28, 1995 The advances bear interest at the prime rate plus 2% (10.25% at September 26, 1996 and 10.5% at December 28, 1995, respectively). Commencing January 1, 1993 to date, interest on all advances to Peter R. Harvey has been accrued and fully reserved. This receivable from Peter R. Harvey has been classified as a reduction of common shareholders' equity. In June 1996 Peter R. Harvey loaned the Company 100,000 shares of ARTRA common stock with (with a then fair market value of $587,000). The Company principally issued these common shares to certain lenders as additional consideration for short-term loans. In September 1996, after the Company's shareholders approved an increase in the number of authorized common shares, the Company repaid this loan. At Peter R. Harvey's direction, the 100,000 shares of the Company's common stock were issued in blocks of 25,000 shares to the four daughters of the Company's Chairman of the Board, John Harvey. John Harvey and Peter R. Harvey are brothers. In May 1991, ARTRA's Fill-Mor subsidiary made advances to Peter R. Harvey. The advances, made out of a portion of the proceeds of a short-term bank loan, provided for interest at the prime rate plus 2%. The amount of these advances at March 30, 1995 was $1,540,000 (including $398,000 of accrued interest). In April, 1995, these advances from ARTRA's Fill-Mor subsidiary to Peter R. Harvey were transferred to ARTRA as a dividend. Peter R. Harvey has not received other than nominal compensation for his services as an officer or director of ARTRA or any of its subsidiaries since October of 1990 and Mr. Harvey has agreed not to accept any compensation for his services as an officer or director of ARTRA or any of its subsidiaries until his obligations to ARTRA, described above, are fully satisfied. Additionally, since December 31, 1986, Peter R. Harvey has guaranteed approximately $40,000,000 of ARTRA obligations to private and institutional lenders (John Harvey also was a co-guarantor of a $26,700,000 loan included in that total with Peter R. Harvey) and has also hypothecated personal assets as security for certain ARTRA obligations. Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania corporation) is permitted to make loans to officers and directors. Further, under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is permitted to make loans to an officer (including any officer who is also a director, as in the case of Peter R. Harvey), whenever, in the judgment of the directors, the loan can reasonably be expected to benefit Fill-Mor. At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey. The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan agreement, a condition of which was the application of a portion of the proceeds thereof to the payment of certain of Mr. Harvey's loan obligations to the bank. However, the resolutions did not acknowledge the use of such proceeds for this purpose and the formal loan documents with the bank did not set forth this condition (though in fact, the proceeds were so applied by the bank). As collateral for amounts due from Peter R. Harvey, the Company has received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr. Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial Communication Company (a private company). Such interest is valued by Mr. Harvey at $800,000 to $1,000,000. During 1995, Peter R. Harvey entered into a pledge agreement with ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067 shares of ARTRA common stock and 707,281 shares of Pure Tech International, Inc., a publicly traded corporation. Per terms of a February discharge of bank indebtedness (see Note 6 to the Company's condensed consolidated financial statements), ARTRA received additional collateral from Mr. Harvey consisting of a $2,150,000 security interest in certain real estate, subordinated to the bank's $850,000 security interest in this real estate. ARTRA has entered into various agreements under which it has sold its common shares along with options that require ARTRA to repurchase these shares at the option of the holder, principally one year after the date of each agreement. At September 26, 1996, options are outstanding that, if exercised, would require ARTRA to repurchase 98,734 shares of its common stock for an aggregate amount of $3,565,000. ARTRA does not have available funds to satisfy its obligations if these options were exercised. However the holders of redeemable common stock have the option to sell their shares in the market subject to the limitations of Securities Act Rule 144. At its discretion and subject to its financial ability, ARTRA could reimburse the optionholders for any short-fall resulting from such sale. As discussed in Note 10 to the condensed consolidated financial statements, ARTRA, Bagcraft and Bagcraft's parent BCA have various redeemable preferred stock issues with an aggregate carrying value of $21,511,000 outstanding at September 26, 1997. These redeemable preferred stock issues have various maturity dates commencing in 1997. In recent years, the Company has suffered recurring losses from operations and, at September 26, 1996, has a net capital deficiency. As a result of these factors, the Company has experienced difficulty in obtaining adequate financing to replace certain current credit arrangements, certain of which are in default, to fund its debt service and liquidity requirements in 1996. Due to its limited ability to receive operating funds from its operating subsidiaries, ARTRA historically has met its operating expenditures with funds generated by such alternative sources as private placements of ARTRA common stock and notes, sales of ARTRA common stock with put options, loans from officers/directors and private investors, as well as through sales of assets and/or other equity infusions. ARTRA plans to continue to seek such alternative sources of funds to meet its future operating expenditures. ARTRA does not currently have available funds to repay amounts due under various loan arrangements, principally with private investors, some of which are currently past due. ARTRA will continue to have significant levels of indebtedness in the future. The level of indebtedness may affect the rate at which or the ability of ARTRA to effectuate the refinancing or restructuring of debt. ARTRA intends to continue to negotiate with its creditors to extend due dates to allow ARTRA to maximize value from possible sale of assets and to explore various other sources of funding to meet its future operating expenditures. If ARTRA is unable to negotiate extensions with its creditors and complete the above mentioned transactions, ARTRA could suffer severe adverse consequences, and as a result, ARTRA may be forced to liquidate its assets or file for protection under the Bankruptcy Code. ARTRA's corporate entity has no material commitments for capital expenditures. Bagcraft Bagcraft's Credit Agreement that provides for a revolving credit loan and two separate term loans. The term loans are separate facilities initially totaling $12,000,000 (Term Loan A) and $8,000,000 (Term Loan B), bearing interest at the lender's index rate plus 1.75% and 3%, respectively. At September 26, 1996, interest rates on Term Loan A and Term Loan B were 10 % and 11.25% respectively. The amount available to Bagcraft under the revolving credit loan is subject to a borrowing base, as defined in the agreement, up to a maximum of $18,000,000. At September 26, 1996 and December 28, 1995, approximately $1,900,000 and $6,600,000, respectively, was available and unused by Bagcraft under the revolving credit loan. Borrowings under the revolving credit loan bear interest at the lender's index rate plus 1.5% and are payable upon maturity of the Credit Agreement, unless accelerated under terms of the Credit Agreement. At September 26, 1996 the interest rate on the revolving credit loan was 9.75%. Effective February 1, 1996, the Credit Agreement was amended whereby, among other things, the maturity date of the Credit Agreement was extended until September 30, 1997, certain loan covenants were amended. The principal payments under Term Loan B were modified to include twenty-three monthly installments of $200,000 from November 15, 1995 to September 30, 1997, with the remaining balance payable at maturity (September 30, 1997). Additionally, in conjunction with a preferred stock exchange agreement between BCA (the parent of Bagcraft), Bagcraft and the holder of Bagcraft's 13.5% cumulative redeemable preferred stock, the lender consented to an advance to Bagcraft of $4,135,000 under the revolving credit loan to be transferred to ARTRA as a dividend (see Note 10 to the Company's condensed consolidated financial statements). As additional compensation for borrowings under the Credit Agreement, the lender received a detachable warrant, expiring in December 1998, allowing the holder to purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal value. Under certain conditions Bagcraft is required to repurchase the warrant from the lender. The determination of the repurchase price of the warrant is to be based on the warrant's pro rata share of the highest of book value, appraised value or market value of Bagcraft. In connection with the February 1, 1996 amendment to the Credit Agreement, the warrant agreement was amended to permit the holder to purchase 13% of the fully diluted common equity of Bagcraft at the original nominal purchase price and to extend the expiration date to December 17, 1999. Borrowings under the Credit Agreement are collateralized by substantially all of the assets of Bagcraft. The Credit Agreement, as amended, contains various restrictive covenants, that among other restrictions, require Bagcraft to maintain minimum levels of tangible net worth and liquidity levels, and limits capital expenditures and restricts additional loans, dividend payments and payments to related parties. In addition, the Credit Agreement prohibits changes in ownership of Bagcraft. At September 26, 1996 Bagcraft was in compliance with the provisions of its Credit Agreement. In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a $12,500,000 financing package associated with the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The financing package, funded by a combination of Federal, state and local funds, consists of the following loan agreements payable by Bagcraft directly to the City of Baxter Springs: A $7,000,000 promissory note payable in ten installments of $700,000 due annually on July 21 of each year beginning in 1995 through maturity on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is payable semi-annually. At September 26, 1996 and December 28, 1995, Bagcraft had outstanding borrowings of $5,600,000 and $6,300,000, respectively, under this loan agreement. A $5,000,000 subordinated promissory note payable as follows: $150,000 due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The subordinated promissory note is non-interest bearing, subject to certain repayment provisions as defined in the agreement (as amended). At September 26, 1996 and December 28, 1995, Bagcraft had outstanding borrowings of $4,850,000 and $5,000,000, respectively, under this loan agreement. Two separate $250,000 subordinated promissory notes payable in varying installments through January 20, 2025. The subordinated promissory notes are non-interest bearing, subject to certain repayment provisions as defined in the agreement. At September 26, 1996 and December 28, 1995, Bagcraft had outstanding borrowings of $234,000 and $494,000, respectively, under this loan agreement. Borrowings under the above loan agreements are collateralized by a first lien on the land and building at the Baxter Springs, Kansas production facility and by a second lien on certain machinery and equipment. Under certain circumstances, repayment of the borrowings under the above loan agreements is subordinated to the repayment of obligations under Bagcraft's Credit Agreement. At December 28, 1995 $552,000 of borrowings from the above loan agreements was reflected in the condensed consolidated balance sheet in current assets as restricted cash and equivalents. These funds, invested in interest bearing cash equivalents and restricted for expenditures associated with the Baxter Springs, Kansas project were expended during the first quarter of 1996. The Kansas facility replaced Bagcraft's production facilities in Joplin, Missouri and Carteret, NJ. Bagcraft has historically funded its capital requirements with cash flow from operations and funds available under its revolving credit loan. These sources should provide sufficient cash flow to fund Bagcraft's short-term capital requirements. As discussed above, it is anticipated that Bagcraft's Credit Agreement will provide Bagcraft with the ability to fund its long-term capital requirements. Bagcraft is currently negotiating with the lender to extended the maturity date (September 30, 1997) and increase the amount of borrowiings available to it under the Credit Agreement. Bagcraft anticipates that its 1996 capital expenditures, principally for manufacturing equipment, will be approximately $2,500,000 and will be funded principally from the above mentioned credit facilities and also from operations. Investment In COMFORCE Corporation At December 28, 1995 ARTRA held common stock ownership interest in COMFORCE of approximately 25%. In January 1996, the Company's Board of Directors approved the sale of 200,000 of ARTRA's COMFORCE common shares to certain officers, directors and key employees of ARTRA for non-interest bearing notes totaling $400,000. The notes, collateralized by the 200,000 COMFORCE common shares sold, are not payable until the earlier of the registration of these shares under the Securities Act of 1993 or the expiration of the applicable resale waiting period under Securities Act Rule 144. Additionally, the noteholders have the right to put their COMFORCE shares back to ARTRA in full payment of the balance of their notes. Based upon the preceding factors, the Company has concluded that, for reporting purposes, it has effectively sold options to certain officers, directors and key employees to acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly, these 200,000 COMFORCE common shares have been removed from the Company's portfolio of "Available-for-sale securities" and are classified in the Company's condensed consolidated balance sheet September 26, 1996 as other current assets with an aggregate value of $400,000, based upon the value of proceeds to be received upon future exercise of the options. The disposition of these 200,000 COMFORCE common shares will result in a gain which has been deferred and will not be recognized in the Company's financial statements until the options to purchase these 200,000 COMFORCE common shares are exercised. As of September 26, 1996, no options to acquire any of the 200,000 COMFORCE common shares had been exercised. During the nine months ended September 26, 1996, ARTRA sold 193,000 COMFORCE shares in the market. As additional consideration for 1996 short-term loans, the lenders received 95,000 COMFORCE common shares held by ARTRA. The disposition of these 288,000 COMFORCE shares resulted in realized gains of $4,823,000 during the nine months ended September 26, 1996. At September 26, 1996 ARTRA's remaining investment in COMFORCE (1,813,036 shares, currently a common stock ownership interest of approximately 19%) was classified in the Company's condensed consolidated balance sheet in noncurrent assets as "Available-for-sale securities." At September 26, 1996 the gross unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a separate component of shareholders' equity, was $34,960,000. Additionally, at September 26, 1996, 1,175,000 shares of COMFORCE common stock owned by the Company have been pledged as collateral for various short-term borrowings. Additionally, in conjunction with the Global acquisition, ARTRA agreed to assume substantially all pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, at September 26, 1996 and December 28, 1995, respectively, $764,000 and $4,500,000 of such pre-existing Lori liabilities were classified in ARTRA's condensed consolidated balance at as current liabilities of discontinued operations. See Note 5 to the condensed consolidated financial statements for a further discussion of ARTRA's investment in COMFORCE. The common stock and virtually all the assets of the Company and its Bagcraft subsidiary have been pledged as collateral for borrowings under various loan agreements. Under certain debt agreements the Company is limited in the amounts it can withdraw from its operating subsidiaries. At September 26, 1996 and December 28, 1995, substantially all cash and equivalents on the Company's consolidated balance sheet were restricted to use by and for the Company's operating subsidiaries. Litigation The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. See Note 13 to the Company's consolidated financial statements. At September 26, 1996 and December 28, 1995, the Company had accrued $1,900,000 and $1,500,000 respectively, for potential business-related litigation and environmental liabilities. However, as discussed above ARTRA may not have available funds to pay liabilities arising out of these business-related litigation and environmental matters or, in certain instances, to provide for its legal defense. ARTRA could suffer severe adverse consequences in the event of an unfavorable judgment in any of these matters. Net Operating Loss Carryforwards At September 26, 1996, the Company and its subsidiaries had Federal income tax loss carryforwards of approximately $33,000,000 available to be applied against future taxable income, if any. ARTRA's tax loss carryforwards of approximately $22,000,000 expire principally in 2003 - 2010. Additionally, ARTRA's discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss carryforwards of approximately $11,000,000 available to be applied against future taxable income, if any. In recent years, the Company has issued shares of its common stock to repay various debt obligations, as consideration for acquisitions, to fund working capital obligations and as consideration for various other transactions. Section 382 of the Internal Revenue Code of 1986 limits a corporation's utilization of its Federal income tax loss carryforwards when certain changes in the ownership of a corporation's common stock occurs. In the opinion of management, the Company is not currently subject to such limitations regarding the utilization of its Federal income tax loss carryforwards. Should the Company continue to issue a significant number of shares of its common stock, it could trigger a limitation that would prevent it from utilizing a substantial portion of its Federal income tax loss carryforwards. Impact of Inflation and Changing Prices Inflation has become a less significant factor in our economy; however, to the extent permitted by competition, the Company generally passes increased costs to its customers by increasing sales prices over time. Recently Issued Accounting Pronouncements Impairment of Long-Lived Assets SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use or sale of the asset and its eventual disposition, to the carrying amount of the asset. This new accounting principle is effective for the Company's fiscal year ending December 26, 1996. The Company believes that adoption will not have a material impact on its financial statements. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on new fair value accounting rules. Although expense recognition for employee stock based compensation is not mandatory, the pronouncement requires companies that choose not to adopt the new fair value accounting, to disclose the pro-forma net income and earnings per share under the new method. This new accounting principle is effective for the Company's fiscal year ending December 26, 1996. The Company believes that adoption will not have a material impact on its financial statements as the Company will not adopt the new fair value accounting, but instead comply with the disclosure requirements. PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT 11 Computation of earnings per share and equivalent share of common stock for the nine months ended September 26, 1996 and September 28, 1995. (b) Reports on Form 8-K: On August 23, 1996, the Registrant filed Form 8-K to report that the Registrant and its 100% owned subsidiary, Fill-Mor Holding, Inc. entered into a $2,500,000 term loan agreement with a bank.. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. ARTRA GROUP INCORPORATED ________________________ Registrant Dated: November 12, 1996 JAMES D. DOERING ________________________ __________________________________________ Vice President and Chief Financial Officer EX-11 2 COMPUTATION OF EARNINGS (LOSS) PER SHARE EXHIBIT 11 ARTRA GROUP INCORPORATED AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE AND EQUIVALENT SHARE OF COMMON STOCK (In thousands except per share amounts) Nine Months Ended -------------------- Line Sept 26, Sept 28, - ---- 1996 1995* -------- -------- AVERAGE SHARES OUTSTANDING 1 Weighted average number of shares of common stock outstanding during the period 7,472 6,712 2 Net additional shares assuming stock options and warrants exercised and proceeds used to purchase treasury shares 398 -- -------- -------- 3 Weighted average number of shares and equivalent shares of common stock outstanding during the period 7,870 6,712 ======== ======== EARNINGS (LOSS) 4 Earnings (loss) from continuing operations $ 3,523 ($12,543) 5 Less dividends applicable to redeemable preferred stock (463) (422) 6 Less redeemable common stock accretion (297) (246) -------- -------- 7 Amount for per share computation $ 2,763 ($13,211) ======== ======== 8 Earnings (loss) before extraordinary credit $ 3,523 ($21,699) 9 Less dividends applicable to redeemable preferred stock (463) (422) 10 Less redeemable common stock accretion (297) (246) -------- -------- 11 Amount for per share computation $ 2,763 ($22,367) ======== ======== 12 Net earnings (loss) $ 12,947 ($12,586) 13 Less dividends applicable to redeemable preferred stock (463) (422) 14 Less redeemable common stock accretion (297) (246) -------- -------- 15 Amount for per share computation $ 12,187 ($13,254) ======== ======== PER SHARE AMOUNTS Earnings (loss) from continuing operations (line 7 / line 3) $ 0.32 ($ 1.96) ======== ======== Earnings (loss) before extraordinary credit (line 11 / line 3) $ 0.32 ($ 3.32) ======== ======== Net earnings (loss) (line 15 / line 3) $ 1.55 ($ 1.97) ======== ======== Earnings (loss) per share is computed by dividing net earnings (loss), less redeemable preferred stock dividends and redeemable common stock accretion, by the weighted average number of shares of common stock and common stock equivalents (redeemable common stock, stock options and warrants), unless anti-dilutive, outstanding during the period. Fully diluted earnings (loss) per share are not presented since the result is equivalent to primary earnings (loss) per share. - --------------- * As reclassified for discontinued operations. EX-27 3 FDS -- FORM 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 0000200243 ARTRA GROUP INCORPORATED 1,000 dollars 9-mos DEC-26-1996 DEC-29-1995 SEP-26-1996 1.000 99 0 9,372 301 15,211 25,489 45,645 19,795 86,131 36,368 0 21,511 0 5,777 (17,381) 86,131 90,162 90,162 71,710 71,710 9,472 0 5,370 3,610 87 3,523 0 9,424 0 12,947 1.55 0
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