-----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, L1JN7zgzmXMFsu2Xp107/QpLchzDxpnq0/VdICvXAov+nZQ7A+CMTvYAgmEiaib6 7Fj8oyEWVtmHorvY8cBRMw== 0000200243-97-000001.txt : 19970130 0000200243-97-000001.hdr.sgml : 19970130 ACCESSION NUMBER: 0000200243-97-000001 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970129 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: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-16965 FILM NUMBER: 97513268 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 S-1/A 1 AMENDMENT NO. 1 TO REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on January 29, 1997 Registration No. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 ARTRA GROUP INCORPORATED (Exact name of registrant as specified in its charter) Pennsylvania 2671 25-1095978 (State or other jurisdiction (Primary Standard Industrial Classification (I.R.S Employer Identification No.) of incorporation or organization) Code Number)
-------------------- 500 Central Avenue Northfield, Illinois 60093 (847) 441-6650 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------- Lawrence D. Levin 500 Central Avenue Northfield, Illinois 60093 (847) 441-6650 (Name, address, including zip code, and telephone number, including area code, of agent for service) With copies to: Lawrence R. Samuels Philip E. Ruben Ross & Hardies Kwiatt Silverman & Ruben Ltd. Suite 2500 500 Central Avenue 150 North Michigan Avenue Northfield, IL 60093 Chicago, IL 60601 (847) 441-7676 (312) 558-1000 --------------------- Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement as determined by market conditions and other factors. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. X --- CALCULATION OF REGISTRATION FEE
======================================================================================================================= Proposed Maximum Proposed Maximum Title of Each Class of Amount to Offering Price Aggregate Amount of Securities to be Registered be Registered(1) Per Share(1) Offering Price(1) Registration Fee - ----------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value 3,996,468 $5.44 $21,740,786 $7,497.00 ======================================================================================================================= (1) Solely for the purpose of calculating the registration fee, the offering price per share, the aggregate offering price and the amount of the registration fee have been computed in accordance with Rule 457(c) under the Securities Act of 1933, as amended. Accordingly, the price per share of Common Stock has been calculated to be equal to the average of the high and low prices for a share of Common Stock as reported by the New York Stock Exchange on January 27, 1997, which is a specified date within five business days prior to the original date of filing of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Page 1 of _____ sequentially numbered pages. Exhibit Index appears on sequentially numbered page ______. CROSS REFERENCE SHEET
Form S-1 Item No. Registration Item and Heading Location in Prospectus - -------- ----------------------------- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................... Forepart; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges Prospectus Summary; Risk Factors 4. Outside Front Cover Page; Prospectus Summary; Plan of Use of Proceeds............................................ Distribution 5. Determination of Offering Price............................ Not applicable 6. Dilution................................................... Not applicable 7. Selling Security Holders................................... Selling Shareholders 8. Plan of Distribution....................................... Outside Front Cover Page; Plan of Distribution 9. Description of Securities to be Registered................. Description of the Company's Securities 10. Interests of Named Experts and Counsel..................... Not applicable 11. Information with Respect to the Company: 11.(a) Description of Business.................................... Business and Properties; Index to Financial Statements 11.(b) Description of Property.................................... Business and Properties 11.(c) Legal Proceedings.......................................... Legal Proceedings; Business and Properties 11.(d) Market Price of and Dividends on the Registrant's Common Equity and Related Shareholder Matters............................ Market Price of the Company's Common Stock 11.(e) Financial Statements....................................... Index to Financial Statements 11.(f) Selected Financial Data.................................... Prospectus Summary 11.(g) Supplementary Financial Information........................ Prospectus Summary 11.(h) Management's Discussion and Analysis of Management's Discussion and Analysis of Financial Financial Condition and Results of Operations.......... Condition and Results of Operations 11.(i) Disagreements with Accountants on Accounting and Financial Disclosure............................................. Not applicable 11.(j) Directors and Executive Officers........................... Management 11.(k) Executive Compensation..................................... Executive Compensation 11.(l) Security Ownership of Certain Beneficial Owners and Management.................................. Principal Shareholders 11.(m) Certain Relationships and Related Transactions........................................... Transactions with Management and Others 12. Disclosure of Commission Position on Indemnification for Securities Act Indemnification of Liabilities............................................ Officers and Directors
SUBJECT TO COMPLETION DATED JANUARY 29, 1997 PROSPECTUS Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there by any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. 3,996,468 Shares ARTRA GROUP INCORPORATED COMMON STOCK THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. See "Risk Factors." ARTRA GROUP Incorporated, a Pennsylvania corporation (the "Company" or "ARTRA"), is engaged, through its subsidiary, in manufacturing flexible packaging products principally for the food industry. It also has a significant minority interest (1,769,703 shares or approximately 14% of the outstanding stock as of January 27, 1997) in the common stock of COMFORCE Corporation, a public company whose stock is listed on The American Stock Exchange under the symbol "CFS." All of the 3,996,468 shares of common stock of the Company (the "Common Stock") offered hereby are being offered for sale from time to time by or for the account of certain existing security holders of the Company (the "Selling Shareholders"). See "Selling Shareholders." The Common Stock is listed on the New York and Pacific Stock Exchanges. The Common Stock may be offered by the Selling Shareholders from time to time in transactions on the New York and Pacific Stock Exchanges, in negotiated transactions, or a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Selling Shareholders may effect such transactions by the sale of the Common Stock to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders and/or the purchasers of the Common Stock for whom such broker-dealers may act as agent or to whom they may sell as principal, or both (which compensation to a particular broker-dealer might be in excess of customary commissions). In certain cases the Selling Shareholders, brokers executing sales orders on their behalf and dealers purchasing shares from the Selling Shareholders for resale, may be deemed to be "underwriters," as that term is defined in Section 2(11) of the Securities Act of 1933, as amended (the "Securities Act"), and any commissions received by them and any profit on the resale of Common Stock purchased by them may be deemed underwriting commissions or discounts under the Securities Act. The Company will not receive any proceeds from sales of shares to which this Prospectus relates. However, insofar as the holders of options or warrants to purchase shares of the Common Stock are expected to exercise their warrants or options in order to sell the underlying shares (which are registered hereby), the Company will receive the amount of the exercise prices of any warrants or options so exercised. See "Risk Factors - Dilution and Depression of Market Price from Issuance of Additional Common Stock." As of the date hereof, the aggregate amount of the exercise prices of all shares issuable by the Company upon the exercise of options or warrants outstanding as of the date hereof and subject to registration hereby is $13,618,000. The Company cannot predict when or if it will receive proceeds from the exercise of warrants or options, or the amount of any such proceeds. None of the holders of options or warrants can reasonably be expected to exercise their options or warrants unless the market price on the New York and Pacific Stock Exchanges of the Common Stock is in excess of the exercise price therefor. The Company intends to use the proceeds, if any, received from the exercise of warrants or options to retire or reduce indebtedness, to pay expenses of the offering and for working capital purposes. See "Plan of Distribution." The Company's Common Stock is traded and quoted on the New York and Pacific Stock Exchanges under the symbol "ATA." On January 27, 1997, the last sale price of Common Stock, as reported on the New York Stock Exchange was $5.375 per share. The Company will bear all expenses (other than underwriting discounts and selling commissions, and fees and expenses of counsel or other advisors to the Selling Stockholders) in connection with the registration of the shares of Common Stock being offered hereby, which expenses are estimated to be approximately $225,000. See "Selling Shareholders" elsewhere in this Prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C., a Registration Statement on Form S-1 under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, omits certain information contained in said Registration Statement and the exhibits and schedules thereto, as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto and financial statements, notes, and schedules filed as part thereof, which may be inspected and copied at the public reference facilities of the Commission referred to below. Statements herein concerning the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the full text of such contract or other document filed with the Commission as an exhibit to the Registration Statement, or otherwise, each such statement being qualified and amplified in all respects by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports, proxy statements and other information with the Commission. Certain information as of specified dates concerning directors and officers, their remuneration, options granted to them, the principal holders of securities of the Company, and any material interest of such persons in transactions with the Company, is disclosed in proxy statements distributed to the Company's shareholders and filed with the Commission. Such reports, proxy statements and other information filed by the Company, and The Registration Statement of which this Prospectus forms a part, the exhibits and schedules thereto and amendments thereof, may be inspected at the Commission's public reference facilities maintained at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at the following SEC Regional Offices: Seven World Trade Center, 13th Floor, New York, New York 10048; and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, Room 204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock of the Company is listed on the New York Stock Exchange and the Pacific Stock Exchange, and such reports, proxy material and other information are also available for inspection at the New York Stock Exchange, 20 Broad Street, New York, New York 10005, and the Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104. -2- PROSPECTUS SUMMARY The following is a summary of certain of the information contained in this Prospectus and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere herein. Prospective investors should carefully consider the information set forth under the caption "Risk Factors." The Company ARTRA, through its subsidiary, Bagcraft Corporation of America ("Bagcraft"), currently operates in one industry segment as a manufacturer of packaging products principally serving the food industry. All of the shares of Bagcraft are owned by BCA Holdings, Inc. ("BCA"), which is a wholly owned subsidiary of ARTRA. BCA has no assets other than the shares of Bagcraft. ARTRA is a public company, whose stock is listed on the New York and Pacific Stock Exchanges under the symbol ATA. ARTRA, along with its wholly-owned subsidiary, Fill-Mor Holding, Inc. ("Fill-Mor"), also owns a significant minority interest in COMFORCE Corporation ("COMFORCE"), consisting of 1,769,703 shares or approximately 14% of the outstanding common stock of COMFORCE as of January 27, 1997. COMFORCE 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 capabilities. COMFORCE is a public company, whose stock is listed on The American Stock Exchange under the symbol "CFS." On January 27, 1997, the last reported sale price for the Common Stock of COMFORCE was $9.69 per share. Fill-Mor has no assets other than the COMFORCE shares. The Offering ARTRA is required under certain agreements it has entered into with shareholders and warrant holders to register the shares of Common Stock held by such shareholders or issuable upon the exercise of warrants held by such warrantholders. Existing security holders of the Company are offering up to 3,996,468 shares of Common Stock held by them, or issuable to them upon the exercise of options or warrants held by them. Common Stock Offered by the Selling Shareholders ............ 3,996,468 shares* Common Stock Outstanding as of January 27, 1997.............. 7,868,620 shares Common Stock Issuable Under Options as of January 27, 1997... 923,850 shares Common Stock Issuable Under Warrants as of January 27, 1997.. 1,696,032 shares - ----------------- *Includes Common Stock issuable under options and warrants. Neither the warrants or options are being registered. The Company is registering shares of common stock issuable upon exercise of the options and warrants, shares issuable upon conversion of certain notes, and shares issued in payment of ARTRA notes and other obligations. See "Selling Shareholders" and "Plan of Distribution." Proceeds From Exercise of Warrants or Options The Company will not receive any proceeds from the sale of the Common Stock offered hereby by the Selling Shareholders. However, if the holders of options or warrants to purchase shares of Common Stock exercise their warrants or options in order to sell the underlying shares, the Company will receive the amount of the exercise prices of any warrants or options so exercised. Neither the warrants or options are being registered. The Company - 3 - is registering shares of common stock issuable upon exercise of the warrants, shares issuable upon conversion of certain notes, and shares issued in payment of ARTRA notes and obligations. The Company cannot predict when or if it will receive proceeds from the exercise of warrants or options, or the amount of any such proceeds. The Company intends to use the proceeds, if any, received from the exercise of warrants or options to retire or reduce indebtedness, to pay certain expenses of the offering and for working capital. Risk Factors Prospective investors should carefully review the risk factors and other information set forth herein, including under the heading "Risk Factors" which discusses, among other things, significant risks associated with an investment in the Company. Selected Financial Data Following is a consolidated summary of selected financial data of the Company for the nine month periods ended September 26, 1996 and September 28, 1995 and each of the five fiscal years in the period ended December 28, 1995. The information for the year ended December 29, 1994 has been reclassified to reflect the operations of Arcar Graphics, Inc. as discontinued operations. The sale of Arcar (acquired effective April 9, 1994) was completed on October 26, 1995. Certain selected financial data each of the four fiscal years in the period ended December 29, 1994 has been reclassified to reflect the discontinuance of the Company's fashion costume jewelry business effective September 30, 1995 conducted by its former majority-owned subsidiary COMFORCE (formerly known as The Lori Corporation ("Lori")). In October 1995, due to additional issuances of COMFORCE common stock, the Company's interest in COMFORCE was reduced to approximately 25% and the investment in COMFORCE was accounted for under the equity method during the fourth quarter of 1995. As of January 27, 1997 and September 26, 1996, the Company owned 1,769,703 and 1,813,036 shares, or approximately 14% and 19%, respectively of COMFORCE. See Notes 2 and 5 to the Company's condensed consolidated financial statements for the nine months ended September 26, 1996 for a further discussion of the Company's investment in COMFORCE and its results of operations. - 4 -
Nine Months Ended Fiscal Year Ended (E) -------------------- ----------------------------------------------------------- Sept 26, Sept 28, 1996 1995 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ ------ (in thousands except per share data) Net sales $ 90,162 $ 90,703 $ 121,879 $ 111,837 $ 113,584 $ 121,084 $ 123,906 Earnings (loss) from continuing operations (A) 3,523 (12,543) (16,943) (13,529) (8,327) (4,118) (11,191) Earnings (loss) from discontinued operations (B) -- (9,156) 10 (15,906) (216) (33,854) (1,970) Extraordinary credits (C) 9,424 9,113 14,030 8,965 22,057 -- -- Net earnings (loss) 12,947 (12,586) (2,903) (20,470) 13,514 (37,972) (13,161) Earnings (loss) per share: Continuing operations .32 (1.96) (2.69) (2.56) (1.84) (1.16) (2.87) Discontinued operations -- (1.36) -- (2.74) (.04) (7.74) (.49) Extraordinary credits 1.23 1.35 2.06 1.57 4.49 -- -- Net earnings (loss) 1.55 (1.97) (.63) (3.73) 2.61 (8.90) (3.36) Total assets (D) 86,131 79,161 77,949 93,429 92,774 98,731 126,277 Long-term debt 34,541 11,086 34,113 19,673 29,264 13,802 57,296 Debt subsequently discharged -- -- -- 9,750 -- -- -- Liabilities subject to compromise -- -- -- -- -- 41,500 -- Cash dividends -- -- -- -- -- -- --
- 5 - (A) Earnings from continuing operations for the nine months ended September 26, 1996 includes realized gains of $4,823,000 from dispositions of COMFORCE common common stock and a gain of $838,000 from an exchange of redeemable preferred stock of its subsidiary Bagcraft. (B) The loss from discontinued operations for the nine months ended September 26, 1996, and the year ended December 28, 1995 includes a charge to operations of $6,430,000 to write-off the remaining goodwill of Lori's fashion costume jewelry operations effective June 29, 1995, and a provision of $1,000,000 for loss on disposal of Lori's fashion costume jewelry operations. Earnings from discontinued operations for the year ended December 28, 1995 includes a gain on sale of Bagcraft's Arcar subsidiary of $8,483,000. The loss from discontinued operations for the year ended December 31, 1994 includes a charge to operations of $10,800,000 representing a write-off of New Dimensions goodwill. The loss from discontinued operations for the year ended December 31, 1992 includes charges to operations of $8,664,000 representing an impairment of goodwill at December 31, 1992 and $8,500,000 representing increased reserves for markdowns allowances and inventory valuation. (C) The 1996, 1995 and 1994 extraordinary credits represent gains from net discharge of bank indebtedness. The 1993 extraordinary credit represents a gain from a net discharge of indebtedness due to the reorganization of Lori's New Dimensions subsidiary. (D) As partial consideration for a debt settlement agreement, in December, 1994 Lori's bank lender received all of the assets of the New Dimensions subsidiary. (E) Effective in 1993, the Company adopted a 52/53 week fiscal year ending the last Thursday of December. - 6 - RISK FACTORS THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING RISK FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY AND THIS OFFERING, TOGETHER WITH THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION. Continuing Losses The Company has experienced losses from continuing operations in each year since 1990. Losses from continuing operations of $16,943,000 and $13,529,000 were experienced in 1995 and 1994, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Indebtedness As of January 27, 1997, the Company had outstanding short-term indebtedness of approximately $16,000,000, of which $3,150,000 was past due. Bagcraft, the Company's operating subsidiary, is also obligated to pay substantial amounts in the near future under the terms of its debt obligations. At January 27, 1997, Bagcraft, the Company's operating subsidiary, had borrowings of $28,700,000 outstanding under its Credit Agreement. Effective December 30, 1996, Bagcraft's Credit Agreement was amended to provide for a $20,000,000 term loan payable in varying quarterly installments through maturity on September 30, 2002 and a revolving credit loan, subject to a borrowing base, with maximum borrowings of $18,000,000. Term loan installments totaling $2,000,000 are payable in 1997. At January 27, 1997, the revolving credit loan had outstanding borrowings of $8,700,000 due September 30, 2002. Initial borrowings under Bagcraft's Credit Agreement in December 1993 refinanced borrowings under a previous bank loan agreement. Bagcraft also had approximately $712,000 in 1997, on loans from the City of Baxter Springs, Kansas, the aggregate principal amount of which was $10,681,000 as of January 27, 1997. Proceeds from the Baxter Springs, Kansas loans financed the construction of Bagcraft's 265,000 sq. ft. production facility. ARTRA has outstanding an aggregate of $3,000,000 in loans from The Research Center of Kabbalah ("RCK"). All of these loans are currently past due, but RCK has made no demand for payment of past due amounts. During 1993, RCK, which held approximately 6% of ARTRA's outstanding Common Stock (including the stock issuable upon the exercise of warrants) as of January 27, 1997, made certain short-term loans to the Company of which $2,000,000, with interest at 10%, was outstanding at December 31, 1993. As additional compensation, RCK received warrants to purchase an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00 to $7.00 per share based upon the market price of ARTRA's common stock at the date of issuance. The warrants expire five years from the date of issuance. In January 1994, RCK made an additional $1,000,000 short-term loan to the Company, also with interest at 10%. The proceeds of these loans were used to pay down various ARTRA short-term loans and other debt obligations. In December, 1995, RCK received 126,222 shares of ARTRA common in payment of past due interest through October 31, 1995. In 1996 and 1997 RCK received cash payments of approximately $390,000 representing interest due through December, 1996. Payment on the loans was due March 31, 1994. In July 1996, ARTRA completed a private placement of 12% promissory notes due April 15, 1997 in the principal amount of $7,575,000. The notes are collateralized by ARTRA's interest in all of the common stock of BCA (the parent company of Bagcraft). As additional consideration, the noteholders received warrants to purchase an aggregate of 383,750 ARTRA common shares at a price of $6.00 per share. In addition, warrants to purchase an additional 35,000 shares were issued to an unrelated party as a commission in connection with the offering. The warrants became exercisable August 15, 1996 and expire April 15, 1999. The warrantholders have the right to put these warrants back to ARTRA at any time during the period April 15, 1997 to October 15, 1997, at a price of $2.00 per share. The cost of this obligation ($837,500 if all warrants are put back to the Company) is being accrued in the Company's financial statements as a charge to interest expense over the period April 15, 1996 (the commencement date of the private placement) through April 15, 1997 (the maturity date of the notes as well as the date the warrantholders have the right to put their warrants back to ARTRA). The proceeds from this private placement were used to pay down various ARTRA debt obligations. On August 15, 1996, ARTRA and its 100% owned Fill-Mor subsidiary entered into a $2,500,000 term loan agreement with Manufacturers Bank. The loan, payable by Fill-Mor in 90 days from the date of the loan agreement, bears interest, payable monthly, at the bank's reference rate. Fill-Mor has an option to extend the loan for an additional 90 days. In November 1996, the option was exercised and the loan was extended to February 11, 1997. The loan, guaranteed by ARTRA, is currently collateralized by 960,000 shares of COMFORCE common - 7 - stock. In the event of a default, 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. Effective December 19, 1996, ARTRA and COMFORCE entered into a Settlement Agreement pursuant to which COMFORCE agreed to include in its Registration Statement on Form S-1 380,000 shares of COMFORCE common stock held by ARTRA and its Fill-Mor susidiary. The proceeds of sale are to be used principally to discharge this loan and certain other ARTRA debt obligations collateralized by COMFORCE common stock. In August, 1996, ARTRA borrowed $500,000 from Howard Conant, then 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, Mr. Conant received a warrant, expiring in 2001, to purchase 25,000 ARTRA common shares at a price of $5.00 per share. The proceeds of the loan were used for working capital. At the Company's annual meeting of shareholders, held August 29, 1996, Mr. Conant was elected to the Company's board of directors. In December, 1996, the loan was extended until April 23, 1997 and Mr. Conant received, as additional compensation, a warrant , expiring in 2001, to purchase 25,000 ARTRA common shares at a price of $5.875 per share. In January, 1997, ARTRA borrowed an additional $300,000 from Mr. Conant evidenced by a short-term note, due December 23, 1996, bearing interest at 8%. The loan is collateralized by 100,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. As additional compensation for the loan, Mr. Conant received a warrant, expiring in 2002, to purchase 25,000 ARTRA common shares at a price of $5.75 per share. As of January 27, 1997, borrowings from Mr. Conant totaled $800,000. ARTRA also has outstanding short-term borrowings from other unrelated parties aggregating approximately $2,100,000, of which $150,000 is past due. The remaining amounts come due at various times in 1997. The notes were issued at various times during the period May, 1991 to January, 1997, and the interest rates vary between 8 and 15 percent. The proceeds of these loans were used for working capital. ARTRA was the obligor under two demand notes issued to CIPKA S.A., an unrelated Swiss company, in the amount of $1,811,000. The notes were issued in October, 1990 with interest at 15 percent. In September, 1996, CIPKA S.A. agreed to exchange its notes and the amounts due under other ARTRA obligations for 2,250 shares of ARTRA Series E Preferred Stock. Prior to the issuance of the ARTRA Series E Preferred Stock, ARTRA and CIPKA S.A. mutually agreed to renegotiate the settlement of ARTRA's obligations to CIPKA S.A. In January 1997, ARTRA received notice that its obligations to CIPKA were sold to PRESTWOOD LIMITED, an unrelated company registered in Tortola, BVI. ARTRA anticipates that it will settle this obligation in the short-term through the issuance of ARTRA common stock. ARTRA has suffered recurring losses from operations. As a result of these factors, ARTRA 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. Due to its limited ability to receive operating funds from its operating subsidiary, 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 (including COMFORCE shares) and/or other equity infusions. ARTRA plans to continue to seek such alternative sources of funds to meet its future operating expenditures. However, there can be no assurance that it will be successful in doing so in the future. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Status of Debt Agreements and Operating Plan." Potential Volatility in Market Price of COMFORCE Common Stock ARTRA, along with its wholly owned Fill-Mor subsidiary, owns a significant minority interest in COMFORCE, consisting of 1,769,703 shares or approximately 14% of the outstanding common stock of COMFORCE as of January 27, 1997, with an aggregate value as of that date of approximately $17,144,000 (value at December 26, 1996 was $25,719,000). The value of COMFORCE stock has fluctuated substantially in recent periods. The high per share for the twelve month period ending December 26, 1996 was $34.12, and the per share low during the same period was $6.00. There can be no assurance that the value of the COMFORCE shares will not decline substantially in the future, which would have a material adverse effect on the value of ARTRA. - 8 - The COMFORCE shares constitute unregistered securities under the Securities Act of 1933 (the "Act"). As a result of ARTRA's former involvement in the operations and management of COMFORCE, ARTRA was considered an "affiliate" of COMFORCE under the Act, and because of this, the number of shares that ARTRA could sell without registration under the Act within any three-month period was limited. For the reasons set forth below, the Company believes that an exemption from registration under Rule 144(k) promulgated under the Act is now available to it, and therefore the limitations under Rule 144 on the number of restricted shares that ARTRA could sell within any three-month period without registrations are no longer applicable to it. Rule 144(k) of the Act permits the sale without registration under the Act of restricted shares of an issuer that have been held in excess of three years by persons who have not been "affiliates" of the issuer for the preceding three months. Since December 28, 1995, ARTRA, Fill-Mor and their respective officers, directors, affiliates and employees have held no managerial or executive positions with COMFORCE nor have any of the above served in the capacity of directors, nor have any of them had the right under any agreement or otherwise to serve in such capacity since December 28, 1995. Likewise, neither ARTRA, Fill-Mor nor any of the above had the right under any agreement or otherwise to serve in such capacity since December 28, 1995. Finally, since that time, neither ARTRA, Fill-Mor nor any of their respective officers, directors, affiliates and employees have had any material involvement in, nor have they been able to exercise any control over, COMFORCE, either individually or together with any other person or entity. Because of this, the Company believes that ARTRA and Fill-Mor are not "affiliates" of COMFORCE and, since they have held their shares in excess of three years, qualify for the exemption under Rule 144(k) set forth above. There can be no assurance that the Securities and Exchange Commission would concur with the Company's position. Notwithstanding this, ARTRA does not believe that its ability to sell COMFORCE shares, or eventually to realize on the value of its COMFORCE shares, will be affected in a material adverse way, although it may not be able to sell its COMFORCE shares as quickly as it could if it were to use Rule 144(k), and in any event, an attempt to sell a large number of its COMFORCE shares over a limited period could be expected to result in a reduction in the value of such shares. Effective December 19, 1996, ARTRA and COMFORCE entered into a Settlement Agreement pursuant to which COMFORCE agreed to include in its Registration Statement on Form S-1 380,000 shares of COMFORCE common stock held by ARTRA and its Fill-Mor susidiary and ARTRA agreed to a Lock-up agreement which limits its ability to sell its remaining COMFORCE common shares for a period of 360 days after the effective date of COMFORCE's Registration Statement. The sale of 1,410,000 COMFORCE common shares held by ARTRA and Fill-Mor is restricted because the shares are collateral for various short-term loans (359,703 shares held by ARTRA and Fill-Mor remain unencumbered at January 27, 1997). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Investment in COMFORCE Corporation." Inability to Honor Put Options ARTRA has entered into various agreements under which it has sold its common shares along with put options that require ARTRA to repurchase these shares at the option of the holder, usually one year after the date of each such agreement. At January 27, 1997, options were outstanding that, if exercised, would require ARTRA to repurchase 72,984 shares of its Common Stock for an aggregate of $2,979,000. ARTRA does not have adequate resources to make such redemptions. However, the holders have the option to sell their shares in the market, subject to the limitations of Rule 144 of the Securities Act, which could adversely impact the market price of the Common Stock. At its discretion and subject to its financial ability, ARTRA could reimburse the option holders for any shortfall resulting from such sale. At the present time none of the option holders have demanded payment, and all of the option holders have indicated to the Company a willingness to work with the Company to satisfy the obligations, in some manner other than a demand for payment under the put option. See "Risk Factors - Dilution and Depression of Market Price from Issuance of Additional Common Stock" and "- Limited Trading Activity." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Need for Additional Funds; Unfavorable Credit Terms The Company continues to be engaged in efforts to obtain equity and debt financing. Even if the Company's Bagcraft subsidiary generates positive cash flow (and there can be no assurances that it will), it is restricted in - 9 - paying dividends or making distributions to the Company under certain loan agreements (except for limited overhead allocations payable to ARTRA in certain circumstances and payments under tax sharing arrangements where applicable). As a result, ARTRA does not have a means of generating cash flow on a regular basis. Consequently, ARTRA is reliant on its ability to place debt and equity securities privately and to sell COMFORCE shares to raise cash needed to meet its working capital requirements. The costs and conditions associated with raising required capital may not be on favorable terms, and the Company may not be able to sell COMFORCE shares at favorable prices. In recent years, short-term borrowings by the Company from private investors have generally been available, but at a high cost to the Company. Stated base interest rates on its notes have been as high as 20% (with substantially higher default rates), and certain of the borrowers have demanded warrants as additional consideration for agreeing to extend credit to the Company. Warrants to purchase approximately 1,696,032 shares of the Company's common stock (at exercise prices equal to the market price when issued, which has ranged from $3.50 to $9.875 per share) have previously been issued to private lenders in connection with these transactions. The continuation of such practices could result in further dilution of the existing shareholders' interests in the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Status of Debt Agreements and Operating Plan." Risks Relating to Peter R. Harvey The Company's ability to continue to refinance its operations is dependent on the ability of the Company's officers and directors, especially Peter R. Harvey, to raise capital. In the event Mr. Harvey were not affiliated with the Company for any reason, this could adversely affect the ability of the Company to survive. As of December 26, 1996 (the end of ARTRA's most recent fiscal year), ARTRA has outstanding total amounts due from Peter R. Harvey, including accrued interest, of $8,117,000. The advances bear interest at the prime rate plus 2%, which was 10.25% at December 26, 1996. This receivable has been classified as a reduction of common shareholder's equity. As partial collateral for amounts due from Peter R. Harvey, the Company has received the pledge of 1,523 shares of ARTRA redeemable Series A 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 PureTec Corporation, a publicly traded corporation ("PureTec"). As of January 27,1997, the closing market price of PureTec on the NASDAQ National Market was $1.969 per share. In addition, in connection with a discharge of certain bank indebtedness discussed below, ARTRA received rights under a mortgage of certain real estate owned by Mr. Harvey. The real estate had an appraised value of $2 million as of December 13, 1993. The mortgage secures $2,150,000 of the amount owed by Mr. Harvey. Bank of America Illinois has a senior security interest in the amount of $850,000. See "Transactions with Management And Others -- Settlement of the Bank of America Illinois Debt." Explanatory Paragraph in Report of Independent Accountants The Company's independent accountants, Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), has issued an explanatory paragraph with respect to the Company, that expresses substantial doubt as to the ability of the Company to continue as a going concern due to recurring losses from operations and a net capital deficiency at December 28, 1995. Coopers & Lybrand has stated in its report that, as a result of these factors, the Company has experienced difficulty in obtaining adequate financing to replace the current credit agreements, to fund its debt service and liquidity requirements. The Consolidated Financial Statements do not include any adjustments that might result from this uncertainty. If the Company ceases to operate as a going concern, an investor would be likely to lose his entire investment in the Company's Common Stock. See Note 1 to "Consolidated Financial Statements." Dilution and Depression of Market Price from Issuance of Additional Common Stock As of January 27, 1997, there were 7,868,620 shares of the Company's common stock outstanding. The Company's Board of Directors has the power to issue any and all authorized but unissued shares without shareholder approval. At the annual meeting held on August 29, 1996, the Company's shareholders - 10 - approved an amendment to the Company's Articles of Incorporation to increase the number of authorized common shares from 7,500,000 to 20,000,000. In addition, the Company anticipates that holders of options and warrants will exercise their options and warrants in order to sell the underlying shares registered hereby. Such an exercise could result in a dilution of the interests of existing shareholders. Purchasers of the Shares offered hereby should be aware that the issuance of additional shares may result in a reduction in the market price of the Company's Common Stock then outstanding. See "Description of the Company's Securities." See also "Risk Factors - Limited Trading Activity." Possible Delisting of Securities from the New York Stock Exchange and the Pacific Stock Exchange The Company's Common Stock is currently listed on the New York and Pacific Stock Exchanges. The Company has been unable to maintain the standards for continued listing on these exchanges, and the Company's securities could be subject to delisting from these exchanges at any time. Trading of the Common Stock might thereafter be conducted in the over-the-counter markets on the electronic bulletin board established for securities that do not meet the New York and Pacific Stock exchange listing requirements or in what is commonly referred to as the "pink sheets." If delisting were to occur, an investor could find it more difficult to dispose of, or to obtain accurate quotations regarding the price of the Company's Common Stock, and the market price of the Common Stock could decline significantly. Composition of the Board The Company's Articles of Incorporation require that at least six persons serve on the Board of Directors. Vacancies existed on the Company's Board between 1989 and August 29, 1996. All corporate actions taken between October 12, 1993 and August 29, 1996 are potentially voidable since such actions were taken in reliance on the consent or affirmative vote of less than four of the Company's directors which would constitute a majority of the required six person Board. See "Management -- Information Regarding Directors." Conflicts of Interest In the past, the Company has been a party to numerous transactions with officers and directors of the Company or with entities in which officers and directors of the Company own substantial equity interests. While the Company does not presently contemplate effectuating any additional transactions with officers and directors of the Company or with management-owned entities, there can be no assurance that it will not do so in the future. See "Transactions with Management and Others." In addition, as described under "Principal Shareholders," various officers and directors hold warrants or options to purchase shares of the Company's Common Stock, including at exercise prices lower than the market price of the Company's Common Stock as of the date hereof. Limited Trading Activity During the six months ended December 26, 1996, the daily average number of shares of Common Stock traded on the New York Stock Exchange was approximately 39,500 shares. If such trading levels continue, it may be difficult for Selling Shareholders to effect sales of their shares on the New York and Pacific Stock Exchanges, and the placement of a substantially larger number of sell orders could materially and adversely impact the market price - 11 - of the Common Stock. See also "Risk Factors - Dilution and Depression of Market Price from Issuance of Additional Common Stock." Competitive Conditions in the Packaging Products Industry The packaging products industry is highly competitive. The Company's Bagcraft subsidiary competes as a printer and converter within the competitive flexible packaging business. Management believes the principal competitive factors in the Company's markets are product quality and functionality, price, service and reputation. Bagcraft encounters competition from both integrated producers and independents in each of its four divisions. Some of these competitors are larger and have access to greater financial resources than Bagcraft. Bagcraft's costs have increased substantially in recent years, largely due to increases in the cost of paper. Although Bagcraft generally seeks to pass its increased costs on to its customers, this is frequently not possible due to the competitive nature of the paper products industry. See "Business and Properties - Packaging Products Segment." Litigation At December 26, 1996, ARTRA has reserved $1,900,000 for business litigation and environmental liabilities. Based on investigation and settlement discussions, the Company believes this to be a sufficient amount for any potential costs or liabilities for the matters described below. However, no assurance can be given that the reserved amount is sufficient to satisfy all potential business litigation and environmental liabilities. As described under "Business and Properties - Legal Proceedings" herein, ARTRA or its predecessors or their subsidiaries have been identified by the U.S. Environmental Protection Agency ("EPA") as potentially responsible parties for environmental clean-up costs (or sued by a named potentially responsible party seeking indemnification or contribution for clean-up costs) for waste sent to several sites included on the EPA's National Priorities List, which are commonly known as "Superfund" sites. In addition, ARTRA or its predecessors and their subsidiaries are alleged to have sent hazardous substances to certain other sites which, although not designated as Superfund sites, are sites at which environmental clean-up or remediation may be required to be undertaken. ARTRA and its predecessors, directly and through subsidiaries, have, since 1960, operated in excess of 30 manufacturing facilities. Certain of these facilities used and/or generated hazardous materials and disposed of the hazardous substances, directly or through third party waste disposal firms at various off-site waste disposal locations, in most cases before laws had been enacted governing the safe disposal of hazardous substances. ARTRA has not conducted a comprehensive audit of potential environmental liability at the facilities formerly owned or operated by ARTRA or its predecessors and their subsidiaries since it is no longer the owner or operator of most of the properties at which it or its predecessors or their affiliates conducted manufacturing operations. As a result, ARTRA cannot accurately quantify potential environmental liability associated with past ownership or operation of these facilities. ARTRA did not keep records of the companies with which it contracted for the disposal of wastes before such record-keeping became mandated by law. In addition, even if ARTRA is not found to be responsible for clean-up costs at any particular site, the costs of defending itself in any proceedings or inquiries instituted by the EPA, any state environmental agencies or private parties could itself be significant. As described under "Risk Factors - Need for Additional Funds" herein, ARTRA has limited funds available to it, including for its legal defense. In certain cases, ARTRA may be unable to raise - 12 - the funds needed to mount an adequate (or any) defense against the claims raised, even if it has legal grounds to do so. In one case described under "Business and Properties - Legal Proceedings" herein, ARTRA did not prosecute an appeal of a decision adverse to ARTRA in which its insurer was held not responsible for defending or indemnifying ARTRA in connection with two environmental clean-up cases in California. In addition, in another case, ARTRA entered into a consent decree with the EPA to pay certain clean-up costs, but was unable to pay the costs it had agreed to bear. See "Business and Properties - -- Legal Proceedings." No Cash Dividends The Company has not paid any cash dividends on its Common Stock in recent years and does not anticipate paying any such dividends in the foreseeable future. In addition, the Bagcraft operating subsidiary of the Company is prohibited from or restricted in paying dividends or making distributions to the Company under various loan agreements (except for limited overhead allocations payable to ARTRA in certain circumstances and tax sharing agreements where applicable). Accordingly, even if ARTRA were able to pay dividends to its shareholders, the restrictions or limitations on Bagcraft in upstreaming payments would make payment of dividends by ARTRA unlikely. See "Description of the Company's Securities." Negative Effect on Shareholders from Possible Issuance of Preferred Stock The Company is authorized to issue up to 2,000,000 shares of preferred stock, par value $1,000 per share. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by shareholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. In 1990 the Company issued 3,750 shares of Series A Preferred Stock. No other preferred stock is currently outstanding and the Company has no present plans for the issuance thereof. The issuance of any preferred stock could affect the rights of the holders of Common Stock and, in certain circumstances, reduce the value of the Common Stock. See "Description of the Company's Securities." - 13 - CAPITALIZATION (in thousands) The following table sets forth the capitalization of the Company at September 26, 1996. The following should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this Prospectus. Current maturities of long-term debt $ 2,407 =========== Long-term debt: Bagcraft Credit Agreement, Term loans, interest at the prime rate plus 1.75% to 3%, matures 9/30/97 $ 12,400 Revolving credit loan, interest at the prime rate plus 1.5%, matures 9/30/97 12,311 Unamortized discount (71) Bagcraft, City of Baxter Springs, Kansas loan agreements, interest, at varying rates to 6.6%, due in varying amounts through 2025 9,901 ----------- $ 34,541 =========== Obligation expected to be settled by the issuance of common stock $ 2,250 =========== Redeemable common stock, issued 164,847 shares $ 3,565 =========== 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 =========== 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; 8,650 shares issued and outstanding $ 1,978 =========== 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 =========== 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 =========== - 14 - Common stock, no par value; authorized 20,000,000 shares; issued 7,603,766 shares $ 5,777 Additional paid-in capital 40,140 Unrealized appreciation of investments 34,960 Receivable from related party, including accrued interest (5,861) Accumulated deficit (86,568) ----------- (11,552) Less treasury stock (7,628 shares), at cost (52) ----------- Total shareholders' equity $ (11,604) =========== Total capitalization $ 50,420 =========== - 15 - Management's Discussion and Analysis of Financial Condition and Results of Operations. ARTRA, through its Bagcraft subsidiary, currently operates in one industry segment as a manufacturer of packaging products principally serving the food industry. ARTRA also owns a significant minority interest in COMFORCE along with ARTRA's wholly owned Fill-Mor subsidiary, consisting of 1,769,703 shares or approximately 14% of the outstanding common stock of COMFORCE as of January 27, 1997. COMFORCE 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 capabilities. COMFORCE is a public company, whose stock is listed on The American Stock Exchange under the symbol "CFS." On January 27, 1997, the last reported sale price for the Common Stock of COMFORCE was $9.69 per share. Fill-Mor has no assets other than its COMFORCE shares. 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 for the nine months ended September 26, 1996, 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. The sale of Arcar resulted from an unsolicited offer from an unrelated entity for an amount that management believed would exceed the long-term appreciation of Arcar's assets. COMFORCE Prior to September, 1995, ARTRA's then 62.9% owned subsidiary, COMFORCE (formerly 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 and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of the fashion costume 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 COMFORCE, 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. The Assumption Agreement also provided for ARTRA to exchange its interest in 100% of Lori's Series C cumulative preferred stock for 100,000 newly issued shares of COMFORCE common stock. - 16 - 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. The acquisition of COMFORCE Global was completed on October 17, 1995. 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 believed 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 to the Company's condensed consolidated financial statements for the nine months ended September 26, 1996 for a further discussion of the accounting treatment of ARTRA's investment in COMFORCE. Effective December 19, 1996, ARTRA and COMFORCE agreed to settle various differences in the interpretation of certain agreements relating to the Global acquisition, whereby, among other things: (a) COMFORCE delivered to ARTRA 100,000 shares of COMFORCE common stock in consideration of ARTRA's guarantee of the Global purchase price to the seller and 100,000 shares of COMFORCE common stock for the cancellation of the Series C Preferred Stock. ARTRA's financial statements have reflected the issuance of these 200,000 COMFORCE common shares to ARTRA since the fourth quarter of 1995. (b) ARTRA delivered to COMFORCE certificates evidencing its ownership of 100% of the Lori Series C Preferred Stock. (c) COMFORCE agreed to include in its Registration Statement on Form S-1 to register for resale 380,000 shares of COMFORCE common stock held by ARTRA and its Fill-Mor subsidiary. Sales proceeds will be used principally to discharge the Manufacturers Bank loan and certain other ARTRA debt obligations. (d) ARTRA agreed to a Lock-up Agreement which limits its ability to sell its remaining COMFORCE common shares for a period of 360 days after the effective date of COMFORCE's Registration Statement on Form S-1. (e) ARTRA deposited 125,000 shares of its COMFORCE common stock into an escrow account to collateralize its remaining obligations under the Assumption Agreement. - 17 - Results of Operations On October 26, 1995, the Company's wholly-owned subsidiary, Bagcraft, completed the sale of the business assets, subject to the buyer's assumption of certain liabilities, of its Arcar subsidiary. In September, 1995, COMFORCE adopted a plan to discontinue its jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of the jewelry business. 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 following discussion of results of operations is presented for the Company's continuing operations at September 26, 1996 and December 28, 1995, which were conducted by the Company's Bagcraft subsidiary. The Company's Bagcraft subsidiary 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. Nine Months Ended September 26, 1996 vs. Nine Months Ended September 28, 1995 Continuing Operations 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 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 $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 to discharges of bank indebtedness in the fourth quarter of 1995 and the first quarter of 1996. - 18 - 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. Discontinued Operations The 1995 loss from discontinued operations of $9,156,000 consists of a charge to operations of $6,430,000 to write-off the remaining goodwill of Lori's fashion costume jewelry operations, a provision of $1,000,000 for loss on disposal of Lori's fashion costume jewelry operations and operating losses of Lori's fashion costume jewelry operations, partially offset by operating earnings of Bagcraft's Arcar subsidiary. Year Ended December 28, 1995 vs. Year Ended December 29, 1994 Continuing Operations Net sales from continuing operations of $121,879,000 for the year ended December 28, 1995 were $10,042,000, or 9.0%, higher than net sales from continuing operations for the year ended December 29, 1994. The 1995 sales increase is attributable to increased 1995 selling prices due to the significant increases in paper costs in the second half of 1994 and early 1995 and to an improved sales mix in 1995. The Company's cost of sales from continuing operations of $102,508,000 for year ended December 28, 1995 increased $7,742,000 as compared to year ended December 29, 1994. Cost of sales from continuing operations in the year ended December 28, 1995 was 84.1% of net sales compared to a cost of sales percentage of 84.7% for the year ended December 29, 1994. The increase in cost of sales is primarily attributable to the significant increases in paper costs in the second half of 1994 and early 1995. The decrease in cost of sales percentage is primarily attributable to the Company's ability to pass along the significant increases in paper costs and to improved production efficiencies in 1995. Selling, general and administrative expenses from continuing operations were $19,131,000 in the year ended December 28, 1995 as compared to $16,760,000 in the year ended December 29, 1994. Selling, general and administrative expenses were 15.7% of net sales in the year ended December 28, 1995 as compared to 15.0% of net sales in the year ended December 29, 1994. The 1995 increase in selling, general and administrative expenses is primarily attributable to a compensation charge of $3,000,000 related to the issuance of a 35% common stock interest in COMFORCE as additional compensation for certain individuals to enter into employment or consulting services agreements to manage its entry into and development of the telecommunications and computer technical staffing services business. In recent years, Bagcraft has experienced a decline in its domestic microwave popcorn business due to the acquisition of one of its major customers by a company with its own packaging ability. Accordingly, at December 31, 1995, Bagcraft incurred a charge to operations of $1,503,000 to write-down the carrying value of idle machinery and equipment dedicated to the production of microwave popcorn products. Operating loss from continuing operations in the year ended December 28, 1995 was $5,593,000 as compared to operating loss of $4,026,000 in the year ended December 29, 1994. The increased operating loss is primarily attributable to a compensation charge of $3,000,000 related to the issuance of a 35% common stock interest in COMFORCE as additional compensation for certain individuals to enter into employment or consulting services agreements to manage its entry into and development of the telecommunications and computer technical staffing services business and a charge to operations of $1,503,000 to write-down the carrying value of idle machinery and equipment dedicated to the production of microwave popcorn products, partially offset by improved operating margins of the Bagcraft subsidiary. - 19 - Interest expense from continuing operations in the year ended December 28, 1995 increased $1,164,000 as compared to the year ended December 29, 1994. The 1995 increase is principally due to the cost of ARTRA common stock issued as additional compensation for the December 1995 private placement of ARTRA short-term notes. 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 and 1994 pre-tax losses. The 1995 extraordinary credit represents a net gain from discharge of bank indebtedness. Discontinued Operations Earnings from discontinued operations of $10,000 for the year ended December 28, 1995 consisted of a charge to operations of $6,430,000 to write-off the remaining goodwill of Lori's fashion costume jewelry operations, a provision of $1,000,000 for loss on disposal of Lori's fashion costume jewelry operations and operating losses of Lori's fashion costume jewelry operations, offset by a gain on sale of Bagcraft's Arcar subsidiary of $8,483,000 and operating earnings of Bagcraft's Arcar subsidiary. The loss from discontinued operations of $15,906,000 for the year ended December 29, 1994 consisted principally of a charge to operations of $10,800,000 to write-off goodwill of Lori's former New Dimensions subsidiary and operating losses of Lori's fashion costume jewelry operations. Year Ended December 29, 1994 vs. Year Ended December 30, 1993 Continuing Operations Net sales from continuing operations of $111,837,000 for the year ended December 29, 1994 were $1,747,000, or 1.5%, lower than net sales from continuing operations for the year ended December 30, 1993. The 1994 net sales decrease is primarily attributable to the sale of Bagcraft's Roll Press division, which was completed in the second quarter of 1993. The Company's cost of sales from continuing operations of $94,766,000 for year ended December 29, 1994 increased $1,305,000 as compared to year ended December 30, 1993. Cost of sales from continuing operations in the year ended December 29, 1994 was 84.7% of net sales compared to a cost of sales percentage of 82.3% for the year ended December 30, 1993. The increase in the packaging segment cost of sales and cost of sales percentage is primarily attributable to unforeseen delays in the completion of and higher than anticipated start-up costs of the Baxter Springs, Kansas production facility and higher raw material costs in the second half of 1994, partially offset by a more favorable product mix. Selling, general and administrative expenses from continuing operations were $16,760,000 in the year ended December 29, 1994 as compared to $15,537,000 in the year ended December 30, 1993. Selling, general and administrative expenses were 15.0% of net sales in the year ended December 29, 1994 as compared to 13.7% of net sales in the year ended December 30, 1993. The 1994 increase in selling, general and administrative expenses is primarily attributable to an increase in employee benefit costs and professional fees. In December, 1993 the Bagcraft subsidiary recorded a charge to operations of $1,175,000 representing equipment and inventory relocation costs and employee severance and outplacement costs relating to the construction of a new manufacturing facility in Baxter Springs, Kansas. Operating loss from continuing operations in the year ended December 29, 1994 was $4,026,000 as compared to operating loss of $974,000 in the year ended December 30, 1993. The increased operating loss is primarily attributable to unforeseen delays in the completion of and higher than anticipated start-up costs of the Baxter Springs, Kansas production facility. - 20 - Interest expense from continuing operations in the year ended December 29, 1994 increased $2,067,000 as compared to the year ended December 30, 1993. The 1994 increase is principally due to an overall increase in borrowings due to the December, 1993 refinancing of Bagcraft's bank debt, an increase in the prime rate and fees incurred for short-term borrowings at the Corporate entity. The 1994 extraordinary credit represents a net gain from discharge of bank indebtedness under the loan agreements of COMFORCE and its operating subsidiaries. The 1993 extraordinary credit represents a gain from a net discharge of indebtedness at COMFORCE's New Dimensions subsidiary. No income tax expense is reflected in the Company's financial statements resulting from the extraordinary credit due to the utilization of tax loss carryforwards. Discontinued Operations The loss from discontinued operations of $15,906,000 for the year ended December 29, 1994 consisted principally of a charge to operations of $10,800,000 to write-off goodwill of Lori's former New Dimensions subsidiary and operating losses of Lori's fashion costume jewelry operations. The loss from discontinued operations of $216,000 for the year ended December 30, 1994 consisted principally of operating losses of Lori's fashion costume jewelry operations. The increased 1994 operating losses of Lori's fashion costume jewelry operations was principally attributable to the combination of a soft retail environment, a planned reduction of in-store inventory levels by certain major customers in 1994 and a shift in the buying patterns of certain mass merchandisers from participation in Lori's service program to purchases of costume jewelry and accessories directly from manufacturers. 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. Cash and cash equivalents increased $277,000 during the year ended December 28, 1995. Cash flows from investing activities of $20,639,000 exceeded cash flows used by operating activities of $5,943,000 and cash flows used by financing activities of $14,419,000. Cash flows from investing activities represent proceeds from the October 26, 1995 sale of Arcar. Cash flows used by operating activities were principally attributable to the Company's loss from operations, exclusive of the effect of a charge to operations of $6,430,000 representing an impairment of goodwill at COMFORCE's discontinued jewelry business and a compensation charge to continuing operations of $3,000,000 representing the issuance in aggregate of a 35% common stock interest in COMFORCE as additional consideration under employment or consulting services agreements with certain individuals to manage COMFORCE's entry into and development of the telecommunications and computer technical staffing services business. Cash flows used by financing activities were principally attributable to a net reduction of long-term debt with proceeds from the October 26, 1995 sale of Arcar. 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. The Company's consolidated working capital deficiency decreased $34,107,000 to $26,365,000 during the year ended December 28, 1995. The decrease in working capital deficiency is principally attributable to the classification of borrowings under Bagcraft's credit agreement as long-term liabilities at - 21 - December 28, 1995 due to a February 1, 1996 amendment that extended the maturity date of the agreement until September 30, 1997 (see Note 10 to the Company's consolidated financial statements for the year ended December 28, 1995). At December 29, 1994, borrowings under Bagcraft's credit agreement were classified in the Company's consolidated balance sheet as currently payable. Status of Debt Agreements and Operating Plan At December 26, 1996 and September 26, 1996 the Parent Company was in default of provisions of certain of its credit agreements. Under certain debt agreements of Bagcraft with its lenders, Bagcraft is restricted in the distributions that it can make to ARTRA. 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 for the nine months ended September 26, 1996 and discussion below. ARTRA Corporate As of January 27, 1997, the Company had outstanding short-term indebtedness of approximately $16,000,000, of which $3,150,000 was past due. ARTRA has outstanding an aggregate of $3,000,000 in loans from RCK. All of these loans are currently past due, but RCK has made no demand for payment of past due amounts. During 1993, RCK, which held approximately 6% of ARTRA's outstanding Common Stock (including the stock issuable upon the exercise of warrants) as of December 26, 1996, made certain short-term loans to the Company of which $2,000,000, with interest at 10%, was outstanding at December 31, 1993. As additional compensation, RCK received warrants to purchase an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00 to $7.00 per share based upon the market price of ARTRA's common stock at the date of issuance. The warrants expire five years from the date of issuance. In January 1994, RCK made an additional $1,000,000 short-term loan to the Company, also with interest at 10%. The proceeds of this loan were used to pay down various ARTRA short-term loans and other debt obligations. In December, 1995, RCK received 126,222 shares of ARTRA common in payment of past due interest through October 31, 1995. Payment on the loans was due March 31, 1994. In 1996 and 1997 RCK received cash payments of approximately $390,000 representing past due interest through December, 1996. Payment on the loans was due March 31, 1994. In July 1996, ARTRA completed a private placement of 12% promissory notes due April 15, 1997 in the principal amount of $7,575,000. The notes are collateralized by ARTRA's interest in all of the common stock of BCA (the parent company of Bagcraft). As additional consideration, the noteholders received warrants to purchase an aggregate of 383,750 ARTRA common shares at a price of $6.00 per share. In addition, warrants to purchase an additional 35,000 shares were issued to an unrelated party as a commission in connection with the offering. The warrants became exercisable August 15, 1996 and expire April 15, 1999. The warrantholders have the right to put these warrants back to ARTRA at any time during the period April 15, 1997 to October 15, 1997, at a price of $2.00 per share. The cost of this obligation ($837,500 if all warrants are put back to the Company) is being accrued in the Company's financial statements as a charge to interest expense over the period April 15, 1996 (the commencement date of the private placement) through April 15, 1997 (the maturity date of the notes as well as the date the warrantholders have the right to put their warrants back to ARTRA). The proceeds from this private placement were used to pay down various ARTRA debt obligations. On August 15, 1996, ARTRA and its 100% owned Fill-Mor subsidiary entered into a $2,500,000 term loan agreement with Manufacturers Bank. The loan, payable by Fill-Mor in 90 days from the date of the loan agreement, bears interest, payable monthly, at the bank's reference rate. Fill-Mor has an option to extend the loan for an additional 90 days. In November 1996, the option was exercised and the loan was extended to February 11, 1997. The loan, guaranteed by ARTRA, is currently collateralized by 960,000 shares of COMFORCE common stock. In the event of a default, the bank has the right to sell all of its right 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. Effective December 19, 1996, ARTRA and COMFORCE entered into a Settlement Agreement pursuant to which COMFORCE agreed to include in its Registration Statement on Form S-1 380,000 shares of COMFORCE common stock held by ARTRA and its Fill-Mor susidiary. The proceeds of sale are to be used principally to discharge this loan and certain other ARTRA debt obligations collateralized by COMFORCE common stock. - 22 - In August, 1996, ARTRA borrowed $500,000 from Howard Conant,then a private investor, evidenced by a 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, Mr. Conant received a warrant, expiring in 2001, to purchase 25,000 ARTRA common shares at a price of $5.00 per share. The proceeds of the loan were used for working capital. At the Company's annual meeting of shareholders, held August 29, 1996, Mr. Conant was elected to the Company's board of directors. In December, 1996, the loan was extended until April 23, 1997 and Mr. Conant received, as additional compensation, a warrant , expiring in 2001, to purchase 25,000 ARTRA common shares at a price of $5.875 per share. In January, 1997, ARTRA borrowed an additional $300,000 from Mr. Conant evidenced by an short-term note, due December 23, 1996, bearing interest at 8%. The loan is collateralized by 100,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. As additional compensation for the loan, Mr. Conant received a warrant, expiring in 2002, to purchase 25,000 ARTRA common shares at a price of $5.75 per share. As of January 27, 1997, borrowings from Mr. Conant totaled $800,000. ARTRA also has outstanding short-term borrowings from other unrelated parties aggregating approximately $2,100,000, of which $150,000 is past due. The remaining amounts come due at various times in 1997. The notes were issued at various times during the period May, 1991 to January, 1997, and the interest rates vary between 8 and 15 percent. ARTRA has suffered recurring losses from operations and had a net capital deficiency at September 26, 1996 and December 28, 1995. As a result of these factors, ARTRA 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 subsidiary, 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 (including COMFORCE shares) and/or other equity infusions. ARTRA plans to continue to seek such alternative sources of funds to meet its future operating expenditures. ARTRA believes that it will be able to satisfy its obligations. However, there can be no assurance that ARTRA will be able to successfully refinance the above referenced indebtedness or that it will be able to sell COMFORCE shares at an acceptable price. See "Investment In COMFORCE Corporation." 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 was the obligor under two demand notes issued to CIPKA S.A., an unrelated Swiss company, in the amount of $1,811,000. The notes were issued in October, 1990 with interest at 15 percent. In September, 1996, CIPKA S.A. agreed to exchange its notes and the amounts due under other ARTRA obligations for 2,250 shares of ARTRA Series E Preferred Stock. Prior to the issuance of the ARTRA Series E Preferred Stock, ARTRA and CIPKA S.A. mutually agreed to renegotiate the settlement of ARTRA's obligations to CIPKA S.A. In January 1997, ARTRA received notice that its obligations to CIPKA were sold to PRESTWOOD LIMITED, an unrelated company registered in Tortola, BVI. ARTRA anticipates that it will settle this obligation in the short-term through the issuance of ARTRA common stock. In May, 1996, ARTRA borrowed $100,000 from Edward A. Celano, then a private investor, evidenced by an unsecured short-term note, due August 7, 1996, and renewed to February 6, 1997, bearing interest at 10%. The proceeds of the loan were used for working capital. At the Company's annual meeting of shareholders, held August 29, 1996, Mr. Celano was elected to the Company's board of directors. Effective January 17, 1997, Mr. Celano exercised his conversion rights and received 18,182 shares of ARTRA common stock as payment of the principal balance of his note. In October 1996 the Company and its Fill-Mor subsidiary entered into a margin loan agreement with a financial institution which provided for borrowings of $600,000, with interest approximating the prime rate. Borrowings under the loan agreement are collateralized by 215,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. The proceeds of the loan were used for working capital. In January, 1997, the loan was repaid with proceeds from other short-term borrowings. As of February 26, 1996, ARTRA was indebted to Bank of America Illinois ("B of A") in the sum of $14,563,639.59 including accrued interest and fees (the "Prior ARTRA Indebtedness"). As of February 26, 1996, Peter R. Harvey, an officer and director of ARTRA, was indebted to B of A in the sum of $7,496,830 - 23 - including accrued interest (the "Prior Harvey Indebtedness"). The Prior ARTRA Indebtedness and the Prior Harvey Indebtedness are collectively referred to as the "Debt," or "Prior Notes." On February 26, 1996, for an aggregate purchase price of $5,150,000 (the "Purchase Price") Arabella, S.A. ("Arabella") purchased from B of A (the "Debt Purchase") all of B of A's interest in the Debt except that B of A retained the rights to $3 million of the Prior Harvey Indebtedness. B of A then entered into a Participation Agreement with ARTRA pursuant to which B of A transferred to ARTRA the right to receive $2.15 million of the retained $3 million indebtedness. The $3 million indebtedness is secured by a mortgage on certain real estate owned by Mr. Harvey. B of A's rights to the remaining $850,000 of the indebtedness have priority over ARTRA's rights to the $2.15 million. The Prior ARTRA Indebtedness and the Prior Harvey Indebtedness were satisfied as follows. 1. ARTRA paid Arabella cash in the amount of $2,650,000, 100,000 shares of ARTRA common stock (valued at $440,667 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). 2. BCA executed a note in favor of Arabella in the principal amount of $1,900,000 with a maturity date of May 26, 1996 (the "New ARTRA Note"), and Peter R. Harvey executed a note in favor of Arabella in the principal amount of $2,296,830 (the "New Harvey Note"). The amount of the Harvey Note was reduced to $100,000 if payment was made by May 26, 1996. Arabella was entitled to up to an additional 100,000 shares of ARTRA common stock and 25,000 shares of COMFORCE stock depending on when ARTRA and Peter R. Harvey repaid the new debt. The New ARTRA and Harvey Notes were repaid in April, 1996, principally from the proceeds of a private placement completed in July (and commenced in April). Based on the date of the repayment, Arabella received an additional 50,000 shares of ARTRA stock, which had a value of $220,000 after a discount for restricted marketability. Arabella also received an additional $125,000 in lieu of the additional 12,500 shares of COMFORCE to which it was entitled based on the date of repayment. 3. ARTRA gave Arabella an option to purchase 40% of the common stock of Bagcraft for nominal consideration. The option was valued at $500,000. Per the terms of the agreement, ARTRA repurchased the option for $550,000 in April, 1996. ARTRA recognized a gain on the discharge of indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a receivable for Mr. Harvey's pro rata share ($1,089,000) of the debt discharge funded by the Company. In addition, ARTRA discharged $2,150,000 of amounts previously owed to it by Peter Harvey, which offset ARTRA's right to receive $2,150,000 from Mr. Harvey pursuant to the Participation Agreement discussed above. See "Transactions With Management And Others -- Settlement of the Bank of America Illinois Debt." 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. In the event the notes and all accrued interest were not paid in full at maturity, the noteholders had the option to convert all or a portion of the amount due into shares of ARTRA common at a conversion price of $3.00 per share. The proceeds from the private placement, held in escrow at December 28, 1995, were used to pay down other debt obligations in January, 1996. At March 28, 1996, the outstanding principal amount due on these notes was reduced to $1,975,000. In April, 1996, the remaining outstanding notes were repaid principally with proceeds from the private placement of ARTRA notes completed in July, 1996 as discussed above. - 24 - On March 31, 1994, ARTRA entered into a series of agreements with B of A and Kenny Construction Company ("Kenny"), which had guaranteed $2,500,000 of ARTRA bank notes held by B of A. A major shareholder and executive officer of Kenny is an ARTRA director. Per terms of the agreements, Kenny purchased $2,500,000 of ARTRA notes from B of A and B of A released Kenny from its $2,500,000 loan guaranty. As additional consideration, Kenny received an option to put back to ARTRA the 49,980 shares of ARTRA common stock which it had received as compensation for the former $2,500,000 loan guaranty at a price of $15.00 per share. The put option was exercisable on the later of the day that the $2,500,000 note payable to Kenny became due or the date the ARTRA bank notes payable to B of A were paid in full. The option price was to increase by $2.25 annually. During the first quarter of 1996, the $2,500,000 note and related accrued interest was paid in full, principally with the proceeds from additional short-term borrowings. The put option remains outstanding. On February 20, 1996, the Company issued 10% Secured Convertible Promissory Notes to two lenders for the aggregate principal amount of $2,400,000. Up to an aggregate principal amount of $400,000 of Secured Notes was convertible into common stock of the Company at the rate of $5.00 per share. The notes were collateralized by an aggregate of 1,980,000 shares of COMFORCE common stock, which constituted all of the COMFORCE stock owned by the Company. The 10% Notes were due on June 19, 1996. The holders converted notes with a value of $400,000, and the remaining notes were repaid with the proceeds from the June sale of COMFORCE shares. See "Investment In COMFORCE Corporation." ARTRA has entered into various agreements under which it has sold its common shares along with put options that require ARTRA to repurchase these shares at the option of the holder, usually one year after the date of each such agreement. At January 27, 1997, options were outstanding that, if exercised, would require ARTRA to repurchase 72,984 shares of its Common Stock for an aggregate of $2,979,000. ARTRA does not have adequate resources to make such redemptions. However, the holders have the option to sell their shares in the market, subject to the limitations of Rule 144 of the Securities Act, which could adversely impact the market price of the Common Stock. At its discretion and subject to its financial ability, ARTRA could reimburse the option holders for any shortfall resulting from such sale. At the present time none of the option holders have demanded payment, and all of the option holders have indicated to the Company a willingness to work with the Company to satisfy the obligations, in some manner other than a demand for payment under the put option. As discussed in Note 14 to the Company's condensed consolidated financial statements for the nine months ended September 26, 1996, ARTRA has total amounts 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 amounts due 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. As of December 26, 1996 (the end of ARTRA's most recent fiscal year(, amounts due from Peter R. Harvey, including accrued interest, totaled $8,117,000. Commencing January 1, 1993 to date, interest on all amounts due from Peter R. Harvey has been accrued and fully reserved. As partial 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 PureTec. As of November 25, 1996, the closing market price of Puretec on the NASDAQ National Market was $2.0625 per share. In addition, in connection with a discharge of certain bank indebtedness discussed below, ARTRA received rights under a mortgage of certain real estate owned by Mr. Harvey. The real estate had an appraised value of $2 million as of December 13, 1993. The mortgage secures $2,150,000 of the amount owed by Mr. Harvey. Bank of America Illinois has a senior security interest in the amount of $850,000. See "Transactions With Management And Others -- Settlement of the Bank of America Illinois Debt." ARTRA's corporate entity has no material commitments for capital expenditures. - 25 - Bagcraft Bagcraft entered into a Credit Agreement, dated as of December 17, 1993 (the "Credit Agreement") that provided 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, outstanding borrowings on Term Loan A and Term Loan B were $12,000,000 and $2,800,000, respectively, with interest rates of 10% and 11.25% respectively. At December 28, 1995, outstanding borrowings on Term Loan A and Term Loan B were $12,000,000 and $4,600,000, respectively, with interest rates of 10.25% and 11.5% respectively. The amount available to Bagcraft under the revolving credit loan is subject to a borrowing base, as defined in the Credit Agreement, up to a maximum of $18,000,000. At 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 and December 28, 1995, interest rates on the revolving credit loan were 9.75% and 10%, respectively. 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, and 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 for the nine months ended September 26, 1996). As additional compensation for borrowings under the Credit Agreement, in December 1993, the lender received a detachable warrant ("Warrant"), expiring in December 1998, allowing the holder to purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal value. Under certain conditions Bagcraft was required to repurchase the Warrant from the lender. The determination of the repurchase price of the Warrant was 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. Effective December 30, 1996, the Credit Agreement was amended and restated whereby, among other things, the maturity date of the Credit Agreement was extended to September 30, 2002 and certain loan covenants were amended. The amount of Term Loan A was increased to $20,000,000 and Term Loan B was satisfied and consolidated into Term Loan A. The interest rate on Term Loan A was reduced to the lender's index rate plus .25%. Principal payments under Term Loan A were modified to provide for annual principal payments (payable in quarterly installments) in the amount of $2,000,000 in 1997 through 1999; $3,000,000 in 2000 and 2001; and $8,000,000 in 2002. The interest on the revolving credit loan was reduced to the lender's index rate. Bagcraft was also provided with a $3,00,000 capital expenditures line of credit with interest at the lender's index rate plus .25%. Borrowings under the Credit Agreement are collateralized by the common stock and substantially all of the assets of Bagcraft. The Credit Agreement, as amended, contains various restrictive covenants, that among other restrictions, require Bagcraft to maintain minimum levels of tangible net worth and liquidity levels, and 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 December 26, 1996 Bagcraft was in compliance with the provisions of its Credit Agreement. - 26 - In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a $12,500,000 financing package associated with the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The financing package, funded by a combination of Federal, state and local funds, consists of the following loan agreements payable by Bagcraft directly to the City of Baxter Springs: A $7,000,000 promissory note payable in ten installments of $700,000 due annually on July 21 of each year beginning in 1995 through maturity on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is payable semi-annually. At December 26, 1996, Bagcraft had outstanding borrowings of $5,600,000 under this loan agreement. A $5,000,000 subordinated promissory note payable as follows: $150,000 due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The subordinated promissory note is non-interest bearing, subject to certain repayment provisions as defined in the agreement (as amended). At December 26, 1996, Bagcraft had outstanding borrowings of $4,850,000 under this loan agreement. Two separate $250,000 subordinated promissory notes payable in varying installments through January 20, 2025. The subordinated promissory notes are non-interest bearing, subject to certain repayment provisions as defined in the agreement. At December 26, 1996 Bagcraft had outstanding borrowings of $231,000 under this loan agreement. Borrowings under the above loan agreements are collateralized by a first lien on the land and building at the Baxter Springs, Kansas production facility and by a second lien on certain machinery and equipment. Under certain ircumstances, 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 recently amended Credit Agreement will provide Bagcraft with the ability to fund its long-term capital requirements. Bagcraft anticipates that its 1997 capital expenditures, principally for manufacturing equipment, will be approximately $2,500,000 and will be funded principally from the above-mentioned credit facilities and also from operations. 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. - 27 - Investment In COMFORCE Corporation ARTRA, along with its wholly owned Fill-Mor subsidiary, owns a significant minority interest in COMFORCE, consisting of 1,769,703 shares or approximately 14% of the outstanding common stock of COMFORCE as of January 27, 1997, with an aggregate value as of that date of approximately $17,144,000 (value at December 26, 1996 was $25,719,000). The value of COMFORCE stock has fluctuated substantially in recent periods. The high per share for the twelve month period ending December 26, 1996 was $34.12, and the per share low during the same period was $6.00. There can be no assurance that the value of the COMFORCE shares will not decline substantially in the future, which would have a material adverse effect on the value of the Company. The COMFORCE shares constitute unregistered securities under the Securities Act of 1933 (the "Act"). As a result of ARTRA's former involvement in the operations and management of COMFORCE, ARTRA was considered an "affiliate" of COMFORCE under the Act, and because of this, the number of shares that ARTRA could sell without registration under the Act within any three-month period was limited. For the reasons set forth below, the Company believes that an exemption from registration under Rule 144(k) promulgated under the Act is now available to it, and therefore the limitations under Rule 144 on the number of restricted shares that ARTRA could sell within any three-month period without registrations are no longer applicable to it. Rule 144(k) of the Act permits the sale without registration under the Act of restricted shares of an issuer that have been held in excess of three years by persons who have not been "affiliates" of the issuer for the preceding three months. Since December 28, 1995, ARTRA, Fill-Mor and their respective officers, directors, affiliates and employees have held no managerial or executive positions with COMFORCE nor have any of the above served in the capacity of directors, nor have any of them had the right under any agreement or otherwise to serve in such capacity since December 28, 1995. Likewise, neither ARTRA, Fill-Mor nor any of the above had the right under any agreement or otherwise to serve in such capacity since December 28, 1995. Finally, since that time, neither ARTRA, Fill-Mor nor any of their respective officers, directors, affiliates and employees have had any material involvement in, nor have they been able to exercise any control over, COMFORCE, either individually or together with any other person or entity. Because of this, the Company believes that ARTRA and Fill-Mor are not "affiliates" of COMFORCE and, since they have held their shares in excess of three years, qualify for the exemption under Rule 144(k) set forth above. There can be no assurance that the Securities and Exchange Commission would concur with the Company's position. Notwithstanding this, ARTRA does not believe that its ability to sell COMFORCE shares, or eventually to realize on the value of its COMFORCE shares, will be affected in a material adverse way, although it may not be able to sell its COMFORCE shares as quickly as it could if it were to use Rule 144(k), and in any event, an attempt to sell a large number of its COMFORCE shares over a limited period could be expected to result in a reduction in the value of such shares. Effective December 19, 1996, ARTRA and COMFORCE entered into a Settlement Agreement pursuant to which COMFORCE agreed to include in its Registration Statement on Form S-1 380,000 shares of COMFORCE common stock held by ARTRA and its Fill-Mor susidiary and ARTRA agreed to a Lock-up agreement which limits its ability to sell its remaining COMFORCE common shares for a period of 360 days after the effective date of COMFORCE's Registration Statement. The sale of 1,410,000 COMFORCE common shares held by ARTRA and Fill-Mor is restricted because the shares are collateral for various short-term loans (359,703 shares held by ARTRA and Fill-Mor remain unencumbered at January 27, 1997). 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 received upon future exercise of the options. The disposition of these 200,000 COMFORCE - 28 - 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 January 27, 1997 , 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 January 27, 1997 ARTRA's remaining investment in COMFORCE (1,769,703 shares, or approximately a 14% common stock ownership interest) was classified in the Company's condensed consolidated balance sheet in noncurrent assets as "Available-for-sale securities." In conjunction with the Global acquisition, ARTRA agreed to assume substantially all pre-existing COMFORCE liabilities (i.e., COMFORCE liabilities existing from operations prior to the acquisition of Global) 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 COMFORCE liabilities were classified in ARTRA's condensed consolidated balance sheet as current liabilities of discontinued operations. See Note 5 to the condensed consolidated financial statements for the nine months ended September 26, 1996 for a further discussion of ARTRA's investment in COMFORCE. See "Changes in Business - COMFORCE" for additional information relating to the Company's investment in COMFORCE. Litigation The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. See Note 13 to the Company's condensed consolidated financial statements for the nine months ended September 26, 1996. At December 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. However, as discussed elsewhere herein, 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. See "Risk Factors -- Litigation," and "Legal Proceedings." 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. - 29 - Impact of Inflation and Changing Prices Bagcraft's costs have increased substantially in recent years, largely due to increases in the cost of paper. Although Bagcraft seeks to pass its increased costs on to its customers, this is frequently not possible due to the competitive nature of the paper products industry. 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 did 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. BUSINESS AND PROPERTIES General At December 29, 1994 and, through September 1995, ARTRA principally operated in two industry segments as: 1) a manufacturer of packaging products principally serving the food industry; and 2) a designer and distributor of popular-priced fashion costume jewelry. - 30 - During 1995, the Company's packaging products business was conducted by its current principal operating subsidiary, Bagcraft, and its then wholly-owned subsidiary Arcar Graphics, Inc. ("Arcar") acquired effective April 9, 1994. As discussed in Note 3 to the Company's consolidated financial statements for the year ended December 28, 1995, effective October 26, 1995, Bagcraft completed the sale of the business assets of Arcar, subject to the buyer's assumption of certain liabilities. During 1995, the Company's fashion costume jewelry business was conducted by its then majority-owned subsidiary COMFORCE (then known as The Lori Corporation) through its wholly-owned subsidiaries: Rosecraft, Inc. and Lawrence Jewelry Corporation. In recent years, COMFORCE's fashion costume jewelry operations had experienced a pattern of significantly lower sales levels and related operating losses primarily due to a shift in the buying patterns of its major customers (i.e. certain mass merchandisers) from participation in COMFORCE's service program to purchases of costume jewelry and accessories directly from manufacturers and due to a continued unfavorable retail environment. Accordingly, in September, 1995, COMFORCE adopted a plan to discontinue its jewelry business as discussed in Note 3 to the Company's consolidated financial statements for the year ended December 28, 1995. As discussed in Note 3 to the Company's consolidated financial statements for the year ended December 28, 1995, on October 17, 1995, COMFORCE completed the acquisition of one hundred percent of the capital stock of COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc. for consideration of approximately $6.4 million, net of cash acquired. This consideration consisted of cash 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 issued as consideration for various fees and guarantees associated with the transaction. 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. Additionally, in conjunction with the Global acquisition, ARTRA has agreed to assume certain pre-existing COMFORCE liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Effective July 4, 1995, COMFORCE and ARTRA entered into employment or consulting services agreements with certain individuals to manage COMFORCE'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 was reduced to approximately 19% and 25% at September 26, 1996 and December 28, 1995, respectively. See "Changes in Business - - COMFORCE" for additional information relating to the Company's investment in COMFORCE. Packaging Products Segment Effective March 3, 1990, ARTRA entered into the packaging products business with its acquisition of Bagcraft. Bagcraft, established in 1947, is a leading manufacturer and supplier of flexible packaging products to the fast food, bakery, microwave popcorn and supermarket industries and is also a significant supplier to the theater - 31 - industry. Several of Bagcraft's products are widely recognized and have become standard items within various segments of the food industry. Bagcraft is a full-service supplier complete with its own laboratory and engineering departments. Bagcraft's sales and technical staff work in conjunction with Bagcraft's customers to determine the proper components of the package. Bagcraft's art department creates packaging designs, subject to customer approval, or duplicates customer-supplied designs. Thereafter, the packaging is produced in accordance with customer specifications using a variety of papers, film, foil and lamination. Bagcraft has developed a number of proprietary innovations in the manufacture of its packaging products. Such innovations include the Dubl-Wax(TM) bag, which introduced specialty waxed bags to the retail bakery industry. Bagcraft is also credited with being instrumental in developing and producing the first microwave popcorn bags. Bagcraft currently produces over two billion bags and two billion sheets and wrappers annually for the packaging of more than 1,000 different products. Bagcraft purchases the paper, foil, films and chemicals it uses from a number of different unaffiliated suppliers. Since Bagcraft purchases each of the raw materials it requires from more than one supplier, it is not dependent upon a single supplier for any specific materials or supplies. Sales orders are processed, and manufacturing and delivery schedules are determined primarily at Bagcraft's headquarters and principle production facility in Chicago. In September, 1994, Bagcraft completed the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The new Kansas facility, which has added production capacity in Bagcraft's growing food service products business, has replaced Bagcraft's production facility in Joplin, Missouri (which was conveyed to a contractor involved in constructing the Baxter Springs facility in partial consideration of such contractor's fees), its facility in Carteret, New Jersey (which was sold in 1994) and its facility in Forest Park, Georgia (which was converted into a distribution facility). Bagcraft's products are sold throughout the United States by a sales force of approximately 20 full-time salespersons who sell to wholesale distributors and a number of independent brokers who sell Bagcraft product lines to large food processors and food chains. Bagcraft presently sells its products to more than 1,000 customers. Although some of these are the largest and most recognizable companies in the food industry, no single customer accounted for more than 10% of ARTRA's consolidated net sales in 1995. Sales to customers are made pursuant to orders placed in advance for periods of up to one year. In certain instances Bagcraft and a customer can enter into an agreement to maintain a specified minimum inventory for the customer. The contracts entered into by Bagcraft with its customers vary in length depending on the customer's needs and Bagcraft's capacity to meet the customer's requirements. Generally, Bagcraft's contracts provide advance notice of from 30 days to one year to terminate a contract. The contracts typically provide for delivery of goods at an agreed-upon fixed price, subject to adjustment upon timely notice in advance. Bagcraft usually grants its customers rights of return, subject to penalty, except in the case of goods produced to specification. In addition, Bagcraft typically requires payment for goods 30 days after shipment, but gives its customers a 1% discount if payment is made within 10 days after shipment. Bagcraft believes that it is the manufacturer of the most diversified line of flexible packaging products in the United States. However, there are a number of domestic and foreign companies which compete directly with Bagcraft in each of its major product lines, certain of which have a larger market share with respect to specific product lines. Bagcraft's competitors range from small companies to divisions of large corporations which have - 32 - substantially greater financial resources than those available to Bagcraft. Bagcraft competes on the basis of quality, service and the price of its products. Bagcraft believes that only a modest level of continuing research and development and strict quality and process control will be necessary to maintain and improve its position in the flexible packaging industry. All product modifications and manufacturing innovations reflect input from its personnel in general management, sales, marketing design, R&D and engineering. Bagcraft's products are sold by four marketing divisions as described below: Paper Division Bagcraft believes it is the industry leader in specialty paper bags, which represented approximately 32% of Bagcraft's 1995 sales. Bakeries account for approximately 60% of the paper division's sales which also include supermarkets and various retail food chains. A number of the paper division's products, including Dubl-Wax(TM), Dubl-Panel(TM), Dubl-Clear(TM) and Sealing-Strip(TM) represent significant manufacturing innovations which have contributed to Bagcraft's position as the industry leader. Major customers include Wal*Mart, Walgreen's, Albertson's, Dunkin' Donuts and Boston Market. Bagcraft believes the outlook for the future indicates stability and growth. Bagcraft's Paper Division stocks approximately 150 generic products, which enables Bagcraft to lead the industry in providing the widest variety of immediately available unprinted and stock printed bags and sheets in the industry. Stock products are bought and inventoried by distributors who, in turn, sell them in varying quantities to end-users for a multitude of purposes. The stock line is sold mainly through Bagcraft field salespeople and telemarketing from Bagcraft's Chicago home office. Food Service Division The Food Service Division, which represented approximately 47% of Bagcraft's 1995 sales, is a leader among its competitors. Bagcraft's products sold to the food service industry include foil and paper bags and sheets for sandwiches, french fries, chicken and other prepared foods. Major customers in this industry include Wendy's, Burger King, Taco Bell, Dairy Queen and McDonald's. The development of the Honeycomb sheet helped propel Bagcraft to its industry leading position. The Honeycomb sheet incorporates a moisture absorbing layer which prevents buns from becoming soggy and tends to keep food warm for a longer period of time. Additionally, when used to replace rigid packaging, it represents significant source reduction to the solid waste system. - 33 - Specialty Bag Division The Specialty Bag Division represented approximately 15% of Bagcraft's 1995 sales. Many of the division's products represent unique additions to Bagcraft's standard products. The Cue-Pon Bag(TM) has a "tear out" coupon affixed near the window on the bag which offers the shopper the immediate benefit of the coupon upon purchase. The Cue-Pon Pocket Bag(TM) has a pouch on the front of the bag which can be filled with novelty items by the retailer. The division features products for the packaging of bakery goods, such as cookies and donuts, coffee, pre- popped popcorn and specialized promotional items such as premiums for kids meals sold by food service chains. This division provides bags with transparent windows, metal tin tie attachments and convenient self-opening bottoms. This division also produces theater popcorn bags, which provide the theater chains with a more economical package that is easy to dispose of and substantially reduces the amount of space needed to inventory the product as well as providing a conveniently resealable bag by using Tac-Labels(TM) in lieu of Tin Ties. Bagcraft is the leading supplier of popcorn bags to theater chains such as General Cinema Corporation and Mann Theaters. The newest addition to this division is the "To Go!" Bags(TM). These double wall bags provide many of the properties of rigid containers such as tubs and cartons with the environmental and storage advantages of bags. Although in the early stages of production, "To Go!" Bags(TM) have been enthusiastically received and now are subject to a backlog. Other customers for the division include Bake-Line Products and Interstate Brands. Microwave Popcorn Division The Microwave Popcorn Division, which represented approximately 5% of Bagcraft's 1995 sales, represents an example of Bagcraft's high technology advancements. Bagcraft supplies microwave popcorn packaging to several industry leaders, including Hunt-Wesson (Orville Redenbacher) and U.S.A. Family Foods. Bagcraft was instrumental in the development of the first microwave popcorn bag and played an important role in developing "susceptor" accelerator technology which it has incorporated into its products. The susceptor technology involves placing a metallized material into the popcorn bag which accelerates the heat transfer and results in a higher percentage of the popcorn kernels being popped. In recent years, Bagcraft has experienced a decline in its domestic microwave popcorn business due to the acquisition of one of its major customers by a company with its own packaging ability. Accordingly, at December 31, 1995, Bagcraft incurred a charge to operations of approximately $1,500,000 to write-down the carrying value of idle machinery and equipment dedicated to the production of microwave popcorn products. - 34 - Discontinued Business - Arcar As discussed in Note 3 to the Company's consolidated financial statements for the year ended December 28, 1995, effective April 8, 1994, Bagcraft acquired the business assets, subject to buyer's assumption of certain liabilities of Arcar Graphics, Inc. ("Arcar"), a manufacturer and distributor of waterbase inks for the flexographic and rotogravure printing industries. Arcar is one of the larger waterbase ink suppliers in the United States and serves over 500 customers. The principal markets of Arcar's products included printers of tags and labels, flexible packaging manufacturers and polycoated cup manufacturers. As discussed in Note 3 to the Company's consolidated financial statements for the year ended December 28, 1995, effective October 26, 1995, Bagcraft completed the sale of the business assets of Arcar, subject to the buyer's assumption of certain liabilities. Employees The Company currently employs approximately 940 persons. The Company considers its relationships with its employees to be good. Properties The following table sets forth a brief description of the properties of the Company and its subsidiaries. The Company and its subsidiaries believe that all of their facilities are adequate for their present and reasonably anticipated future business requirements.
Location General Description Ownership - -------- ------------------- --------- ARTRA: Northfield, IL (1) Headquarters facility of Leased, month to month approximately 7,000 sq. ft Bagcraft: Chicago, IL Administrative and manufacturing facility of Owned approximately 148,000 sq. ft. Chicago, IL (2) Warehouse and office facility of Leased, expiring in 2006 approximately 63,000 sq. ft Baxter Springs, KS(3) Manufacturing, warehouse and office facility of approximately 265,000 sq. ft. Owned Forest Park, GA(3) Warehouse and office facility Owned of approximately 35,000 sq. ft - 35 - (1) In July, 1992 ARTRA sold its headquarters building, and now leases it under a month-to-month lease. (2) This lease provides for a ten-year option to renew at the then current market rate. (3) In September, 1994, Bagcraft completed construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. This facility replaced Bagcraft's production facilities in Joplin, Missouri, Carteret, New Jersey and Forest Park, Georgia. Bagcraft conveyed the former Joplin, Missouri facility to one of the contractors involved in the construction of the Baxter Springs, Kansas facility as partial consideration for the work performed by this contractor. Bagcraft sold the Carteret, New Jersey facility in 1994. The Forest Park, Georgia facility was retained as a distribution center until June, 1996 and was subsequently closed.
Legal Proceedings The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. At December 26, 1996 the Company had accrued $1,900,000 for business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial position; however it may have have an adverse effect on the results of operations for an individual reporting period. 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 form Emerald Acquisition Corp. ("Emerald"). Envirodyne had filed a Chapter 11 bankruptcy on January 7, 1993 which provided ARTRA with no value in the Emerald Stock received in connection with the acquisition. On November 22, 1993, ARTRA filed a First Amended Complaint. The defendants removed the case to the Bankruptcy Court in which the Emerald Chapter 11 case is pending. On July 15, 1994, all but two of ARTRA's causes of action were remanded to the state court. The Bankruptcy Court retained jurisdiction of ARTRA's claims against the defendants for breaching their fiduciary duty as directors of Emerald to Emerald's creditors and interference with ARTRA's contractual relations with Emerald. On April 7, 1995, the Company's appeal of the Bankruptcy Court's order retaining jurisdiction over two claims was denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these claims. On August 4, 1995, ARTRA appealed from the Bankruptcy Court's dismissal order. That appeal was denied on October 31, 1996 by the United States District Court. ARTRA has a right to appeal the District Court's decision. This appeal has been filed in the United States Court of Appeals for the Seventh Circuit. On July 18, 1995, ARTRA filed a Fourth Amended Complaint in the State Court Action for breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation, breach of contract and promissory estoppel. In the State Court Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of $408.6 million and the repayment of approximately $33 million in fees paid to Salomon. The causes of action for breach of the fiduciary duty of due care were repleaded to reserve ARTRA's right to appeal the State Court's dismissal of the causes of action in the Third Amended Complaint. The cause of action against defendant Kelly was dismissed with prejudice pursuant to a stipulation between ARTRA and the Kelly Defendants. On or about March 1, 1996, DPK brought a motion for summary judgment as to ARTRA's claims for breach of contract and promissory estoppel. DPK's motion was granted on June 4, 1996. The Company has appealed this decision. In January, 1985 the United States Environmental Protection Agency ("EPA") notified Bagcraft that it was a potentially responsible party ("PRP") under the Comprehensive Environmental Responsibility Compensation and Liability Act ("CERCLA") for alleged release of hazardous substances at the Cross Brothers site near Kankakee, Illinois. Although Bagcraft has denied liability for the - 36 - 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 action. 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 consolidated financial statements at September 26, 1996, which constitutes Bagcraft's pro rata share of the $1.1 million. Bagcraft was listed by the EPA as a de minimis PRP 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. On July 22, 1994 Bagcraft executed a de minimis settlement with the EPA with respect to the American Chemical Services, Inc. site. Bagcraft is presently unable to determine its liability, if any, with respect to the Duane Marine 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 reported a release associated with solvent tanks located in a vault at its Chicago facility. After seeking approval from the IEPA, Bagcraft installed and is currently operating a soil vapor and extraction system designed to achieve remedial objectives which the IEPA has determined to be appropriate to the site. Bagcraft's Chicago facility has also been the subject of allegations that it violated laws and regulations associated with the Clean Air Act. The facility has numerous sources of air emissions of volatile organic materials ("VOMs") associated with its printing operations and is required to maintain and comply with permits and emissions regulations with regard to each of these emission sources. In November of 1995, the EPA issued a Notice of Violation ("NOV") against Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act and related regulations. The NOV alleges that the facility installed and operated emission sources without permits, that it failed to operate air pollution control equipment at required efficiencies and that there were releases of VOMs above permitted limits. Although Bagcraft is attempting to negotiate a settlement, the EPA may yet file a federal complaint to enforce its NOV. The EPA has not demanded a specific penalty but maximum penalties under the Clean Air Act are $25,000 per day for each demonstrated violation. In April 1994, the EPA notified the Company that it was a PRP 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 subsidiary, Fill-Mor. 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, when Harvel was a majority-owned subsidiary of ARTRA. In early 1994, a group of PRP's filed a claim in the Envirodyne bankruptcy proceeding with respect to the Palmer site. In May 1994, Envirodyne and its Clearshield National, Inc. subsidiary filed an adversary proceeding against ARTRA for indemnification in connection with this claim. Both the claim and the adversary proceeding were voluntarily dismissed, but the PRP group has requested that ARTRA pay a share of the response costs. The cost of clean-up at the Palmer, Massachusetts site has been estimated to be approximately $7 million according to proofs of claim - 37 - filed in the adversary proceeding. A committee formed by the PRP group has estimated the liability respecting the activities of Clearshield to be approximately $400,000. ARTRA has not made any independent investigation of the amount of its potential liability and no assurances can be given that it will not substantially exceed $400,000. In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in 1991 in the United States District Court for Maryland, Sherwin-Williams Company ("Sherwin-Williams") brought suit against ARTRA and other former owners of a paint manufacturing facility in Baltimore, Maryland for recovery of costs of investigation and clean-up of hazardous substances which were stored, disposed of or otherwise released at this manufacturing facility. This facility was owned by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA, from 1960 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 the 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"), a 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 to determine what, if any, additional liability it may incur in this matter. There can be no assurance that ARTRA's liability will not be material in amount. Several cases have arisen from ARTRA's purchase of Dutch Boy Paints which owned a facility in Chicago which it purchased from NL Industries. In a case titled City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in the Circuit Court of Cook County, Illinois, the City of Chicago brought a nuisance action and alleged that ARTRA (and NL Industries, Inc.) had improperly stored, discarded and disposed of hazardous substances at the Dutch Boy site, and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At the time the suit was filed, the City of Chicago claimed that it would cost $1,000,000 to remediate the site. ARTRA and NL Industries, Inc. have counter sued each other and have filed third party actions against the subsequent owners of the property. The Company is presently unable to determine its liability, if any, in connection with this case. The parties were conducting discovery but the case was stayed pending the resolution of the EPA action described below. In 1986, in a case titled People of the State of Illinois v. NL Industries, Inc., ARTRA GROUP Incorporated, et al., the Cook County State's attorney filed suit seeking response costs in excess of $2,000,000 and treble punitive damages for costs expended by IEPA in remediating contamination at the Dutch Boy site, alleging that all former owners contributed to the contamination. In 1989, the Circuit Court dismissed the action, holding that the state had failed to exhaust its administrative procedures. In 1992, this holding was reversed by the Illinois Supreme Court. In 1996, the Illinois Appellate Court affirmed the District Court's decision to dismiss the case based on lack of due diligence on the part of the State of Illinois. The State of Illinois has filed a Petition for - 38 - Rehearing which was granted. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case. On November 17, 1995, the EPA issued letters to ARTRA, NL Industries and others alleging that they were potentially responsible parties with respect to releases at the Dutch Boy facility in Chicago and demanding that they remediate the site. NL Industries entered into a consent decree with EPA in which it agreed to remediate the site. The Company is presently unable to determine its liability, if any, in connection with this case. On August 7, 1995, a Second Amended Verified Complaint was filed in the Supreme Court of N.Y. by Philip Elghanian against ARTRA, its officers and directors (the "ARTRA Defendants") and others alleging that the defendants engaged in a scheme to defraud plaintiff of approximately $5 million of the value of his investment in shares of ARTRA. The plaintiff seeks damages and interest in excess of $38 million and punitive and exemplary damages in excess of $100 million. On January 19, 1996, the ARTRA Defendants filed a motion to dismiss the Second Amended Complaint. As of June 7, 1996 that motion is still pending. Since New York permits interlocutory appeals, the decision, if adverse, may be appealed. On June 14, 1995 Tartan Resources brought suit in the United States District Court for the Northern District of Illinois against A.G. Holding Corporation, The Lori Corporation and Bagcraft. Bagcraft was voluntarily dismissed from the lawsuit by the plaintiff. Tartan Resources alleges that under the alter-ego theory, A.G. Holding is liable for a judgment entered against ARTRA and Artra Resources Corp. The plaintiff seeks $151,215.46 plus interest, costs and attorneys fees. A.G. Holding's motion for summary judgment was granted on September 19, 1996. On March 17, 1993, a judgment in the amount of $599,187.52 was entered against Artra Group, Inc. in the matter entitled SW Associates Limited Partnership v. Artra Group, Inc., Case No. 90 L 19514. Plaintiff commenced post judgment collection proceedings to collect its debt, but in 1994 these proceedings were dismissed for lack of diligence. To date, no money has been recovered from Artra. In connection with the sale of its former Sargent Welch Scientific Company subsidiary, ARTRA assumed liabilities relating to early retirement claims. ARTRA is approximately $120,000 behind in scheduled payments. ARTRA intends to pay the entire liability, which is a maximum of $320,000, depending upon years lived by covered employees. ARTRA has accrued the entire $320,000 in its financial statements. In 1994, ARTRA entered into a settlement agreement in connection with a lawsuit filed by Hosiery Manufacturing Company. Under the terms of the settlement, ARTRA was to pay $500,000. ARTRA was unable to satisfy its obligations under the settlement agreement and subsequently entered into a new settlement agreement reducing the liability to $125,000. This liability was paid in September 1996. - 39 - MARKET PRICE OF THE COMPANY'S COMMON STOCK ARTRA's common stock, without par value, is traded on the New York ("NYSE") and Pacific Stock Exchanges. The Company currently does not meet certain of the requirements for maintaining its listing on the NYSE and the NYSE is reviewing the status of the Company's listing on the exchange. As of December 26, 1996 the approximate number of holders of its common stock was 2,500. The high and low sales prices for ARTRA's common stock, as reported in the NYSE Quarterly Market Statistics reports, during the past two fiscal years were as follows: 1996 1995 -------------------- --------------------- High Low High Low -------- -------- -------- --------- First quarter 6 - 3/4 4 - 5/8 5 - 3/4 3 - 1/2 Second quarter 9 - 1/4 5 - 3/4 5 - 1/2 3 - 1/4 Third quarter 8 - 3/8 4 - 3/4 6 4 - 1/8 Fourth quarter 6 - 3/4 5 5 - 1/8 3 - 5/8 No dividends were paid in 1996 or 1995 nor are any anticipated in 1997. The Company was prohibited from paying dividends to its stockholders pursuant to the terms of its bank loan agreement that was discharged in February 1996. In addition, the Company's operating subsidiaries historically have been prohibited from or restricted in paying dividends or making distributions under their respective debt agreements (except for limited overhead allocations or payments in accordance with tax sharing agreements with the parent entity). Accordingly, current restrictions or limitations on the Company's Bagcraft subsidiary in upstreaming payments in 1997 and beyond would make the payment of dividends by ARTRA unlikely. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the loan agreements of the Company and its Bagcraft subsidiary. - 40 - DESCRIPTION OF THE COMPANY'S SECURITIES General The authorized capital stock of the Company consists of (i) 20,000,000 shares of Common Stock without par value, of which 7,868,620 shares have been issued and are outstanding as of January 27, 1997, and (ii) 2,000,000 shares of Preferred Stock, par value $1,000 per share, which may be issued in one or more series with such rights and preferences as determined by the Board of Directors, of which 3,750 shares of a series designated "Series A Preferred Stock" have been issued and are outstanding as of the date hereof. As of the date hereof, there were approximately 2,500 holders of record of the Company's Common Stock. Common Stock The Company has not paid any cash dividends on its Common Stock in recent years and does not anticipate paying any such dividends in the foreseeable future. In addition, Bagcraft is prohibited from or restricted in paying dividends or making distributions to the Company under various loan agreements (except for limited overhead allocations payable to the parent entity and payments under tax sharing arrangements where applicable). Accordingly, even if the Company were permitted to pay dividends to its shareholders, the restrictions or limitations on Bagcraft in upstreaming payments would make payment of dividends by the Company unlikely. Payment of dividends by the Company is also subject to the significant cumulated dividends on the Company's Series A Preferred Stock, which must be paid prior to the payment of dividends on the common stock. The holders of the Common Stock are entitled to dividends or other distributions only if, as and when declared out of funds legally available therefor after payment of any dividends required to be paid in respect of any preferred stock then outstanding. Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at the rate of $60.00 per share per annum prior to the payment of dividends on the Common Stock. The Company's ability to pay dividends in respect of the Common Stock may be further limited since it is required to redeem the Series A Preferred Stock on March 1, 2000 to the extent of legally available funds for a redemption price of $1,000 per share plus accrued and unpaid dividends to the date of redemption. In the event legally available funds are insufficient to redeem the Series A Preferred Stock on March 1, 2000, ARTRA must thereafter redeem such stock when and as funds become legally available. In addition, in the event a "control transaction" (as described below under "-Series A Preferred Stock") occurs, which is not approved by the Board of Directors, the Series A Preferred Stock is required to be thereupon redeemed. Pursuant to the Articles of Incorporation of the Company, the Board of Directors may, without shareholder approval, authorize the issuance of such other series of preferred stock with dividend rights and liquidation preferences prior and superior to those of the common stock. In the event the Board of Directors authorizes one or more additional series of Preferred Stock, the ability of the Company to pay dividends or other distributions to the holders of the Common Stock may be further limited and could have the effect of making the acquisition of the Company more difficult or unattractive or uneconomic for a potential hostile acquirer, as more fully described under "Shareholder Voting Rights," below. The Common Stock is not subject to any conversion or redemption provisions and the holders thereof are not provided any pre-emptive rights. All outstanding shares of Common Stock are fully-paid and non-assessable. See also "Shareholder Voting Rights," below for a description of the voting rights of shareholders. - 41 - Series A Preferred Stock The following is a brief description of the rights and preferences of the Series A Preferred Stock. No Series A Preferred Stock is being offered hereby, but the rights of the holders of Common Stock are affected by the rights and preferences of the Series A Preferred Stock. Holders of the Series A Preferred Stock are entitled to receive dividends at the rate of $60.00 per share per annum, payable annually. The annual dividend shall be payable in cash or at the sole option of ARTRA, in additional shares or fractional shares of the Series A Preferred Stock having the aggregate redemption value equal to the amount of such dividends. Such dividends shall be cumulative and shall accrue on each share on a day-to-day basis. No dividends or distributions upon liquidation may be paid to the holders of common stock if there is any deficiency in the payment of Series A Preferred Stock dividends and, in the case of distributions upon liquidation, of a liquidation preference of $1,000 per share of Preferred Stock. To date, no dividends have been declared or paid on the Series A Preferred Stock. The outstanding shares of Series A Preferred Stock are required to be redeemed by ARTRA on March 1, 2000 to the extent funds are legally available therefor. The redemption price is $1,000 per share plus an amount equal to the accrued and unpaid dividends to the date fixed for redemption. Also, in the event of a "control transaction" which is not approved by the Board of Directors of ARTRA, all of the outstanding shares of the Series A Preferred Stock shall be redeemed at a price of $1,000 per share plus unpaid accrued dividends prior to the consummation of the "control transaction." The term "control transaction" means the acquisition by a person or group (other than Messrs. P. Harvey and J. Harvey and their affiliates) of the voting power over voting shares of ARTRA which would entitle the holder or holders thereof to cast at least 40% of the votes that all shareholders would be entitled to cast in an election of directors of ARTRA. The Series A Preferred Stock is not convertible into Common Stock and no pre-emptive rights have been granted with respect to the Series A Preferred Stock. See also "Shareholder Voting Rights," below for a description of the voting rights of shareholders. Shareholder Voting Rights Each share of Common Stock has equal voting rights and each share is entitled to one vote in all matters in which shareholders shall be entitled to vote. The Articles of Incorporation provide for cumulative voting in the election of directors. Therefore, every shareholder entitled to vote for directors has the right, in person or by proxy, to multiply the number of votes to which the shareholder is entitled to cast by the total number of directors to be elected in the same election. The shareholder may cast the whole number of such votes for one candidate or may distribute them among any two or more candidates. - 42 - Generally, the holders of shares of Common Stock and Series A Preferred Stock are entitled to one vote per share on a combined basis and not on a class basis except in limited circumstances. Under the Articles of Incorporation of the Company, the affirmative vote of a majority of the holders of Common Stock and Series A Preferred Stock (voting as a single class) represented in person or by proxy at a meeting at which a quorum is present, is generally required to approve matters submitted to the shareholders, subject to certain exceptions under both the Articles of Incorporation and the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), described below. Under the BCL, the holders of the stock of each class or series are entitled to vote, as a class, on the following: (i) an amendment to the Articles of Incorporation authorizing the board to fix the rights and preferences of preferred stock; (ii) an amendment to the Articles of Incorporation authorizing a new class or series of shares, or increasing the number of authorized shares of any class or series of shares having a preference as to dividends or assets which is senior to an existing class of shares; (iii) an amendment to the Articles of Incorporation making a change in the preferences, limitations or special rights of any class of shares which is adverse to such class; and (iv) adoption of a plan authorizing the division, merger, consolidation or conversion of the corporation or the sale by the corporation of all or substantially all of its assets if the plan effects a change in the Articles of Incorporation such that a vote would have been required under any of the preceding three clauses. Under the Company's Articles of Incorporation, shareholders have certain special voting rights. The Articles provide that if required by the BCL (as summarized in the preceding paragraph), the holders of stock of each class or series are entitled to vote as a class. Since the designations of rights and preferences of the Series A Preferred Stock provide that the holders of such stock shall vote with the holders of the common stock as a single class, the holders of Series A Preferred Stock would vote as a separate class only where required by the BCL. These special voting rights are as follows: (1) Removal of the entire Board of Directors or any class thereof or any individual director without assigning any cause requires the vote of 80% of the shares of all shareholders entitled to vote on the election of directors. (2) Approval of (a) a proposal that the Company enter into a merger or consolidation with a person who, together with his affiliates, owns or controls 5% or more of the voting stock of the Company, or (b) a proposal to reclassify securities, recapitalize or other transaction (except certain redemptions permitted by the terms of the security to be redeemed) designed to decrease the number of shares of voting stock outstanding after any person has acquired 5% or more of the Company's voting stock, requires the affirmative vote of 80% of the shares of all shareholders entitled to vote on the proposal, except that the foregoing provisions do not apply to a merger, consolidation or sale of assets and property (i) which shall have been approved by a resolution duly adopted by a majority of the directors in the office and the affirmative vote of the holders of shares of voting stock of the Corporation representing at least a majority of the shares of all shareholders entitled to vote on the proposal or (ii) between the Company and another corporation, 50% or more of the voting stock of which is owned by the Company, if the Company is the survivor or purchaser. (3) The affirmative vote of 80% of the shares of all shareholders entitled to vote on the amendment of the Articles of Incorporation or of a majority of the shares of all shareholders entitled to vote and 80% of the directors in office is required to amend the provisions of the Articles of Incorporation described in paragraphs (1) and (2). - 43 - These provisions could have the effect of deterring a hostile takeover attempts in several respects. First, the takeover of the Company would certainly be made more difficult (and thus the Company would be a less attractive target) in that removal of a member or class of members of, or the entire board of directors requires approval of the holders of 80% of the Company's stock. Second, the requirement that the holders of 80% of the Company's stock approve a merger with a 5% stockholder unless the Company's board approves the transaction (in which case the affirmative vote of the holders of only a majority of the Company's stock is needed to approve the transaction) could also make a hostile takeover quite difficult, while increasing the probability that a transaction with a person controlling the board or with another friendly suitor would be approved. "Blank Check" Preferred Stock The Articles of Incorporation of the Company authorize its Board of Directors to establish series or classes of preferred stock and fix the rights, preferences, privileges and restrictions thereof. The Board is authorized to issue up to 2,000,000 shares of preferred stock, of which 3,750 shares of Series A Preferred Stock have been issued and are are oustanding as of the date hereof. The BCL provides that if any proposed amendment to the certificate of incorporation of a corporation adversely affects the preferences, limitations or special rights of any class of shares, then the holders of shares of such class are entitled to vote as a class as to such amendment. However, since the holders of Common Stock approved an amendment to the Articles of Incorporation of the Company which permits the Board of Directors to authorize the issuance of new series of preferred stock with such rights (including voting rights) and preferences as fixed by the Board of Directors, the holders of Common Stock will not have the right to vote, whether as class or otherwise, to authorize the issuance of new series of preferred stock with preferences as to dividends and distributions on liquidation. By authorizing and issuing preferred stock with particular rights, the Company might be able to deter a hostile acquisition. For example, the Company could issue shares of preferred stock with extraordinary voting rights or liquidation preferences to make it more difficult for a hostile acquirer to gain control of the Company. In addition to the anti-takeover effect of the issuance of preferred stock, holders of preferred stock have a preferred position over holders of common stock on liquidation, the right to a fixed or minimum dividend before any dividend is paid (or accrued) on common stock, and the right to approve certain extraordinary corporate matters. See also "Description of the Company's Securities - Series A Preferred Stock." Put Options From time to time the Company has issued shares of its Common Stock to private investors in transactions in which the investors received non-transferable put options to resell such shares to the Company for prescribed periods at prices in excess of the purchase price paid by them for such shares. As of January 27, 1997, private investors held in the aggregate 72,984 shares of the Common Stock subject to put options requiring the Company to repurchase shares for $2,979,000 in the aggregate. Warrants and Options From time to time the Company has issued warrants and options to purchase its Common Stock for an exercise price generally based on the market price of the Common Stock as of the date of grant of the option or warrant. As of January 27, 1997, investors held warrants to purchase 1,696,032 shares in the aggregate of Common Stock. In addition, as of such date, employees or former employees of the Company held options granted under the Company's 1985 and 1996 Stock Option Plan to purchase 923,850 shares in the aggregate of Common Stock. - 44 - MANAGEMENT Information Regarding Directors The following table lists the name and age of each director of ARTRA, his business experience during the past five (5) years, his positions with ARTRA and certain directorships. Name Age Positions and Experience - ---- --- ------------------------ John Harvey 64 Chairman of the Board of Directors and Chief Executive Officer of ARTRA; Director since 1968; Chairman of the Board of Directors, since 1985, a Director from 1982 to December 1995 and the Chief Executive Officer from 1990 to November 1995 of COMFORCE Corporation (temporary professional employment, formerly The Lori Corporation); an equity holding of ARTRA representing 14% of COMFORCE outstanding stock; a Director of Plastic Specialties and Technologies, Inc. ("PST") (textiles, hose and tubing); and Director of Ozite Corporation (textiles, hose and tubing). Director of PureTec Corporation, the successor by merger to Ozite. Former Director of Rymer Foods, Inc. (portion control meat products and seafood). Peter R. Harvey 61 President and Chief Operating Officer and a Director since 1968; Director of COMFORCE (temporary professional employment, formerly The Lori Corporation)from 1985 to December 1995 and a vice president through January 1996, an equity holding of ARTRA representing 14% of COMFORCE outstanding common stock; a former Director and Chief Operating Officer of SoftNet Systems, Inc. ("SoftNet"). During 1995, Mr. Harvey resigned from all of the Softnet offices, formerly The Vader Group Inc. (image processing and health care cost containment); Vice President and Director of Ozite Corporation, the majority parent of PST (textiles, hose and tubing). Director of PureTec Corporation, the successor by merger to Ozite. Former Director of Rymer Foods Inc., (portion control meat products and seafood). Gerard M. Kenny 44 Director since 1988; Executive Vice President and Director since 1982 of Kenny Construction Company since 1982 (diversified heavy construction); General Partner of Clinton Industries (investments), a limited partnership, since 1972. Edward A. Celano 57 Executive Vice President of the Atlantic Bank of New York since May 1, 1996, Senior Vice President of National Westminster, USA from 1984 through April 1996, corporate finance. Howard R. Conant 71 Retired Chairman of the Board of Interstate Steel Co., 1970 to 1990, and a consultant to Interstate through 1992. - 45 - Maynard K. Louis 66 Retired Chairman of the Board of Lord Label (now known as Porter & Chatburn), a printing company, from 1965 to 1989, Vice President, 1989 to 1993, director of ARTRA from 1993 through 1995. Robert L. Johnson 60 Chairman and Chief Executive Officer of Johnson Bryce, Inc., flexible packaging materials of food products since 1991, and previously, for many years, a vice president of Sears Roebuck & Co. John Harvey and Peter R. Harvey are brothers. COMFORCE was a 64.3% owned subsidiary of ARTRA until October, 1995. ARTRA now owns approximately 14% of COMFORCE. PureTec International, Inc. and PST are affiliates of ARTRA. Information Regarding Executive Officers Set forth below is information concerning the executive officers and other key employees of ARTRA who were in office or employed as of the date of this Prospectus. Name Age Position - ---- --- -------- John Harvey 64 Chairman of the Board and Chief Executiv0 Officer of ARTRA Peter R. Harvey 61 President and Chief Operating Officer of ARTRA John G. Hamm 57 Executive Vice President of ARTRA Robert S. Gruber 63 Vice President - Corporate Relations of ARTRA James D. Doering 60 Vice President, Treasurer and Chief Financial Officer of ARTRA John Conroy 52 Vice President - Corporate Administration of ARTRA Lawrence D. Levin 45 Controller of ARTRA Edwin G. Rymek 66 Secretary of ARTRA John Harvey, Chairman and Chief Executive Officer of ARTRA. See "Information Concerning Directors" above for a description of Mr. Harvey's relevant business experience. Peter R. Harvey, President and Chief Operating Officer of ARTRA. See "Information Concerning Directors" above for a description of Mr. Harvey's relevant business experience. John G. Hamm, Executive Vice President of ARTRA. Mr. Hamm has served as Executive Vice President, since February 1988, and Vice President - Finance, from 1975 until 1988, of ARTRA. Mr. Hamm has also served as Vice President - Finance, from August 1990 until July 1995, and as a Director, from 1984 until - 46 - July 1995, of Ozite Corporation. Mr. Hamm also serves as a Director of SoftNet Systems, Inc. since 1985 and served as Director of PST from 1985 until January, 1996. Robert S. Gruber, Vice President - Corporate Relations of ARTRA. Mr. Gruber has served as Vice President - Corporate Relations of ARTRA since 1975 and The Lori Corporation from 1975 to 1995. Mr. Gruber has served as a consultant to COMFORCE during 1996. James D. Doering, Vice President, Treasurer and Chief Financial Officer of ARTRA. Mr. Doering has served as Vice President, since 1980, Treasurer, since 1987, Chief Financial Officer, since February 1988, and Controller, from 1980 to 1987. Mr. Doering has also served as Vice President and Chief Financial Officer of COMFORCE from February 1988 through January 1996. John Conroy, Vice President - Corporate Administration of ARTRA. Mr. Conroy has served as Vice President - Corporate Administration since March 1990. Prior thereto, he served as Vice President - Corporate Administration, of Sargent-Welch Scientific Company from September 1988 to December 1989. Mr. Conroy previously served in various risk management positions with ARTRA from 1978 to September 1988, most recently as Corporate Risk Director. Lawrence D. Levin, Controller of ARTRA. Mr. Levin has served as Controller, since 1987, Assistant Treasurer and Assistant Secretary, since 1980, and Assistant Controller, from 1980 to 1987. Mr. Levin has also served as Controller of COMFORCE since December 1989 through January 1996 and as the Assistant Chief Financial Officer of COMFORCE from May 1993 through January 1996. Edwin G. Rymek, Secretary of ARTRA. Mr. Rymek has served as Secretary of ARTRA since 1987 and of COMFORCE from 1982 through 1995. Officers are appointed by the boards of directors of ARTRA and its subsidiaries and serve at the pleasure of each respective board. Except for the relationship of Peter R. Harvey (a director and executive officer) and John Harvey (a director and executive officer), who are brothers, there are no family relationships among the executive officers and/or directors, nor are there any arrangements or understandings between any officer and another person pursuant to which he was appointed to office except as may be hereinafter described. EXECUTIVE COMPENSATION Directors' Compensation Directors who are not employees of ARTRA ("Outside Directors") are entitled to receive an annual retainer of $4,000 and $250 per meeting attended; however, no fees were paid to Outside Directors in 1995. Each Outside Director who sits on an established committee of ARTRA is entitled to receive $150 per committee meeting attended. Employees of ARTRA who also serve as directors receive no additional compensation for such service. Executive Officer Compensation The following table shows all compensation paid by ARTRA and its subsidiaries for the fiscal years ended December 26, 1996, December 28, 1995 and December 29, 1994, to the chief executive officer of ARTRA and each of its other most highly compensated executive officers who were serving as executive officers of ARTRA as of December 26, 1996 and whose compensation exceeded $100,000 in 1996. - 47 - SUMMARY COMPENSATION TABLE
Annual Compensation(1) Long Term Compensation(1) ---------------------- ------------------------- Securities All Underlying(3) Other Name and Salary Salary Options - Compen- Principal Positions Year Paid Deferred(2) Bonus No. of Shares sation ------------------- ---- ---- ----------- ----- ------------- ------ John Harvey, 1996 $137,811 $ -0- $ -0- 141,000 $5,456(4) Chairman and Chief 1995 126,200 -0- -0- -0- 2,520(5) Executive Officer 1994 126,200 -0- -0- -0- 2,520(5) James D. Doering, 1996 133,600 -0- -0- 57,500 6,000(4) Vice President and 1995 49,900 83,500 -0- -0- 3,470(5) Chief Financial Officer 1994 111,133 22,267 -0- -0- 3,000(5) John G. Hamm, 1996 133,600 -0- -0- 101,250 6,000(4) Executive 1995 49,900 83,500 -0- -0- 3,470(5) Vice President 1994 111,133 22,267 -0- -0- 3,000(5) Robert S. Gruber, 1996 110,400 -0- -0- 97,750 6,000(4) Vice President 1995 92,000 69,000 -0- -0- 3,000(5) Corporate Relations 1994 -0- 18,400 -0- -0- 4,831(5) - ----------------------- (1) No additional annual compensation was paid, no restrictive stock awards or stock appreciation rights were granted, and no long term incentive plan payouts were made to any of the officers listed in the table. Only compensation earned in 1996 (irrespective of the year in which paid) is considered in determining inclusion in this table. (2) Salaries are shown as paid (or deferred) in the year earned. Any deferred salaries paid in a year subsequent to the year earned are not shown as paid in such subsequent year. All salary deferrals for the years 1994 and 1995 have been paid as of the date hereof. (3) All of the options shown in this column were granted under the Company's 1996 Stock Option Plan at an exercise price of $5.25 per share, being the closing price of the Company's common stock on the New York Stock Exchange on the date of grant (October 4, 1996). These options expire October 4, 2006. (4) These amounts include the Company's contributions to the 401(k) plan during 1996 and 1995 and amounts contributed to the ARTRA GROUP Incorporated Employee Stock Ownership Plan (the "ESOP") during 1995. See note (5) below for a further discussion of the ESOP. (5) These amounts represent the closing price on the New York Stock Exchange of Common Stock as of the date the named officers became entitled to receive the stock (i.e., December 29, 1994) pursuant to the ESOP. Annual contributions were made to the ESOP at the discretion of the Board of Directors. ARTRA contributed 15,000 common shares to the Plan with a fair market value of $71,250 ($4.75 per share) for the plan year ending December 29, 1994. Effective August 1, 1995, the Company terminated the ESOP and subsequently distributed the related Employee accounts to participants.
- 48 - The following table sets forth information concerning the aggregate number and potential realizable values of options granted to the Chief Executive Officer and the other executive officers of the Company listed in the Summary Compensation Table during the fiscal year ended December 26, 1996. The Board of Directors authorized the issuance of options on October 5, 1996 at a per share exercise price of $5.25 (being the closing price on October 4, 1996). OPTION GRANTS IN FISCAL YEAR 1996
Potential Realizable Value at Assumed Annual Rates of Appreciation for Individual Grants Option Term (1) ----------------------------------------------------------------- ------------------------- Number of % of Total Options Options Granted to Exercise Price Expiration Name Granted Employees in 1996 ($ per share) Date 5% 10% - ------------------- -------- ----------------- ------------- ---------- ---------- ---------- John Harvey 141,000 26.5% $ 5.25 10-04-06 $ 466,710 $1,184,400 James D. Doering 57,500 10.8% $ 5.25 10-04-06 $ 190,325 $ 784,875 John G. Hamm 101,250 19.0% $ 5.25 10-04-06 $ 335,138 $ 850,500 Robert S. Gruber 97,750 18.3% $ 5.25 10-04-06 $ 323,553 $ 821,100
The following table sets forth information concerning the aggregate number and values of options held by the Chief Executive Officer and the other executive officers of the Company listed in the Summary Compensation Table as of December 26, 1996 which were granted to such officers in consideration of their services as officers or directors of the Company. No other options held by the Chief Executive Officer or any other executive officers of the Company listed in the Summary Compensation Table were exercised in 1996. AGGREGATED OPTION EXERCISES IN 1996 AND OPTION VALUES AS OF DECEMBER 26, 1996
Number of Value of Unexercised Unexercised In-the-Money Options at 12-26-96 Options at 12-26-96 Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized Unexercisable(1) Unexercisable(2) - ------------------ --------------- --------- ------------------- ------------------ John Harvey 0 $ 0 221,000/ $321,000/None 0 James D. Doering 8,500 18,000 111,000/ 180,000/None 0 John G. Hamm 0 0 140,450/ 184,000/None 0 Robert S. Gruber 0 0 118,750/ 136,000/None 0 - ------------------------------- (1) See the notes under "Principal Shareholders" for a description of the options (including exercise prices) granted to each of the executive officers listed in this table. (2) The listed options were issued at per share exercise prices of from $3.65 per share to $5.25 per share. The market price of Common Stock as of the close of trading on December 26, 1996 on the New York Stock Exchange was $6.125 per share.
- 49 - Compensation Committee Interlocks And Insider Participation Authority to determine the compensation of executive officers is conferred upon the Company's Board of Directors or, in the case of officers paid by Bagcraft Corporation of America ("Bagcraft"), by Bagcraft's Board of Directors. The salary of John Harvey was paid by Bagcraft. ARTRA's Board did not consider the compensation of its officers in 1996. The decisions concerning the cash compensation of these executive officers (including of John Harvey, the Chairman and Chief Executive Officer of ARTRA, who was compensated by Bagcraft for his services as its Chairman) were made by Peter R. Harvey, the President and Chief Operating Officer of ARTRA. Although ARTRA has an Option and Compensation Committee formed to consider and award options under ARTRA's 1985 Stock Option Plan, this committee did not meet in 1995. In December, 1995, the ARTRA Board awarded options to the Chief Executive Officer and to certain executive officers subject to approval by the shareholders of the proposed 1996 Stock Option Plan. Peter R. Harvey, John Harvey and Gerard Kenny executed the consent approving these awards. These awards were granted as compensation for late salary payments during the period 1991 to 1995. See "Transactions with Management and Others" for a description of various transactions and relationships between the Company and each of these directors. - 50 - PRINCIPAL SHAREHOLDERS As of January 27, 1997, there were 7,868,620 shares of Common Stock issued and outstanding. The following table sets forth the number and percentage of Common Stock known by management of ARTRA to be beneficially owned as of January 27, 1997 by (i) all stockholders known by management of ARTRA to own 5% or more of ARTRA's Common Stock, (ii) all directors of ARTRA, (iii) each executive officer included in the Summary Compensation Table and (iv) all directors, executive officers and other key employees of ARTRA as a group (9 persons). Unless stated otherwise, each person so named exercises sole voting and investment power as to the shares of Common Stock so indicated. As of January 27, 1997, 3,750 shares of Series A Preferred Stock of ARTRA, par value $1,000 per share, were issued and outstanding. Each share of this Series A Preferred Stock entitles the holder to one vote on an equal basis with each share of Common Stock. Accordingly, for purposes of showing ownership of Common Stock in the table below, the Series A Preferred Stock is treated as Common Stock. Number of Shares Beneficially Name of Beneficial Owner Owned Percent - ------------------------ ----- ------- Research Center of Kabbalah(1) 447,250 5.6% Peter R. Harvey(2) Common 440,243 5.6% Preferred 1,523 40.6% John Harvey(3) 523,796 6.4% Gerard M. Kenny(4) 240,048 3.0% Maynard K. Louis(5) 121,000 1.5% Howard R. Connant(6) 205,000 2.6% Robert L. Johnson 2,873 * John G. Hamm(7) 143,498 1.8% Robert S. Gruber(8) 141,104 1.8% James D. Doering(9) 124,311 1.6% All directors and executive officers as a group (12 persons) 2,168,567 24.0% * Less than 1% of the outstanding shares. Ozite Corporation, an affiliate of ARTRA by reason of Peter R. Harvey and John Harvey being directors of the parent corporation, Puretec, is the record holder of 2,227 shares (59.4%) of the ARTRA Series A Preferred. (1) The address of Research Center of Kabbalah ("RCK") is 83-84 115th Street, Richmond Hill, New York 11418. The shares beneficially owned by RCK consist of 361,000 shares of Common Stock owned directly, 21,250 shares of Common Stock issuable under a warrant which expires October 29, 1998 at an exercise price of $6.00 per share, and 65,000 shares of Common Stock issuable under a warrant which expires December 31, 1998 at an exercise price of $7.00 per share. - 51 - (2) Mr. Peter R. Harvey's business address is 500 Central Avenue, Northfield, Illinois 60093. The shares beneficially owned by Mr. Harvey consist of 375,138 shares held directly by him (of which 373,615 are Common Stock and 1,523 are shares of Series A Preferred Stock), 23,001 shares held as trustee for the benefit of his nieces, 800 shares owned by his wife and children, 634 shares held in his 401(k) plan, 7,193 shares held in his individual retirement account, 20,000 shares issuable under an option which expires September 19, 2001 at an exercise price of $3.65 per share and 15,000 shares issuable under an option which expires January 8, 2003 at an exercise price of $3.75 per share. (3) Mr. John Harvey's business address is 500 Central Avenue, Northfield, Illinois 60093. The shares of Common Stock beneficially owned by Mr. Harvey consist of 123,100 shares held directly by him, 1,705 shares held in his 401(k) plan, 5,746 shares held in his individual retirement account, 100,000 shares held by Mr. Harvey's daughters, 75,000 shares issuable under an option which expires December 19, 2000 at an exercise price of $3.65 per share, 1,000 shares issuable under an option which expires September 19, 2001 at an exercise price of $3.65 per share, 4,000 shares issuable under an option which expires January 8, 2003 at an exercise price of $3.75 per share, 141,000 shares issuable under an option which expires October 4, 2006 at an exercise price of $5.25 per share and an aggregate of 72,245 shares issuable under warrants expiring at various dates in 2000 and 2001 received in 1995 and 1996 as additional compensation for 1995 and 1996 short-term loans at exercise prices of $3.75 per share to $6.25 per share. (4) The shares beneficially owned by Mr. Kenny consist of 2,000 shares of ARTRA's common stock issuable upon the exercise of an option at $10.00 per share expiring November 28, 1996, 75,652 shares held by (or issuable to) Kenny Construction Company, 14,411 shares held by Clinton Industries, and 75,001 shares issuable under a warrant held by Clinton Industries which expires November 10, 1997 at an exercise price of $5.00 per share. Kenny Construction Company holds put options to sell to ARTRA (i) 23,004 shares of Common Stock for a put price of $83.45 per share plus an amount equal to 15% per annum for each day from March 1, 1991 to the date of payment by ARTRA, which put option expires December 31, 1997, and (ii) 49,980 shares of Common Stock for a put price of $21.19 per share, subject to an annual increase of $2.25, which put option is exercisable on the later of the date ARTRA's obligations to Bank of America are repaid or the $2,500,000 note of ARTRA payable to Kenny Construction Company (as described in paragraph 5 under "Transactions with Management and Others." If the stock subject to the put is sold at a price less than the put price, the Company would remain liable to the holder of the put for the amount by which the put price of the shares exceeds the selling price. Mr. Kenny is Executive Vice President, Director and beneficial owner of 16.66% of the issued and outstanding stock of Kenny Construction Company. He is also the General Partner and a 14.28% beneficial owner of Clinton Industries, a limited partnership. See paragraphs 4 and 5 under "Transactions with Management and Others." (5) Mr. Louis is the holder of warrants to purchase 121,000 shares of ARTRA common stock at prices of $4.50 to $8.00 per share which warrants expire on various dates commencing in 1997 and ending June 13, 2001. (6) Mr. Conant holds 140,000 ARTRA common shares directly, Mrs. Conant holds 5,000 ARTRA common shares and Mr. Conant holds warrants to acquire 60,000 shares of ARTRA common stock at prices of $5.00 to $5.75 per share which warrants expire on various dates in 2001 and 2002. - 52 - (7) The shares of Common Stock beneficially owned by Mr. Hamm consist of 50 shares held directly by him, 93 shares held by him and his wife jointly, 2,905 shares held in his 401(k) plan, 25,000 shares issuable under an option which expires December 19, 2000 at an exercise price of $3.65 per share, 1,000 shares issuable under an option which expires September 19, 2001 at an exercise price of $3.65 per share, 13,200 shares issuable under an option which expires January 8, 2003 at an exercise price of $3.75 per share, and 101,250 shares issuable under an option which expires October 4, 2006, at an exercise price of $5.25 per share. (8) The shares of Common Stock beneficially owned by Mr. Gruber consist of 20,190 shares held directly by him, 943 shares held in his 401(k) plan, 1,221 shares held in his individual retirement account, 8,000 shares issuable under an option which expires December 19, 2000 at an exercise price of $3.65 per share, 1,000 shares issuable under an option which expires September 19, 2001 at an exercise price of $3.65 per share, 12,000 shares issuable under an option which expires January 8, 2003 at an exercise price of $3.75 per share and 97,750 shares issuable under an option which expires October 4, 2006, at an exercise price of $5.25 per share. (9) The shares of Common Stock beneficially owned by Mr. Doering consist of 10,500 shares held by him in joint tenancy with his wife, 1,693 shares held in his 401(k) plan, 1,118 shares held in his individual retirement account, 22,500 shares issuable under an option which expires December 19, 2000 at an exercise price of $3.65 per share, 31,000 shares issuable under an option which expires January 8, 2003 at an exercise price of $3.75 per share and 57,500 shares issuable under an option which expires October 4, 2006, at an exercise price of $5.25 per share. - 53 - TRANSACTIONS WITH MANAGEMENT AND OTHERS Effective October 17, 1995, COMFORCE, formerly a 64% owned subsidiary of ARTRA, 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. Effective July 4, 1995, Lori's management agreed to issue up to a 35% common stock interest in the 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 believed 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 subsi diaries were deconsolidated from ARTRA's consolidated financial statements. See Note 5 to the Company's condensed consolidated financial statements for the nine months ended September 26, 1996 for a further discussion of the accounting treatment of ARTRA's investment in COMFORCE. Effective December 19, 1996, ARTRA and COMFORCE agreed to settle various differences in the interpretation of certain agreements relating to the Global acquisition, whereby, among other things: (a) COMFORCE delivered to ARTRA 100,000 shares of COMFORCE common stock in consideration of ARTRA's guarantee of the Global purchase price to the seller and 100,000 shares of COMFORCE common stock for the cancellation of the Series C Preferred Stock. ARTRA's financial statements have reflected the issuance of these 200,000 COMFORCE common shares to ARTRA since the fourth quarter of 1995. (b) ARTRA delivered to COMFORCE certificates evidencing its ownership of 100% of the Lori Series C Preferred Stock. - 54 - (c) COMFORCE agreed to include in its Registration Statement on Form S-1 to register for resale 380,000 shares of COMFORCE common stock held by ARTRA and its Fill-Mor subsidiary. Sales proceeds will be used principally to discharge the Manufacturers Bank loan and certain other ARTRA debt obligations. (d) ARTRA agreed to a Lock-up Agreement which limits its ability to sell its remaining COMFORCE common shares for a period of 360 days after the effective date of COMFORCE's Registration Statement on Form S-1. (e) ARTRA deposited 125,000 shares of its COMFORCE common stock into an escrow account to collateralize its remaining obligations under the Assumption Agreement. During 1995, ARTRA received $399,000 of advances from COMFORCE. In 1996, COMFORCE advanced ARTRA an additional $54,000. During 1996 ARTRA repaid the above advances and paid down, assumed or otherwise settled substantially all of the known pre-existing COMFORCE liabilities it assumed in conjunction with the COMFORCE Global acquisition. John Harvey was the chief executive officer, the chairman of the board of COMFORCE until November 1995 and a director to December 1995. Peter R. Harvey was a a director of COMFORCE to December 1995 and a vice president of COMFORCE through January 1, 1996. James D. Doering was the vice president and chief financial officer of COMFORCE through January 1996. Lawrence D. Levin was the controller and assistant chief financial officer of COMFORCE through January 1996. Edwin Rymek was the secretary of COMFORCE through November 1995. In January 1995, ARTRA borrowed $100,000 from John Harvey on a short-term basis evidenced by a note due March 20, 1995 and bearing interest at 8% per annum. This loan, as well as other short-term borrowings from John Harvey, aggregating $175,000 at December 28, 1995, have been renewed as they matured during 1995. In February 1996 ARTRA repaid $50,000 to Mr. Harvey. In May 1996 ARTRA repaid Mr. Harvey's loans and related accrued interest in their entirety. As additional compensation the loans provided for the issuance of warrants to purchase ARTRA common shares, as determined by the number of days the loans are outstanding. 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. During 1990 and 1991, ARTRA made advances to Peter R. Harvey, of which $820,000 (including $112,000 in accrued interest) remained outstanding at December 30, 1993. The outstanding principal balance of these advances bears interest at the prime rate plus 2%. ARTRA had previously borrowed funds from Mr. Harvey evidenced by a $2,000,000 ARTRA note payable to him. Upon Mr. Harvey's surrender of this note to ARTRA (which note had previously been pledged by him to secure obligations he owed to another company), ARTRA applied the $2,000,000 to amounts due from him. In addition to the advances made directly by ARTRA, certain advances were previously made to Mr. Harvey by Bagcraft prior to its acquisition by ARTRA in 1990. In December 1993, $1,894,000, representing the total amount of these advances (including accrued interest of $120,000) was transferred from ARTRA's Bagcraft subsidiary to ARTRA as a dividend (a portion of which interest has been reserved on ARTRA's books). In February 1996, a bank agreed to discharge all amounts under its ARTRA notes ($14,563,639.39 including accrued interest and fees) and certain obligations of ARTRA's president, Peter R. Harvey. In connection with said discharge, ARTRA obtained a $2,150,000 participation right in a $3 million note, which was offset by the discharge of $2,150,000 in prior Harvey indebtedness. In addition, ARTRA recorded a receivable of $1,089,000 for Mr. Harvey's pro rata share of the debt discharge funded by the Company. See "Transactions with Management and Others -- Settlement of the Bank of America Illinois Debt." - 55 - 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, bear 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. The aggregate amount of all amounts due from Mr. Harvey which remained outstanding as of December 26, 1996 (the end of ARTRA's most recent fiscal year) was $8,117,000. ARTRA has accrued interest in the sum of $1,699,000 on the principal owed to it by Mr. Harvey. Commencing January 1, 1993 to date, interest on these amounts due from Peter R. Harvey has been accrued and fully reserved. As partial 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 PureTec. In addition, in connection with a discharge of certain bank indebtedness discussed below, ARTRA received rights under a mortgage of certain real estate owned by Mr. Harvey. The mortgage secures $2,150,000 of the amount owed by Mr. Harvey. The bank has a senior security interest in the amount of $850,000. See "Transactions With Management And Others - - Settlement of the Bank of America Illinois Debt." Peter R. Harvey has not received compensation for his services other than nominal amounts as an officer or director of ARTRA or any of its subsidiaries since October 1990. Additionally, Mr. Harvey has agreed not to accept any compensation for his services as an officer or director of ARTRA or any of its subsidiaries until his obligations to ARTRA, described above, are fully satisfied. 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 the ARTRA obligations which are described in this proxy statement. 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 Peter R. Harvey were ratified by ARTRA's Board of Directors. In the case of the loan made by Fill-Mor to Peter R. 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 Peter R. Harvey's loan obligations to the bank. However, the resolutions did not acknowledge the use of such proceeds for this purpose and the formal loan documents with the bank did not set forth this condition (though in fact, the proceeds were so applied by the bank). In 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. - 56 - During 1986 and through August 10, 1988, ARTRA entered into a series of short-term borrowing agreements with private investors. Each agreement granted an investor a put option, principally due in one year, that required ARTRA to repurchase any or all of the shares sold at a 15% to 20% premium during a specified put period. Kenny Construction Company ("Kenny") entered into a put option agreement with ARTRA, which has been extended from time to time, most recently on November 11, 1992. At such time ARTRA and Kenny agreed to extend the put option whereby Kenny received the right to sell to ARTRA 23,004 shares of ARTRA common stock at a put price of $56.76 plus an amount equal to 15% per annum for each day from March 1, 1991 to the date of payment by ARTRA, which option expires December 31, 1997. Gerard M. Kenny, a director of ARTRA, is the Executive vice-president and Chief Executive Officer and a director of Kenny and beneficially owns 16.66% of Kenny's capital stock. On March 21, 1989, ARTRA borrowed $5,000,000 from its bank lender evidenced by a promissory note. This note has been amended and extended from time to time. The borrowings on this note were collateralized by, among other things, a $2,500,000 personal guaranty by Kenny. Kenny received compensation in the form of 833 shares of ARTRA common stock for each month that its guaranty remained outstanding through March 31, 1994. Under this arrangement, Kenny received 49,980 shares of ARTRA common stock as compensation for its guaranty. On March 31, 1994, ARTRA entered into a series of agreements with its bank lender and with Kenny. Under the terms of these agreements, Kenny purchased a $2,500,000 participation in the $5,000,000 note payable to ARTRA's bank lender. Kenny's participation is evidenced by a $2,500,000 ARTRA note (the "Kenny Note") bearing interest at the prime rate. As consideration for its purchase of this participation, the bank lender released Kenny from its $2,500,000 loan guaranty. As additional consideration, Kenny received an option to put back to ARTRA the 49,980 shares of ARTRA common stock received as compensation for its $2,500,000 ARTRA loan guaranty at a price of $15.00 per share. The put option is subject to increase at the rate of $2.25 per share per annum ($19.50 at May 31, 1996). The put option is exercisable on the later of the date the Kenny Note is repaid or the date ARTRA's obligations to its bank lender are fully paid. During the first quarter of 1996, the $2,500,000 note and related accrued interest was paid in full, principally with the proceeds from additional short-term borrowings. The put option remains outstanding. On September 27, 1989, ARTRA received a proposal to purchase Bagcraft from Sage Group, Inc. ("Sage"), a privately-owned corporation. Effective March 3, 1990, a wholly-owned subsidiary of ARTRA indirectly acquired from Sage 100% of the issued and outstanding common shares of BCA Holdings, Inc., which in turn owned 100% of the stock of Bagcraft, for total consideration which was delivered to Ozite as the successor by merger to Sage, upon approval of ARTRA's shareholders. The consideration for the Bagcraft acquisition consisted of 772,000 shares of ARTRA's common stock and 3,750 shares of its $1,000 par value junior non-convertible payment-in-kind preferred stock bearing a dividend rate of 6%. The issuance of the ARTRA Common and Preferred Stock as consideration was approved by ARTRA's shareholders at the December 1990 annual meeting of shareholders. Upon the merger of Sage into Ozite on August 24, 1990, Ozite became entitled to receive this consideration, which right Ozite assigned to its PST subsidiary. Peter R. Harvey, ARTRA's President, and John Harvey, ARTRA's Chairman of the Board of Directors, were the principal shareholders of Sage and Ozite as of the times that the merger agreements were executed and the mergers consummated. Ozite subsequently repurchased the 3,750 shares of preferred stock in February 1992, 1,523 of which shares were subsequently assigned to Peter Harvey in consideration of his discharge of certain indebtedness of Ozite to him in April 1992. Mr. Harvey pledged these 1,523 preferred shares to ARTRA. The $4,750,000 price of the 772,000 shares of common stock and 3,750 shares of preferred stock was equal to the fair market value thereof as of January 31, 1991 as determined by an independent investment banking firm engaged by PST to make such determination. - 57 - Peter R. Harvey and John Harvey are significant stockholders of PST's parent, PureTec, as described in Note 1 to the table under "Principal Shareholders." Peter R. Harvey is a Vice President and a director of PST and a director of PureTec. John Harvey is a director of PST and PureTec. In 1987, the predecessor of PST acquired a $5,000,000 subordinated note bearing interest at a rate of 13.5% per annum and 50,000 shares of 13-1/2% cumulative redeemable preferred stock of Bagcraft with a liquidation preference of $5,000,000 with $10,000,000 of the net proceeds of the PST public offering in May 1987. Interest accrued on the note at a rate of 13.5% per annum. No cash payments of interest were made during the term of the note. However, during 1992, per agreement with PST, the interest payments for 1992 were remitted by Bagcraft to ARTRA and the noteholder received Series A preferred stock of Bagcraft's parent, BCA Holdings, Inc. ("BCA") having a liquidation value of $675,000. In December 1993, the principal outstanding under this note was repaid in full in cash from proceeds of Bagcraft's new credit facility with an institutional lender and PST accepted additional BCA preferred stock having a liquidation value of $3,000,000 in satisfaction of all unpaid accrued interest thereon. The BCA preferred stock provides a $1,000 per share liquidation preference and annual cumulative cash dividends of $60.00 per share when and if declared by BCA. The Bagcraft redeemable preferred stock remains outstanding as of the date hereof. As of May 30, 1996, dividends in the amount of $ 560,000 had cumulated thereon. Settlement of the Bank of America Illinois Debt As of February 26, 1996, ARTRA was indebted to B of A in the sum of $14,563,639.59 including accrued interest and fees (the "Prior Indebtedness"). As of February 26, 1996, Peter R. Harvey, an officer and director of ARTRA, was indebted to B of A in the sum of $7,496,830 including accrued interest (the "Prior Harvey Indebtedness"), (the Prior Indebtedness and the Prior Harvey Indebtedness are collectively referred to as the "Debt", or "Prior Notes"). On February 26, 1996, for an aggregate purchase price of $5,150,000 (the "Purchase Price") Arabella, S.A. ("Arabella") purchased from B of A (the "Debt Purchase") all of B of A's interest in the Debt except that B of A retained the rights to $3 million of the Prior Harvey Indebtedness. B of A then entered into a Participation Agreement with ARTRA pursuant to which B of A transferred to ARTRA the right to receive $2.15 million of the retained $3 million indebtedness. The $3 million indebtedness is secured by a mortgage on certain real estate owned by Mr. Harvey. B of A's rights to the remaining $850,000 of the indebtedness have priority over ARTRA's rights to the $2.15 million. The Prior ARTRA Indebtedness and the Prior Harvey Indebtedness were satisfied as follows. 1. ARTRA paid Arabella cash in the amount of $2,650,000, 100,000 shares of ARTRA common stock (valued at $440,667 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). 2. BCA executed a note in favor of Arabella in the principal amount of $1,900,000 with a maturity date of May 26, 1996 (the "New ARTRA Note,") and Peter R. Harvey executed a note in favor of Arabella in the principal amount of $2,296,830 (the "New Harvey Note"). The amount of the Harvey Note was reduced to $100,000 if payment was made by May 26, 1996. Arabella was entitled to up to an additional 100,000 shares of ARTRA common stock and 25,000 shares of COMFORCE stock depending on when ARTRA and Peter R. Harvey repaid the new debt. The New ARTRA and Harvey Notes were repaid in April, 1996, principally from the proceeds of a private placement completed in July (and commenced in April). Based on the date of the repayment, Arabella received an additional 50,000 shares of ARTRA stock, which had a value of $220,000 after a discount for restricted marketability. Arabella also received an additional $125,000 in lieu of the additional 12,500 shares of COMFORCE to which it was entitled based on the date of repayment. - 58 - 3. ARTRA gave Arabella an option to purchase 40% of the common stock of Bagcraft for nominal consideration. The option was valued at $500,000. Per the terms of the agreement, ARTRA repurchased the option for $550,000 in April, 1996. ARTRA recognized a gain on the discharge of indebtedness of $9,424,000 ($1.23 per share) in the first quarter of 1996 and recorded a receivable for Mr. Harvey's pro rata share ($1,089,000) of the debt discharge funded by the Company. In addition, ARTRA forgave $2,150,000 debt previously owed to it by Peter Harvey, which offset ARTRA's right to receive $2,150,000 from Mr. Harvey pursuant to the Participation Agreement discussed above. In order to obtain access to the $2,650,000 paid to Arabella, the following transactions occurred. 1. Bagcraft purchased from BCA all of the authorized shares of a newly created BCA Class B Redeemable Preferred stock (the "BCA B Pref") consisting of 8,135 shares, a $1,000 per share liquidation preference and annual cumulative cash dividends of $135 per share for $4,135,000 which was borrowed under Bagcraft's line of credit. 2. BCA distributed the $4,135,000 to ARTRA. ARTRA paid $2,650,000 to Arabella and used the remaining $1,485,000 to pay down other debt obligations and for working capital. 3. Bagcraft then exchanged the BCA B Pref for 82.7% of the outstanding shares of Bagcraft preferred stock (the "Bagcraft Preferred") which were owned by Ozite Corporation, a wholly owned subsidiary of PureTec. Following this exchange, Ozite held all of the outstanding BCA B Pref. Bagcraft then held 82.7% of the outstanding shares of its Preferred which was canceled. There are 8,650 shares of Bagcraft Preferred remaining outstanding held by PST. Other Transactions On March 9, 1990, Maynard K. Louis, a member of the Board of Directors, made a loan to ARTRA in the principal amount of $500,000 bearing interest at the rate of 10% per annum. This loan was repaid in 1992 through the issuance to Mr. Louis of 68,198 shares of ARTRA's common stock. On April 2, 1992, Mr. Louis made a loan to ARTRA in the principal amount of $100,000 bearing interest at the rate of 9% per annum, which loan, due April 1, 1994, has been extended. On October 1, 1993, Mr. Louis made a short term loan in the principal amount of $75,000 bearing interest at the rate of 8% per annum to ARTRA's BCA Holdings Inc. and A G Holding Corp. subsidiaries due October 22, 1993, which loan was repaid. As consideration for making or agreeing to extend these loans, Mr. Louis received the warrants to purchase ARTRA's common stock described in note 5 to the table under "Principal Shareholders." During 1993, The Research Center of Kabbalah ("RCK"), which holds approximately 6% of ARTRA's outstanding Common Stock (including the stock issuable upon the exercise of warrants) as of December 26, 1996, made certain short-term loans to the Company of which $2,000,000, with interest at 10%, was outstanding at December 31, 1993. As additional compensation, RCK received warrants to purchase an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00 to $7.00 per share based upon the market of ARTRA's common stock at the date of issuance. The warrants expire five years from the date of issuance. In January 1994, Kabbalah made an additional $1,000,000 short-term loan to the Company, also with interest at 10%. The proceeds of these loans were used to pay down various ARTRA short-term loans and other debt obligations. In December, 1995, RCK received 126,222 shares of ARTRA common in payment of past due interest through October 31, 1995. In 1996 and 1997 RCK received cash payments of approximately $390,000 representing interest due through December, 1996. Payment on the loans was due March 31, 1994. In May, 1996, ARTRA borrowed $100,000 from Edward A. Celano, then a private investor, evidenced by an unsecured short-term note, due August 7, 1996, and renewed to February 6, 1997, bearing interest at 10%. The proceeds of the loan were used for working capital. At the Company's annual meeting of shareholders, held August 29, 1996, Mr. Celano was elected to the Company's board of directors. Effective January 17, 1997, Mr. Celano exercised his conversion rights and received 18,182 shares of ARTRA common stock as payment of the principal balance of his note. - 59 - In August, 1996, ARTRA borrowed $500,000 from Howard Conant, then 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, Mr. Conant received a warrant, expiring in 2001, to purchase 25,000 ARTRA common shares at a price of $5.00 per share. The proceeds of the loan were used for working capital. At the Company's annual meeting of shareholders, held August 29, 1996, Mr. Conant was elected to the Company's board of directors. In December, 1996, the loan was extended until April 23, 1997 and Mr. Conant received, as additional compensation, a warrant , expiring in 2001, to purchase 25,000 ARTRA common shares at a price of $5.875 per share. In January, 1997, ARTRA borrowed an additional $300,000 from Mr. Conant evidenced by an short-term note, due December 23, 1996, bearing interest at 8%. The loan is collateralized by 100,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. As additional compensation for the loan, Mr. Conant received a warrant, expiring in 2002, to purchase 25,000 ARTRA common shares at a price of $5.75 per share. As of January 27, 1997, borrowings from Mr. Conant totaled $800,000. SELLING SHAREHOLDERS The following table sets forth certain information, as of January 27, 1997, when 7,868,620 shares of Common Stock were issued and outstanding regarding the shares of Common Stock held by the persons ("Selling Shareholders") offering shares pursuant to this Prospectus. Included in certain of the shares owned and offered by Selling Shareholders are shares issuable upon the exercise of warrants, as described in the notes to the table. In cases where the Selling Shareholder serves or has served within the past three years as an officer, director or employee of the Company or any of its subsidiaries, this relationship is noted. In most instances in which shares of Common Stock issuable upon the exercise of Warrants are being registered, the Selling Shareholder acquired the Warrant as additional consideration for extending credit to the Company or in connection with another transaction. In certain instances, shares of Common Stock of Selling Shareholders being registered were acquired in exchange for debt securities (promissory notes) of the Company previously held by the Selling Shareholders, or otherwise to pay, compromise or discharge indebtedness (including interest) of the Company due to the Selling Shareholder. Because the Selling Shareholders may offer all or some part of the Common Stock that they hold pursuant to the offering contemplated by this Prospectus, and because this offering is not being underwritten (on a firm commitment or any other basis), no estimate can be given as to the amount of Common Stock that will be held by Selling Shareholders upon termination of this offering. - 60 -
Before the Offering ------------------------------------------------- Number of Percent of Shares Shares Total Shares Offered Name of Beneficial Owner Beneficially Outstanding Hereby Owned (1)(2) (1) - -------------------------------------------------------------------------------------------------- Robert Abrams (22) 4,724 * 4,724 Alltech Associates (42) 10,000 * 10,000 Donald Arends (22) 2,847 * 2,847 Donald Arends Pension Plan (3) 2,200 * 2,200 Baytree Associates, Inc. (15) 15,000 * 15,000 James F. Beedie (4) 5,000 * 5,000 James A. Belushi (4) 5,000 * 5,000 Morris Belzberg (4) 25,000 * 25,000 William Belzberg (4) 25,000 * 25,000 K. Reed Berkey (4) 2,500 * 2,500 Nora Baker (4) 5,000 * 5,000 Julius Berman (24) 6,250 * 6,250 Evelyn Bishop, Trustee (5) 168,051 2.1% 168,051 Richard Blackmore (28) 17,500 * 17,500 Violet M. Blank Living Trust (15) 7,500 * 7,500 Blacksmith Books, Ltd. (22) 2,873 * 2,873 Barry W. Blank (15) 75,000 * 75,000 John Bramsen (4) 10,000 10,000 Fred Broling (22) 14,234 * 14,234 Robert A. Calabrese (27) 15,000 * 15,000 Thomas J. Carroll (34) 28,461 * 28,461 Edward A Celano (12) 18,182 * 18,182 Woodrow Chamberlain (4) 10,000 * 10,000 Cipka S.A. (6) 192,790 2.5% 192,790 Clinton Industries (7) 75,001 * 75,001
- 61 -
Before the Offering ------------------------------------------------- Number of Percent of Shares Shares Total Shares Offered Name of Beneficial Owner Beneficially Outstanding Hereby Owned (1)(2) (1) - -------------------------------------------------------------------------------------------------- Marilyn Cohen (15) 3,750 * 3,750 Stanley Cohen (24) 6,250 * 6,250 Earle Combs (22) 4,724 * 4,724 Howard R. Conant (20) 205,000 2.6% 170,000 Leo Denslow (15) 9,000 * 9,000 Ronald Di Martino (15) 15,000 * 15,000 David J. Doerge Trust (34) 20,677 * 20,677 David J. Doerge Trust (4) 45,000 * 45,000 Richard A. Dolan (23) 33,263 * 33,263 Mark Dorian (4) 5,000 * 5,000 Stephen N. Engberg (4) 10,000 * 10,000 Kelly Erickson (15) 7,500 * 7,500 Paul Farmer IRA (4) 2,500 * 2,500 Leonard Feldman (4) 15,000 * 15,000 Barry M. Ferrigno & B. Allan P/S Plan (15) 7,500 * 7,500 Field Container Corp. (8) 150,943 1.9% 150,943 William F. Foster Jr. (32) 5,000 * 5,000 Rudolph Frank (22) 2,363 * 2,363 Paul H. Fricke (22) 2,873 * 2,873 William Gallagher (22) 4,724 * 4,724 Gibralt Holdings, Ltd. (4) 5,000 * 5,000 Howard Grafman (4) 5,000 * 5,000 Ilse W. Grafman (4) 5,000 * 5,000 James E. Grieger (22) 5,693 * 5,693
- 62 -
Before the Offering ------------------------------------------------- Number of Percent of Shares Shares Total Shares Offered Name of Beneficial Owner Beneficially Outstanding Hereby Owned (1)(2) (1) - -------------------------------------------------------------------------------------------------- Robert S. Gruber (22) 141,104 1.8% 2,874 Robert Haney (38) 1,000 * 1,000 Morton J. Harris (22) 2,873 * 2,873 Bucky W.F. Fong (15) 3,750 * 3,750 Joseph Giamanco (15) 30,000 * 30,000 Myron and Donna Goldstein (15) 11,250 * 11,250 GHM, Inc. (15) 3,750 * 3,750 Clark Gunderson (30) 5,000 * 5,000 John Harvey (9) 523,796 6.4% 82,206 Peter R. Harvey (21) 440,243 5.6% 42,067 Kim Eliabeth Harvey (40) 25,000 * 25,000 Julie Harvey Valeriote (40) 25,000 * 25,000 Lori Ann Harvey (40) 25,000 * 25,000 Kim Eliabeth Harvey (40) 25,000 * 25,000 Norton Herrick (34) 41,333 * 41,333 Austin Iodice (10) 30,373 * 30,373 Dane Johnson, IRA (15) 3,750 * 3,750 Carol M. Jacobsohn (11) 8,250 * 8,250 Robert Johnson (22) 2,873 * 2,873 Robert Jones (31) 8,321 * 8,321 Catherine Joyce (22) 4,745 * 4,745 Karel Private Mangers Fund (24) 25,000 * 25,000 Karel Private Managers Fund - 25,000 * 25,000 Series TE (24) Robert Kartheiser (22) 6,641 * 6,641
- 63 -
Before the Offering ------------------------------------------------- Number of Percent of Shares Shares Total Shares Offered Name of Beneficial Owner Beneficially Outstanding Hereby Owned (1)(2) (1) - -------------------------------------------------------------------------------------------------- Stephen Kaufman (24) 6,250 * 6,250 Thomas Kigin (4) 2,500 * 2,500 Craig Kubacki (22) 4,724 * 4,724 David Kubacki (22) 4,724 * 4,724 Kenneth L. Kwiatt (22) 22,687 * 22,687 Kwiatt, Silverman & Ruben, Ltd. Profit Sharing Plan (38) 15,000 * 15,000 Michael Laundrie (44) 9,733 * 9,733 R. D. Levy (22) 5,364 * 5,364 Steven M. Levy (29) 17,877 * 17,877 Robert Lofblad (22) 16,154 * 16,154 Frank N. Magid (4) 2,500 * 2,500 Maynard K. Louis (13) 121,000 1.5% 121,000 MH Capital Partners, L.P. (15) 7,500 * 7,500 Richard McLean (22) 3,320 * 3,320 M. A. Berman Partners, L.P. (24) 25,000 * 25,000 M. A. Berman Trading (24) 12,500 * 12,500 David MacDonald (22) 4,726 * 4,726 Maser Sosinski & Assoc. P.A. (15) 7,500 * 7,500 Thomas L. Mason (22) 959 * 959 D. Michael Meyer (4) 10,000 * 10,000 John E. Mc Connnaughy (15) 75,000 * 75,000 James McHugh (4) 5,000 * 5,000 James B. McGill (4) 5,000 * 5,000 Johanna B. McGill (4) 5,000 * 5,000
- 64 -
Before the Offering ------------------------------------------------- Number of Percent of Shares Shares Total Shares Offered Name of Beneficial Owner Beneficially Outstanding Hereby Owned (1)(2) (1) - -------------------------------------------------------------------------------------------------- R & J Lucas Revocable Trust (43) 10,000 * 10,000 Alfred Mendelson (22) 9,513 * 9,513 Ira Mendelson (22) 4,724 * 4,724 Mesirow Financial Inc., Custodian for 5,000 * 5,000 Thomas Philipsborn IRA (4) Richard Meyer (22) 2,873 * 2,873 Jerry Michelson IRA (4) 3,750 * 3,750 Jerry Michelson (4) 1,250 * 1,250 Mid America Hospital Group Inc. (24) 12,500 * 12,500 William J. Mirch (4) 5,000 * 5,000 Dr. John H. Muehlstein IRA (4) 5,000 * 5,000 Jerry Pillard (22) 385 * 385 Pollack Family L.L.C. (15) 3,750 * 3,750 Janet M. Portelly (15) 6,000 * 6,000 Ravinia Investors LLC (4) 2,500 * 2,500 Charles Reeder (4) 20,000 * 20,000 Research Center of Kabbalah (14) 447,250 5.6% 212,250 William G. Reynolds, Jr. (4) 1,250 * 1,250 J.E. Rich (22) 14,239 * 14,239 Richard Richter, IRA (15) 22,500 * 22,500 Evan D. Ritchie Living Trust (4) 2,500 * 2,500 Robert Rittmaster (22) 3,321 * 3,321 Philip E. Ruben (38) 20,687 * 20,687 Barry Rymer (35) 113,481 1.4% 113,481
- 65 -
Before the Offering ------------------------------------------------- Number of Percent of Shares Shares Total Shares Offered Name of Beneficial Owner Beneficially Outstanding Hereby Owned (1)(2) (1) - -------------------------------------------------------------------------------------------------- B. Rymer Insurance Trust (22) 48,715 * 48,715 Lenore M. Schnick dtd 12/30/70 (4) 15,000 * 15,000 Harvey Schuster (33) 25,000 * 25,000 Fred Schwartz (24) 6,250 * 6,250 James Scott (4) 5,000 * 5,000 Martha T. Seelbach (4) 3,750 * 3,750 William Seelbach (4) 5,000 * 5,000 William G. Reynolds, Jr. (4) 1,250 * 1,250 Marshall Rodin (41) 18,184 * 18,184 Sherwood Securities Corp. (15) 15,000 * 15,000 Sigma Pairs (24) 87,500 1.1% 87,500 Michael Silverman (38) 16,687 * 16,687 Lloyd Singer (22) 4,724 * 4,724 Alfred Slatin (22) 3,276 * 3,276 Paul Smeets (4) 10,000 * 10,000 Eva Staley Residential Trust (4) 5,000 * 5,000 Henry M. Staley Trust u/a/d 11/13/73 (4) 7,500 * 7,500 Staley Family Agency Account (4) 20,000 * 20,000 Avery J. StoneTrust (4) 20,000 * 20,000 Josef Strahammer (16) 136,355 1.7% 136,355 Shepard C. Swift Trust (4) 10,000 * 10,000 Dieter E.A. Tannenberg (39) 30,000 * 30,000 Michael Targoff (24) 125,000 1.6% 125,000
- 66 -
Before the Offering ------------------------------------------------- Number of Percent of Shares Shares Total Shares Offered Name of Beneficial Owner Beneficially Outstanding Hereby Owned (1)(2) (1) - -------------------------------------------------------------------------------------------------- Emanuel Tarrson (36) 50,000 * 50,000 Ronald Tarrson (37) 40,000 * 40,000 Steven Tarrson (4) 10,000 * 10,000 Joann Timbanard (15) 3,750 * 3,750 John Tull (17) 13,122 * 13,122 James C. Tull (22) 2,873 * 2,873 Thomas Urich (22) 448 * 448 Kenneth D. Vander Weele (22) 2,873 * 2,873 Alexander Verde (18) 301,599 3.7% 301,599 Billy Walker Enterprises (15) 7,500 * 7,500 Martin Weinstein, IRA (15) 15,000 * 15,000 Ginette Weiss (22) 1,403 * 1,403 Roger Weissenberg (22) 1,406 * 1,406 Westminster Capital (34) 41,333 * 41,133 Thomas Whitney (4) 10,000 * 10,000 Roger D. and Gail L. Williams (15) 7,500 * 7,500 Diane Wilson (4) 1,250 * 1,250 D. R. Zaccone (19) 174,000 2.2% 174,000 Marc L. Werner (25) 90,000 1.2% 90,000 Manufacturers Indemnity and Insurance Co. of America (26) 5,000 * 5,000 --------- ---- --------- TOTAL 5,244,664 52.2% 3,996,468 ========= ==== ========= ------------------------------------- *Less than 1% of the total shares outstanding.
- 67 - (1) The ownership percentages are calculated based on the assumption that all shares issuable to the Selling Shareholder upon the exercise of options or warrants by such shareholder (but only such shareholder) have been issued. (2) Unless otherwise indicated in the notes to this table, all shares shown as beneficially owned by the named individual are owned of record by such person. (3) Consists of 2,200 shares of Common Stock issuable to the D.L. Arends Pension Plan upon the exercise of a warrant at an exercise price of $8.00 per share, which expires May 5, 2001. (4) Consists of shares of Common Stock issuable upon the exercise of a warrant at an exercise price of $6.00 per share and expiring April 15, 1999. These warrants were issued under the Company's 1996 Private Placement of 12% Secured Promissory Notes. (5) Consists of 111,657 shares of Common Stock owned of record by Evelyn Bishop as trustee under the Bishop Living Trust dated 10/4/94 and 56,394 shares issuable to the trustee upon the exercise of the following warrants: Number of Shares Exercise Price Per Share Expiration Date of Warrant 4,244 6.000 05-17-98 6,367 6.000 05-29-98 6,685 6.000 11-29-98 4,457 6.000 11-17-98 1,560 5.375 05-16-97 7,023 5.000 05-28-97 7,383 4.750 11-28-97 7,764 3.750 05-28-98 10,911 8.000 06-13-01 (6) Consists of 192,790 shares of Common Stock owned of record by Cipka S.A. (7) Consists of 75,001 shares of Common Stock issuable to Clinton Industries upon the exercise of a warrant at an exercise price of $5.00 per share, which warrant expires November 10, 1997. Clinton Industries is a partnership, the general partners of which are the controlling shareholders of Kenny Construction Company, also a holder of shares of the Common Stock. (8) Consists of 150,943 shares of Common Stock issuable to Field Container Corp. upon the exercise of a warrant at an exercise price of $5.375 per share, which warrant expires May 15, 1997. (9) The shares of Common Stock beneficially owned by Mr. Harvey consist of 123,100 shares held directly by him, 1,705 shares held in his 401(k) plan, 5,746 shares held in his individual retirement account, 100,000 shares held by Mr. Harvey's daughters, 75,000 shares issuable under an option which expires December 19, 2000 at an exercise price of $3.65 per share, 1,000 shares issuable - 68 - under an option which expires September 19, 2001 at an exercise price of $3.65 per share, 4,000 shares issuable under an option which expires January 8, 2003 at an exercise price of $3.75 per share and an aggregate of 72,245 shares issuable under the following warrants issued as additional consideration for short-term loans: Number of Exercise Price Expiration Date Shares per Share of Warrant 4,700 $5.500 02-01-99 1,500 5.625 03-30-99 6,000 4.750 01-20-00 11,667 3.750 04-28-00 7,800 4.750 04-28-00 8,426 4.250 07-27-00 4,019 4.625 09-30-00 4,019 4.875 10-31-00 4,019 4.375 11-30-00 8,038 6.125 12-31-00 4,019 6.125 02-29-01 4,019 6.250 03-31-01 4,019 6.000 04-30-01 (10) Consists of 2,873 owned of record by Mr. Iodice and 27,500 shares of Common Stock issuable to Mr. Iodice upon the exercise of the following warrants: Number of Exercise Price Expiration Date Shares per Share of Warrant 3,000 5.375 09-30-09 4,500 5.375 10-07-98 7,500 5.375 10-14-98 12,500 5.625 08-04-98 (11) Consists of 38,000 shares of Common Stock owned of record by Ms. Jacobsohn and 8,250 shares of the Common Stock issuable to Ms. Jacobsohn upon the exercise of the following warrants: Number of Exercise Price Expiration Date Shares per Share of Warrant 5,500 $9.875 01-28-97 2,750 5.000 12-02-97 - 69 - (12) Consists of 18,182 shares of Common Stock owned of record by Mr. Celano, a director of the Company. (13) Consists of 121,000 shares of the Common Stock issuable to Mr. Louis upon the exercise of the following warrants: Number of Exercise Price Expiration Date Shares per Share of Warrant 3,000 $7.000 04-02-97 15,000 5.625 09-29-97 15,000 4.500 04-01-98 15,000 5.125 10-01-98 1,500 5.375 10-01-98 2,250 5.375 10-08-98 3,750 5.375 10-15-98 2,500 6.000 02-16-99 15,000 5.375 04-01-99 15,000 5.125 10-01-99 22,000 8.000 06-13-01 11,000 6.000 03-09-98 Mr. Louis is a director of the Company. (14) Consists of 361,000 shares of Common Stock owned of record by Research Center of Kabbalah and 21,250 shares of Common Stock issuable to Research Center of Kabbalah upon the exercise of a warrant at an exercise price of $6.00 per share, which warrant expires October 29, 1998 and 65,000 shares of Common Stock issuable upon the exercise of a warrant at an exercise price of $7.00 per share which warrant expires December 31, 1998. (15) Consists of shares of Common Stock of record issued under the Company's December 1995, Private Placement of $2,500,000 of 12% convertible subordinated promissory notes. 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. (16) Consists of 136,355 shares of Common Stock owned of record by Mr. Strahammer. These shares consist of 20,812 issued to Mr. Strahammer in lieu of interest on certain borrowings and 115,543 shares issued to Mr. Strahammer in payment of a $678,000 demand note. -70- (17) Consists of 11,622 shares of Common Stock owned of record by Mr. Tull and 1,500 shares of Common Stock issuable to Mr. Tull upon the exercise of a warrant at an exercise price of $6.375 per share, which warrant expires September 9, 1997. (18) Consists of 65,284 shares of Common Stock owned of record by Mr. Verde and 236,315 shares of Common Stock issuable to Mr. Verde upon the exercise of the following warrants: Number of Exercise Price Expiration Date Shares per Share of Warrant 76,480 5.000 08-09-97 37,258 3.750 02-09-98 36,651 4.125 08-09-98 35,555 5.000 02-09-99 10,464 5.000 08-09-99 39,907 5.000 02-09-98 (19) Consists of 174,000 shares of the Common Stock issuable to Mr. Zaccone upon the exercise of the following warrants: Number of Exercise Price Expiration Date Shares per Share of Warrant 10,000 $6.250 07-05-02 600 6.250 09-03-02 10,600 6.250 09-03-02 17,000 5.375 10-31-02 16,800 7.750 12-17-02 17,000 3.750 01-30-03 17,000 7.000 03-31-03 17,000 4.000 05-01-03 5,667 3.500 07-31-03 11,333 5.125 09-01-03 25,667 3.500 09-16-03 25,333 5.875 10-26-03 (20) Consists of 140,000 shares of Common Stock owned of record by Mr. Conant, 5,000 shares held by Mrs. Conant and 60,000 shares of Common Stock issuable to Mr. Conant upon the exercise of the following warrants: Number of Exercise Price Expiration Date Shares per Share of Warrant 25,000 5.000 08-26-01 25,000 5.875 12-22-01 10,000 5.750 01-15-02 (21) The shares of Common Stock beneficially owned by Mr. Harvey consist of 375,138 shares held directly by him (of which 373,615 are Common Stock and 1,523 are shares of Series A Preferred Stock), 23001 shares held as trustee for the benefit of his nieces, 800 shares owned by his wife and children, 634 shares held in his 401(k) plan, 7,193 shares held in his individual retirement account, 20,000 shares issuable under an option which expires September 19, 2001 at an exercise price of $3.65 per share and 15,000 shares issuable under an option which expires January 8, 2003 at an exercise price of $3.75 per share. - 71 - (22) As part of the consideration for ARTRA's March 1990 acquisition of Bagcraft, a subsidiary of Ozite Corporation ("Ozite") received 772,000 shares of ARTRA common stock. In 1995, Ozite distributed certain of these shares of ARTRA common stock to the listed owner of record in connection with a settlement of certain Ozite liabilities. (23) Consists of 33,263 shares of record owned by Mr. Dolan, of which 7,500 were in payment of the principal amount of a short-term loan, of which 7,246 were in payment of an ARTRA loan guarantee fee and which 18,517 were distributed to Mr. Dolan by Ozite in connection with a settlement of certain Ozite liabilities. (24) Consists of shares of Common Stock of record sold to the owner in a private placement, the proceeds of which were used to fund working capital obligations. (25) Consists of 45,000 shares of Common Stock issuable to Mr. Werner upon the exercise of a warrant at an exercise price of $4.88 per share, which warrant expires December 24, 1999 and 45,000 shares of Common Stock issuable to Mr. Werner upon the exercise of a warrant at an exercise price of $4.125 per share, which warrant expires August 16, 2000. These warrants were issued as additional compensation for short-term loans. (26) Consists of 5,000 shares of Common Stock issuable to Manufacturers Indemnity and Insurance Co. of America upon the exercise of a warrant at an exercise price of $6.00 per share, which warrant expires April 15, 1999. The warrant was issued as additional compensation for a short-term loan. (27) Consists of 15,000 shares of Common Stock owned of record by Mr.Calabrese. (28) Consists of: (a) 10,000 shares of Common Stock owned of record by Mr. Blackmore. (b) 7,500 shares of Common Stock issuable to Mr. Blackmore upon the exercise of a warrant at an exercise price of $6.00 per share, which warrant expires September 18, 2001. The warrant was issued as additional compensation for a short-term loan. (29) Consists of 17,877 shares of Common Stock owned of record by Mr. Levy. (30) Consists of 5,000 shares of Common Stock issuable to Mr. Gunderson upon the exercise of a warrant at an exercise price of $6.00 per share, which warrant expires May 28, 2001. The warrant was issued as additional compensation for a short-term loan. (31) Consists of 3,321 shares of Common Stock owned of record by Mr. Jones and 5,000 shares of Common Stock issuable to Mr. Jones upon the exercise of a warrant at an exercise price of $6.75 per share, which warrant expires May 28, 2001. (32) Consists of 5,000 shares of Common Stock issuable to Mr. Foster upon the exercise of a warrant at an exercise price of $6.00 per share, which warrant expires May 28, 2001. The warrant was issued as additional compensation for a short-term loan. (33) Consists of 25,000 shares of Common Stock owned of record by Mr. Schuster. (34) Consists of shares of record issued in payment of notes and accrued interest thereon. (35) Consists of shares of Common Stock of record issued as consideration for guarantees of ARTRA bank borrowings. - 72 - (36) Consists of: (a) 12,500 shares of Common Stock issuable to Mr.Tarrson upon the exercise of a warrant at an exercise price of $5.00 per share, which warrant expires September 12, 2001 and 12,500 shares of Common Stock issuable to Mr.Tarrson upon the exercise of a warrant at an exercise price of $6.125 per share, which warrant expires December 22, 2001 . The warrants were issued as additional compensation for a short-term loan. (b) 25,000 shares of Common Stock issuable upon the exercise of a warrant at an exercise price of $6.00 per share and expiring April 15, 1999. These warrants were issued under the Company's 1996 Private Placement of 12% Secured Promissory Notes. (37) Consists of: (a) 12,500 shares of Common Stock issuable to Mr.Tarrson upon the exercise of a warrant at an exercise price of $5.00 per share, which warrant expires September 12, 2001 and 12,500 shares of Common Stock issuable to Mr.Tarrson upon the exercise of a warrant at an exercise price of $6.125 per share, which warrant expires December 22, 2001 . The warrants were issued as additional compensation for a short-term loan. (b) 15,000 shares of Common Stock issuable upon the exercise of a warrant at an exercise price of $6.00 per share and expiring April 15, 1999. These warrants were issued under the Company's 1996 Private Placement of 12% Secured Promissory Notes. (38) Consists of shares of Common Stock originally issued to Kwiatt, Silverman & Ruben, Ltd. in payment of professional fees and shares of Common Stock issued to Ozite as consideration for the March 1990 acquisition of Bagcraft. See note (22) to this listing of Selling Shareholders. (39) Consists of 30,000 shares of Common Stock owned of record by Mr. Tannenberg. (40) Consists of shares of Common Stock owned of record by the selling shareholder. These 100,000 shares of the Company's Common Stock were loaned to the Company by its president, Peter R. Harvey, in June 1996. In September 1996, after the Company's shareholders approved an increase in the number of authorized common shares, the Company repaid this loan. At Mr. Harvey's direction, the 100,000 shares of the Company's Common Stock were issued to the following individuals: Kim Eliabeth Harvey 25,000 shares Julie Harvey Valeriote 25,000 shares Lori Ann Harvey 25,000 shares Kim Eliabeth Harvey 25,000 shares Kim Eliabeth Harvey, Julie Harvey Valeriote, Lori Ann Harvey and Kim Eliabeth Harvey are the daughters of the Company's Chairman of the Board, John Harvey. John Harvey and Peter Harvey are brothers. (41) Consists of 6,084 shares of Common Stock issuable upon the exercise of a warrant at an exercise price of $4.00 per share and 12,100 shares of Common Stock issuable upon the warrant at an excercise price of $5.75 per share. These warrants expire September 20, 2001. (42) Consists of 10,000 shares of Common Stock issuable to Alltech Associates upon the exercise of a warrant at an exercise price of $6.00 per share, which warrant expires July 1, 1998. (43) Consists of 10,000 shares of Common Stock issuable to R&M Lucas upon the exercise of a warrant at an exercise price of $6.00 per share, which warrant expires January 15, 2002. (44) Consists of 9,733 shares of record owned by Mr. Laundrie. - 73 - PLAN OF DISTRIBUTION The manner in which the Common Stock covered by this Prospectus are to be distributed is set forth on the cover page hereof. Any sales effected through securities brokers or dealers will be on an "agency" basis, unless as a result of a privately negotiated transaction a broker or dealer enters into an agreement with a Selling Shareholder to purchase shares for its own account. At the date of this Prospectus, none of the Selling Shareholders contemplate entering into such a contractual relationship with a broker or dealer, although one or more of them may decide to do so in the future. To comply with certain states' securities laws, if applicable, the Common Stock will be sold in such states only through brokers or dealers. In addition, in certain states the Common Stock may not be sold unless they have been registered or qualify for sale in such states or an exemption from registration or qualification is available and is complied with. From time to time, to the extent required by the rules of the Securities and Exchange Commission, the Company will distribute Prospectus Supplements. The Selling Shareholders and any broker-dealers who participate in a sale of their shares of Common Stock may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, and any commissions received by them, and proceeds of any such sales as principal, may be deemed to be underwriting discounts and commissions under the Securities Act. All expenses of the registration of Common Stock offered hereby, estimated to be approximately $225,000 will be borne by the Company. As and when the Company is required to update this Prospectus, it may incur additional expenses in excess of this estimated amount. Normal commission expenses and brokerage fees, as well as any applicable transfer taxes, are payable individually by the Selling Shareholders. Since the Selling Shareholders will be subject to the anti-manipulation rules promulgated under the Exchange Act, including Rule 10b-2, 10b-6 and 10b-7, in connection with transactions in the Common Stock during the effectiveness of the Registration Statement of which this Prospectus is a part, the Company advised the Selling Shareholders to consult competent securities counsel prior to initiating any such transaction. The Company will notify each Selling Shareholder of the Commission's rules and, as a condition to agreeing the register the shares of a Selling Shareholder, will require that such Selling Shareholder agree to comply with such rules. The Company will not receive any proceeds from the sale of the Common Shares offered hereby by the Selling Shareholders. However, insofar as the holders of options or warrants to purchase shares of the Common Stock are expected to exercise their warrants or options in order to sell the underlying shares (which are registered hereby), the Company will receive the amount of the exercise prices of any warrants or options so exercised. The Company cannot predict when or if it will receive proceeds from the exercise of warrants or options, or the amount of any such proceeds. The Company intends to use the proceeds, if any, received from the exercise of warrants or options to retire or reduce indebtedness, to pay certain expenses of the offering and for working capital purposes. The offering is being conducted to satisfy certain contractual obligations to holders of options, as well as to provide a vehicle for certain of its officers, directors and advisors to exercise their options to purchase the Company's stock (at exercise prices which are currently lower than the market price of the Company's stock) and sell the stock acquired upon such exercise. See "Selling Shareholders." INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's By-laws provide that the Company will indemnify an officer or director, and may indemnify any other employee or agent, in connection with any pending or threatened suit or administrative proceeding against - 74 - any such person by reason of such person serving as a director, officer, employee or agent of the Company, or, at the request of the Company, in such capacity for another entity. However, no indemnification will be made if the act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. In addition, the By-laws provide that the above indemnification provisions are not exclusive of any other rights to indemnification any such person may have under any contract or vote of shareholders or disinterested shareholders or as determined by a court. The By-laws expressly provide that it is the Company's policy to permit indemnification to the fullest extent permitted by law. The By-laws further provide that the indemnification provisions will be deemed to be amended upon any amendment of the BCL, which expands or enlarges the powers of corporations to indemnify. The BCL provides that a corporation will have the power to indemnify any representative of a corporation, or of any other entity at the request of the corporation, if such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The BCL further provides that indemnification is mandatory where the representative is "successful on the merits or otherwise" in defense of an action or proceeding, and in addition, the BCL provides that the method of indemnification provided by the act is not exclusive of rights under any by-law, vote of shareholders or disinterested shareholders or otherwise, unless the act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. EXPERTS The consolidated balance sheets of ARTRA GROUP Incorporated and Subsidiaries as of December 28, 1995 and December 29, 1994, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 28, 1995 included in this Prospectus have been audited by Coopers & Lybrand L.L.P., independent accountants, as stated in their report appearing herein which includes an explanatory paragraph referring to an uncertainty concerning the Company's abilitiy to continue as a going concern. The above-referenced financial statements of ARTRA GROUP Incorporated have been included in reliance upon the report of Coopers & Lybrand L.L.P. given upon the authority of that firm as experts in accounting and auditing. - 75 - No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy any securities in any jurisdiction in which such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof. LEGAL MATTERS The validity of the shares of Common Stock offered by the Company hereby will be passed upon for the Company by Kwiatt, Silverman & Ruben, Ltd., Northfield, Illinois. The law firm of Kwiatt, Silverman & Ruben, Ltd. through certain members of the firm and its Profit Sharing Plan own 76,061 shares of Common Stock of the Company this represents less than one (1%) percent of the total shares outstanding. TABLE OF CONTENTS Heading Page Additional Information 2 Prospectus Summary 3 Risk Factors 7 Capitalization 14 Management's Discussion and Analysis 16 of Financial Condition and Results of Operations Business and Properties 30 Legal Proceedings 36 Market Price of the Company's 40 Common Stock Description of the Company's 41 Securities Management 45 Executive Compensation 47 ARTRA GROUP Incorporated Principal Shareholders 51 Transactions with Management and 54 PROSPECTUS Others Selling Shareholders 60 January 29, 1997 Plan of Distribution 74 Indemnification of Officers 74 and Directors Experts 75 Index to Financial Statements F-1 INDEX TO FINANCIAL STATEMENTS Page Condensed Consolidated Balance Sheet as of September 26, 1996 (Unaudited) Condensed Consolidated Statements of Operations Nine Months Ended September 26, 1996 and September 28, 1995 (Unaudited) Condensed Consolidated Statement of Changes in Shareholders' Equity (Deficit) Nine Months Ended September 26, 1996 (Unaudited) Condensed Consolidated Statements of Cash Flows Nine Months Ended September 26, 1996 and September 28, 1995 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) Report of Independent Accountants Consolidated Balance Sheets as of December 28, 1995 and December 29, 1994 Consolidated Statements of Operations for each of the three fiscal years in the period ended December 28, 1995 Consolidated Statements of Changes in Shareholders' Equity (Deficit) for each of the three fiscal years in the period ended December 28, 1995 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended December 28, 1995 Notes to Consolidated Financial Statements Financial Statement Schedules: I. Condensed Financial Information of Registrant II. Valuation and Qualifying Accounts Schedules other than those listed are omitted as they are not applicable or required or equivalent information has been included in the financial statements or notes thereto. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited in thousands) September 26, 1996 -------- ASSETS Current assets: Cash and equivalents $ 99 Restricted cash and equivalents -- Receivables, less allowance for doubtful accounts of $301 9,071 Inventories 15,211 Other 1,108 -------- Total current assets 25,489 -------- Property, plant and equipment 45,645 Less accumulated depreciation and amortization 19,795 -------- 25,850 -------- Other assets: Available -for-sale securities 31,728 Excess of cost over net assets acquired, net of accumulated amortization of $2,007 3,029 Other 35 -------- 34,792 -------- $86,131 ======== The accompanying notes are an integral part of the condensed consolidated financial statements. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited in thousands) September 26, 1996 -------- LIABILITIES Current liabilities: Notes payable, including amounts due to related parties of $3,600 $15,518 Current maturities of long-term debt 2,407 Accounts payable 7,645 Accrued expenses 9,667 Income taxes 367 Liabilities of discontinued operations 764 ------- Total current liabilities 36,368 ------- Long-term debt 34,541 Obligation expected to be settled by the issuance of common stock 2,250 Other noncurrent liabilities 1,750 Commitments and contingencies Redeemable common stock, issued 98,734 shares 3,565 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; 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 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 1,978 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 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 5,777 Additional paid-in capital 40,140 Unrealized appreciation of investments 34,960 Receivable from related party, including accrued interest (5,861) Accumulated deficit (86,568) -------- (11,552) Less treasury stock (7,628 shares), at cost 52 -------- (11,604) -------- $86,131 ======== 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) Nine Months Ended ---------------------- Sept 26, Sept 28, 1996 1995* --------- -------- Net sales $ 90,162 $ 90,703 -------- -------- Costs and expenses: Cost of goods sold, exclusive of depreciation and amortization 71,710 76,871 Selling, general and administrative 10,967 15,972 Depreciation and amortization 2,954 3,306 -------- -------- 85,631 96,149 -------- -------- Operating earnings (loss) 4,531 (5,446) -------- -------- Other income (expense): Interest expense (5,370) (6,392) Realized gain on disposal of available-for-sale securities 4,823 -- Other income (expense), net (205) 1 -------- -------- (752) (6,391) -------- -------- Earnings (loss) from continuing operations before income taxes and minority interest 3,779 (11,837) Provision for income taxes (87) (35) Minority interest (169) (671) -------- -------- Earnings (loss) from continuing operations 3,523 (12,543) Loss from discontinued operations -- (9,156) -------- -------- Earnings (loss) before extraordinary credit 3,523 (21,699) Extraordinary credit, net discharge of indebtedness 9,424 9,113 -------- -------- Net earnings (loss) 12,947 (12,586) Dividends applicable to redeemable preferred stock (463) (422) Reduction of retained earnings applicable to redeemable common stock (297) (246) -------- -------- Earnings (loss) applicable to common shares $ 12,187 ($13,254) ======== ======== Earnings (loss) per share: Continuing operations $ 0.32 ($ 1.96) Discontinued operations -- (1.36) -------- -------- Earnings (loss) before extraordinary credit 0.32 (3.32) Extraordinary credit 1.23 1.35 -------- -------- Net earnings (loss) $ 1.55 ($ 1.97) ======== ======== Weighted average number of shares of common stock and common stock equivalents outstanding 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 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. 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. These Lori liabilities consist principally of accounts payable incurred by Lori's discontinued jewelry operations. The Assumption Agreement also provided for ARTRA to exchange its interest in 100% of Lori's Series C cumulative preferred stock for 100,000 newly issued shares of COMFORCE common stock. 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. Effective December 19, 1996, ARTRA and COMFORCE agreed to settle various differences in the interpretation of certain agreements relating to the Global acquisition, whereby, among other things: (a) COMFORCE delivered to ARTRA 100,000 shares of COMFORCE common stock in consideration of ARTRA's guarantee of the Global purchase price to the seller and 100,000 shares of COMFORCE common stock for the cancellation of the Series C Preferred Stock. ARTRA's financial statements have reflected the issuance of these 200,000 COMFORCE common shares to ARTRA since the fourth quarter of 1995. (b) ARTRA delivered to COMFORCE certificates evidencing its ownership of 100% of the Lori Series C Preferred Stock. (c) COMFORCE agreed to include in its Registration Statement on Form S-1 to register for resale 380,000 shares of COMFORCE common stock held by ARTRA and its Fill-Mor subsidiary. Sales proceeds will be used principally to discharge certain ARTRA and Fill-Mor debt obligations. (d) ARTRA agreed to a Lock-up Agreement which limits its ability to sell its remaining COMFORCE common shares for a period of 360 days after the effective date of COMFORCE's Registration Statement on Form S-1. (e) ARTRA deposited 125,000 shares of its COMFORCE common stock into an escrow account to collateralize its remaining obligations under the Assumption Agreement. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) The Company's consolidated financial statements have been reclassified to report separately the results of operations of Arcar and COMFORCE's discontinued 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 nine months ended September 28, 1995 consist of: Net sales $ 16,932 ======== Loss from discontinued operations before income taxes $ (8,151) (Provision) credit for income taxes (5) -------- Loss from operations $ (8,156) ======== Provision for disposal of COMFORCE's jewelry business (1,000) Provision for income taxes -- -------- Provision for disposal of business (1,000) -------- Loss from discontinued operations $ (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 at September 26, 1996, (in thousands) consist of: Raw materials and supplies $ 5,762 Work in process 302 Finished goods 9,147 ------- $15,211 ======= 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 any 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 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. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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. The remaining 638,036 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary are unencumbered at September 26, 1996. As of January 27, 1997, 1,410,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary have been pledged as collateral for various short-term borrowings and 359,703 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary remain unencumbered. 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 at September 26, 1996, (in thousands) consist of: ARTRA bank notes payable, at various interest rates $ 2,500 ARTRA 12% secured promissory notes 7,575 ARTRA 12% convertible subordinated promissory notes - Amounts due to related parties, interest principally at 10% 3,600 Other, interest from 10% to 20% 1,843 -------- $ 15,518 ======== 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 418,750 ARTRA common shares at a price of $6.00 per share. The warrants expire April 15, 1999. The warrantholders have the right to put these warrants back to ARTRA at any time during the period April 15, 1997 to October 15, 1997, at a price of $2.00 per share. The cost of this obligation ($837,500 if all warrants are put back to the Company) is being accrued in the Company's financial statements as a charge to interest expense over the period April 15, 1996 (the commencement date of the private placement) through April 15, 1997 (the maturity date of the notes as well as the date the warrantholders have the right to put their warrants back to ARTRA). These promissory notes are collateralized by ARTRA's interest in all of the common stock of BCA (the parent of Bagcraft). The proceeds from the private placement, completed in July 1996, were used principally to pay down other debt obligations. 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 renewed to January 6, 1997, 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 a 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 at September 26, 1996, (in thousands) consists of: Bagcraft Credit Agreement: Term loan A, interest at the prime rate plus 1.75% $ 12,000 Term loan B, interest at the prime rate plus 3% 2,800 Revolving credit loan, interest at the prime rate plus 1.5% 12,311 Unamortized discount (847) Bagcraft City of Baxter Springs, Kansas loan agreements, interest at varying rates 10,684 -------- 36,948 Current scheduled maturities (2,407) -------- $ 34,541 ======== 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, approximately $1,900,000 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, in December 1993, the lender received a detachable warrant, expiring in December 1998, allowing the holder to purchase up to 10% of the fully diluted common ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued) 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 the common stock and substantially all of the assets of Bagcraft. The Credit Agreement, as amended, contains various restrictive covenants, that among other restrictions, require Bagcraft to maintain minimum levels of tangible net worth and liquidity levels, and 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, Bagcraft had outstanding borrowings of $5,600,000 under this loan agreement. A $5,000,000 subordinated promissory note payable as follows: $150,000 due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The subordinated promissory note is non-interest bearing, subject to certain repayment provisions as defined in the agreement (as amended). At September 26, 1996, Bagcraft had outstanding borrowings of $4,850,000 under this loan agreement. Two separate $250,000 subordinated promissory notes payable in varying installments through January 20, 2025. The subordinated promissory notes are non-interest bearing, subject to certain repayment provisions as defined in the agreement. At September 26, 1996, Bagcraft had outstanding borrowings of $234,000 under this loan agreement. Borrowings under the above loan agreements are collateralized by a first lien on the land and building at the Baxter Springs, Kansas production facility and by a second lien on certain machinery and equipment. Under certain circumstances, repayment of the borrowings under the above loan agreements is subordinated to the repayment of obligations under Bagcraft's Credit Agreement. 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 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 were accrued at September 26, 1996. 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, the Company had accrued $1,900,000 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. 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 At September 26, 1996, advances to Peter R. Harvey, ARTRA's president, classified in the condensed consolidated balance sheet as a reduction of common shareholders' equity, (in thousands) consist of: Total advances, including accrued interest $ 7,232 Less interest for the period January 1, 1993 to date, accrued and fully reserved (1,371) -------- Net advances $ 5,861 ======== ARTRA has total advances due from its president, Peter R. Harvey, of which $7,232,000, including accrued interest, remained outstanding at September 26, 1996. The advances bear interest at the prime rate plus 2% (10.25% at September 26). 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 (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. 15. OBLIGATION EXPECTED TO BE SETTLED BY THE ISSUANCE OF COMMON STOCK ARTRA was the obligor under two demand notes, issued to an unrelated foreign company, in the amount of $1,811,000. The notes were issued in October, 1990 with interest at 15 percent. In September, 1996, the noteholder agreed to exchange its notes and the amounts due under other ARTRA obligations for 2,250 shares of ARTRA Series E Preferred Stock. Prior to the issuance of the ARTRA Series E Preferred Stock, ARTRA and the unrelated foreign company mutually agreed to renegotiate the settlement of ARTRA's obligations. In January 1997, ARTRA received notice that its obligations to the unrelated foreign company were sold to a second unrelated foreign company. ARTRA anticipates that it will settle this obligation in the short-term through the issuance of ARTRA common stock. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors ARTRA GROUP Incorporated Northfield, Illinois We have audited the consolidated balance sheets of ARTRA GROUP Incorporated and Subsidiaries as of December 28, 1995 and December 29, 1994, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 28, 1995. We also have audited the financial statement schedules listed in the index of this Form S-1. These financial statements and financial statement schedules are the responsibility of ARTRA GROUP Incorporated's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ARTRA GROUP Incorporated and Subsidiaries as of December 28, 1995 and December 29, 1994, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency. As a result of these factors, the Company has experienced difficulty in obtaining adequate financing to replace its current credit arrangements, certain of which are in default, to fund its debt service and to satisfy liquidity requirements for 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND L.L.P. Chicago, Illinois November 26, 1996 ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 28, December 29, 1995 1994 -------- -------- ASSETS Current assets: Cash and equivalents $2,347 $2,070 Restricted cash and equivalents 552 1,324 Receivables, less allowance for doubtful accounts and markdowns of $250 in 1995 and $1,654 in 1994 10,897 13,707 Inventories 16,634 20,268 Available -for-sale securities 1,427 - Other 324 1,148 -------- -------- Total current assets 32,181 38,517 -------- -------- Property, plant and equipment Land 930 930 Buildings 11,679 10,584 Improvements to land and leaseholds - 187 Machinery and equipment 30,547 33,756 Construction in in progress 1,117 2,693 -------- -------- 44,273 48,150 Less accumulated depreciation and amortization 17,335 17,110 -------- -------- 26,938 31,040 -------- -------- Other assets: Available -for-sale securities 15,519 - Excess of cost over net assets acquired, net of accumulated amortization of $2,022 in 1995 and $7,934 in 1994 3,258 19,076 Other 53 4,796 -------- -------- 18,830 23,872 -------- -------- $77,949 $93,429 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 28, December 29, 1995 1994 -------- -------- LIABILITIES Current liabilities: Notes payable, including amounts due to related parties of $5,675 in 1995 and $5,669 in 1994 $25,300 $28,053 Current maturities of long-term debt 3,512 37,521 Accounts payable, including amounts due to a related party of $399 in 1995 10,925 16,788 Accrued expenses 14,106 16,533 Income taxes 203 94 Liabilities of discontinued operations 4,500 - -------- ------- Total current liabilities 58,546 98,989 -------- ------- Long-term debt 34,113 19,673 Debt subsequently discharged - 9,750 Other noncurrent liabilities 650 1,463 Commitments and contingencies Redeemable common stock, issued 283,965 shares in 1995 and 279,679 shares in 1994 4,774 4,144 ARTRA redeemable preferred stock payable to a related party, $1,000 par value; Series A, 6% cumulative payment-in-kind, including accumulated dividends, net of unamortized discount of $1,575 in 1995 and $1,842 in 1994; redeemable March 1, 2000 at $1,000 per share plus accrued dividends; authorized 2,000,000 shares all series; issued 3,750 shares 3,694 3,129 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; 50,000 shares authorized and issued 10,794 10,119 BCA Holdings preferred stock payable to a related party, $1.00 par value, Series A, 6% cumulative; including accumulated dividends; liquidation preference of $1,000 per share; 10,000 shares authorized; issued 3,675 shares 4,143 3,922 SHAREHOLDERS' EQUITY (DEFICIT) Common stock, no par value; authorized 7,500,000 shares; issued 7,102,979 shares in 1995 and 6,455,602 shares in 1994 5,540 5,052 Additional paid-in capital 38,526 36,613 Unrealized appreciation of investments 21,047 - Receivable from related party, including accrued interest (4,318) (4,100) Accumulated deficit (98,755) (94,520) -------- -------- (37,960) (56,955) Less treasury stock (57,038 shares), at cost 805 805 -------- -------- (38,765) (57,760) -------- -------- $77,949 $93,429 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Fiscal Year --------------------------------- 1995 1994* 1993* --------- -------- ---------- Net sales $121,879 $111,837 $113,584 --------- --------- --------- Costs and expenses: Cost of goods sold, exclusive of depreciation and amortization 102,508 94,766 93,461 Selling, general and administrative 19,131 16,760 15,537 Depreciation and amortization 4,330 4,337 4,385 Write-down of idle machinery and equipment 1,503 - - Restructuring costs - - 1,175 --------- --------- --------- 127,472 115,863 114,558 --------- --------- --------- Operating loss (5,593) (4,026) (974) --------- --------- --------- Other income (expense): Interest expense (9,782) (8,618) (6,551) Equity in loss of COMFORCE (533) - - Other income (expense), net (88) 13 (87) --------- --------- --------- (10,403) (8,605) (6,638) --------- --------- --------- Loss from continuing operations before income taxes and minority interest (15,996) (12,631) (7,612) Provision for income taxes (51) (9) (7) Minority interest (896) (889) (708) --------- --------- --------- Loss from continuing operations (16,943) (13,529) (8,327) Earnings (loss) from discontinued operations 10 (15,906) (216) --------- --------- --------- Loss before extraordinary credit (16,933) (29,435) (8,543) Extraordinary credit, net discharge of indebtedness 14,030 8,965 22,057 --------- --------- --------- Net earnings (loss) (2,903) (20,470) 13,514 Dividends applicable to redeemable preferred stock (565) (516) (471) Reduction of retained earnings applicable to redeemable common stock (767) (309) (243) --------- --------- --------- Earnings (loss) applicable to common shares ($4,235) ($21,295) $12,800 ========= ========= ========= Earnings (loss) per share: Continuing operations ($2.69) ($2.56) ($1.84) Discontinued operations - (2.74) (0.04) --------- --------- --------- Loss before extraordinary credit (2.69) (5.30) (1.88) Extraordinary credit 2.06 1.57 4.49 --------- --------- --------- Net earnings (loss) ($0.63) ($3.73) $2.61 ========= ========= ========= Weighted average number of shares of common stock and common stock equivalents outstanding 6,776 5,702 4,908 ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
_______________________________________________ * As reclassified for discontinued operations. ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS 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 31, 1992 4,542,592 $3,587 $29,034 $(5,885) $(86,025) 57,038 $(805) $(60,094) Net earnings - - - - 13,514 - - 13,514 Redeemable common stock accretion - - - - (243) - - (243) Common stock issued to pay liabilities 292,996 224 1,412 - - - - 1,636 Exercise of stock options 74,700 56 294 - - - - 350 Net decrease in receivable from related party - - - 2,042 - - - 2,042 Redeemable preferred stock dividends - - - - (471) - - (471) Common stock issued as compensation 73,320 55 302 - - - - 357 --------- ------ -------- ------- ---------- ------- ------ -------- Balance at December 30, 1993 4,983,608 3,922 31,042 (3,843) (73,225) 57,038 (805) (42,909) Net loss - - - - (20,470) - - (20,470) Redeemable common stock accretion - - - - (309) - - (309) Common stock sold through private placements 855,000 641 2,484 - - - - 3,125 Common stock issued for Lori debt settlement agreement 400,000 300 2,200 - - - - 2,500 Common stock issued to pay liabilities 142,635 107 684 - - - - 791 Sale and reclassification of redeemable common stock (34,266) - (282) - - - - (282) Common stock contributed to ESOP 65,000 49 292 - - - - 341 Exercise of stock options 25,300 19 116 - - - - 135 Net increase in receivable from related party - - - (257) - - - (257) Redeemable preferred stock dividends - - - - (516) - - (516) Common stock issued as compensation 18,325 14 77 - - - - 91 --------- ------ -------- ------- -------- ------- ------ -------- Balance at December 29, 1994 6,455,602 5,052 36,613 (4,100) (94,520) 57,038 (805) (57,760) Net loss - - - - (2,903) - - (2,903) Reclassification of redeemable common stock (100,000) - (500) - - - - (500) Common stock issued to pay liabilities 243,915 183 857 - - - - 1,040 Common stock as additional consideration for private placement of ARTRA notes 375,000 281 985 - - - - 1,266 Net increase in receivable from related party, including accrued interest - - - (218) - - - (218) Redeemable common stock put option exercised (8) 8 - - - - - - - Sale and reclassification of redeemable common stock 85,714 399 - 399 Unrealized appreciation of investments - - - $21,047 - - - - 21,047 Common stock contributed to ESOP 23,750 18 95 - - - - - 113 Exercise of stock options 12,100 9 39 - - - - - 48 Redeemable common stock accretion - - - - - (767) - - (767) Redeemable preferred stock dividends - - - - - (565) - - (565) Common stock issued as compensation 6,898 5 30 - - - - - 35 --------- ------ -------- ------- -------- --------- ------- ------ -------- Balance at December 28, 1995 7,102,979 $5,540 $38,526 $21,047 ($4,318) ($98,755) 57,038 ($805) ($38,765) ========= ====== ======== ======= ======== ========= ======= ====== ======== The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
Fiscal Year ----------------------------------- 1995 1994 1993 --------- ---------- -------- Cash flows from operating activities: Net earnings (loss) ($2,903) ($20,470) $13,514 Adjustments to reconcile net earnings (loss) to cash flows from operating activities: Extraordinary gain from net discharge of indebtedness (14,030) (8,965) (22,057) Gain on disposal of discontinued operations (8,183) - - Depreciation of property, plant and equipment 4,120 4,252 4,283 Amortization of excess of cost over net assets acquired 837 1,693 1,623 Impairment of discontinued jewelry operations goodwill 6,430 10,800 - Amortization of other assets 689 963 216 Inventory valuation reserve 290 - - Gain on sale of property, plant and equipment - (59) (284) Write-down of idle equipment and machinery 1,503 - - Equity in loss of COMFORCE 533 - - Minority interest 896 889 708 Contribution to ARTRA ESOP 42 77 423 Other, principally common issued as compensation 1,300 485 389 Changes in assets and liabilities, net of effects of businesses acquired and discontinued: Increase in receivables (184) (1,923) (348) (Increase) decrease in inventories 453 (727) 2,453 (Increase) decrease in other current and noncurrent assets 1,421 1,068 (1,031) Increase in payables and accrued expenses 611 4,675 804 Increase (decrease) in other current and noncurrent liabilities 450 (763) 170 (Increase) decrease in receivable from related party, including accrued interest (218) (257) 42 --------- ---------- -------- Net cash flows from (used by) operating activities (5,943) (8,262) 905 --------- ---------- -------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment - 2,251 1,401 Additions to property, plant and equipment (2,820) (11,881) (3,156) Retail fixtures (631) (665) (951) Acquisition of Arcar - (2,264) - Proceeds from sale of Arcar 20,318 - - Proceeds from collection of Welch notes 3,000 - - Decrease in restricted cash 772 - - Other - 101 - --------- ---------- -------- Net cash flows from (used by) investing activities 20,639 (12,458) (2,706) --------- ---------- -------- The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
Fiscal Year ----------------------------------- 1995 1994 1993 --------- --------- --------- Cash flows from financing activities: Net increase in short-term debt 5,488 1,920 54 Proceeds from long-term borrowings 136,756 116,775 123,743 Reduction of long-term debt 156,641) (100,131) (124,759) Proceeds from private placements of ARTRA common stock - 3,230 - Proceeds from exercise of stock options 48 30 129 Proceeds from sale of BCA Holdings preferred stock - - 3,000 Exercise of redeemable common stock put options - (50) - Other (70) (44) (187) -------- ---------- --------- Net cash flows from (used by) financing activities (14,419) 21,730 1,980 -------- ---------- --------- Increase in cash and cash equivalents 277 1,010 179 Cash and equivalents, beginning of year 2,070 1,060 881 ======== ========== ========= Cash and equivalents, end of year $2,347 $2,070 $1,060 ======== ========== ========= Supplemental cash flow information: Cash paid during the year for: Interest $5,847 $8,811 $7,333 Income taxes paid (refunded), net (15) 59 (108) Supplemental schedule of noncash investing and financing activities: Issue common stock and redeemable common stock to pay down current liabilities $1,040 $756 $1,636 Notes issued to sellers as consideration for Arcar acquisition - 8,000 - ARTRA common stock issued to Lori's bank lender as partial consideration for discharge of indebtedness - 2,500 - Transfer New Dimensions assets, net of cash of $674, to Lori's bank lender under terms of the debt settlement agreement - 6,475 - Debt refinanced - - 36,609 The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Financial Restructuring ARTRA Group Incorporated's ("ARTRA" or the "Company") consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities or other adjustments that might be necessary should ARTRA be unable to continue as a going concern. 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, and 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 9, Notes Payable, and Note 10, Long Term Debt, for further discussion of the status of credit arrangements and restrictions on the ability of operating subsidiaries to fund ARTRA corporate obligations. Due to its limited ability to receive operating funds from its operating subsidiaries, ARTRA has historically met its operating expenditures with funds generated by alternative sources, such as private placements of ARTRA common stock and notes, sales of ARTRA common stock with put options, loans from officers/directors and private investors, as well as through sales of assets and/or other equity infusions. ARTRA plans to continue to seek such alternative sources of funds to meet its future operating expenditures. ARTRA, 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 62.9% owned subsidiary, The Lori Corporation ("Lori"), operated as a designer and distributor of popular-priced fashion costume jewelry and accessories. In recent years, Lori's fashion costume jewelry operations had experienced a pattern of significantly lower sales levels and related operating losses primarily due to a shift in the buying patterns of its major customers (i.e. certain mass merchandisers) from participation in Lori's service program to purchases of costume jewelry and accessories directly from manufacturers and due to a continued unfavorable retail environment. Accordingly, in September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business as discussed in Note 3. As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase agreement to participate in the acquisition of one hundred percent of the capital stock of COMFORCE Global Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc. Global provides telecommunications and computer technical staffing and consulting services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. On October 17, 1995, Lori completed the acquisition of one hundred percent of the capital stock of Global. In connection with the re-focus of its business Lori changed its name to COMFORCE Corporation ("COMFORCE"). Effective July 4, 1995, Lori 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 Lori. After the issuance of the Lori common shares, plus the effects of the issuance of Lori common shares sold by private placements and other Lori 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. See Notes 3 and 6 for a further discussion of ARTRA's investment in COMFORCE. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 October, 1995 the Company recognized an extraordinary gain of $4,917,000 ($.71 per share) as a result of a settlement agreement with a bank whereby a $3,600,000 note payable due December 31, 1990 plus accrued interest of $1,467,000 were discharged for a cash payment of $150,000. As discussed in Note 8, the Company recognized an extraordinary gain of $9,113,000 ($1.35 per share) in March 1995 as a result of the discharge of amounts due a bank under the loan agreements of Lori and its parent, Fill-Mor Holding, Inc. ("Fill-Mor"). In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the former Welch Vacuum Technology ("Welch") subsidiary under terms of a noncompetition agreement and a subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the 1989 sale of Welch. 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. The cash proceeds were used for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the remainder used for working capital. In conjunction with this transaction, ARTRA entered into a letter agreement with the bank whereby the bank agreed not to exercise any of its rights and remedies with respect to amounts due the bank under its ARTRA notes (see Note 9) and certain obligations of ARTRA's president, Peter R. Harvey. In February 1996, the bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest and fees) and certain obligations of Mr. Harvey. ARTRA will recognize a gain on the discharge of this indebtedness of approximately $10,000,000 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 as consideration for the issuance of BCA Holdings, Inc. ("BCA", the parent of Bagcraft) preferred stock, see Note 12. 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. The Company has adopted a 52/53 week fiscal year ending the last Thursday of December. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany accounts and transactions are eliminated. B. Cash Equivalents Short-term investments with an initial maturity of less than ninety days are considered cash equivalents. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) C. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. D. Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred and expenditures for major renovations are capitalized. Depreciation is computed on the basis of estimated useful lives principally by the straight line method for financial statement purposes and principally by accelerated methods for tax purposes. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the period covered by the lease. The costs of property retired or otherwise disposed of are applied against the related accumulated depreciation to the extent thereof, and any profit or loss on the disposition is recognized in earnings. E. Investments in Equity Securities In 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, at December 28, 1995, the Company's investment in COMFORCE (see Note 6) is classified as available for sale and is stated at fair value. The adoption of SFAS No. 115 resulted in an increase to shareholders' equity in the fourth quarter of 1995 of $21,047,000. In prior years and, until October 1995, COMFORCE was a majority-owned subsidiary included in the consolidated financial statements of the Company. F. Intangible Assets The net assets of a purchased business are recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of net assets acquired (goodwill) is reflected as intangible assets and amortized on a straight-line basis principally over 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through forecasted future operations. 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. G. Revenue Recognition Sales to customers are recorded at the time of shipment net of estimated markdowns and merchandise credits. H. Income Taxes Income taxes are accounted for as prescribed in Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes. Under the asset and liability method of Statement No. 109, the Company recognizes the amount of income taxes payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to recovered or settled. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) I. Use of Estimates In Preparation of Financial Statements The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. J. 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. 3. 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, for consideration of $10,264,000 consisting of cash of $2,264,000 and subordinated promissory notes totaling $8,000,000. The acquisition of Arcar was accounted for by the purchase method and, accordingly, the assets and liabilities of Arcar were included in ARTRA's financial statements at their estimated fair market value at the date of acquisition. Effective October 26, 1995, Bagcraft sold the business assets, subject to the buyer's assumption of certain liabilities, of Arcar for cash of approximately $20,300,000, resulting in a net gain of $8,483,000. The net proceeds, after extinguishment of certain Arcar debt obligations, of approximately $10,400,000, were used to reduce Bagcraft debt obligations. At December 29, 1994, the total assets and liabilities of Arcar were approximately $13,157,000 and $11,914,000, respectively. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Lori/COMFORCE In September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of the fashion costume jewelry business. At December 29, 1994, the total assets and liabilities of Lori's discontinued fashion costume jewelry business were approximately $17,460,000 and $11,914,000, respectively. 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, (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. The shares issued to Peter R. Harvey and ARTRA are subject to ratification by COMFORCE's stockholders. Such shares have the same rights and privileges as other common stock shareholders. While the shareholders of these new shares will vote on this issue, the vote is a ratification of the transaction. Failure to ratify this transaction would have no impact on the outcome of the transaction as ratification is being performed to meet American Stock Exchange listing requirements. These transactions have been approved by COMFORCE's current management personnel and ARTRA, which together own a majority of the outstanding shares of COMFORCE's Common Stock and, therefore, such ratification is expected. 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. The acquisition of Global was funded principally by private placements of approximately 1,950,000 shares of Lori common stock at $3.00 per share (total proceeds of approximately $5,800,000) plus detachable warrants to purchase approximately 970,000 shares of Lori common stock at $3.375 per share that expire five years from the date of issue. In connection with the re-focus of its business, Lori changed its name to COMFORCE Corporation. 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, ARTRA has accrued $4,500,000 of Lori liabilities classified in its consolidated balance at December 28, 1995 as current liabilities of discontinued operations. These Lori liabilities consist principally of notes and other payables incurred by Lori's discontinued jewelry operations. The Assumption Agreement also provided for ARTRA to exchange its interest in 100% of Lori's Series C cumulative preferred stock for 100,000 newly issued shares of COMFORCE common stock. Effective July 4, 1995, Lori's management agreed to issue up to a 35% common stock interest in the 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 consumation 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 Lori common shares, plus the effects of the issuance of Lori common shares sold by private placements and other Lori common shares issued in conjunction with the Global acquisition, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 25%. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. See Note 6 for a further discussion of and the accounting treatment of the Company's investment in COMFORCE at December 28, 1995. Other During 1995 the Company was dismissed as party to certain litigation relating to the former Welch subsidiary. Accordingly, the Company reversed $700,000 of excess liability accruals originally provided in 1989 to complete the disposal of Welch. The Company's consolidated financial statements have been reclassified to report separately the results of operations of Arcar and COMFORCE's discontinued fashion costume jewelry business prior to the deconsolidation of Lori and its majority-owned subsidiaries effective October 1995. The 1995, 1994 and 1993 operating results (in thousands) of Bagcraft's discontinued Arcar subsidiary and COMFORCE's discontinued fashion costume jewelry business and net gain on disposal of discontinued operations consist of: 1995 1994 1993 -------- -------- --------- Net sales $ 16,932 $ 40,278 $ 46,054 ======== ======== ========= Loss from operations before income taxes $ (8,156) $(15,832) $ (183 Provision for income taxes (17) (74) (33) -------- -------- --------- Loss from operations (8,173) (15,906) (216) -------- -------- --------- Gain on sale of Arcar subsidiary 8,483 -- -- Provision for disposal of business (300) Provision for income taxes -- -- -- -------- -------- --------- Gain on disposal of businesses 8,183 -- -- -------- -------- --------- Earnings (loss) from discontinued operations $ 10 $(15,906) $ (216) ======== ======== ========= 4. CONCENTRATION OF RISK The accounts receivable of the Company's Bagcraft subsidiary at December 28, 1995 consist primarily of amounts due from companies in the food industry. As a result, the collectibility of these receivables is dependent, to an extent, upon the economic condition and financial stability of the food industry. Credit risk is minimized as a result of the large number and diverse nature of Bagcraft's customer base. Bagcraft's major customers include some of the largest companies in the food industry. At December 28, 1995, Bagcraft had 10 customers with accounts receivable balances that aggregated approximately 40% of the Company's total trade accounts receivable. No single customer accounted for 10% or more of Bagcraft's 1995 sales. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. INVENTORIES Inventories consist of: December 28, December 29, 1995 1994 -------- -------- (in thousands) Raw materials and supplies $ 5,645 $ 7,041 Work in process 40 877 Finished goods 10,949 12,350 -------- -------- $ 16,634 $ 20,268 ======== ======== 6. INVESTMENT IN COMFORCE (formerly LORI) CORPORATION As discussed in Note 3, 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%. 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. Due to such factors as a lack of board of directors representation and participation in policy formulation by ARTRA, as well as a lack of interchange of managerial personnel, ARTRA is not able to exercise significant influence over the operating and financial policies of COMFORCE. Additionally, assuming contemplated additional issuances of COMFORCE common shares, on a fully diluted basis ARTRA's ownership interest in COMFORCE will be reduced to less than 20%. In the opinion of the Company, effective December 28, 1995, the investment in COMFORCE ceased to conform to the requirements of APB Opinion No. 18. Accordingly, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, at December 28, 1995, the Company's investment in COMFORCE is classified as available for sale and is stated at fair value. The adoption of SFAS No. 115 resulted in an increase to shareholders' equity in the fourth quarter of 1995 of $21,047,000. In prior years and, until October 1995, COMFORCE was a majority-owned subsidiary included in the consolidated financial statements of the Company. 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, in 1996, these 200,000 COMFORCE common shares will be removed from the Company's portfolio of "Available-for-sale securities" and will classified in the Company's consolidated balance sheet 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 will not be recognized in the Company's financial statements until the options to purchase these 200,000 COMFORCE common shares are exercised. As additional consideration for a February 1996 short-term loan (see Note 9) the lender has received to-date 37,500 COMFORCE common shares held by ARTRA. In March 1996, ARTRA sold 93,000 COMFORCE shares in the market, with the proceeds used for working capital. The above mentioned 330,500 COMFORCE shares were classified in the Company's consolidated balance sheet at December 28, 1995 in ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) current assets as "Available-for-sale securities." ARTRA's remaining investment in COMFORCE (1,970,536 shares) was classified in the Company's consolidated balance sheet at December 28, 1995 in noncurrent assets as "Available-for-sale securities. 7. INVESTMENT IN EMERALD ACQUISITION CORPORATION / ENVIRODYNE INDUSTRIES, INC. In March, 1989, Envirodyne Industries, Inc. ("Envirodyne") and Emerald Acquisition Corporation ("Emerald") entered into a definitive agreement for a subsidiary of Emerald to acquire all of the issued and outstanding shares of Envirodyne common stock. Pursuant to the terms of certain letter agreements, ARTRA agreed to participate in the transaction and received Envirodyne's consent to sell its then 4,830,000 Envirodyne common shares (a 26.3% interest) to Emerald. On May 3, 1989 the transaction was consummated. ARTRA received consideration consisting of cash of $75,000,000, a 27.5% common stock interest in Emerald and Emerald junior debentures. On January 6, 1993, a group of bondholders filed an involuntary petition for reorganization of Envirodyne under Chapter 11 of the U.S. Bankruptcy Code. On January 7, 1993, Envirodyne and certain of its subsidiaries (the "Debtor") filed petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. Subsequently, Emerald filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the same court. Envirodyne's plan of reorganization did not provide for any distribution or value to Emerald and Emerald, therefore, is without assets to provide value to ARTRA for ARTRA's investment in Emerald common stock and Emerald Junior Debentures. See discussion below and in Note 20 Litigation for remedies being pursued by ARTRA as damages for the lost value of its investment in Emerald common stock and Emerald Junior Debentures. On November 2, 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. 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. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8. EXTRAORDINARY GAINS ARTRA Debt Restructuring In October, 1995 the Company recognized an extraordinary gain of $4,917,000 ($.71 per share) as a result of a settlement agreement with a bank whereby a $3,600,000 note payable due December 31, 1990 plus accrued interest of $1,467,000 were discharged for a cash payment of $150,000. Lori Debt Restructuring Per terms of a debt settlement agreement, borrowings due a bank under the loan agreements of Lori and its discontinued fashion costume jewelry subsidiaries (including the former New Dimensions ("New Dimensions") subsidiary, which ceased operations in December 1994) 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 Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank). Upon the satisfaction of certain conditions of the debt settlement agreement in 1995, as discussed below, the balance of this indebtedness was discharged. In conjunction with the debt settlement agreement, ARTRA entered into a $1,850,000 short-term loan agreement with a non-affiliated corporation, the proceeds of which were used to fund amounts due the bank as discussed below. The loan, due June 30, 1995, with interest payable monthly at 10%, was collateralized by 100,000 shares of Lori common stock. These 100,000 Lori common shares were originally issued to the bank under terms of the debt settlement agreement. In August, 1995 the loan was extended until September 15, 1995 and the lender received the above mentioned 100,000 Lori common shares as consideration for the loan extension. The loan was repaid by ARTRA in February, 1996. The Company recognized an extraordinary gain of $8,965,000 ($1.57 per share) in December 1994 as a result of the reduction of amounts due the bank under the loan agreements of Lori and its discontinued fashion costume jewelry subsidiaries and Fill-Mor to $10,500,000 (of which $7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank) as of December 23, 1994 calculated (in thousands) as follows: Amounts due the bank under loan agreements of Lori and its operating subsidiaries and Fill-Mor $ 25,394 Less amounts due the bank at December 29, 1994 (10,500) --------- Bank debt discharged 14,894 Accrued interest and fees discharged 3,635 Other liabilities discharged 1,985 Less consideration to the bank per terms of the amended settlement agreement Cash (1,900) ARTRA common stock (2,500) New Dimensions assets assigned to the bank at estimated fair market value (7,149) --------- Net extraordinary gain $ 8,965 ========= ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) On March 31, 1995, the bank was paid $750,000 and the remaining indebtedness of Lori 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. The $750,000 payment was funded with the proceeds of a $850,000 short-term loan from a former director of Lori. As consideration for assisting in the debt restructuring, the former director received 150,000 shares of Lori common stock valued at $337,500 ($2.25 per share) based upon Lori's closing market value on March 30, 1995. The first quarter 1995 extraordinary gain was calculated (in thousands) as follows: Amounts due the bank under loan agreements of Lori and its operating subsidiaries and Fill-mor $ 10,500 Less amounts due the bank (750) --------- Bank debt discharged 9,750 Less fair market value of Lori common stock issued as consideration for the debt restructuring (337) Other fees and expenses (300) --------- Net extraordinary gain $ 9,113 ========= New Dimensions 1993 Restructuring The reorganization of New Dimensions resulted in a 1993 extraordinary gain of $22,057,000 ($4.49 per share) from a net discharge of indebtedness calculated (in thousands) as follows: Amount due on New Dimensions' 12.75% Senior Notes, including accrued interest $ 22,822 Trade liabilities and accrued expenses 3,231 --------- Total unsecured claims 26,053 Less present value of payments due to unsecured creditors (2,725) Less present value of bank restructuring loan fee (1,271) --------- Net extraordinary gain $ 22,057 ========= 9. NOTES PAYABLE Notes payable (in thousands) consist of: December 28, December 29, 1995 1994 -------- -------- ARTRA bank notes payable, at various interest rates $ 12,063 $ 18,507 Amounts due to related parties, interest from 8% to 12% 5,675 5,669 ARTRA 12% convertible subordinated promissory notes 2,500 - Other, interest from 8% to 20% 5,062 3,877 -------- -------- $ 25,300 $ 28,053 ======== ======== ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Bank Notes Payable At December 31, 1993, $17,063,000 in ARTRA notes, plus related loan fees and accrued interest 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, and a secondary position on the assets of BCA, payments due under a noncompetition agreement with the Company's former Welch subsidiary and by a subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the sale of Welch. Additionally, the bank notes are collateralized by a $5,500,000 personal guaranty of a private investor and, prior to March 31, 1994 as discussed below, the bank notes were collateralized by a $2,500,000 guaranty of a private corporation. A major shareholder and executive officer of the private corporation is an ARTRA director. As additional compensation, the private investor is receiving 1,833 shares of ARTRA common stock for each month the guaranty is outstanding and the private corporation received 833 shares of ARTRA common stock for each month the guaranty was outstanding. Among other things, the bank notes prohibit the payment of cash dividends by ARTRA. On March 31, 1994, ARTRA entered into a series of agreements with its bank lender and with the private corporation noted above that had guaranteed $2,500,000 of ARTRA's bank notes. Per terms of the agreements, the private corporation purchased $2,500,000 of ARTRA notes from ARTRA's bank thereby reducing the outstanding principal on ARTRA's bank notes to $12,063,000 and the bank released the private corporation from its $2,500,000 loan guaranty. The ARTRA bank notes and related loan fees were payable on September 30, 1994. Interest on the bank notes continues to accrue at the prime rate (8.75% and 8.5% at September 28, 1995 and December 29, 1994, respectively) and is payable quarterly. Interest on the bank notes has been paid through June 14, 1994. Effective March 31, 1994, ARTRA pledged, as additional collateral for its bank notes, 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 for breaches of fiduciary duty by the directors of Emerald, induced by Salomon and Kelly, in connection with the reorganization of Envirodyne as discussed in Note 7. 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 has 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 ($18.938 per share at December 28, 1995). The $2,500,000 note payable to the private corporation is reflected in the above table 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. In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the former Welch subsidiary under terms of a noncompetition agreement and a subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the 1989 sale of Welch. 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. The cash proceeds were used for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the remainder used for working capital. In conjunction with this transaction, ARTRA entered into a letter agreement with the bank whereby the bank agreed not to exercise any of its rights and remedies with respect to amounts due the bank under its ARTRA notes and certain obligations of ARTRA's president, Peter R. Harvey through at least September 28, 1995. 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. ARTRA will recognize a gain on the discharge of its bank indebtedness of approximately $10,000,000 in the first quarter of 1996 and will record a receivable for Mr. Harvey's prorata share of the debt discharge funded by the Company. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In conjunction with the February 1996 discharge of indebtedness, the Company entered into a $1,900,000 short-term loan agreement with an unaffiliated company. The loan, due May 26, 1996, with interest at 12% is collateralized by, among other things, the common stock of ARTRA's BCA subsidiary. As additional compensation for the loan and for participating in the above discharge of indebtedness, the lender has received, to-date, 150,000 shares of ARTRA common stock and 37,500 shares of COMFORCE common stock held by ARTRA. Additionally, for a cash payment of $500,000 to ARTRA, the lender purchased an option to acquire up to 40% of the common stock of Bagcraft for nominal consideration. If the borrowings under the loan agreement are repaid by May 26, 1996, ARTRA can repurchase the option for a cash payment of $550,000. If the borrowings under the loan agreement are repaid subsequent to May 26, 1996, the percentage of the warrant ARTRA can repurchase declines on a sliding scale through July 25, 1996. The proceeds from this loan agreement along with proceeds received from the Bagcraft subsidiary as consideration for the issuance of BCA preferred stock (see Note 12) were used to fund the cash payment to the bank for the above discharge of indebtedness. Effective May 14, 1991, ARTRA, through its wholly-owned Fill-Mor subsidiary, entered into a loan agreement with a bank providing for borrowings of up to $2,500,000 with interest at the prime rate plus 2%, of which $2,200,000 was outstanding at December 29, 1994. The loan was collateralized by ARTRA's interest in Lori common stock and preferred stock, by the proceeds of a tax sharing agreement between ARTRA and its Bagcraft subsidiary and by ARTRA's interest in Fill-Mor's common stock. At December 29, 1994, borrowings on this note were reclassified as amounts due under the debt restructuring agreement discussed in Note 8. In March, 1995, borrowings due under this loan agreement were discharged. At December 29, 1994 an ARTRA bank note with outstanding borrowings of $3,600,000 had been past due since December 31, 1990. Effective October 30, 1995, the Company settled this bank obligation totaling approximately $5,000,000, including accrued interest, for a cash payment of $150,000. The gain on this debt extinguishment was reflected in the Company's consolidated financial statements in the fourth quarter of 1995. In October, 1995 the bank agreed to discharge the $3,600,000 note plus accrued interest of $1,467,000 for a cash payment of $150,000, resulting in an extraordinary gain of $4,917,000 ($.71 per share) in the fourth quarter of 1995. An ARTRA bank note with outstanding borrowings of $345,000 at December 29, 1994 was guaranteed by a private company. Interest on the note was at the prime rate plus 2%. In October, 1995 all amounts due on this bank note were paid in full. Amounts Due To Related Parties At December 28, 1995 and December 29, 1994, the Company had outstanding borrowings from its Chairman, John Harvey, of $175,000 and $42,000, respectively. Since January, 1995, John Harvey's borrowings have been evidenced by unsecured short-term notes bearing interest at 8%. As additional compensation the loans provide for the issuance of warrants to purchase ARTRA common shares at prices equal to the market value of ARTRA's common stock at the date of issuance. The warrants expire five years from the date of issuance. Terms of the note provide for the issuance of additional warrants to purchase ARTRA common shares, as determined by the number of days the loans are outstanding. Through February 29, 1996, John Harvey has received warrants to purchase an aggregate of 58,007 shares of ARTRA common stock at prices ranging from $3.75 to $6.125 per share as additional compensation for his loans to ARTRA. At March 30, 1995, amounts due to related parties included a $850,000 short-term loan from a then director of COMFORCE. The loan provided for interest at the prime rate plus 1%. As consideration for assisting with the debt restructuring, the former director received 150,000 Lori common shares valued at $337,500 ($2.25 per share) based upon COMFORCE closing market value on March 30, 1995. The principal amount of the loan was reduced to $750,000 at July 31, 1995. The remaining loan principal was not repaid on its scheduled to maturity date of July 31, 1995. Per terms of the loan agreement, the former director received an additional 50,000 COMFORCE common shares as compensation for the ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) non-payment of the loan at its originally scheduled maturity. The maturity date of the loan was subsequently extended to September 30, 1995. The Company then entered into discussions with the director to extend the maturity date of the loan and, as additional consideration for the non-payment of the loan, the former director received an additional 25,000 shares of COMFORCE common stock in January 1996. In March 1996, the loan was repaid in full by ARTRA. At December 29, 1994, amounts due to related parties also included borrowings of $127,000, respectively, from the above mentioned former director of COMFORCE. As additional compensation the former director has received warrants to purchase an aggregate of 236,315 ARTRA common shares at prices ranging from $3.75 to $6.375 per share based upon the market value of ARTRA's common stock at the date of issuance. The warrants expire five years from the date of issuance. Terms of the note provide for the issuance of additional warrants to purchase ARTRA common shares as determined by the number of days the loan is outstanding. In December 1995, amounts due pursuant to this loan were repaid by the issuance of 33,000 shares of ARTRA common stock. On December 31, 1993, a religious organization, currently holding approximately 7% of ARTRA's outstanding common stock, loaned the Company $2,000,000 evidenced by a short-term note bearing interest at 10%. The proceeds of this loan were remitted to ARTRA's bank to pay principal and interest on ARTRA's bank notes as discussed above. In January, 1994 the religious organization made an additional $1,000,000 short-term loan to the Company also with interest at 10%. As additional compensation for the above loans, the lender received warrants to purchase an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00 to $7.00 per share based upon the market of ARTRA's common stock at the date of issuance. The warrants expire in 1998, five years from the date of issuance. In July, 1994 ARTRA made a $2,000,000 payment against the amounts outstanding on the above loans and the religious organization subsequently loaned ARTRA an additional $2,000,000. At December 28, 1995 and December 29, 1994 borrowings due the religious organization totaled $3,000,000. In December, the religious organization received 126,222 shares of ARTRA common in payment of past due interest through October 31, 1995. 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. In the event the notes and all accrued interest is not paid in full at maturity, the noteholders have the option to convert all or a portion of the amount due into shares of ARTRA common at a conversion price of $3.00 per share. The proceeds from the private placement, held in escrow at December 28, 1995, were used to pay down other debt obligations in January, 1996. The notes were repaid in April, 1996, substantially with proceeds from a new private placement of ARTRA notes. Other In conjunction with the debt settlement agreement discussed in Note 8, ARTRA entered into a $1,850,000 short-term loan agreement with a non-affiliated corporation, the proceeds of which were used to fund amounts due the bank as discussed below. The loan, due June 30, 1995, with interest payable monthly at 10%, was collateralized by 100,000 shares of Lori common stock. These 100,000 COMFORCE common shares were originally issued to the bank under terms of the August 18, 1994 Settlement Agreement. In August, 1995 the loan was extended until September 15, 1995 and the lender received the above mentioned 100,000 COMFORCE common shares as consideration for the loan extension. The loan was repaid by ARTRA in February, 1996. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 10. LONG-TERM DEBT Long-term debt (in thousands) consists of: December 28, December 29, 1995 1994 -------- -------- Bagcraft Credit Agreement, Term loans, interest at the prime rate plus 1.75% to 3% $ 16,600 $ 17,000 Revolving credit loan, interest at the prime rate plus 1.5% 9,231 16,672 Unamortized discount - (315) Bagcraft, City of Baxter Springs, Kansas loan agreements, interest, at varying rates 11,794 12,310 Arcar subordinated promissory notes due to seller, interest at the prime rate - 8,000 Arcar bank term loan, interest at the prime rate plus .75% - 2,750 Amounts due a bank term under terms of a debt settlement agreement - 10,500 Other, at various interest rates, due in varying amounts through 1995 - 27 -------- -------- 37,625 66,944 Current scheduled maturities (3,512) (37,521) Debt subsequently discharged - (9,750) -------- -------- $ 34,113 $ 19,673 ======== ======== Bagcraft Effective December 17, 1993, Bagcraft refinanced its bank debt by entering into a Credit Agreement that provides for a revolving credit loan and two separate term loans. The term loans were separate two-year facilities initially totaling $12,000,000 (Term Loan A) and $8,000,000 (Term Loan B), bearing interest at the lender's index rate plus 1.75% and 3%, respectively. The principal under Term Loan A is payable at maturity, unless accelerated under terms of the Credit Agreement. The principal under Term Loan B ($4,600,000 and $5,000,000 outstanding at December 28, 1995 and December 29, 1994, respectively) was scheduled to be payable in twenty-four monthly installments of $250,000 from January 1, 1994 to December 1, 1995, with the remaining principal balance payable at maturity, unless accelerated under terms of the Credit Agreement. At December 28, 1995, interest rates on Term Loan A and Term Loan B were 10.25% and 11.5% 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 December 28, 1995 and December 29, 1994, approximately $6,600,000 and ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) $800,000, 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 December 28, 1995 the interest rate on the revolving credit loan was 10%. Borrowings under the Credit Agreement are collateralized by the common stock and substantially all of the assets of Bagcraft. The Credit Agreement, as amended, contains various restrictive covenants, that among other restrictions, require Bagcraft to maintain minimum levels of tangible net worth and liquidity levels, and 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. In October, 1995 the Credit Agreement was amended whereby, among other things, the maturity date of the Credit Agreement was extended until March 31, 1996, certain loan covenant violations were resolved and the principal payments under Term Loan B were modified to include five monthly installments of $200,000 from November 15, 1995 to March 31, 1996, with the remaining balance payable at maturity (March 31, 1996) . 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, the lender consented to the use of $4,135,000 advanced under the revolving credit loan to fund a preferred stock exchange agreement between BCA (the parent of Bagcraft), Bagcraft and the holder of Bagcraft's 13.5% cumulative, redeemable preferred stock (see Note 12). As additional compensation for borrowings under the Credit Agreement, in December, 1993, 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. In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a $12,500,000 financing package associated with the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The financing package, funded by a combination of Federal, state and local funds, consists of the following loan agreements payable by Bagcraft directly to the City of Baxter Springs: A $7,000,000 promissory note payable in ten installments of $700,000 due annually on July 21 of each year beginning in 1995 through maturity on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is payable semi-annually. At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $6,300,000 and $7,000,000, 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 December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $5,000,000 and $4,810,000, respectively, under this loan agreement. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Two separate $250,000 subordinated promissory notes payable in varying installments through January 20, 2025. The subordinated promissory notes are non-interest bearing, subject to certain repayment provisions as defined in the agreement. At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $493,000 and $500,000, 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 and December 29, 1994, $552,000 and $774,000, respectively, of borrowings from the above loan agreements is reflected in the consolidated balance sheet in current assets as restricted cash and equivalents. These funds, invested in interest bearing cash equivalents, are restricted for expenditures associated with the Baxter Springs, Kansas project. Arcar On April 8, 1994, Bagcraft completed the acquisition of Arcar for consideration consisting of cash of $2,264,000 and subordinated promissory notes totaling $8,000,000 ($5,500,000 and $8,000,000 outstanding at September 28, 1995 and December 29, 1994, respectively). The subordinated promissory notes provided for interest payable quarterly at the prime rate (as defined in the agreement). At September 28, 1995, the remaining outstanding promissory notes were scheduled to mature as follows: $2,500,000 payable March 15, 1996; $2,500,000 payable March 15, 1997; $500,000 payable March 15, 1998. The seller also received a warrant to purchase 177,778 ARTRA common shares at a price of $5.625 per share, the market value at the date of grant. Exercise of the warrant was payable only through a reduction of the subordinated promissory notes and accrued interest due the seller under terms of the purchase agreement. The subordinated promissory notes were paid in full in October, 1995 with proceeds from the sale of Arcar (see Note 3). Effective April 8, 1994, Arcar entered into a Loan and Security Agreement (the "Agreement") with a bank that provided for a revolving credit loan and a term loan. The term loan, in the original principal amount of $2,750,000, provided for interest at the prime rate plus .75%. Borrowings under the Agreement were collateralized by substantially all of the assets of Arcar. The Agreement contained various restrictive covenants, that among other restrictions, require Arcar to maintain minimum levels of net worth and liquidity levels and limit additional loans, dividend payments, capital expenditures and payments to related parties. All borrowings under the Agreement were paid in full in October, 1995 with proceeds from the sale of Arcar (see Note 3). Lori As discussed in Note 8, effective August 18, 1994, as amended effective December 23, 1994, ARTRA, Fill-Mor, Lori and Lori's fashion costume jewelry subsidiaries entered into an agreement with Lori's bank lender to settle obligations due the bank under terms of the bank loan agreements of Lori and its fashion costume jewelry subsidiaries and Fill-Mor. Borrowings due the bank under the loan agreements of Lori and its operating subsidiaries and Lori's parent, Fill-Mor, plus amounts due the bank for accrued interest and fees were reduced to $10,500,000 as of December 23, 1994 (of which $7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank). As partial consideration for the Amended Settlement Agreement the bank received a $750,000 Lori note payable due March 31, 1995. In March, 1995 the $750,000 note due the bank was paid and the remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an additional extraordinary gain to Lori and Fill-Mor of $9,113,000 in 1995 (See Note 8). ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The common stock and virtually all the assets of ARTRA's subsidiaries have been pledged as collateral for ARTRA's and its subsidiaries' borrowings. Under certain debt agreements the Company is limited in the amounts it can withdraw from its operating subsidiaries. At December 28, 1995 and December 29, 1994, substantially all cash and equivalents on the Company's consolidated balance sheet are restricted to use by and for the Company's operating subsidiaries. At December 28, 1995 the aggregate amount of yearly maturities of long-term debt, exclusive of debt discharged, is: 1996, $3,512,000; 1997, $24,143,000; 1998, $3,137,000; 1999, $3,137,000; 2000, $712,000; thereafter, $2,983,000. 11. 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. ARTRA agreed to register 100,000 ARTRA common shares issued to a bank as partial consideration for a 1994 debt settlement agreement on or before July 31, 1995, after which the bank has the right to put the 100,000 common shares back to ARTRA for an exercise price of $500,000. As of March 31, 1996 the ARTRA common shares have not been registered and the bank has not exercised the put option. At December 28, 1995 and December 29, 1994 options are outstanding that, if exercised, would require ARTRA to repurchase 283,965 and 279,679 shares of its common stock for an aggregate amount of $4,774,000 and $4,144,000, respectively. 12. REDEEMABLE PREFERRED 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 $1,519,000 and $1,221,000 were accrued at December 28, 1995 and December 29, 1994, respectively. In 1987, Bagcraft issued to a subsidiary of Ozite $5,000,000 of preferred stock (50,000 shares of 13.5% cumulative, redeemable preferred stock with a liquidation preference equal to $100 per share) redeemable by Bagcraft in 1997 at a price of $100 per share plus accrued dividends. Dividends, which accrue and are payable semiannually on June 1 and December 1 of each year, are reflected in the Company's consolidated statement of operations as minority interest. The holder has agreed to forego dividend payments as long as such payments are prohibited by Bagcraft's lenders. Accumulated dividends of $5,794000 and $5,119,000 were accrued at December 28, 1995 and December 29, 1994, respectively. 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. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Effective February 1, 1996, BCA, Bagcraft and Ozite entered into an agreement to exchange certain preferred stock between the Companies. In connection with the agreement, BCA issued to Bagcraft 8,135 shares of BCA Series B preferred stock (with a liquidation preference equal to $1,000 per share) for cash of $4,135,000. Bagcraft in turn exchanged the BCA Series B preferred stock for Bagcraft redeemable preferred stock (82.7% of 50,000 shares, or 41,350 shares) held by Ozite. Funds for the transaction were obtained by Bagcraft through an advance under its revolving credit. BCA then upstreamed the proceeds to ARTRA for working capital purposes. As a result of the preferred stock exchange agreement, 17.3% of the original Bagcraft redeemable preferred stock and the prorata share of dividends remain outstanding February 1, 1996. Dividends related to the Bagcraft redeemable preferred stock exchanged have been forgiven in accordance with the agreement. The dividend forgiveness will be reflected in the Company's consolidated financial statements in the first quarter of 1996. 13. STOCK OPTIONS AND WARRANTS Stock Option Plan In July, 1985, ARTRA's shareholders approved a stock option plan (the "Plan") for certain officers and key employees of the Company and its subsidiaries. The Plan, as amended, reserved 1,000,000 shares of the Company's common stock and authorized the granting of options on or before February 1, 1995. The purchase price of such options was to be not less than the market value at the date of grant for incentive stock options ("ISO") and not less than 110% of the market value on the date of grant for an ISO granted to a shareholder possessing 10% more of the voting stock of the Company. Non-qualified options may be granted at such price and amount as the Company determines at the date of grant. During 1994, the Company issued a former officer of Bagcraft a non-qualified option to purchase 20,000 shares of ARTRA common stock at $5.75 per share as additional compensation for short-term loans to ARTRA. Effective January 8, 1993, the Company issued certain officers and key employees of ARTRA options to purchase 148,100 shares of ARTRA common stock at $3.75 per share. The options expire ten years from the date of grant. During 1993, the Company issued to a then officer of Bagcraft a non-qualified option to purchase 50,000 shares of ARTRA common stock at $3.75 per share as additional compensation for short-term loans to ARTRA. The options were exercised during 1993. The exercise of these options was principally paid through a reduction of the then Bagcraft officer's loans to ARTRA. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of stock option transactions for the three years in the period ended December 28, 1995 is as follows: 1995 1994 1993 -------- -------- -------- Outstanding at beginning of year: Shares 445,460 450,760 340,360 $ 3.75 $ 3.75 $ 5.25 Prices to to to $ 20.50 $ 20.50 $ 20.50 Options granted: Shares 20,000 198,100 Prices $ 5.75 $ 3.75 Options exercised: Shares (12,100) (25,300) (74,700) $ 3.75 Prices $ 4.00 $ 5.25 to $ 5.25 Options canceled: Shares (1,860) (13,000) $ 5.25 Prices $ 20.50 to $ 5.75 Outstanding at end of year: Shares 431,500 445,460 450,760 ======== ======== ======== $ 3.65 $ 3.75 $ 3.75 Prices to to to $ 10.00 $ 20.50 $ 20.50 Options exercisable at end of year 431,500 445,460 450,760 ======== ======== ======== Options available for future grant at end of year - 390,814 410,814 ======== ======== ======== ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Warrants At December 28, 1995, warrants were outstanding to purchase a total of 1,148,548 common shares at prices ranging from $3.50 per share to $10.50 per share. The warrants, exercisable from the date of issue, expire at various dates through 2003. During 1995, ARTRA issued warrants to purchase an aggregate of 140,507 shares of its common stock at prices ranging from $3.75 per share to $6.125 per share, principally to certain lenders as additional compensation for short-term loans. The warrants expire at various dates in 2000. Warrants to purchase 48,331 shares of ARTRA common stock at prices ranging from $6.75 per share to $11.375 per share expired unexercised during 1995. The warrants were issued as additional compensation for various short-terms loans. During 1994, ARTRA issued warrants to purchase an aggregate of 154,719 shares of its common stock at prices ranging from $4.50 per share to $6.625 per share, principally to certain lenders as additional compensation for short-term loans. The warrants expire at various dates from 1996 and 1999. Warrants to purchase 9,166 shares of ARTRA common stock at prices ranging from $10.00 per share to $11.25 per share expired unexercised during 1994. The warrants were issued as additional compensation for various short-terms loans. During 1993, ARTRA issued warrants to purchase an aggregate of 326,090 shares of its common stock at prices ranging from $3.50 per share to $7.00 per share, principally to certain lenders as additional compensation for short-term loans. The warrants expire at various dates from 1998 and 2003. Additionally, warrants to purchase 76,668 shares of ARTRA common stock at prices ranging from $18.00 per share to $27.00 per share expired unexercised during 1993. The warrants were issued as additional compensation for short-term loans in 1988. 14. RESTRUCTURING COSTS In December, 1993 the Bagcraft subsidiary recorded a charge to operations of $1,175,000 representing equipment and inventory relocation costs and employee severance and outplacement costs relating to the construction of a new manufacturing facility in Baxter Springs, Kansas. In September, 1994, Bagcraft completed construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. This facility replaced Bagcraft's production facilities in Joplin, Missouri, Carteret, New Jersey and Forest Park, Georgia. 15. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease certain buildings and equipment which are used in its manufacturing and distribution operations. At December 28, 1995, future minimum lease payments under operating leases that have an initial or remaining noncancellable term of more than one year (in thousands) are: Year ---- 1996 $ 944 1997 860 1998 737 1999 719 2000 449 After 2000 765 ------- $ 4,474 ======= ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Rental expense was $861,000, $1,116,000 and $1,240,000 in fiscal years 1995, 1994 and 1993 respectively. In conjunction with the sale of Arcar (see Note 3), Bagcraft entered into an ink products purchase agreement with the Arcar buyer for a period of five years. Under terms of the agreement, Bagcraft is required to purchase a minimum supply of ink based on market prices in effect at the time of each purchase. Minimum dollar amounts required for each of the contract years ending September 30 is $4,100,000 in 1996; $4,300,000 in 1997; $4,500,000 in 1998; $3,375,000 in 1999; and $2,250,000 in 2000. Bagcraft has issued a letter of credit of $1,000,000 in conjunction with this agreement. The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. At December 28, 1995 and December 29, 1994, the Company had accrued $1,800,000 and $1,500,000, respectively, for business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. However, ARTRA may not have available funds to pay liabilities arising out of these business-related litigation and environmental matters or, in certain instances, to provide for its legal defense. In January, 1985 the United States Environmental Protection Agency ("EPA") notified the Company's Bagcraft subsidiary that it was a potentially responsible party 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 consolidated financial statements at 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 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA for indemnification in connection with this proceeding. The cost of clean-up at the Palmer, Massachusetts site has been estimated to be approximately $7 million according to proofs of claim filed in the adversary proceeding. A committee formed by the named potentially responsible parties has estimated the liability respecting the activities of Clearshield to be $400,000. ARTRA has not made any independent investigation of the amount of its potential liability and no assurances can be given that it will not substantially exceed $400,000. In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in 1991 in the United States District Court for Maryland, Sherwin-Williams Company ("Sherwin-Williams") brought suit against ARTRA and other former owners of a paint manufacturing facility in Baltimore, Maryland for recovery of costs of investigation and clean-up of hazardous substances which were stored, disposed of or otherwise released at this manufacturing facility. This facility was owned by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from 1968 to 1980. Sherwin-William's current projection of the cost of clean-up is approximately $5 to $6 million. The Company has filed counterclaims against Sherwin-Williams and cross claims against other former owners of the property. The Company also is vigorously defending this action and has raised numerous defenses. Currently, the case is in its early stages of discovery and the Company cannot determine what, if any, its liability may be in this matter. ARTRA was named as a defendant in United States v. Chevron Chemical Company brought in the United States District Court for the Central District of California respecting Operating Industries, Inc. site in Monterey Park, California. This site is included on the EPA's National Priorities List. ARTRA's involvement stemmed from the alleged disposal of hazardous substances by The Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling paste, wall coatings and related products, certain of which generated hazardous substances as a by-product of the manufacturing process. ARTRA entered into a consent decree with the EPA in which it agreed to pay $85,000 for one phase of the clean-up costs for this site; however, ARTRA defaulted on its payment obligation. ARTRA is presently unable to estimate the total potential liability for clean-up costs at this site, which clean-up is expected to continue for a number of years. The consent decree, even if it had been honored by ARTRA, was not intended to release ARTRA from liability for costs associated with other phases of the clean-up at this site. The Company is presently unable determine what, if any, additional liability it may incur in this matter. 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 CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 16. INCOME TAXES The provision (credit) for income taxes is included in the statements of operations as follows: 1995 1994 1993 --------- --------- --------- (in thousands) Continuing operations $ 51 $ 9 $ 7 Discontinued operations 17 74 33 --------- --------- --------- $ 68 $ 83 $ 40 ========= ========= ========= A summary of the provision (credit) for income taxes is as follows: 1995 1994 1993 --------- --------- --------- (in thousands) Current: Federal $ - $ - $ - State 68 83 40 --------- --------- --------- $ 68 $ 83 $ 40 ========= ========= ========= The 1995, 1994 and 1993 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 due to the utilization of tax loss carryforwards. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 16. INCOME TAXES, continued In 1995, 1994 and 1993, the effective tax rates from operations, including discontinued operations were (3.9)%, (.4)% and .3%, respectively, as compared to the statutory Federal rate, which are reconciled as follows: 1995 1994 1993 --------- --------- ---------- (in thousands) Provision (credit) for income taxes using statutory rate $ (600) $ (6,629) $ 4,992 State and local taxes, net of Federal benefit 68 73 7 Current year tax loss not utilized - 3,151 1,938 Amortization of goodwill 155 206 212 Previously unrecognized benefit from utilizing tax loss carryforwards (2,136) - - Effect of not including all subsidiaries in the consolidated tax return 2,546 3,249 (7,113) Other 35 33 4 --------- --------- ---------- $ 68 $ 83 $ 40 ========= ========= ========== ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 16. INCOME TAXES, continued The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to the deferred tax liabilities and deferred tax assets at December 28, 1995 and December 29, 1994 and their approximate tax effects (in thousands) are as follows:
1995 1994 ---------------------------- ----------------------------- Temporary Tax Temporary Tax Difference Difference Difference Difference ---------- ---------- ---------- ---------- Trade accounts receivable $ 200 $ 100 $ 1,700 $ 700 Inventories - - 400 200 Investment in Emerald Acquisition Corporation - - 18,600 7,200 Accrued personnel costs 1,800 700 1,900 800 Restructuring reserve 200 100 1,100 400 Environmental reserve 400 200 400 200 Other 2,900 1,100 2,600 1,000 Capital loss carryforward 11,000 4,300 - - Net operating loss 44,000 17,200 97,000 37,800 -------- ------- Total deferred tax assets 23,700 48,300 -------- ------- Inventories (6,700) (2,600) (6,100) (2,400) Accumulated depreciation (7,900) (3,100) (9,500) (3,700) Other (800) (300) (400) (200) -------- Total deferred tax liabilities (6,000) (6,300) -------- ------- Valuation allowance (17,700) (42,000) -------- ------- Net deferred tax asset $ - $ - ======== =======
The Company has recorded a valuation allowance with respect to the future tax benefits and the net operating loss reflected in deferred tax assets as a result of the uncertainty of their ultimate realization. At December 28, 1995, the Company and its subsidiaries had Federal income tax loss carryforwards of approximately $44,000,000 available to be applied against future taxable income, if any. ARTRA's tax loss carryforwards of approximately $33,000,000 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 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 17. EMPLOYEE BENEFIT PLANS The Company and its subsidiaries have certain contributory and noncontributory benefit plans covering eligible employees. Both employee and employer contributions are generally determined as a percentage of the covered employee's annual compensation. The total expense charged to continuing operations from all of these plans amounted to $477,000, $333,000 and $450,000 in 1995, 1994 and 1993, respectively. Effective June 1, 1990, the Company adopted an Employee Stock Ownership Plan ("ESOP") which covers eligible employees of ARTRA and certain of its subsidiaries. Employer contributions to the Plan are at the discretion of ARTRA's Board of Directors. Employee contributions are not permitted. Contributions are allocated in the same proportion that the percentage of a participant's compensation for the Plan year bears to the compensation of all participants for the Plan year. ARTRA contributed 8,750 common shares to the Plan with a fair market value of $42,000 ($4.75 per share) for the plan year ending December 28, 1995. ARTRA contributed 15,000 common shares to the Plan with a fair market value of $71,250 ($4.75 per share) for the plan year ending December 29, 1994. ARTRA contributed 65,000 common shares to the Plan with a fair market value of $423,000 ($6.50 per share) for the plan year ending December 30, 1993. At December 28, 1995, the ESOP held 271,775 shares of ARTRA common stock. Effective August 1, 1995, the Company terminated the ESOP and is currently is the process of distributing the related Employee accounts to participants. The Company typically does not offer the types of benefit programs that fall under the guidelines of Statement of Financial Accounting Standards No. 106 - Employers Accounting for Post Retirement Benefits Other Than Pensions. 18. EARNINGS PER SHARE 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 each period. Fully diluted earnings per share is not presented since the result is equivalent to primary earnings per share. 19. INDUSTRY SEGMENT INFORMATION At December 28, 1995, the Company, through its Bagcraft subsidiary operates in one industry segment as a manufacturer of packaging products principally serving the food industry. Prior to September 28, 1995 and in prior years, ARTRA's then majority owned subsidiary, Lori, operated as a designer and distributor of popular-priced fashion costume jewelry and accessories. In recent years, Lori's fashion costume jewelry operations had experienced a pattern of significantly lower sales levels and related operating losses primarily due to a shift in the buying patterns of its major customers (i.e. certain mass merchandisers) from participation in Lori's service program to purchases of costume jewelry and accessories directly from manufacturers and due to a continued unfavorable retail environment. Accordingly, in September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business as discussed in Note 3. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase agreement to participate in the acquisition of one hundred percent of the capital stock of Global. Global provides telecommunications and computer technical staffing and consulting services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. On October 17, 1995, Lori completed the acquisition of one hundred percent of the capital stock of Global. In connection with the re-focus of its business, Lori changed its name to COMFORCE Corporation. 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%. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from the ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the equity method through the end of fiscal 1995. As discussed in Note 6, effective December 28, 1995, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, at December 28, 1995, the Company's investment in COMFORCE is classified as available for sale and is stated at fair value. No single customer accounted for more than 10% of consolidated net sales in 1995, 1994 and 1993. 20. LITIGATION On November 2, 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. 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 $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. The receivable due June 30, 1997 under terms of the noncompetition agreement was reflected in ARTRA's condensed consolidated balance sheet at December 29, 1994 in other assets at $2,625,000. The subordinated security, due in 1997, was originally scheduled to be non-interest bearing for a ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) period of three years, after which time interest will accrue at the rate of 10% per annum. The note was discounted at a rate of 10% during the non-interest bearing period and was reflected in ARTRA's consolidated balance sheet at December 29, 1994 in other assets at $1,375,000, net of a discount of $1,125,000. 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 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 consolidated financial statements at December 28, 1995. The Company and its subsidiaries are the defendants in various other business-related litigation and environmental matters (see Note 15). Management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 21. RELATED PARTY TRANSACTIONS Advances to Peter R. Harvey, ARTRA's president, classified in the Consolidated Balance Sheet as a reduction of common shareholders' equity, consist of: December 28, December 29, 1995 1994 --------- --------- (in thousands) ARTRA $ 5,369 $ 3,205 Fill-Mor - 1,510 --------- --------- 5,369 4,715 Less interest for the period January 1, 1993 to date, accrued and fully reserved (1,051) (615) --------- --------- $ 4,318 $ 4,100 ========= ========= ARTRA has total advances due from its president, Peter R. Harvey, of which $5,369,000 and $3,205,000, including accrued interest, remained outstanding at December 28, 1995 and December 29, 1994 The advances bear interest at the prime rate plus 2% (10.5% at December 28, 1995 and December 29, 1994). This receivable from Peter R. Harvey has been classified as a reduction of common shareholders' equity. See Note 9 for an additional 1996 advance for Mr. Harvey's prorata share of debt discharged by a bank. The debt discharge was principally funded by ARTRA. In May, 1991, ARTRA's wholly-owned Fill-Mor subsidiary made advances to Peter R. Harvey. The advances provided for interest at the prime rate plus 2%. At March 30, 1995 and December 29, 1994, advances of $1,540,000 and $1,510,000, respectively, including accrued interest, were outstanding. 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 all advances to Peter R. Harvey has been accrued and fully reserved. Interest accrued and fully reserved on the advances to Peter R. Harvey for the years ended December 28, 1995 and December 29, 1994 totaled $436,000 and $341,000, respectively. Peter R. Harvey has not received other than nominal compensation for his services as an officer or director of ARTRA or any of its subsidiaries since October of 1990. Additionally, Mr. Harvey has agreed not to accept any compensation for his services as an officer or director of ARTRA or any of its subsidiaries until his obligations to ARTRA, described above, are fully satisfied. Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania corporation) is permitted to make loans to officers and directors. Further, under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is permitted to make loans to an officer (including any officer who is also a director, as in the case of Peter R. Harvey), whenever, in the judgment of the directors, the loan can reasonably be expected to benefit Fill-Mor. ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 partial 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 PureTec Corporation, a publicly traded corporation. In conjunction with Lori's October 1995 acquisition of Global (see Note 3), ARTRA has agreed to assume certain pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, ARTRA has accrued $4,500,000 of Lori liabilities classified in its consolidated balance at December 28, 1995 as current liabilities of discontinued operations. For a discussion of certain other related party debt obligations see Note 9. ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT ARTRA GROUP INCORPORATED BALANCE SHEETS (Registrant Only In Thousands) December 28, December 29, 1995 1994 --------- --------- ASSETS Current assets: Cash $2,347 $91 Receivables 25 55 Other current assets 85 87 --------- --------- 2,457 233 --------- --------- Property, plant and equipment 25 19 Less accumulated depreciation and amortization 14 6 --------- --------- 11 13 --------- --------- Other assets: Investments in and advances to affiliates 2,567 (15,264) Other - 4,000 --------- --------- 2,567 (11,264) --------- --------- $5,035 ($11,018) ========= ========= LIABILITIES Current liabilities: Notes payable and current maturities of long-term debt $25,300 $28,053 Accounts payable 509 1,576 Accrued expenses 9,323 9,702 Income taxes 200 138 --------- --------- 35,332 39,469 --------- --------- Redeemable common stock 4,774 4,144 --------- --------- Redeemable preferred stock 3,694 3,129 --------- --------- SHAREHOLDERS' EQUITY (DEFICIT) Common stock 5,540 5,052 Additional paid-in capital 38,526 36,613 Unrealized appreciation of investments 21,047 - Receivable from related party, including accrued interest (4,318) (4,100) Accumulated deficit (98,755) (94,520) --------- --------- (37,960) (56,955) Less treasury stock, at cost 805 805 --------- --------- (38,765) (57,760) --------- --------- $5,035 ($11,018) ========= ========= The accompanying notes are an integral part of the condensed financial information. ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT ARTRA GROUP INCORPORATED STATEMENTS OF OPERATIONS (Registrant Only In Thousands) Fiscal Year ----------------------------- 1995 1994* 1993* -------- --------- -------- Selling, general and administrative expenses $1,760 $2,158 $1,907 Depreciation and amortization 27 4 2 Interest expense 4,953 3,139 2,641 Equity in loss of affiliates 7,817 6,129 3,423 Other expense, net 424 308 85 -------- --------- -------- Loss from continuing operations before income taxes (14,981) (11,738) (8,058) Charge equivalent to income taxes (1,962) (1,791) (269) -------- --------- -------- Loss from continuing operations (16,943) (13,529) (8,327) Equity in earnings (loss) of discontinued affiliate 10 (15,906) (216) -------- --------- -------- Loss before extraordinary credit (16,933) (29,435) (8,543) Extraordinary credit, net discharge of indebtedness 14,030 8,965 22,057 -------- --------- -------- Net earnings (loss) ($2,903) ($20,470) $13,514 ======== ========= ======== The accompanying notes are an integral part of the condensed financial information. ______________________________________________ * As reclassified for discontinued operations. ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT ARTRA GROUP INCORPORATED STATEMENTS OF CASHFLOWS (Registrant Only In Thousands)
Fiscal Year ------------------------------- 1995 1994 1993 -------- --------- -------- Cash flows from operating activities: Net earnings (loss) ($2,903) ($20,470) $13,514 Adjustments to reconcile net loss to cash flows from operating activities: Extraordinary gain from net discharge of indebtedness (14,030) (8,965) (22,057) Equity in loss of affiliates 7,817 6,129 3,423 Equity in (earnings) loss of discontinued operations (10) 15,906 216 Gain on sale of property, plant and equipment - - - Other, principally common stock issued as compensation 1,370 489 392 Changes in assets and liabilities: Increase (decrease) in other current and noncurrent assets 32 56 (42) Increase in other current and noncurrent liabilities 1,738 2,152 1,076 (Increase) decrease in receivable from related party (218) (257) 42 -------- --------- -------- Net cash flows used by operating activities (6,204) (4,960) (3,436) -------- --------- -------- Cash flows from investing activities: Proceeds from collection of Welch notes 3,000 - - Proceeds from sale of property, plant and equipment - - - Proceeds from sale of BCA Holdings preferred stock - - 3,000 Dividends and advances from (to) subsidiaries - (772) 1,824 Additions to property, plant and equipment (6) (9) (10) -------- --------- -------- Net cash flows from (used by) investing activities 2,994 (781) 4,814 -------- --------- -------- Cash flows from financing activities: Proceeds from private placements of ARTRA common stock - 3,230 - Proceeds from exercise of stock options and warrants 48 30 129 Net increase (decrease) in short-term borrowings 5,488 1,226 (158) Exercise of redeemable common stock options (70) (50) - -------- --------- -------- Net cash flows from (used by) financing activities 5,466 4,436 (29) -------- --------- -------- Net increase (decrease) in cash 2,256 (1,305) 1,349 Cash balance beginning of year 91 1,396 47 -------- --------- -------- Cash balance end of year $2,347 $91 $1,396 ======== ========= ======== Supplemental schedule of noncash investing and financing activities: Issue common stock and redeemable common stock to pay down current liabilities $1,040 $756 $1,636 ARTRA common stock issued to Lori's bank lender as partial consideration for discharge of indebtedness - 2,500 - The accompanying notes are an integral part of the condensed financial information.
ARTRA GROUP INCORPORATED AND SUB AND SUBSIDIARIES SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(Cont.) ARTRA GROUP INCORPORATED NOTES TO FINANCIAL INFORMATION (Registrant Only) 1. Presentation The condensed financial information of the Registrant has been prepared in accordance with the instructions for Schedule I to Form 10-K. The Registrant's investments in subsidiaries and affiliates are presented on the equity method. 2. Commitments and Contingencies See Note 15 of the consolidated financial statements. 3. Restricted Assets The terms of several agreements place certain restrictions on the net assets of certain operating subsidiaries. See Notes 9 and 10 of the consolidated financial statements for additional information. 4. Notes Payable and Long-Term Debt See Notes 9 and 10 of the consolidated financial statements. 5. Redeemable Common and Preferred Stock and Stock Options See Notes 11, 12 and 13 of the consolidated financial statements. 6. Income Taxes The Registrant files a consolidated income tax return with its 80% or more owned subsidiaries. Separate returns are filed by the Company's majority-owned, but less than 80% owned subsidiaries. For financial reporting purposes, the Registrant's charge or benefit equivalent to income tax represents the difference between the aggregate of income taxes computed on a separate return basis for each of the subsidiaries and affiliates and the income taxes computed on a consolidated basis. 7. Guarantees of Subsidiaries' Obligations See Notes 3 and 21 of the consolidated financial statements for a discussion of guarantees of subsidiary obligations. ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS for each of the three fiscal years in the period ended December 28, 1995 (in thousands)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions ---------------------- (1) (2) Balance at Charged to Charged to Beginning of Costs and Other Deductions Balance at Description Period Expenses Accounts (Describe) End of Period ------------------- --------- ---------- ----------- ---------- ------------- For the fiscal year ended December 28, 1995: Deducted from assets to which they apply: Allowance for inventory valuation $ 207 $ 315 $ (232)(A) $ 290 ========= ========== ======== ========= Allowance for markdowns $ 835 $ 291 $ (1,126)(A) $ - Allowance for doubtful accounts 819 487 (1,056)(A) 250 -------- ---------- -------- --------- $ 1,654 $ 778 $ (2,182) $ 250 ======== ========== ======== ========= For the fiscal year ended December 29, 1994: Deducted from assets to which they apply: Allowance for inventory valuation $ 4,315 $ 218 $ (4,326)(D) $ 207 ======== ========= ======== ========= Allowance for markdowns $ 2,499 $ 4,799 $ (6,463)(B) $ 835 Allowance for doubtful accounts 595 445 (221)(C) 819 -------- -------- -------- --------- $ 3,094 $ 5,244 $ (6,684) $ 1,654 ======== ======== ======== ========= For the fiscal year ended December 30, 1993: Deducted from assets to which they apply: Allowance for inventory valuation $ 4,900 $ 337 $ (922)(D) $ 4,315 ======== ========= ======== ======== Allowance for markdowns $ 5,280 $ 5,722 $ (8,503)(B) $ 2,499 Allowance for doubtful accounts 671 450 (526)(C) 595 -------- -------- -------- -------- $ 5,951 $ 6,172 $ (9,029) $ 3,094 ======== ======== ======== ======== (A) Principally amounts of discontinued operations. (B) Principally markdowns taken. (C) Principally uncollectible accounts written off, net of recoveries. (D) Principally inventory written off, net of recoveries.
PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The expenses estimated to be incurred (other than the fees of the Commission which are actual) in connection with the offering, all of which are payable by the Registrant, are as follows: Description Amount - --------------------------------------------- ---------- SEC Registration Fee $ 8,685 Printing Costs 0 Legal Fees 150,000* Accounting Fees 50,000* Blue Sky Fees and Expenses 1,625 Miscellaneous 14,690* ------- Total $ 225,000* ======= ----------- * Estimate Item 14. Indemnification of Directors and Officers. Reference is made to the discussion in Part I of this Registration Statement under "Indemnification of Officers and Directors," which discussion is incorporated herein by reference. Item 15. Recent Sales of Unregistered Securities. Kwiatt, Silverman & Ruben, Ltd., Northfield, Illinois, has advised Registrant as to the availability of the exemptions from registration under the Securities Act of 1993 described in this Item 15. This firm has also advised Registrant that shares of Registrant's Common Stock issued upon the exercise of options issued under Registrant's 1985 Incentive Stock Option Plan are registered pursuant to a Registration Statement on Form S-8 of Registrant. Accordingly, such shares are not described below. Set forth below is a list of the Warrants issued by Registrant since November 1, 1991. Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in issuing these Warrants, principally as additional consideration in connection with the extension of credit by the Warrantholder or, in certain cases, other transactions. Each Warrant provides for the purchase of shares of Common Stock at a stated exercise price, which was the date Registrant and the holder agreed to the transaction for which the Warrant was awarded as additional consideration. No underwriting fees or commissions were paid in connection with the issuance of these Warrants. II-1 LIST OF WARRANTS ISSUED SINCE FEBRUARY 10, 1991 (AS OF JANUARY 27, 1997) Issuance Number of Exercise Warrant Holder Date Shares Price - ----------------------------------- ---------- -------- ------- Alltech Associates 07-01-98 10,000 $6.000 Clinton Industries 11-10-92 75,001 $5.000 John Harvey 02-01-94 4,700 $5.500 John Harvey 03-30-94 1,500 $5.625 John Harvey 01-19-95 6,000 $4.750 John Harvey 04-28-95 11,667 $3.750 John Harvey 04-28-95 7,800 $4.750 John Harvey 07-27-95 8,426 $4.250 John Harvey 09-30-95 4,019 $4.625 John Harvey 10-31-95 4,019 $4.875 John Harvey 11-30-95 4,019 $4.375 John Harvey 12-31-95 8,038 $6.125 John Harvey 02-29-96 4,019 $6.125 John Harvey 03-31-96 4,019 $6.250 John Harvey 04-30-96 4,019 $6.000 Maynard K. Louis 04-02-92 3,000 $7.000 Maynard K. Louis 09-29-92 15,000 $5.625 Maynard K. Louis 04-01-93 15,000 $4.500 Maynard K. Louis 10-01-93 15,000 $5.125 Maynard K. Louis 10-01-93 1,500 $5.375 Maynard K. Louis 10-08-93 2,250 $5.375 Maynard K. Louis 10-15-93 3,750 $5.375 Maynard K. Louis 02-16-94 2,500 $6.000 Maynard K. Louis 04-01-94 15,000 $5.375 Maynard K. Louis 10-01-94 15,000 $5.125 Maynard K. Louis 06-13-96 22,000 $8.000 Evelyn Bishop, Trustee 11-29-91 6,685 $6.000 Evelyn Bishop, Trustee 11-17-91 4,457 $6.000 Evelyn Bishop, Trustee 05-16-92 1,560 $5.375 Evelyn Bishop, Trustee 05-29-92 7,023 $5.000 Evelyn Bishop, Trustee 11-29-92 7,383 $4.750 Evelyn Bishop, Trustee 05-29-93 7,764 $3.750 Evelyn Bishop, Trustee 06-13-96 10,911 $8.000 Evelyn Bishop, Trustee 05-17-91 4,244 $6.000 Evelyn Bishop, Trustee 05-29-91 6,367 $6.000 Alexander Verde 02-10-91 39,907 $5.000 Alexander Verde 08-09-92 76,480 $5.000 Alexander Verde 02-09-93 37,258 $3.750 Alexander Verde 08-09-93 36,651 $4.125 Alexander Verde 02-09-94 35,555 $5.500 Alexander Verde 08-09-94 10,464 $5.000 Carol M. Jacobsohn 01-28-92 5,500 $9.875 Carol M. Jacobsohn 12-02-92 2,750 $5.000 D.R. Zaccone 07-05-92 10,000 $6.250 II-2 D.R. Zaccone 09-03-92 600 $6.250 D.R. Zaccone 09-01-93 11,333 $5.125 D.R. Zaccone 09-93-02 10,600 $6.250 D.R. Zaccone 12-17-92 16,800 $7.750 D.R. Zaccone 03-31-93 17,000 $7.000 D.R. Zaccone 10-31-92 17,000 $5.375 D.R. Zaccone 01-30-93 17,000 $3.750 D.R. Zaccone 05-01-93 17,000 $4.000 D.R. Zaccone 07-31-93 5,667 $3.500 D.R. Zaccone 09-16-93 25,667 $3.500 D.R. Zaccone 10-26-93 25,333 $5.875 John Tull 09-09-91 1,500 $6.375 Austin Iodice 09-30-98 3,000 $5.375 Austin Iodice 10-07-95 4,500 $5.375 Austin Iodice 10-14-95 7,500 $5.375 Austin Iodice 08-05-91 12,500 $5.750 Research Center Of Kabbalah 10-29-93 21,250 $6.000 Research Center Of Kabbalah 12-31-93 65,000 $7.000 Mark L. Werner 12-24-94 45,000 $4.880 Mark L. Werner 08-16-95 45,000 $4.125 Manufacturers Indemnity And Insurance Co. Of America 04-15-96 5,000 $6.000 Howard R. Conant 02-01-95 10,000 $4.750 Richard Blacmore 04-24-95 10,000 $3.750 Stephen M. Levy 12-29-95 12,500 $4.500 D. L. Arends Psp 05-08-96 2,200 $8.000 Clark Gunderson 05-08-96 5,000 $6.000 Robert Jones 05-08-96 5,000 $6.000 William F. Foster, Jr. 05-08-96 5,000 $6.000 Field Container Corp 05-15-92 150,943 $5.375 Harvey Schuster 06-13-96 15,000 $4.000 Woodrow Chamberlain 04-15-96 10,000 $6.000 James A. Belushi Declaration Of Trust 04-15-96 5,000 $6.000 John Bramsen 04-15-96 10,000 $6.000 Lenore M. Schnick Trust 04-15-96 15,000 $6.000 Morris Belzberg 04-15-96 25,000 $6.000 David J. Doerge Trust 04-15-96 10,000 $6.000 Mark Dorian 04-15-96 5,000 $6.000 Howard Grafman 04-15-96 5,000 $6.000 Ilse W. Grafman 04-15-96 5,000 $6.000 Thomas Kigin 04-15-96 2,500 $6.000 James L. Mcgill 04-15-96 5,000 $6.000 Johanna B. Mcgill 04-15-96 5,000 $6.000 D. Michael Meyer 04-15-96 10,000 $6.000 Leonard Feldman 04-15-96 15,000 $6.000 Charles Reeder 04-15-96 20,000 $6.000 William G. Reynolds, Jr. 04-15-96 1,250 $6.000 Nora Baker 04-15-96 5,000 $6.000 Stephen N. Engberg 04-15-96 10,000 $6.000 II-3 Martha T. Seelbach 04-15-96 3,750 $6.000 William Seelbach 04-15-96 5,000 $6.000 Paul Smeets 04-15-96 10,000 $6.000 Henry M. Staley Trust 04-15-96 7,500 $6.000 Eva Staley Residual Trust 04-15-96 5,000 $6.000 Avery J. Stone 04-15-96 20,000 $6.000 Shephard C. Swift 04-15-96 10,000 $6.000 Emanuel Tarrson 04-15-96 25,000 $6.000 Ronald E. Tarrson 04-15-96 15,000 $6.000 Steven Tarrson 04-15-96 10,000 $6.000 James F. Beedie 04-15-96 5,000 $6.000 Thomas Whitney 04-15-96 10,000 $6.000 Staley Family Agency 04-15-96 20,000 $6.000 Jim Scott 04-15-96 5,000 $6.000 David J. Doerge Trust 04-15-96 35,000 $6.000 William Belzberg 04-15-96 25,000 $6.000 Frank N. Magid 04-15-96 2,500 $6.000 Evan D. Ritchie Living Trust U/A/D 12/23/92 04-15-96 2,500 $6.000 Paul Farmer Ira 04-15-96 2,500 $6.000 Dr. John H. Muehlstein Ira 04-15-96 5,000 $6.000 Diane Wilson 04-15-96 1,250 $6.000 Ravinia Investors Llc 04-15-96 2,500 $6.000 William J. Mirch 04-15-96 5,000 $6.000 K. Reed Berkey 04-15-96 2,500 $6.000 Jerry Michelson Ira 04-15-96 1,250 $6.000 James Mchugh 04-15-96 5,000 $6.000 Jerry Michelson 04-15-96 3,750 $6.000 Thomas Philipsborn Ira 04-15-96 5,000 $6.000 Gibralt Holdings, Ltd. 04-15-96 5,000 $6.000 Howard Conant 08-26-96 25,000 $5.000 Howard Conant 12-23-96 25,000 $5.875 Howard Conant 01-15-97 10,000 $5.750 Emanuel Tarson 09-12-96 12,500 $5.000 Emanuel Tarson 12-23-96 12,500 $6.125 Ronald Tarson 09-12-96 12,500 $5.000 Ronald Tarson 12-23-96 12,500 $6.125 Robert A. Calabrese 09-18-96 10,000 $5.000 Richard Blackmore 09-18-96 7,500 $5.000 Marshall Rodin 09-20-96 6,084 $4.000 Marshall Rodin 09-20-96 12,100 $5.750 R & J Lucas Revocable Trust 0-15-97 10,000 $5.750 Set forth below is a list of persons who exchanged debt securities (promissory notes) of Registrant for Registrant's Common Stock. In each case, Registrant relied upon the exemption afforded by Section 3(a)(9) of the Securities Act of 1933 in effecting these transactions. The price per share shown represents the amount of principal and interest due under the obligation exchanged (on a per share basis). Date of Number of Price Per Holder Exchange Shares Share - ------------------- --------- -------- ----- Maynard K. Louis 3/92 68,198 $8.00 Howard Jacobsohn 3/92 35,714 $7.00 Carol Jacobsohn 3/92 35,714 $7.00 Martin Goldberg 6/92 36,315 $7.10 R. Cooper 6/92 18,750 $8.00 Franklin Bishop 7/92 78,169 $5.53 Marty Nadler 12/92 61,420 $5.24 Carol Jacobsohn 12/92 50,000 $5.00 Ray Cosgrove 3/93 4,000 $3.96 Ray Cosgrove 6/93 2,000 $4.33 II-4 Ray Cosgrove 12/93 7,286 $3.56 Franklin Bishop 12/93 121,132 $5.63 Austin Iodice 7/94 58,333 $6.00 Alexander Verde 01-11-95 25,000 $4.480 Maynard K. Louis 03-24-95 21,622 $4.625 Alexander Verde 12-20-95 8,000 $4.480 Maynard K. Louis 02-24-96 5,000 $5.250 Carol Jacobsohn 03-12-96 38,000 $5.822 Thomas J. Carol 04-25-96 17,211 $3.000 Richard Dolan 09-18-96 7,500 $6.000 Michael Laundrie 01-17-97 9,773 $5.500 Edward A. Celano 01-17-97 18,182 $5.500 Josef Strahammer 01-17-97 115,543 $5.875 Set forth below is a list of persons who received Registrant's Common Stock in satisfaction of interest due under promissory notes of Registrant or of other obligations of Registrant (such as fees for services). In each case, Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in effecting these transactions. The price per share shown represents the amount of interest or of the other obligation discharged (on a per share basis). Date of Number of Price Per Holder Exchange Shares Share - ------------------- --------- -------- ----- Altech Employee Pension Plan 3/92 25,000 $8.00 Maynard K. Louis 6/92 500 $5.75 Altech Employee Pension Plan 6/92 9,280 $5.75 R. Cooper 10/92 2,349 $8.00 Schmeltzer, Aptaker 12/92 60,000 $5.00 Martin Nadler 3/93 20,950 $4.25 Martin Nadler 6/93 1,285 $3.62 Robert P. Lofblad 11/93 14,857 $3.88 Cipka, S.A. 12/93 112,738 $6.38 Josefh Strahammer 12/93 8,748 $3.88 Donahue-Note Holder 4/94 6,000 $7.50 Bard-Note Holder 4/94 6,000 $7.50 Josefh Strahammer 7/94 4,876 $7.00 Cipka, S.A. 8/94 13,030 $6.38 John Tull 3/95 6,898 $5.00 Josef Strahammer 3/95 5,657 $6.00 Austin Iodice 3/95 10,000 $4.00 Josef Strahammer 6/95 5,903 $3.75 Research Center of Kabbalah 11/95 126,222 $4.38 Richard A. Dolan 12/95 7,246 $3.19 Schmeltzer, Aptaker 12/95 25,000 $3.00 Josef Strahammer 12/95 9,252 $3.75 Kwiatt, Silverman & Ruben, Ltd. 9/96 40,000 $5.00 Dieter E.A. Tannenberg 9/96 30,000 $6.00 Set forth below is a list of persons who received Registrant's Common Stock as additional consideration for agreeing to extend credit to Registrant, to guaranty (or continue to guaranty) other indebtedness of Registrant or, in one instance, to forbear in exercising a put option. Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in issuing this stock. The price per share shown is the market price of Registrant's Common Stock on the date such Common Stock was issued. II-5 Date of Number of Price Per Holder Issuance Shares Share - ---------------------------------- --------- -------- -------- Martin Goldberg 3/92 449 $9.96 Martin Nadler 3/92 449 $9.86 Kenny Construction Company 6/92 17,493 $5.13 Bruce Slovitt 2/93 5,114 $4.63 Barry Rymer 12/93 73,320 $4.88 Kenny Construction Company 5/94 18,326 $5.00 Alexander Verde 01-11-95 25,000 $4.480 Maynard K. Louis 03-24-95 21,622 $4.625 Alexander Verde 12-20-95 8,000 $4.480 John E. Mcconnaughy 12-27-95 75,000 $3.375 Richard Richter, IRA 12-27-95 22,500 $3.375 Joann Timbanard 12-27-95 3,750 $3.375 Martin Weinstein, Ira 12-27-95 15,000 $3.375 Barry, M,. Ferrigno & B. Allen 12-27-95 7,500 $3.375 P/S Plan Baytree Associates, Inc. 12-27-95 15,000 $3.375 Billy Walker Enterprises 12-27-95 7,500 $3.375 Barry W. Blank 12-27-95 75,000 $3.375 Thomas J. Carroll 12-27-95 11,250 $3.375 Marilyn Cohen 12-27-95 3,750 $3.375 Leo Denslow 12-27-95 7,500 $3.375 Kelly Erickson 12-27-95 7,500 $3.375 Bucky W. F. Fong 12-27-95 3,750 $3.375 Joseph Giamanco 12-27-95 30,000 $3.375 Myron & Donna Goldstein 12-27-95 11,250 $3.375 Dane Johnson, Ira 12-27-95 3,750 $3.375 Ronald Di Martino 12-27-95 15,000 $3.375 MH Capital Partners, L.P. 12-27-95 7,500 $3.375 Pollack Family L.L. C. 12-27-95 3,750 $3.375 GHM, Inc. 12-27-95 3,750 $3.375 Maser Sosinski & Assoc. P.A. 12-27-95 7,500 $3.375 Sherwood Securities Corp. 12-27-95 15,000 $3.375 Violet M. Blank Living Trust 12-27-95 7,500 $3.375 Leo Denslow 12-27-95 1,500 $3.375 Janet M. Portelly 12-27-95 6,000 $3.375 Roger D. And Gail L. Williams 12-27-95 7,500 $3.375 Arabella S.A. 02-26-96 91,166 $4.406 Alba Ltd. 02-26-96 8,834 $4.406 Arabella S.A. 04-26-96 45,583 $4.406 Alba Ltd. 04-26-96 4 ,417 $4.406 Westminster Capital 06-14-96 41,333 $5.000 Norton Herrick 06-14-96 41,333 $5.000 II-6 Set forth below is a list of transactions or series of transactions involving the exchange of Registrant's Common Stock for shares of Registrant's Ratex Resources Incorporated subsidiary (in the case of John Harvey) or shares of its Sargent-Welch Scientific Company subsidiary held by certain shareholders. Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in effecting these exchanges. The price per share shown is the market price of Registrant's Common Stock on the date such Common Stock was issued. Date of Number of Price Per Holder Issuance Shares Share - ----------------------- -------- --------- ------- John Harvey 7/94 700 $6.00 Northworthy & Co. 1/94 1,506 $7.00 Robert Grady 1/94 944 $6.88 Joan McCue 1/94 944 $6.88 Morgan Stanley, Inc. 3/94 730 $5.75 Rachelle Kremer 8/94 377 $6.75 In November 1991, Howard Jacobsohn purchased 29,851 shares of Registrant's Common Stock for a purchase price of $8.37 per share, the market price of the Common Stock on the date of purchase. The stock was purchased subject to a put option that required Registrant to repurchase the stock held by Mr. Jacobsohn at a higher price. Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in effecting this transaction. No commissions or fees were paid to any underwriter or broker in connection with this transaction. In August 1994, The Lori Corporation, then a majority owned subsidiary of Registrant, and IBJ Schroder Bank & Trust Company ("Schroder") entered into a settlement agreement described under "Business and Properties - Jewelry Segment" in the Prospectus to discharge certain indebtedness owned by The Lori Corporation and its subsidiaries to IBJ Schroder Bank & Trust Company in consideration of, inter alia, Registrant's issuance to such lender of 400,000 shares of Registrant's Common Stock. The market price of Registrant's Common Stock on August 18, 1994 (the date this transaction was effected) was $6.25 per share. Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in issuing this Common Stock. As described under "Business and Properties - Jewelry Segment," in December 1994, the parties negotiated an amendment to the settlement agreement and, in this connection, the Registrant borrowed $1,850,000 from McGoodwin James & Co. In connection with these transactions, 300,000 of the 400,000 shares of the Registrant's common stock issued to Schroder were transferred to McGoodwin James & Co. In August 1994, the Registrant sold 133,333 shares of its Common Stock to The Alana Group Ltd. and 266,667 shares of its Common Stock to Salcott Holdings Limited at a purchase price of $3.75 per share. Of the $1,500,000 of proceeds realized, the Registrant paid $50,000 as a placement fee to M. L. Werner and $15,000 for the legal fees of purchaser's counsel. Registrant relied upon the exemption from registration afforded by Regulation S of the Rules of the Commission in effecting these sales to foreign investors located outside of the United States. In August 1994, the Registrant raised $1,700,000 through the private placement of 425,000 shares of Common Stock at a selling price of $4.00 per share. In addition, in September 1994, Registrant sold 80,000 additional shares to a single individual for $3.75 per share, raising an additional $300,000. II-7 Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in effecting these sales to the investors, each of whom was an accredited investor. No underwriting fees or commissions were paid in connection with this private placement. Set forth below is a list of certain debt securities (promissory notes) issued by Registrant since April 20, 1990. Registrant relied upon the exemption afforded by Section 4(2) of the Securities Act of 1933 in issuing these notes. LIST (AS OF JANUARY 27, 1997) OF CERTAIN DEBT SECURITIES ISSUED, AMENDED, CONSOLIDATED OR RESTATED SINCE APRIL 20, 1990 Note Holder Date of Note (2) Note Amount (3) - ------------------------------ ---------------- --------------- Morton J. Harris Trust 03/01/95 200,000 Research Center of Kabbalah 12/31/93 3,000,000 Richard Blackmore 04/24/95 22,500 Austin Iodice 05/29/96 465,820 William F. Foster 05/28/96 100,000 Clark Gunderson 05/28/96 100,000 Robert Jones 05/28/96 100,000 Anthon J. Giglio 05/29/96 62,500 Austin Iodice 05/29/96 188,333 Woodrow Chamberlain 04/15/96 200,000 James A. Belushi Declaration Of Trust 04/15/96 100,000 John Bramsen 04/15/96 200,000 Lenore M. Schnick Trust 04/15/96 300,000 Semamor Enterprises 04/15/96 500,000 David J. Doerge Trust 04/15/96 200,000 Mark Dorian 04/15/96 100,000 Howard Grafman 04/15/96 100,000 Ilse W. Grafman 04/15/96 100,000 Thomas Kigin 04/15/96 50,000 James L. Mcgill 04/15/96 100,000 Johanna B. Mcgill 04/15/96 100,000 D. Michael Meyer 04/15/96 200,000 Leonard Feldman 04/15/96 200,000 Charles Reeder 04/15/96 400,000 William G. Reynolds, Jr. 04/15/96 25,000 II-8 Nora Baker 04/15/96 100,000 Stephen N. Engberg 04/15/96 200,000 Martha T. Seelbach 04/15/96 75,000 William Seelbach 04/15/96 100,000 Paul Smeets 04/15/96 200,000 Henry M. Staley Trust 04/15/96 150,000 Eva Staley Residual Trust 04/15/96 100,000 Avery J. Stone 04/15/96 400,000 Shephard C. Swift 04/15/96 200,000 Emanuel Tarrson 04/15/96 500,000 Ronald E. Tarrson 04/15/96 300,000 Steven Tarrson 04/15/96 200,000 James F. Beedie 04/15/96 100,000 Thomas Whitney 04/15/96 200,000 Staley Family Agency 04/15/96 400,000 James L. Scott 04/15/96 100,000 William Belzberg 05/17/96 500,000 Frank N. Magid 05/20/96 50,000 Evan D. Ritchie Living Trust U/A/D 12/23/92 05/23/96 50,000 Paul Farmer Ira 05/30/96 50,000 Dr. John H. Muehlstein Ira 06/05/96 100,000 Diane Wilson 06/05/96 25,000 Ravinia Investors Llc 06/13/96 50,000 William J. Mirch 06/21/96 100,000 K. Reed Berkey 06/26/96 50,000 Jerry Michelson Ira 06/27/96 25,000 James Mchugh 07/03/96 100,000 Jerry Michelson 06/27/96 75,000 Thomas Philipsborn Ira 06/25/96 100,000 Gibralt Holdings, Ltd. 07/05/96 100,000 Howard Conant 08/27/96 500,000 Emanuel Tarson 09/13/96 250,000 Ronald Tarson 09/13/96 250,000 Howard Conant 01/15/97 300,000 R & J Lucas Revocable Trust 01/15/97 300,000 (1) This table shows promissory notes which the Registrant treats as debt securities. Notes issued to banks or other commercial lending institutions are excluded. (2) Certain of these notes have been amended, restated, or consolidated to, inter alia, (i) extend the maturity date and, in this connection, provide for the issuance of warrants to purchase shares of Registrant's Common Stock as consideration therefor, (ii) modify the interest rate or other terms of the note, (iii) capitalize unpaid interest or (iv) consolidate two ore more separate notes previously issued. The date shown, if the subject note has been amended, restated or consolidated, is the date the subject note was most recently amended, restated or consolidated. In such instances, the date that the subject note was originally issued is not shown. II-9 (3) This amount represents the principal amount of the subject note (included capitalized interest, if any) as of the date issued, amended, restated or consolidated as shown in the prior column. Certain of these notes have been repaid or retired, including through the exchange of stock or other securities of Registrant. The Registrant contributed 100,000 shares, 65,000 shares, 15,000 shares and 8,750 shares of its Common Stock to the ARTRA GROUP Incorporated Employee Stock Ownership Plan (the "ESOP") effective as of December 31, 1992, 1993, 1994 and 1995 respectively. Insofar as the ESOP is a noncontributory plan, the Registrant has relied upon releases and no action letters of the Commission that provide that the issuance by a registrant of its stock in such circumstances does not constitute a "sale" subject to registration under the Securities Act of 1933. Effective August 1, 1995, the Company terminated the ESOP and completed the distribution of its ARTRA common shares to the participants in 1996. II-10 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits ** 2.1 Debtor's Amended Chapter 11 Plan of New Dimensions Accessories, Ltd. filed on February 16, 1993 in the United States Bankruptcy Court for the Southern District of New York filed as an exhibit to Registrant's Form 8-K dated February 18, 1993 and incorporated by reference herein. ** 2.2 Voluntary Petition of New Dimensions Accessories, Ltd. (for reorganization under Chapter 11 of the Bankruptcy Code) filed February 5, 1993 in the United States Bankruptcy Court for the Southern District of New York filed as an exhibit to Registrant's Form 8-K dated February 18, 1993 and incorporated by reference herein. ** 2.3 Debtor's Amended Chapter 11 Plan, As Modified, of New Dimensions Accessories, Ltd. dated March 9, 1993 With Proposed Modifications dated March 26, 1993, as filed in the United States Bankruptcy Court for the Southern District of New York, filed as an exhibit to Registrant's Form 8-K dated May 17, 1993 and incorporated by reference herein. ** 2.4 Second Amended Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code of New Dimensions Accessories, Ltd. filed as an exhibit to Registrant's Form 8-K dated May 17, 1993 and incorporated by reference herein. ** 2.5 Notice of Entry of Order Confirming Second Amended Plan of Reorganization as Modified dated April 9, 1993 filed as an exhibit to Registrant's Form 8-K dated May 17, 1993 and incorporated by reference herein. ** 2.6 Amended Disclosure Statement dated as February 16, 1993, of New Dimensions Accessories, Ltd.. Pursuant to Section 1125 of the Bankruptcy Code filed as an exhibit to Registrant's Form 8-K dated February 18, 1993 and incorporated by reference herein. ** 3.1 Amended and Restated Articles of Incorporation of the Registrant as filed in the Department of State of Pennsylvania on December 21, 1990 filed as an exhibit to Registrant's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. ** 3.2 Bylaws of the Registrant, amended as of July 24, 1990, filed as an exhibit to Registrant's Form 10-K for the year ended December 31, 1990 and incorporated by reference herein. ** 3.3 Statement with Respect to Shares of Series A Preferred Stock of Registrant, filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993 and incorporated by reference herein. II-11 ** 3.4 Statement with Respect to Rights and Preferences Series B Preferred Stock of Registrant, filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993 and incorporated by reference herein. ** 4.1 Form of Registrant's Common Stock Certificate. ** 4.2 Form of Registrant's Warrant. 5.1 Opinion of Kwiatt, Silverman & Ruben, Ltd. 10.1 AMENDED AND RESTATED CREDIT AGREEMENT, Dated as of December 30, 1996, by and among BAGCRAFT CORPORATION OF AMERICA, as Borrower and GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and as Lender. 10.2 AMENDED AND RESTATED WARRANT To Purchase Common Stock of BAGCRAFT CORPORATION OF AMERICA (Warrant No. 2). 10.3 SETTLEMENT AND RELEASE AGREEMENT, dated as of December 19, 1996, by and among ARTRA GROUP Incorporated, Fill-Mor Holding, Inc. and Peter R. Harvey, COMFORCE Corporation, James L. Paterek, Michael Ferrentino, Christopher P. Franco and Kevin W. Kiernan and Kwiatt, Silverman & Ruben, Ltd. 10.4 LOCK-UP AGREEMENT, dated December 19, 1996, re. sale of COMFORCE common stock. ** 10.5 Note Purchase Agreement dated February 20, 1996 by and among ARTRA Group Incorporated Fill-Mor Holding, Inc. and Westminster Capital, Inc. in the amount of $1,200,000. ** 10.6 Note Purchase Agreement dated February 20, 1996 by and among ARTRA Group Incorporated, Fill-Mor Holding, Inc. and Norton Herrick in the amount of $1,200,000. ** 10.7 Registration Rights Agreement dated February 20, 1996 by and among ARTRA Group Incorporated and Westminster Capital, Inc. re: Purchase of a Secured Convertible Promissory Note. ** 10.8 Registration Rights Agreement dated February 20, 1996 by and among ARTRA Group Incorporated and Norton Herrick re: Purchase of a Secured Convertible Promissory Note. ** 10.9 Form Of Promissory Note re: December 1995, Private Placement of twelve percent (12%) convertible subordinated promissory notes. ** 10.10 Form Of Warrant To Purchase Common Stock re: July, 1996 Private Placement of twelve percent (12%) promissory notes due April 15, 1997 for 378,750 ARTRA common shares. ** 10.11 Form Of Promissory Note re: July, 1996 Private Placement of twelve percent (12%) promissory notes due April 15, 1997. II-12 ** 10.12 Letter Agreement dated February 26, 1996 by and among ARTRA Group Incorporated, ARTRA Subsidiary, Inc., BCA Holdings, Inc., Peter and Jean Harvey, and Bank of America Illinois, re. certain Purchase and Sale Agreement and Assignment between the Bank and Arabella S.A., a Luxembourg holding company, filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.13 Purchase and Sale Agreement and Assignment, dated as of February 26, 1996, by and between Bank of America Illinois (the "Seller") and Arabella S.A., a Luxembourg holding company (the "Purchaser"), filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.14 Letter Agreement dated February 26, 1996 by and among ARTRA Group Incorporated and Arabella S.A., a Luxembourg holding company, re. purchase of certain indebtedness by Arabella (the "Purchaser") from Bank of America Illinois (the "Seller"), filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.15 Amended and Restated Promissory Note, dated February 26, 1996 made by BCA Holdings, Inc. in favor of Arabella S.A., filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.16 Option to Purchase Shares of Common Stock of Bagcraft Corporation of America sold by BCA Holdings, Inc. to Arabella S.A., filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.17 Preferred Stock Agreement made by and between BCA Holdings Inc. and Bagcraft Corporation of America, filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.18 Preferred Stock Exchange Agreement, dated as of January 31, 1996 by and between Ozite Corporation, BCA Holdings Inc. and Bagcraft Corporation of America, filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.19 Limited Consent and Sixth Amendment to Credit Agreement, dated as of February 1, 1996 between Bagcraft Corporation of America and General Electric Capital Corporation, filed as an exhibit to Registrant's Form 10-K, for the year ended December 28, 1995. ** 10.20 Asset Purchase Agreement made as of the 28th day of September, 1995, by and among Arcar Graphics, Inc., an Illinois corporation ("Arcar" or "Seller"), BCA Holdings, Inc., a Delaware corporation ("BCA"), Bagcraft Corporation of America, a Delaware corporation ("BCA" and, collectively with BCA, "Bagcraft"), ARTRA Group Incorporated, a Pennsylvania corporation ("ARTRA"), and Arcar Acquisition Corp., a Delaware corporation ("Buyer"), filed with Registrant's Form 8-K dated October 26, 1995. II-13 ** 10.21 Limited Release, dated October 30, 1995, between NatWest Bank N. A. ("Releasor"), and ARTRA Group Incorporated and Peter R. Harvey ("Releasee"), filed with Registrant's Form 8-K dated October 26, 1995. ** 10.22 Stock Purchase Agreement, Dated September 11, 1995 by and Among Spectrum Technologies, Inc., The Lori Corporation, COMFORCE Corp.; ARTRA Group Incorporated, Peter R. Harvey, Marc L. Werner, James L. Paterek, Michael Ferrentino, and Christopher P. Franco, filed with Registrant's Form 8-K dated September 11, 1995. ** 10.23 Letter Agreement dated June 29, 1995, regarding employment or consulting services between The Lori Corporation, ARTRA Group Incorporated, James L. Paterek, Michael Ferrentino, and Christopher P. Franco, filed with Registrant's Form 8-K dated September 11, 1995. ** 10.24 Assignment Agreement, dated and effective March 31, 1995, by and among IBJ Schroder Bank & Trust Company, The Lori Corporation, Lawrence Jewelry Co., Lawrence Jewelry Corporation, New Dimensions Accessories Ltd., Rosecraft, Inc., Fill-Mor Holding, Inc., ARTRA Group Incorporated and Alexander Verde, filed as an exhibit to Registrant's Form 10-K, for the year ended December 29, 1994, dated April 12, 1995. ** 10.25 Registration and Settlement Agreement dated as of March 31, 1995 by and between ARTRA Group Incorporated and IBJ Schroder Bank & Trust Company filed as an exhibit to Registrant's Form 10-K, for the year ended December 29, 1994, dated April 12, 1995. ** 10.26 Amended Settlement Agreement by and among The Lori Corporation, Lawrence Jewelry Co., Lawrence Jewelry Corporation, New Dimensions Accessories Ltd. (formerly known as R.N. Koch, Inc.), Rosecraft, Inc., Fill- Mor Holding, Inc., ARTRA Group Incorporated and IBJ Schroder Bank & Trust Company, dated as of December 23, 1994 filed as an exhibit to Registrant's Form 8-K, dated January 3, 1995. ** 10.27 Loan Agreement, dated as of December 23, 1994, by and among ARTRA Group Incorporated and McGoodwin James & Co filed as an exhibit to Registrant's Form 8-K, dated January 3, 1995. ** 10.28 Settlement Agreement dated August 18, 1994 by among The Lori Corporation, Lawrence Jewelry Co., Lawrence Jewelry Corporation, New Dimensions Accessories, Ltd., Rosecraft, Inc., Fill-Mor Holding, Inc., ARTRA Group Incorporated and IBJ Schroder Bank & Trust Company, dated as of August 18,1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994. ** 10.29 Pledge and Security Agreement between The Lori Corporation and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994. II-14 ** 10.30 Pledge and Security Agreement between Lawrence Jewelry Co. and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994. ** 10.31 Pledge and Security Agreement between Lawrence Jewelry Corporation and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994. ** 10.32 Pledge and Security Agreement between New Dimensions Accessories, Ltd. and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994. ** 10.33 Pledge and Security Agreement between Rosecraft, Inc. and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994. ** 10.34 Pledge and Security Agreement between Fill-Mor Holding, Inc. and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994. ** 10.35 Subordinated Promissory Note dated December 31, 1993 in the original principal amount of $3,000,000 from Registrant to the Research Center of Kabbalah. 23.1 Consent of Kwiatt, Silverman & Ruben, Ltd. 23.2 Consent of Coopers & Lybrand L.L.P. ** 11.1 Computation of earnings per share and equivalent share of common stock for each of the three years in the period ended December 28, 1995. ** 21.1 Subsidiaries. II-15 ** 24.1 Powers of Attorney (included on page II-14 of this Registration Statement.) ** 99.2 Fourth Amended Complaint filed July 18, 1995 in the case of ARTRA GROUP Incorporated v. Salomon Brothers Holding Company Inc., et al. in the Circuit Court of the Eighteenth Judicial Circuit for the State of Illinois. ** 99.3 Joint Memorandum of Points and Authorities of Salomon Defendants sent to the Honorable Michael Galasso of the Circuit Court of the Eighteenth Judicial Circuit for the State of Illinois in the case of ARTRA GROUP Incorporated v. Salomon Brothers Holding Company Inc., et al. ** 99.4 Complaint filed September 24, 1991 in the case of The Sherwin-Williams Company v. ARTRA GROUP Incorporated, et al. in the United States District Court for the District of Maryland. ** 99.5 Answer, Counterclaim and Crossclaim of Registrant filed June 3, 1992 in the case of The Sherwin-Williams Company v. ARTRA GROUP Incorporated, et al. ** 99.6 Second Amended Verified Complaint filed August 7, 1995 in the Supreme Court of New York in the case of Philip Elghanian v. Peter Harvey, Jeffrey Newman, Artra Group Inc., et al. ** 99.7 Complaint dated June 14, 1995 filed in the United States District Court for the Northern District of Illinois in the case of Tartan Resources v. A. G. Holding Corp., et al. ** 99.8 Complaint filed in the Circuit Court of Cook County, Illinois in the case of City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated. ** 99.9 March 17, 1993 Judgment against ARTRA GROUP Inc. in the case SW Assoc. Limited Partnership v. ARTRA GROUP Inc. ** 99.10 Third-Party Complaint and Counterclaim of Registrant in the case of City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated. ** 99.11 Complaint filed in the Circuit Court of Cook County, Illinois in the case of People of the State of Illinois v. NL Industries, Inc. and ARTRA GROUP Inc., et al. ** 99.12 Notice of Potential Liability dated November 17, 1995 sent to ARTRA GROUP Inc. by the United States Environmental Protection Agency regarding the Dutch Boy facility in Chicago, Illinois. II-16 ** 99.13 Notice of Potential Liability dated September 30, 1993 sent by the United States Environmental Protection Agency to James Doering, President of Fill- Mor Holdings Inc., regarding Harvel Industries Corp. disposal of waste to a PSC Resources Site in Palmer, Massachusetts. ** 99.14 Subsequent Notice of Potential Liability regarding Harvel Industries Corp. dated April 18, 1994 and sent by the United States Environmental Protection Agency to John Conroy, Vice President of Registrant. ** 99.15 Complaint filed December 6, 1994 in the U.S. District Court for the Northern District of Indiana (Ninth Ave Remedial Group v. Bagcraft et al). ** 99.16 Notice of Violation dated November, 1995 issued by the U.S. EPA against Bagcraft regarding alleged violations of the Clean Air Act and related regulations at the Chicago Facility. ---------------------- * To be filed by amendment. ** Previously filed (b) Financial Statement Schedules. Set forth below is a list of the Financial Statement Schedules included as part of the Registration Statement. Schedules other than those listed are omitted as they are not applicable or required or equivalent information has been included in the financial statements or notes thereto. See "Index to Financial Statements" in the Prospectus. I. Condensed Financial Information of Registrant II. Valuation and Qualifying Accounts Item 17. Undertakings. (a) The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; II-17 (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-18 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Northfield, State of Illinois, on January 29, 1997. ARTRA GROUP Incorporated (Registrant) By: /s/ Peter R. Harvey ___________________________________ Peter R. Harvey President and Chief Operating Officer Pursuant to the requirements of the Securities Act, this Amendment No. 1 to this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Name/Signature Title Date * ______________________ Chairman and Chief Executive Officer John Harvey (Principal Executive Officer); Director * ______________________ Vice President and Chief Financial Officer James D. Doering (Principal Financial Officer) * ______________________ Lawrence D. Levin Controller (Principal Accounting Officer) * ______________________ Peter R. Harvey Director * ______________________ Gerard M. Kenny Director * By: /s/ Lawrence D. Levin ______________________________ Lawrence D. Levin Attorney-in-fact January 29, 1997 Registration No. 33- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- EXHIBITS Filed With FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 -------------------- ARTRA GROUP INCORPORATED (Exact name of registrant as specified in its charter) EX-5.1 2 OPINION OF KWIATT SILVERMAN & RUBEN January 29, 1997 ARTRA GROUP Incorporated 500 Central Avenue Northfield, IL 60093 Re: Registration Statement on Form S-1 Ladies and Gentlemen: You have requested our opinion with respect to the offering and sale of Common Stock pursuant to a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), of up to an aggregate of 3,996,468 shares of Common Stock, no par value per share (the "Common Stock") of ARTRA GROUP Incorporated (the "Corporation"). In so acting, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed relevant and necessary to form a basis for the opinions hereinafter expressed. In conducting such examination, we have assumed (i) that all signatures are genuine, (ii) that all documents and instruments submitted to us as copies conform with the originals, and (iii) the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof. As to any facts material to this opinion, we have relied upon statements and representations of officers and other representatives of the Corporation and certificates of public officials and have not independently verified such facts. Based upon the foregoing, it is our opinion that the Common Stock, when issued, and the consideration for the options and/or warrants is received, will be legally issued, fully paid and non-assessable. We express no opinion as to the laws of any jurisdiction other than the State of Illinois; the United States of America. Insofar as the foregoing opinion relates to matters that would be controlled by the substantive laws of any jurisdiction other than the United States of America or the State of Illinois, we have assumed that the substantive laws of such jurisdiction conform in all respects to the internal laws of the State of Illinois. We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration Statement relating to the registration of 3,996,468 shares of Common Stock and to the use of our name under the caption "Legal Matters" in connection with the Registration Statement and in the Prospectus forming a part thereof. Very truly yours, Kwiatt, Silverman & Ruben, Ltd. EX-10 3 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.1 AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 30, 1996 by and between BAGCRAFT CORPORATION OF AMERICA as Borrower and GENERAL ELECTRIC CAPITAL CORPORATION as Agent and as Lender TABLE OF CONTENTS 1. AMOUNT AND TERMS OF CREDIT...........................................1 1.1 Revolving Credit Advances...................................1 ------------------------- 1.2 Term Loan...................................................2 --------- 1.3 Capital Expenditure Loan....................................3 ------------------------ 1.4 Letters of Credit...........................................4 ----------------- 1.5 Prepayment..................................................4 ---------- 1.6 Single Loan.................................................6 ----------- 1.7 Use of Proceeds.............................................6 --------------- 1.8 Interest....................................................6 -------- 1.9 Eligible Accounts...........................................9 ----------------- 1.10 Eligible Inventory..........................................9 ------------------ 1.11 Fees........................................................9 ---- 1.12 Cash Management Systems....................................10 ----------------------- 1.13 Receipt of Payments........................................10 ------------------- 1.14 Application and Allocation of Payments.....................10 -------------------------------------- 1.15 Loan Account and Accounting................................10 --------------------------- 1.16 Indemnity..................................................11 --------- 1.17 Access.....................................................12 ------ 1.18 Taxes......................................................13 ----- 1.19 Capital Adequacy and Other Adjustments.....................13 -------------------------------------- 1.20 Amendment and Restatement..................................15 ------------------------- 2. CONDITIONS PRECEDENT................................................15 2.1 Conditions to the Initial Revolving Credit Advance, Initial Letter of Credit Obligations, the Term Loan and the Capital Expenditure Advance........................15 ----------------------------------- 2.2 Further Conditions to Each Revolving Credit Advance, Each Letter of Credit Obligation, Each Term Loan and each Capital Expenditure Advance...........................17 -------------------------------- 2.3 Further Conditions to Each Capital Expenditure Advance.....18 ------------------------------------------------------ 3. REPRESENTATIONS AND WARRANTIES......................................19 3.1 Corporate Existence; Compliance with Law...................19 ---------------------------------------- 3.2 Executive Offices..........................................19 ----------------- 3.3 Corporate Power Authorization, Enforceable Obligations.....20 ------------------------------------------------------ 3.4 Financial Statements and Projections.......................20 ------------------------------------ 3.5 Collateral Reports.........................................20 ------------------ 3.6 Material Adverse Effect....................................20 ----------------------- 3.7 Ownership of Property; Liens...............................20 ---------------------------- 3.8 Restrictions; No Default...................................21 ------------------------ 3.9 Labor Matters..............................................21 ------------- 3.10 Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness.........................22 ---------------------------------- 3.11 Government Regulation......................................22 --------------------- -i- 3.12 Margin Regulations.........................................22 ------------------ 3.13 Taxes......................................................23 ----- 3.14 ERISA......................................................23 ----- 3.15 No Litigation..............................................24 ------------- 3.16 Brokers....................................................25 ------- 3.17 Employment Matters.........................................25 ------------------ 3.18 Patents, Trademarks, Copyrights and Licenses...............25 -------------------------------------------- 3.19 Full Disclosure............................................25 --------------- 3.20 Hazardous Materials........................................26 ------------------- 3.21 Insurance Policies.........................................26 ------------------ 3.22 Deposit and Disbursement Accounts..........................26 --------------------------------- 3.23 Government Contracts.......................................26 -------------------- 3.24 Customer and Trade Relations...............................26 ---------------------------- 3.25 Agreements and Other Documents.............................26 ------------------------------ 3.26 Kansas Indebtedness........................................27 ------------------- 4. FINANCIAL STATEMENTS AND INFORMATION................................27 4.1 Reports and Notices........................................27 ------------------- 4.2 Communication with Accountants.............................27 ------------------------------ 5. AFFIRMATIVE COVENANTS...............................................27 5.1 Maintenance of Existence and Conduct of Business...........27 ------------------------------------------------ 5.2 Payment of Obligations.....................................28 ---------------------- 5.3 Books and Records..........................................28 ----------------- 5.4 Litigation.................................................28 ---------- 5.5 Insurance..................................................28 --------- 5.6 Compliance with Laws.......................................30 -------------------- 5.7 Agreements.................................................30 ---------- 5.8 Supplemental Disclosure....................................30 ----------------------- 5.9 Employee Plans.............................................30 -------------- 5.10 Environmental Matters......................................30 --------------------- 5.11 Landlords' Agreements, Bailee Letters and Mortgagee Agreements...................................31 ------------------------ 5.12 Leased Locations of Collateral.............................31 ------------------------------ 5.13 Subsidiaries...............................................31 ------------ 5.14 Maintenance of Equipment and Fixtures......................31 ------------------------------------- 5.15 Purchase Offers............................................32 --------------- 5.16 Board of Directors.........................................32 ------------------ 6. NEGATIVE COVENANTS..................................................32 6.1 Mergers, Etc...............................................32 ------------ 6.2 Investments; Loans and Advances............................32 ------------------------------- 6.3 Indebtedness...............................................32 ------------ 6.4 Employee Loans and Transactions............................32 ------------------------------- 6.5 Capital Structure and Business.............................33 ------------------------------ 6.6 Guaranteed Indebtedness....................................33 ----------------------- -ii- 6.7 Liens......................................................33 ----- 6.8 Sale of Assets.............................................34 -------------- 6.9 Events of Default..........................................34 ----------------- 6.10 ERISA......................................................34 ----- 6.11 Financial Covenants........................................34 ------------------- 6.12 Hazardous Materials........................................34 ------------------- 6.13 Sale-Leasebacks............................................35 --------------- 6.14 Cancellation of Indebtedness...............................35 ---------------------------- 6.15 Restricted Payments........................................35 ------------------- 6.16 Leases.....................................................35 ------ 6.17 Composition................................................35 ----------- 6.18 Fiscal Year................................................36 ----------- 6.19 Change of Corporate Name...................................36 ------------------------ 6.20 Sale of Stock..............................................36 ------------- 6.21 Cash Management............................................36 --------------- 6.22 No Impairment of Upstreaming...............................36 ---------------------------- 6.23 No Amendment...............................................36 ------------ 6.24 No Change in Management....................................36 ----------------------- 6.25 Management Agreements......................................36 --------------------- 6.26 Overriding Agreements......................................36 --------------------- 7. TERM................................................................37 7.1 Termination................................................37 7.2 Survival of Obligations Upon Termination of Financing Arrangements..................................37 ------------------------- 8. EVENTS OF DEFAULT: RIGHTS AND REMEDIES..............................37 8.1 Events of Default..........................................37 ----------------- 8.2 Remedies...................................................40 -------- 8.3 Waivers by Borrower........................................40 ------------------- 9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT.................41 9.1 Assignments and Participations.............................41 ------------------------------ 9.2 Appointment of Agent.......................................42 -------------------- 9.3 Set-Off and Sharing of Payments............................43 ------------------------------- 9.4 Disbursement of Funds......................................44 --------------------- 9.5 Disbursements of Advances, Payments and Information........44 --------------------------------------------------- 10. MISCELLANEOUS.......................................................47 10.1 Successors and Assigns.....................................47 ---------------------- 10.2 Complete Agreement; Modification of Agreement..............47 --------------------------------------------- 10.3 Amendments and Waivers.....................................47 ---------------------- 10.4 Fees and Expenses..........................................48 ----------------- 10.5 No Waiver..................................................50 --------- 10.6 Remedies...................................................50 -------- 10.7 Severability...............................................50 ------------ -iii- 10.8 Conflict of Terms..........................................50 ----------------- 10.9 Authorized Signature.......................................50 -------------------- 10.10 GOVERNING LAW..............................................50 ------------- 10.11 Notices....................................................51 ------- 10.12 Section Titles.............................................52 -------------- 10.13 Counterparts...............................................52 ------------ 10.14 MUTUAL WAIVER OF JURY TRIAL................................52 --------------------------- 10.15 Confidentiality............................................53 --------------- -iv- INDEX OF EXHIBITS, SCHEDULES AND ANNEXES ---------------------------------------- Exhibit A - Form of Notice of Revolving Credit Advance Exhibit B - Form of Borrowing Base Certificate Exhibit C - Form of Revolving Credit Note Exhibit D - Form of Term Loan Note Exhibit E - Form of Notice of Capital Expenditure Advance Exhibit F - Form of Capital Expenditure Advance Compliance Certificate Exhibit G - Form of Capital Expenditure Loan Note Exhibit H - Form of Notice of Conversion/Continuation Schedule 3.2 - Executive Offices Schedule 3.7 - Real Estate and Leases Schedule 3.9 - Labor Matters Schedule 3.10 - Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness Schedule 3.13 - Tax Matters Schedule 3.14 - ERISA Plans Schedule 3.15 - Litigation Schedule 3.17 - Employment Matters Schedule 3.18 - Intellectual Property Schedule 3.20 - Hazardous Materials Schedule 3.21 - Insurance Policies Schedule 3.22 - Deposit and Disbursement Accounts Schedule 3.23 - Government Contracts Schedule 5.1 - Trade Names Schedule 6.3 - Indebtedness Schedule 6.4 - Affiliate and Employee Loans, Transactions and Employment Agreements Schedule 10.8 - Authorized Signatures Annex A - Definitions Annex B - Letters of Credit Annex C - Cash Management Systems Annex D - Schedule of Documents Annex E - Responsible Individual Annex F - Eligible Accounts Annex G - Eligible Inventory Annex H - Insurance Standards Annex I - Financial Statements and Projections -- Reporting Annex J - Collateral Reports Annex K - Financial Covenants Annex L - Notice Addresses -v- AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 30, 1996, is by and between BAGCRAFT CORPORATION OF AMERICA, a Delaware corporation ("Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent for Lenders. RECITALS A. The parties hereto are parties to a Credit Agreement dated as of December 17, 1993 (as amended, supplemented or otherwise modified, the "Prior Credit Agreement") pursuant to which Lenders provided to Borrower aggregate commitments of up to Thirty-Eight Million Dollars ($38,000,000), subject to the terms and conditions set forth therein. B. The parties hereto desire to amend and restate the Prior Credit Agreement and the "Obligations" (as defined therein) to reflect continued aggregate commitments of up to Thirty-Eight Million Dollars ($38,000,000) provided by Lenders to Borrower, subject to the terms and conditions set forth herein. C. Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings ascribed to them in Annex A. All Schedules, Exhibits, Annexes and other attachments hereto, or expressly identified to this Agreement, are incorporated herein by reference, and taken together with this Agreement, shall constitute but a single agreement. These Recitals shall be construed as part of the Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.1 Revolving Credit Advances. (a) Upon and subject to the terms and conditions hereof, each Lender agrees to make available, from time to time, until the Commitment Termination Date, for Borrower's use and upon the request of Borrower therefor, advances (each, a "Revolving Credit Advance") against Eligible Accounts and Eligible Inventory in an aggregate amount outstanding which, pursuant to Section 1.1(b), shall not at any given time exceed the lesser at such time of (i) the Maximum Revolving Credit Loan (Eighteen Million Dollars ($18,000,000) (as such amount may be adjusted from time to time in accordance with the terms of this Agreement) minus the sum of outstanding Letter of Credit Obligations, and (ii) an amount equal to the Borrowing Base minus the sum of outstanding Letter of Credit Obligations ("Borrowing Availability"), in any case less such reserves as Agent may deem appropriate from time to time in its sole and absolute discretion. Until all amounts outstanding in respect of the Revolving Credit Loan shall become due and payable on the Commitment Termination Date, Borrower may from time to time borrow, repay and reborrow under this Section 1.1(a). Each Revolving Credit Advance shall be made on notice by Borrower to the individual responsible for Borrower as identified on Annex E at the address specified thereon, given no later than (1) 11:30 a.m. (Chicago time) on the Business Day of the -1- proposed Revolving Credit Advance, in the case of an Index Rate Loan and (2) 11:30 a.m. (Chicago time) on the date which is three Business Days prior to the proposed Revolving Credit Advance, in the case of a LIBOR Loan. Each such notice (a "Notice of Revolving Credit Advance") shall be substantially in the form of Exhibit A, specifying therein the requested date, the amount of such Revolving Credit Advance, and such other information as may be required by Agent and shall be given in writing (by telecopy, telex or cable) or by telephone confirmed immediately in writing. If Borrower desires to have the Revolving Credit Advance bear interest by reference to a LIBOR Rate, it must comply with Section 1.8(f). Agent shall be entitled to rely upon, and shall be fully protected under this Agreement in relying upon, any Notice of Revolving Credit Advance believed by Agent to be genuine and to assume that each Person executing and delivering the same was duly authorized unless the responsible individual, or a designee thereof, acting thereon for Agent shall have, at the time of reliance thereon, actual knowledge to the contrary. (b) Borrower shall execute and deliver to each Lender an amended and restated note to evidence the Revolving Credit Loan, such note to be in the principal amount of the Restated Revolving Loan Commitment of such Lender, dated the Closing Date and substantially in the form of Exhibit C (each, as executed and as it may be amended, restated, supplemented or otherwise modified from time to time, a "Revolving Credit Note" and, collectively, the "Revolving Credit Notes"). The Revolving Credit Notes shall represent the obligation of Borrower to pay the amount of the Maximum Revolving Credit Loan or, if less, the aggregate unpaid principal amount of all Revolving Credit Advances made by Lenders to Borrower and all other Obligations with interest thereon as prescribed in Section 1.8. The date and amount of each Revolving Credit Advance and each payment of principal with respect thereto shall be recorded on the books and records of Agent, which books and records shall constitute prima facie evidence of the accuracy of the information therein recorded. The entire unpaid balance of the Revolving Credit Loan shall be immediately due and payable on the Commitment Termination Date. 1.2 Term Loan. (a) Upon and subject to the terms and conditions hereof, each Lender agrees to provide its Pro Rata Share of a term loan to Borrower on the Closing Date, in the amount of Eight Million Dollars ($8,000,000), which shall be consolidated with the principal balance of "Term Loan A" (as defined in the Prior Credit Agreement) outstanding under the Prior Credit Agreement in the amount of Twelve Million Dollars ($12,000,000) and amended and restated as set forth below as a Term Loan Commitment in the aggregate amount of Twenty Million Dollars ($20,000,000) (the "Term Loan"). Amounts repaid under the Term Loan may not thereafter be reborrowed. (b) Borrower shall pay the principal amount of the Term Loan in consecutive installments on the respective dates (each, a "Payment Date"), and in the corresponding amounts, set forth below: Payment Installment Date Amount ---- ------ March 31, 1997 $ 500,000 June 15, 1997 $ 500,000 -2- September 15, 1997 $ 500,000 December 15, 1997 $ 500,000 March 15, 1998 $ 500,000 June 15, 1998 $ 500,000 September 15, 1998 $ 500,000 December 15, 1998 $ 500,000 March 15, 1999 $ 500,000 June 15, 1999 $ 500,000 September 15, 1999 $ 500,000 December 15, 1999 $ 500,000 March 15, 2000 $ 750,000 June 15, 2000 $ 750,000 September 15, 2000 $ 750,000 December 15, 2000 $ 750,000 March 15, 2001 $ 750,000 June 15, 2001 $ 750,000 September 15, 2001 $ 750,000 December 15, 2001 $ 750,000 March 15, 2002 $2,000,000 June 15, 2002 $2,000,000 September 15, 2002 $2,000,000 September 30, 2002 $2,000,000 Notwithstanding anything to the contrary contained herein or in the Term Loan Notes, the then entire unpaid balance of the Term Loan shall be immediately due and payable upon the first to occur of the (i) Commitment Termination Date and (ii) acceleration of the Revolving Credit Loan. (c) Borrower shall execute and deliver to each Lender an amended and restated note to evidence the Term Loan, such note to be in a principal amount equal to the amount of the Term Loan provided by such Lender, dated the Closing Date and substantially in the form of Exhibit D (each, as executed and as it may be amended, restated, supplemented or otherwise modified and in effect from time to time, a "Term Loan Note" and, collectively, the "Term Loan Notes"). The Term Loan Notes shall represent the obligation of Borrower to pay the amount of the Term Loan and all other obligations with interest thereon as prescribed in Section 1.8. The date and amount of each payment of principal and interest on the Term Loan shall be recorded on the books and records of Agent, which books and records shall constitute prima facie evidence of the accuracy of the information therein recorded. 1.3 Capital Expenditure Loan. (a) Subject to the terms and conditions hereof, each Lender agrees to make available from time to time, until the Commitment Termination Date, in connection with the financing of Capital Expenditures constituting the acquisition cost of Equipment, its Pro Rata Share of advances (each, a "Capital Expenditure Advance"). The aggregate Capital Expenditure Advances incurred during the term of this Agreement shall not exceed the Capital Expenditure Loan Commitment (Three Million Dollars ($3,000,000)). In addition, each Capital Expenditure Advance shall not exceed the lesser of (x) the Maximum Capital Expenditure -3- Advance Amount or (y) Capital Expenditure Loan Availability as of the date of such Capital Expenditure Advance. Amounts from time to time borrowed under this Section 1.3(a) and repaid may not be reborrowed. Each Capital Expenditure Advance must be in a minimum amount of $500,000 and integral multiples of $500,000 in excess of such amount. Subject to the additional advance notice requirements set forth in Section 2.3, each Capital Expenditure Advance shall be made on notice by Borrower to the individual responsible for Borrower as identified on Annex E at the address specified thereon, given no later than (1) 11:30 a.m. (Chicago time) on the Business Day of the proposed Capital Expenditure Advance, in the case of an Index Rate Loan and (2) 11:30 a.m. (Chicago time) on the date which is two Business Days prior to the proposed Capital Expenditure Advance, in the case of a LIBOR Loan. Each such notice (a "Notice of Capital Expenditure Advance") shall be substantially in the form of Exhibit E, specifying therein the requested date, the amount of such Capital Expenditure Advance, and such other information as may be required by Agent and shall be given in writing (by telecopy, telex or cable) or by telephone confirmed immediately in writing. If Borrower desires to have the Capital Expenditure Advance bear interest by reference to a LIBOR Rate, it must comply with Section 1.8(f). Agent shall be entitled to rely upon, and shall be fully protected under this Agreement in relying upon, any Notice of Capital Expenditure Advance believed by Agent to be genuine and to assume that each Person executing and delivering the same was duly authorized unless the responsible individual, or a designee thereof, acting thereon for Agent shall have, at the time of reliance thereon, actual knowledge to the contrary. (b) Borrower shall execute and deliver to each Lender a note to evidence the Capital Expenditure Loan, such note to be in the maximum principal amount of the Capital Expenditure Loan Commitment of such Lender, dated the Closing Date and substantially in the form of Exhibit G (each, as executed and as it may be amended, restated, supplemented or otherwise modified from time to time, a "Capital Expenditure Loan Note" and, collectively, the "Capital Expenditure Loan Notes"). The Capital Expenditure Loan Notes shall represent the obligation of Borrower to pay the amount of the Capital Expenditure Loan Commitment or, if less, the aggregate unpaid principal amount of the Capital Expenditure Loan made by Lenders to Borrower and all other Obligations with interest thereon as prescribed in Section 1.8. Borrower shall pay the principal amount of each Capital Expenditure Advance in equal installments on twelve (12) consecutive Payment Dates, commencing with the first Payment Date to occur after the making of such Capital Expenditure Advance. The date and amount of each Capital Expenditure Advance and each payment of principal with respect thereto shall be recorded on the books and records of Agent, which books and records shall constitute prima facie evidence of the accuracy of the information therein recorded. Notwithstanding the foregoing, the entire unpaid balance of the Capital Expenditure Loan shall be immediately due and payable on the Commitment Termination Date, if not sooner paid in full. 1.4 Letters of Credit. Subject to the terms and conditions of this Agreement, including Annex B, Borrower shall have the right to request, and each Lender agrees to incur its Pro Rata Share of, Letter of Credit Obligations in accordance with Annex B. 1.5 Prepayment. (a) In the event that the outstanding balance of the Revolving Credit Loan shall, at any time, exceed the lesser at such time of (i) the Maximum Revolving Credit Loan minus the sum of Letter of Credit Obligations then outstanding and (ii) the Borrowing Base -4- minus the sum of Letter of Credit Obligations then outstanding, Borrower shall immediately repay the Revolving Credit Loan in the amount of such excess. (b) Borrower shall have the right at any time on thirty (30) days' prior written notice to Agent to terminate and prepay the entire Revolving Credit Loan. Upon any such termination and prepayment, Borrower's right to receive Revolving Credit Advances and to request the incurrence of Letter of Credit Obligations shall simultaneously terminate and, notwithstanding anything to the contrary contained herein, the Term Loan Notes or the Capital Expenditure Loan Notes, the entire outstanding balances of the Term Loan and the Capital Expenditure Loan shall be immediately due and payable. Each such prepayment and termination shall be accompanied by the payment of all accrued and unpaid interest and all Fees and other remaining Obligations, including the Letter of Credit Obligations and the then outstanding balances of the Term Loan and the Capital Expenditure Loan. Any prepayment made pursuant hereto shall be accompanied by the payment of Fees in accordance with Section 1.11(c) and LIBOR funding breakage costs in accordance with Section 1.16(b). (c) Borrower shall have the right at any time on thirty (30) days' prior written notice to Agent to voluntarily prepay all or any portion of the Term Loan or the Capital Expenditure Loan. Any prepayments of less than all of the outstanding balance of the Term Loan shall be applied to the then remaining installments of the Term Loan in the inverse order of maturity until paid in full. Any prepayments of less than all of the outstanding balance of the Capital Expenditure Loan shall be applied to the then remaining installments of the Capital Expenditure Loan in the inverse order of maturity until paid in full. Any prepayment made pursuant hereto shall be accompanied by the payment of Fees in accordance with Section 1.11(c) and LIBOR funding breakage costs in accordance with Section 1.16(b). (d) Immediately upon receipt by Borrower of Net Proceeds of any Asset Disposition, Borrower shall apply all of such Net Proceeds in the following order: (i) to the then remaining installments of the Term Loan in the inverse order of their maturity, (ii) to the then remaining installments of the Capital Expenditure Loan in the inverse order of their maturity and (iii) to the Revolving Credit Loan, in which case the aggregate Revolving Loan Commitments shall be permanently reduced on a pro rata basis by the amount of such prepayment; provided, however, that (A) the foregoing shall not apply to an Asset Disposition to the extent the Net Proceeds thereof are (1) used to refund or fund Borrower's purchase within sixty (60) days prior to such Asset Disposition of capital assets for use in its business or (2) used by Borrower within one-hundred eighty (180) days following such Asset Disposition to purchase capital assets for use in its business (and to the extent such Net Proceeds exceed the costs of any of the foregoing purchases, such excess Net Proceeds shall be governed by this Section 1.5(d)) and (B) in no event shall Asset Dispositions exceed One Million Five Hundred Thousand Dollars ($1,500,000) in the aggregate per annum. All sales or purchases of assets referred to herein (i) shall be subject to the provisions of Section 6.8 and (ii) shall be, or shall have been, as the case may be, offered or sold to, or purchased from, a Person that is not an Affiliate of Borrower or any of its Subsidiaries on an arms' length basis. (e) Within sixty (60) days following the end of Fiscal Year 1997 and each Fiscal Year thereafter, Borrower shall prepay the Term Loan in an amount equal to fifty percent (50%) of -5- Excess Cash Flow for such Fiscal Year calculated on the basis of Borrower's financial statements for such Fiscal Year delivered to Agent pursuant to Section 4.1. All such prepayments from Excess Cash Flow shall be applied in the following order: (i) to the then remaining installments of the Term Loan in the inverse order of their maturity, (ii) to the then remaining installments of the Capital Expenditure Loan in the inverse order of their maturity and (iii) to the Revolving Credit Loan, in which case the aggregate Revolving Loan Commitments shall be permanently reduced on a pro rata basis by the amount of such prepayment. Concurrently with the making of any such payment, Borrower shall deliver to Agent a certificate of its chief executive officer or chief financial officer demonstrating its calculation of the amount required to be paid. 1.6 Single Loan. The Revolving Credit Loan, all Revolving Credit Advances, the Term Loan, the Capital Expenditure Loan, all Capital Expenditure Advances, all Letter of Credit Obligations and all other Obligations of Borrower under this Agreement and the other Loan Documents shall constitute one (1) secured obligation of Borrower secured, until repaid in full and Commitments therefor are terminated, by all of the Collateral. 1.7 Use of Proceeds. Borrower shall utilize the proceeds of all Revolving Credit Advances and the Term Loan for the financing of ordinary working capital needs and Capital Expenditures to the extent permitted hereunder; provided that Borrower shall utilize the proceeds of Revolving Credit Advance made as of the Closing Date for the satisfaction in full of "Term Loan B" (as defined in the Prior Credit Agreement) and Borrower may use the proceeds of the Revolving Loan (i) to redeem 50% of the shares issuable under the Warrant for $1,500,000 and (ii) subject to the terms hereof, to redeem the preferred stock of Borrower held by PST for up to $2,100,000. Borrower shall utilize the proceeds of the Capital Expenditure Loan for the financing of Capital Expenditures to the extent permitted hereunder. 1.8 Interest. (a) Borrower shall pay interest to Agent, for the ratable benefit of Lenders, in arrears (i) as to any Index Rate Loan, on the first day of each calendar month to occur while such Loan is outstanding, (ii) as to any LIBOR Loan, on the last day of the LIBOR Period applicable thereto, (iii) on the Commitment Termination Date, and (iv) if any interest accrues or remains payable after the Commitment Termination Date, upon demand by Agent. (b) If any interest or other payment on any Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day (except as set forth in the definition of LIBOR Period) and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (c) Borrower shall be obligated to pay interest to Agent, for the ratable benefit of Lenders, at a rate equal to (i) the Index Rate plus the applicable per annum rate (the "Index Margin") set forth in the following grid or (ii) at Borrower's election in accordance with Section 1.8(f), the applicable LIBOR Rate plus the applicable per annum rate (the "LIBOR Margin"; the Index Margin and LIBOR Margin, each a "Margin"), in each case based on the amounts outstanding from time to time under the applicable Loan. -6-
Term Loan and Ratio of EBITDA to Revolving Loan Capital Expenditure Loan Fixed Charges plus ----------------------------- ------------------------------ Capital Expenditures LIBOR Margin Index Margin LIBOR Margin Index Margin - -------------------- ------------ ------------ ------------ ------------ Less than 1.5 2.50 0.00 3.00 0.25 Less than 1.5 but greater than 1.75 2.25 0.00 2.75 0.00 Less than 1.75 2.00 0.00 2.50 0.00
Initially, the applicable Margin for each Loan shall be the highest rates set forth in the foregoing grid for such Loan. Thereafter, all determinations of each Margin will be based on the ratio of (1) EBITDA to (2) the sum of (A) Fixed Charges plus (B) the greater of (I) actual Capital Expenditures and (II) $2,500,000, all as determined for Borrower and its Subsidiaries on a consolidated basis as of the last day of each Fiscal Quarter for the trailing twelve (12) Fiscal Months then ended. All adjustments (up or down) in the Margins will be implemented prospectively on a quarterly basis, effective on the first day of the first Fiscal Quarter that occurs more than five (5) days after delivery of Borrower's quarterly Financial Statements for the preceding Fiscal Quarter to Lenders, commencing with Financial Statements delivered for the fourth Fiscal Quarter of 1996. Concurrently with the delivery of such Financial Statements, Borrower shall deliver to Agent and Lenders a certificate, signed by its chief financial officer, setting forth in reasonable detail the basis for the determination of each Margin. If a Default or an Event of Default shall have occurred or be continuing at the time, the applicable Margin for each Loan shall be the highest rate set forth in the foregoing grid for such Loan until the first day of the first calendar month following the date on which such Default or Event of Default is waived or cured. Thereafter, each Margin shall be as determined based on the foregoing grid. (d) All computations of interest shall be made by Agent on the basis of a three hundred and sixty (360) day year, in each case for the actual number of days occurring in the period for which such interest is payable. The Index Rate applicable during each calendar month shall be determined on the last day of the preceding calendar month, and the interest rate applicable during each calendar month shall be calculated based on the Index Rate as in effect for that calendar month. Each determination by Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error or bad faith. (e) So long as any Default or Event of Default shall have occurred and be continuing, the interest rate applicable to the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan and any other Obligations shall be increased by two percent (2%) per annum above the rates of interest otherwise applicable hereunder ("Default Rate"). (f) So long as no Default or Event of Default shall have occurred and be continuing, and subject to the additional conditions precedent set forth in Section 2.2, Borrower shall have the option to (i) request that any Revolving Credit Advances be made as a LIBOR Loan, (ii) convert at any time all or any part of outstanding Loans from Index Rate Loans to LIBOR Loans, (iii) convert any LIBOR Loan to an Index Rate Loan, subject to payment of LIBOR breakage costs in accordance with Section 1.16(b) if such conversion is made prior to the expiration of the LIBOR Period applicable thereto, or (iv) continue all or any portion of any Loan as a LIBOR Loan upon the -7- expiration of the applicable LIBOR Period, in which case the succeeding LIBOR Period of that continued Loan shall commence on the last day of the LIBOR Period of the Loan to be continued. Any Loan to be made or continued as, or converted into, a LIBOR Loan must be in a minimum amount of $500,000 and integral multiples of $500,000 in excess of such amount. Any such election must be made by 11:30 a.m. (Chicago time) on the third (3rd) Business Day prior to (1) the date of any proposed Advance which is to bear interest at the LIBOR Rate, (2) the end of each LIBOR Period with respect to any LIBOR Loans to be continued as such, or (3) the date on which Borrower wishes to convert any Index Rate Loan to a LIBOR Loan for a LIBOR Period designated by Borrower in such election. If no election is received with respect to a LIBOR Loan by 11:30 a.m. (Chicago time) on the third (3rd) Business Day prior to the end of the LIBOR Period with respect thereto (or if a Default or an Event of Default shall have occurred and be continuing or the additional conditions precedent set forth in Section 2.2 or 2.3, as applicable, shall not have been satisfied), that LIBOR Loan shall be converted to an Index Rate Loan at the end of its LIBOR Period. Borrower must make such election by notice to Agent in writing, by telecopy or overnight courier. In the case of any conversion or continuation, such election must be made pursuant to a written notice (a "Notice of Conversion/Continuation") in the form of Exhibit H. (g) Notwithstanding anything to the contrary set forth in this Section 1.8, if, at any time until payment in full of all of the Obligations, any rate of interest payable hereunder exceeds the highest rate of interest permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto (the "Maximum Lawful Rate"), then in such event and so long as the Maximum Lawful Rate would be so exceeded, such rate of interest payable hereunder shall be reduced to be equal to the Maximum Lawful Rate; provided, however, that if at any time thereafter the rate of interest payable hereunder is less than the Maximum Lawful Rate, Borrower shall continue to pay interest hereunder at the Maximum Lawful Rate until such time as the total interest received by Agent, on behalf of Lenders, from the making of such advances hereunder is equal to the total interest which would have been received had the interest rate payable hereunder been (but for the operation of this paragraph) the interest rate payable since the Closing Date, as otherwise provided in this Agreement. Thereafter, the interest rate payable hereunder shall be the applicable rate of interest provided in Section 1.8(c) or (e) of this Agreement, unless and until the rate of interest again exceeds the Maximum Lawful Rate, in which event this paragraph shall again apply. In no event shall the total interest received by any Lender pursuant to the terms hereof exceed the amount which such Lender could lawfully have received had the interest due hereunder been calculated for the full term hereof at the Maximum Lawful Rate. In the event the Maximum Lawful Rate is calculated pursuant to this paragraph, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made. In the event that a court of competent jurisdiction, notwithstanding the provisions of this Section 1.8 (g), shall make a final determination that a Lender has received interest hereunder or under any of the other Loan Documents in excess of the Maximum Lawful Rate, Agent shall, to the extent permitted by applicable law, promptly apply such excess in the following order: (i) to any interest due and not yet paid hereunder in respect of the Term Loan, (ii) to any interest due and not yet paid hereunder in respect of the Capital Expenditure Loan, (iii) to any interest due and not yet paid hereunder in respect of the Revolving Credit Loan, (iv) to the then remaining installments of the Term Loan in the inverse order of maturity, (v) to the then remaining installments of the Capital Expenditure Loan in the inverse order of maturity, (vi) to the outstanding principal of -8- the Revolving Credit Loan, (vii) to Fees and any other unpaid Obligations and (viii) thereafter with respect to any excess, to Borrower or as a court of competent jurisdiction may otherwise order. 1.9 Eligible Accounts. Based on the most recent Schedule of Accounts delivered by Borrower to Agent and on other information available to Agent, Agent shall at its sole discretion determine which Accounts shall be deemed to be "Eligible Accounts" for purposes of determining the amounts, if any, to be advanced to Borrower under the Revolving Credit Loan. In determining whether a particular Account constitutes an Eligible Account, Agent shall not include any such Account which is excluded by the criteria set forth on Annex F. 1.10 Eligible Inventory. Based on the most recent Schedule of Inventory delivered by Borrower to Agent and on other information available to Agent, Agent shall in its sole discretion determine which Inventory shall be deemed to be "Eligible Inventory" for purposes of determining the amounts, if any, to be advanced to Borrower under the Revolving Credit Loan. In determining whether any particular Inventory constitutes Eligible Inventory, Agent shall not include Inventory which is excluded by the criteria set forth on Annex G. 1.11 Fees. (a) Borrower shall pay to GE Capital, individually, the fees specified in that certain Fee Letter, dated as of the Closing Date (the "GE Capital Fee Letter"), at the times specified for payment therein. Borrower shall pay to GE Capital, individually, the fees specified in any other fee letter hereafter executed between GE Capital and Borrower, at the respective times specified for payment in each such letter. (b) As additional compensation for Lenders' costs and risks in making the Revolving Credit Loan available to Borrower, Borrower agrees to pay to Agent, for the ratable benefit of Lenders, in arrears, on the first Business Day of each month prior to the Commitment Termination Date and on the Commitment Termination Date, a fee for Borrower's non-use of available funds (the "Non-use Fee") in an amount equal to three-eighths of one percent (.375%) per annum (calculated on the basis of a three hundred and sixty (360) day year and actual days elapsed) of the difference between the respective daily averages of (i) the Maximum Revolving Credit Loan (as it may be adjusted and in effect from time to time hereunder) and (ii) the amount of the Revolving Credit Loan plus Letter of Credit Obligations outstanding during the period for which the Non-Use Fee is due. Notwithstanding the foregoing, in the event Agent, in its sole discretion, establishes a reserve based upon its determination that an Event of Default or a Material Adverse Effect is likely to occur, then (but only for so long as such reserve is in effect) the Non-Use Fee shall not apply to that amount by which such reserve reduces the Maximum Revolving Credit Loan. (c) If Borrower prepays all or any portion of the Term Loan or the Capital Expenditure Loan, or prepays the Revolving Loan and terminates the Revolving Loan Commitment, whether voluntarily or involuntarily and whether before or after acceleration of the Obligations, Borrower shall pay to Agent, for the benefit of Lenders as liquidated damages and compensation for the costs of being prepared to make funds available hereunder an amount equal to (i) $500,000, in the case of a prepayment on or prior to the January 1, 1998, (ii) $350,000, in the case of a prepayment after January 1, 1998 but on or prior to January 1, 1999 and (iii) $250,000, in the case of a prepayment after January 1, 1999 but on or prior to January 1, 2000. Notwithstanding the -9- foregoing, no prepayment fee shall be payable by Borrower upon a mandatory prepayment made pursuant to Section 1.5(d) or (e) or 1.19(c) or (d); provided that Borrower does not permanently reduce the Revolving Loan Commitment upon any such prepayment and, in the case of prepayments made pursuant to Section 1.5(d) or (e), the transaction giving rise to the applicable prepayment is expressly permitted under Section 6. 1.12 Cash Management Systems. Prior to the Closing Date, Borrower shall have established and will at all times maintain the cash management systems described on Annex C. 1.13 Receipt of Payments. Borrower shall make each payment under this Agreement not later than 12:00 noon (Chicago time) on the day when due in lawful money of the United States of America in immediately available funds to the Collection Account. For purposes of computing interest and fees and determining the amount of funds available for borrowing pursuant to Section 1.1(a) and 1.3(a), (a) all payments (including cash sweeps) consisting of cash, wire or electronic transfers in immediately available funds shall be deemed received on the date of deposit thereof in the Collection Account and notice to Agent of such deposit, and (b) all payments consisting of checks, drafts, or similar non-cash items shall be deemed received one (1) Business Day after the date of receipt of good funds following deposit of any such payment in the Collection Account and notice to Agent of such deposit. 1.14 Application and Allocation of Payments. (a) Borrower hereby irrevocably waives the right to direct the application of any and all payments at any time or times hereafter received from or on behalf of Borrower and Borrower hereby irrevocably agrees that Agent shall have the continuing exclusive right to apply any and all such payments against the then due and payable Obligations of Borrower and in repayment of the Revolving Credit Loan, Letter of Credit Obligations, the Term Loan and the Capital Expenditure Loan, as Agent may deem advisable notwithstanding any previous entry by Agent upon the Loan Account or any other books and records. In the absence of a specific determination by Agent with respect thereto, the same shall be applied in the following order: (i) to then due and payable Fees and expenses; (ii) to then due and payable interest payments on the Term Loan, the Capital Expenditure Loan and on the Revolving Credit Loan; (iii) to Obligations other than Fees, expenses and interest and principal payments; and (iv) to then due and payable principal payments on the Term Loan, the Capital Expenditure Loan and the Revolving Credit Loans, and (v) to all other then due and payable Obligations. Agent is authorized to, and, upon the expiration of the applicable time period, if any, set forth in Section 8.1, at its option may, make or cause to be made Revolving Credit Advances on behalf of Borrower for payment of all Fees, expenses, Charges, costs, principal, interest, or other Obligations owing by Borrower under this Agreement or any of the other Loan Documents if and to the extent Borrower fails to promptly pay any such amounts as and when due, even if such Revolving Credit Advance would cause total Revolving Credit Advances to exceed Borrowing Availability or the Maximum Revolving Credit Loan amount. At Agent's option and to the extent permitted by law, any advances so made shall be deemed Revolving Credit Advances constituting part of the Revolving Credit Loan hereunder. 1.15 Loan Account and Accounting. Agent shall maintain a loan account (the "Loan Account") on its books to record: (a) all Revolving Credit Advances and payments made under Letter of Credit Obligations, (b) all payments made by Borrower and (c) all other appropriate -10- debits and credits as provided in this Agreement with respect to the Obligations. All entries in the Loan Account shall be made in accordance with Agent's customary accounting practices as in effect from time to time. Borrower shall pay all Obligations as such amounts become due or are declared due pursuant to the terms of this Agreement. The balance in the Loan Account, as recorded on Agent's most recent printout or other written statement, shall be presumptive evidence of the amounts due and owing to Agent and Lenders by Borrower; provided, that, any failure to so record or any error in so recording shall not limit or otherwise affect Borrower's obligations to pay the Obligations. Agent shall render to Borrower a monthly accounting of transactions under the Revolving Credit Loan, Term Loan and Capital Expenditure Loan, setting forth the balance of the Loan Account. Each and every such accounting shall (absent manifest error) be deemed final, binding and conclusive upon Borrower in all respects as to all matters reflected therein, unless Borrower, within thirty (30) days after the date any such accounting is rendered, shall notify Agent in writing of any objection which Borrower may have to any such accounting, describing the basis for such objection with specificity. In that event, only those items expressly objected to in such notice shall be deemed to be disputed by Borrower. Agent's determination, based upon the facts available, of any item objected to by Borrower in such notice shall be presumptively correct, unless Borrower shall further object to such determination within a reasonable period of time thereafter. 1.16 Indemnity. (a) Borrower shall indemnify and hold each of Agent, Lenders and their respective Affiliates, officers, directors, employees, attorneys, agents and representatives (each, an "Indemnified Person"), harmless from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses (including attorneys' fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended under this Agreement and the other Loan Documents or in connection with or arising out of the transactions contemplated hereunder and thereunder, including any and all Environmental Liabilities and costs; provided, that Borrower shall not be liable for any indemnification to such Indemnified Person to the extent that any such suit, action, proceeding, claim, damage, loss, liability or expense results solely from such Indemnified Person's gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction after all possible appeals have been exhausted. NEITHER AGENT, ANY LENDER NOR ANY OTHER INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY HERETO, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. (b) To induce Lenders to provide the LIBOR Rate option on the terms provided herein, if (i) any LIBOR Loans are repaid in whole or in part prior to the last day of any applicable LIBOR Period (whether that repayment is made pursuant to any provision of this Agreement or any other Loan Document or is the result of acceleration, by operation of law or otherwise); (ii) Borrower shall default in payment when due of the principal amount of or interest on any LIBOR Loan; (iii) -11- Borrower shall default in making any borrowing of, conversion into or continuation of LIBOR Loans after Borrower has given notice requesting the same in accordance herewith; or (iv) Borrower shall fail to make any prepayment of a LIBOR Loan after Borrower has given a notice thereof in accordance herewith, Borrower shall indemnify and hold harmless each Lender from and against all losses, costs and expenses resulting from or arising from any of the foregoing. Such indemnification shall include any loss (including loss of margin) or expense arising from the reemployment of funds obtained by it or from fees payable to terminate deposits from which such funds were obtained. For the purpose of calculating amounts payable to a Lender under this Section 1.16(b), each Lender shall be deemed to have actually funded its relevant LIBOR Loan through the purchase of a deposit bearing interest at the LIBOR Rate in an amount equal to the amount of that LIBOR Loan and having a maturity comparable to the relevant Interest Period; provided, however, that each Lender may fund each of its LIBOR Loans in any manner it sees fit, and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 1.16(b). This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. As promptly as practicable under the circumstances, each Lender shall provide Borrower with its written calculation of all amounts payable pursuant to this Section 1.16(b), and such calculation shall be binding on the parties hereto unless Borrower shall object in writing within ten (10) Business Days of receipt thereof, specifying the basis for such objection in detail. (c) Borrower hereby acknowledges and agrees that Agent (i) is not now, and has not ever been, in control of any of the Real Estate or of Borrower's affairs, and (ii) does not have the capacity through the provisions of the Loan Documents to influence Borrower's conduct with respect to the ownership, operation or management of any of its real property, including any of its Real Estate. 1.17 Access. Borrower shall (i) provide full access during normal business hours, from time to time upon five (5) Business Days' prior notice, to Agent and any of its officers, employees and agents, as frequently as Agent determines, in its sole discretion, to be appropriate (unless a Default or Event of Default shall have occurred and be continuing, in which event Agent and its officers, employees, designees, agents and representatives shall have access at any and all times and without any notice), to the properties, facilities, books, records, suppliers, customers, advisors and employees (including officers) of Borrower and its Subsidiaries, to the Collateral, to the accountants of Borrower and its Subsidiaries and to the work papers of such accountants. Without limiting the generality of the foregoing, Borrower shall permit Agent, and any of its officers, employees, agents and representatives, on two (2) separate occasions per annum (unless a Default or an Event of Default has occurred and is continuing, then, in such case, at any and all times) determined by Agent in its sole discretion, to (i) inspect, audit and make extracts from all of Borrower's and its Subsidiaries' records, files and books of account and (ii) inspect, review and evaluate the Accounts, Inventory at Borrower's and its Subsidiaries' locations and at premises not owned by or leased to Borrower or any Subsidiary of Borrower. Borrower shall make available to Agent, its counsel and advisors, immediately upon Agent's request therefor, originals or copies of all books, records, board minutes, contracts, insurance policies, environmental audits, business plans, files, financial statements (actual and pro forma), filings with federal, state and local regulatory agencies, and other instruments and documents which Agent may request. Borrower shall deliver any document or instrument necessary for Agent, as it may from time to time request, to obtain -12- records from any service bureau or other Person which maintains records for Borrower, and shall maintain duplicate records or supporting documentation on media, including computer tapes and discs owned by Borrower. Borrower shall instruct its certified public accountants and its banking and other financial institutions to make available to Agent such information and records as Agent may request. Confidential information obtained by Agent and Lenders pursuant to this Section 1.17 shall be subject to Section 10.14. A fee of $500 per day per individual (plus all out-of-pocket costs and expenses) in connection with each field audit conducted by Agent pursuant to this Agreement and the other Loan Documents shall be due and payable by Borrower (and, in Agent's sole and absolute discretion, charged against the Revolving Credit Facility). 1.18 Taxes. (a) Any and all payments by Borrower hereunder or under any Term Loan Note, Capital Expenditure Loan Note or Revolving Credit Note shall be made, in accordance with this Section 1.18, free and clear of and without deduction for any and all present or future Taxes. If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Term Loan Note, Capital Expenditure Loan Note or Revolving Credit Note, (i) the sum payable shall be increased as much as shall be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 1.18) Agent or Lenders, as applicable, receive an amount equal to the sum they would have received had no such deductions been made, (ii) Borrower shall make such deductions, and (iii) Borrower shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. (b) Borrower shall indemnify and pay, within ten (10) days of demand therefor, Agent and each Lender for the full amount of Taxes (including any Taxes imposed by any jurisdiction on amounts payable under this Section 1.18) paid by Agent or such Lender, as appropriate, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. (c) Within thirty (30) days after the date of any payment of Taxes, Borrower shall furnish to Agent, at its address referred to in Section 10.10, the original or a certified copy of a receipt evidencing payment thereof. 1.19 Capital Adequacy and Other Adjustments. (a) In the event that any Lender shall have determined that the adoption after the Closing Date of any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by any Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from any central bank or governmental agency or body having jurisdiction does or would have the effect of increasing the amount of capital, reserves or other funds required to be maintained by such Lender and thereby reducing the rate of return on such Lender's capital as a consequence of its obligations hereunder, then Borrower shall from time to time within fifteen (15) days after notice and demand from such Lender (together with the certificate referred to in the next sentence and with a copy to Agent) pay to Agent, for the account of such Lender, additional amounts -13- sufficient to compensate such Lender for such reduction; provided, however, that, notwithstanding the foregoing, Borrower shall have no obligation to make any such payment in the event, if any, that such notice and demand was sent by such Lender more than ninety (90) days after it became aware of such law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order. A certificate as to the amount of such cost and showing the basis of the computation of such cost submitted by such Lender to Borrower and Agent shall, absent manifest error, be final, conclusive and binding for all purposes. (b) Each Lender organized under the laws of a jurisdiction outside the United States (a "Foreign Lender") as to which payments to be made under this Agreement or under the Notes are exempt from United States withholding tax under an applicable statute or tax treaty shall provide to Borrower and Agent a properly completed and executed IRS Form 4224 or Form 1001 or other applicable form, certificate or document prescribed by the IRS or the United States certifying as to such Foreign Lender's entitlement to such exemption (a "Certificate of Exemption"). Prior to becoming a Lender under this Agreement and within fifteen (15) days after a reasonable written request of Agent or Borrower from time to time thereafter, each Foreign Lender that becomes a Lender under this Agreement shall provide a Certificate of Exemption to Borrower and Agent. No foreign Person may become a Lender hereunder if such Person is unable to deliver a Certificate of Exemption. If a Foreign Lender does not provide a Certificate of Exemption to Agent and Borrower within the time periods set forth above, Borrower shall withhold taxes from payments to such Foreign Lender at the applicable statutory rate and Borrower shall not be required to pay any additional amounts as a result of such withholding; provided, that all such withholding shall cease upon delivery by such Foreign Lender of a Certificate of Exemption to Agent and Borrower. (c) In the event Borrower shall be required to pay any increased cost to any Lender pursuant to Section 1.19(a), Borrower shall be entitled, by so notifying Agent and such Lender within thirty (30) days after such Lender notifies Borrower of any such increased cost, to arrange for the substitution of a new lender for such Lender within sixty (60) days thereafter pursuant to the relevant provisions of Section 9.1, whereupon, upon the effectiveness of such substitution, all of such Lender's Pro Rata Share shall be assigned to such new lender; provided, however, that: (i) such Lender shall be entitled to withdraw its notice of increased costs within a period of thirty (30) days from the date of Borrower's notice of substitution, whereupon Borrower shall no longer be entitled to substitute for such Lender as described above; (ii) in no event shall Borrower be entitled to substitute for any Lender unless the net present value of the additional cost to Borrower (including closing costs) of such substitution is less than the net present value of the additional cost referred to in this Section 1.19 to Borrower of maintaining such Lender's Pro Rata Share; and (iii) in all events (other than those described in clause (i) above), Borrower shall remain liable for the increased costs of such Lender for the period prior to the actual repayment of such Lender's Pro Rata Share. -14- (d) Notwithstanding anything to the contrary contained herein, if the introduction of or any change in any law or regulation (or any change in the interpretation thereof) shall make it unlawful, or any central bank or other Governmental Authority shall assert that it is unlawful, for any Lender to make or to continue to fund or maintain any LIBOR Loan, then, unless that Lender is able to make or to continue to fund or to maintain such LIBOR Loan at another branch or office of that Lender without, in that Lender's opinion, adversely affecting it or its Loans or the income obtained therefrom, on notice thereof and demand therefor by such Lender to Borrower through Agent, (i) the obligation of such Lender to make or to continue to fund or maintain LIBOR Loans shall terminate and (ii) Borrower shall forthwith prepay in full all outstanding LIBOR Loans owing to such Lender, together with interest accrued thereon, unless Borrower, within five (5) Business Days after the delivery of such notice and demand, converts all such Loans into a Loan bearing interest based on the Index Rate. 1.20 Amendment and Restatement. (a) This Agreement amends and restates in its entirety the Prior Credit Agreement and, upon effectiveness of this Agreement, the terms and provisions of the Prior Credit Agreement shall, subject to this Section 1.20, be superseded hereby. All references to "Credit Agreement" contained in the Loan Documents delivered in connection with the Prior Credit Agreement shall be deemed to refer to this Agreement. Notwithstanding the amendment and restatement of the Prior Credit Agreement by this Agreement, the Obligations outstanding under the Prior Credit Agreement as of the Closing Date (except to the extent repaid in accordance herewith) shall remain outstanding and constitute continuing Obligations hereunder and shall continue to be secured by the Collateral. Such outstanding Obligations and the Liens securing payment thereof shall in all respects be continuing, and this Agreement shall not be deemed to evidence or result in a novation or repayment and re-borrowing of such Obligations. In furtherance of and without limiting the foregoing, from and after the Closing Date and except as expressly specified herein, the terms, conditions, and covenants governing the Obligations outstanding under the Prior Credit Agreement shall be solely as set forth in this Agreement, which shall supersede the Prior Credit Agreement in its entirety. (b) This is the final expression of a credit agreement among Borrower, Agent and Lenders. This Agreement cannot be contradicted by evidence of any prior oral credit agreement or of a contemporaneous oral credit agreement among Borrower, Agent and Lenders. Borrower and Agent affirm that they have no oral agreement or agreement by course of dealing with respect to the subject matter hereof. 2. CONDITIONS PRECEDENT 2.1 Conditions to the Initial Revolving Credit Advance, Initial Letter of Credit Obligations, the Term Loan and the Capital Expenditure Advance. Notwithstanding any other provision of this Agreement and without affecting in any manner the rights of Agent and Lenders hereunder, Borrower shall have no rights under this Agreement (but shall have all applicable obligations hereunder), and no Lender shall be obligated to make any Revolving Credit Advance or Capital Expenditure Advance, incur any Letter of Credit Obligation, make the Term Loan, or to take, fulfill, or perform any other action hereunder, until the following conditions have been satisfied, in Agent's sole and reasonable discretion, or waived in writing by Agent: -15- (a) This Agreement or counterparts hereof shall have been duly executed by, and delivered to, Borrower, Agent and Lenders. (b) Agent shall have received such guaranties, documents, instruments, agreements and amendments thereto and legal opinions as Agent shall request in connection with the transactions contemplated by this Agreement and the other Loan Documents, including all guaranties, documents, instruments, agreements and legal opinions listed in Annex D, each in form and substance satisfactory to Agent. (c) "Term Loan B" (as defined in the Prior Credit Agreement) will have been repaid in full as of the Closing Date. (d) Agent shall have received evidence satisfactory to it that Borrower has obtained consents and acknowledgments of all Persons whose consents and acknowledgments may be required, including, but not limited to, all requisite Governmental Authorities, to the terms, and to the execution and delivery, of this Agreement, the other Loan Documents and the consummation of the transactions contemplated hereby and thereby. (e) Borrower shall have paid to GE Capital all Fees required to be paid at or prior to the Closing Date under the terms of the GE Capital Fee Letter. (f) Since December 31, 1995, there shall have been: (i) no Material Adverse Effect on the business, operations, financial condition, prospects or projections of Borrower, the industries in which it operates, the Collateral, or any of its Subsidiaries; (ii) no litigation will have commenced which, if successful, could have any such Material Adverse Effect or could challenge any of the transactions contemplated by this Agreement and the other Loan Documents; (iii) except for (A) the redemption of preferred stock of Borrower owned by PST in accordance with the Prior Credit Agreement and (B) payments made pursuant to the Tax Sharing Agreement in accordance with Section 6.15 of the Prior Credit Agreement, no dividends, distributions, payments, loans, contributions, fees or other transfers of cash, property or other assets to any stockholders or Affiliate of Borrower, including ARTRA or its employees, directors, officers or Affiliates; and (iv) no material increase in liabilities, liquidated or contingent, and no material decrease in assets of Borrower or any of its Subsidiaries. (g) Agent shall have completed its business and legal due diligence with respect to Borrower and its Subsidiaries and the legal and corporate structure thereof and the results of such due diligence shall be satisfactory to Agent, in its sole discretion. (h) Agent shall have received Borrower's duly executed acknowledgment to the Notice and Conditional Waiver of Events of Default addressed by Agent to Borrower on December 16, 1996, and each of the conditions referred to therein shall have been satisfied in full in accordance with the terms thereof. -16- (i) Agent shall have received such other documents as Agent or any Lender may reasonably request in connection with the transactions contemplated by this Agreement and the other Loan Documents. 2.2 Further Conditions to Each Revolving Credit Advance, Each Letter of Credit Obligation, Each Term Loan and each Capital Expenditure Advance. It shall be a further condition to the making of each Revolving Credit Advance and Capital Expenditure Advance, the incurrence of each Letter of Credit Obligation and the continuance of the Term Loan, that the following statements shall be true on the date of each such advance, incurrence or funding (or any conversion or continuation of any Loan into or as a LIBOR Loan), as the case may be: (a) All of Borrower's representations and warranties contained herein or in any of the other Loan Documents shall be true and correct on and as of the Closing Date and the date on which each such Revolving Credit Advance is made or such Letter of Credit Advance is incurred, as though made on and as of such date, except to the extent that any such representation or warranty expressly relates to an earlier date and except for changes therein expressly permitted or expressly contemplated by this Agreement. (b) Borrower and each of its Subsidiaries shall be in compliance in all material respects with all of the covenants and other agreements contained herein or in any of the other Loan Documents. (c) No event shall have occurred and be continuing, or would result from the making of any Revolving Credit Advance or Capital Expenditure Advance, the incurrence of any Letter of Credit Obligation or the funding of the Term Loan, as the case may be, which constitutes or would constitute a Default or an Event of Default. (d) After giving effect to such Revolving Credit Advance or the incurrence of such Letter of Credit Obligation, as the case may be, the aggregate principal amount of the Revolving Credit Loan shall not exceed the maximum amount permitted by Section 1.5(a) without requiring that a payment be made to Agent or any Lender in an amount equal to the excess of the then outstanding aggregate principal amount of the Revolving Credit Loan over such maximum amount permitted by Section 1.5(a). (e) After giving effect to such Capital Expenditure Advance, the aggregate principal amount of the Capital Expenditure Loan shall not exceed the maximum amount permitted by Section 1.3(a). (f) Each of the conditions set forth in Section 2.1 shall continue to be satisfied as of such date. The request and acceptance by Borrower of the proceeds of any Revolving Credit Advance or any Term Loan or Capital Expenditure Advance, or the request by Borrower for the incurrence by Lenders of any Letter of Credit Obligation, or the conversion or continuation of any Loan into, or as, a LIBOR Loan, as the case may be, shall be deemed to constitute, as of the date of such request -17- or acceptance, (i) a representation and warranty by Borrower that the conditions in this Section 2.2 have been satisfied and (ii) a reaffirmation by Borrower of the granting and continuance of Agent's Liens, on behalf of itself and Lenders, pursuant to the Collateral Documents. 2.3 Further Conditions to Each Capital Expenditure Advance. It shall be a further condition to the initial and each subsequent Capital Expenditure Advance that each of the following conditions shall have been satisfied: (a) Capital Expenditure Advance Compliance Certificate. At least five (5) Business Days prior to the funding of any such Capital Expenditure Advance, Borrower shall deliver to Agent a Capital Expenditure Advance Compliance Certificate, fully executed by the chief financial officer or chief executive officer of Borrower. Such Certificate must be in the form of Exhibit F and must describe the nature and amount of Equipment proposed to be acquired in connection with a Capital Expenditure Advance and certify that (i) the proceeds of such Capital Expenditure Advance shall be used solely to fund Capital Expenditures constituting the Hard Costs of such Equipment, (ii) the aggregate amount of such Capital Expenditure Advance does not exceed the lesser of (x) the Maximum Capital Expenditure Advance Amount or (y) Capital Expenditure Loan Availability as of such date, (iii) after giving effect to such Capital Expenditure Advance, the aggregate principal amount of the Capital Expenditure Advances made during the term of this Agreement shall not exceed the Capital Expenditure Loan Commitment and (iv) such Equipment can and shall be used by Borrower in the ordinary course of its business consistent with past practices. (b) Additional Requirements. Concurrently with the delivery of each Capital Expenditure Advance Compliance Certificate (or, in the case of clause (iv) below, promptly upon receipt by Borrower), Borrower shall deliver to Agent: (i) to the extent necessary or requested by Agent, evidence of the proper filing in all required filing offices of duly executed Code financing statements or amendments to existing financing statements with respect to the Equipment acquired with the proceeds of such Advance (and termination or partial release statements, as required to terminate or release any Liens on such Equipment at the time of the acquisition thereof by Borrower), and such other documents, instruments and agreements as Agent may request, including duly endorsed certificates of title for all titled Equipment, all in form satisfactory to Agent and perfecting first priority security interests of Agent on behalf of Lenders in such Equipment. (ii) if requested by Agent, copies of policies of insurance and loss payable endorsements in form and substance satisfactory to Agent regarding the Equipment acquired with the proceeds of such Capital Expenditure Advance, duly executed, and evidence of the payment of the premiums therefor; (iii) duly executed originals of a letter of direction from Borrower addressed to Agent with respect to the disbursement on the applicable funding date of the proceeds of such Capital Expenditure Advance, which disbursement shall be made by Agent directly to the seller of the Equipment; -18- (iv) stamped invoices, delivery and acceptance certificates and other documentary evidence satisfactory to Agent evidencing the acceptance and purchase of the applicable Equipment by Borrower; and (v) such other documents as Agent or any Lender may reasonably request in connection with such Capital Expenditure Advance. The request and acceptance by Borrower of the proceeds of any Capital Expenditure Advance shall be deemed to constitute, as of the date of such request, (i) a representation and warranty by Borrower that the conditions in this Section 2.3 have been satisfied and (ii) a reaffirmation by Borrower of the granting and continuance of Agent's Liens, on behalf of itself and Lenders, pursuant to the Collateral Documents. 3. REPRESENTATIONS AND WARRANTIES To induce Lenders to make the Revolving Credit Loan, the Term Loan and the Capital Expenditure Loan, and to incur the Letter of Credit Obligations, Borrower makes the following representations and warranties to Agent and each Lender, each and all of which shall be true and correct as of the date of execution and delivery of this Agreement, and shall survive the execution and delivery of this Agreement: 3.1 Corporate Existence; Compliance with Law. Borrower and each of its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has been duly qualified to conduct business and is in good standing in each other jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, where failure to so qualify could have a Material Adverse Effect; (ii) has the requisite corporate power and authority and the legal right to own, pledge, mortgage or otherwise encumber and operate its properties, to lease the property it operates under lease and to conduct its business as now, heretofore and proposed to be conducted; (iii) has all licenses, permits, consents or approvals from or by, and has made all filings with, and has given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct, where failure to do so could have a Material Adverse Effect; (iv) is in compliance with its certificate or articles of incorporation and by-laws; and (v) is in compliance with all applicable provisions of law, where failure to so comply could have a Material Adverse Effect. 3.2 Executive Offices. The current location of Borrower's executive office and principal place of business is set forth on Schedule 3.2 and, except as set forth on Schedule 3.2, none of such locations have changed within the past six (6) months. 3.3 Corporate Power Authorization, Enforceable Obligations. The execution, delivery and performance by Borrower of the Loan Documents and all instruments and documents to be delivered by Borrower, to the extent it is a party thereto, hereunder and thereunder and the creation of all Liens provided for herein and therein: (i) are within Borrower's corporate power; (ii) have been duly authorized by all necessary or proper corporate and shareholder action; (iii) are not -19- in contravention of any provision of Borrower's certificate or articles or incorporation or bylaws; (iv) will not violate any law or regulation, or any order or decree of any court or governmental instrumentality; (v) will not conflict with or result in the breach or termination of, constitute a default under or accelerate any performance required by, any indenture, mortgage, deed of trust, lease, agreement or other instrument to which Borrower is a party or by which Borrower or any of its property is bound, including, without limitation, the Kansas Loan documents; (vi) will not result in the creation or imposition of any Lien upon any of the property of Borrower other than those in favor of Agent, on behalf of itself and Lender, all pursuant to the Loan Documents; and (vii) do not require the consent or approval of any Governmental Authority or any other Person, except those referred to in Section 2.1(d), all of which will have been duly obtained, made or complied with prior to the Closing Date. At or prior to the Closing Date, each of the Loan Documents shall have been duly executed and delivered for the benefit of or on behalf of Borrower and each shall then constitute a legal, valid and binding obligation of Borrower, to the extent it is a party thereto, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights of creditors generally or by application of general principles of equity. 3.4 Financial Statements and Projections. Borrower has delivered to Agent the Financial Statements and Projections most recently required to be delivered to Agent as of the Closing Date pursuant to the Prior Credit Agreement. 3.5 Collateral Reports. Borrower has delivered to Agent all Collateral Reports most recently required to be delivered to Agent as of the Closing Date pursuant to the Prior Credit Agreement. 3.6 Material Adverse Effect. Neither Borrower nor any of its Subsidiaries, as of December 31, 1995, had any obligations, contingent liabilities, or liabilities for Charges, long-term leases or unusual forward or long-term commitments which are not reflected in the audited Financial Statements of Borrower and its Subsidiaries as of such date and which could, alone or in the aggregate, have or result in a Material Adverse Effect. There has been no material adverse change in the business, assets, operations, prospects, projections or financial or other condition of Borrower or any of its Subsidiaries since December 31, 1995. Except as otherwise permitted hereunder or for the redemption of preferred stock of Borrower owned by PST in accordance with this Agreement and the Prior Credit Agreement, (a) no dividends, advances or other distributions have been declared, paid or made upon any Stock of Borrower or any of its Subsidiaries and (b) since December 31, 1995, no shares of Stock of Borrower have been, or are required to be, redeemed, retired, purchased or otherwise acquired for value. 3.7 Ownership of Property; Liens. (a) Except as described on Schedule 3.7, the real estate listed on Schedule 3.7 constitutes all of the real property owned, leased, or used in its business by Borrower or its Subsidiaries. Borrower and each of its Subsidiaries own good and marketable fee simple title to: (i) all of its Real Estate, subject to no Liens other than Permitted Encumbrances, and has valid and marketable leasehold interests in all of its Leases (both as lessor and lessee, sublessee or assignee), all as described on Schedule 3.7, and (ii) good and marketable title to, or valid leasehold interests in, all of its other properties and assets, and none of the properties and -20- assets of Borrower or any of its Subsidiaries are subject to any Liens, except Permitted Encumbrances; and Borrower or such Subsidiary has received all deeds, assignments, waivers, consents, non-disturbance and recognition or similar agreements, bills of sale and other documents, and duly effected all recordings, filings and other actions necessary to perfect and, in all material respects, establish and protect, Borrower's or such Subsidiary's right, title and interest in and to all such real estate and other assets or property. Neither Borrower, any of its Subsidiaries nor any other party to any such Lease described on Schedule 3.7 is in any material default of its obligations thereunder or has delivered or received any notice of default under any such Lease, and no event has occurred which, with the giving of notice, the passage of time or both, would constitute a default under any such Lease. Except as described on Schedule 3.7, (i) neither Borrower nor any of its Subsidiaries owns or holds or is obligated under or a party to, any option, right of first refusal or any other contractual right to purchase, acquire, sell, assign or dispose of any real property owned or leased by Borrower or such Subsidiary; and (ii) no portion of any real property owned or leased by Borrower or any of its Subsidiaries has suffered any material damage by fire or other casualty loss or a Release which has not heretofore been completely repaired and restored to its original condition or is being remedied. To the best of Borrower's knowledge after good faith and diligent investigation, except as disclosed on Schedule 3.20 as required pursuant to Section 3.20, all permits, including environmental air and waste permits, required to have been issued or appropriate to enable the real property owned or leased by Borrower or such Subsidiary to be lawfully occupied and used for all of the purposes for which they are currently occupied and used, have been lawfully issued and are, as of the Closing Date, in full force and effect. 3.8 Restrictions; No Default. No contract, lease, agreement or other instrument to which Borrower or any of its Subsidiaries is a party or by which it or any of its properties or assets is bound or affected and no provision of applicable law or governmental regulation has or results in a Material Adverse Effect, or could have or result in a Material Adverse Effect. Neither Borrower nor any of its Subsidiaries is in default, and to Borrower's or such Subsidiary's knowledge no third party is in default, under or with respect to any contract, agreement, lease or other instrument to which it is a party. No Default or Event of Default has occurred and is continuing. 3.9 Labor Matters. There are no strikes or other labor disputes against Borrower or any of its Subsidiaries that are pending or threatened. Hours worked by and payment made to employees of Borrower and its Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable federal, state, local or foreign law dealing with such matters. All payments due from Borrower or any of its Subsidiaries on account of employee health and welfare insurance have been paid or accrued as a liability on the books of Borrower. Except as set forth on Schedule 3.9, neither Borrower nor any of its Subsidiaries has any obligation under any collective bargaining agreement or any employment agreement. There is no organizing activity involving Borrower or any of its Subsidiaries pending or threatened by any labor union or group of employees. Except as set forth on Schedule 3.9, there are no representation proceedings pending or threatened with the National Labor Relations Board, and no labor organization or group of employees of Borrower or any of its Subsidiaries has made a pending demand for recognition. There are no complaints or charges against Borrower or any of its Subsidiaries pending or threatened to be filed with any federal, state, local or foreign court, governmental agency or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment of any -21- individual by Borrower or any of its Subsidiaries. Neither Borrower nor any of its Subsidiaries is a contractor or subcontractor and, except as set forth on Schedule 3.9, neither Borrower nor any Subsidiary has a legal obligation to engage in affirmative action. 3.10 Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness. Except as set forth on Schedule 3.10, (i) Borrower has no subsidiaries, is not engaged in any joint venture or partnership with any other Person, and or an Affiliate of any other Person, (ii) there are no outstanding rights to purchase options, warrants or similar rights or agreements pursuant to which any Person may be required to issue or sell any Stock or other equity security of Borrower and (iii) Borrower is the sole direct or indirect beneficial owner of all of the outstanding capital stock of its Subsidiaries. All of the issued and outstanding Stock of Borrower is owned by each of the Stockholders named on Schedule 3.10. Except as set forth on Schedule 3.10, there are no outstanding rights to purchase options, warrants or similar rights or agreements pursuant to which any Person may be required to issue or sell any Stock or other equity security of any Subsidiary of Borrower. As of the Closing Date, all outstanding Indebtedness and all Liens of Borrower and its Subsidiaries are described in Section 6.3 (including Schedule 6.3) and 6.7, respectively. 3.11 Government Regulation. Neither Borrower nor any of its Subsidiaries is an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940 as amended. Neither Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or any other federal or state statute that restricts or limits its ability to incur Indebtedness or to perform its obligations hereunder, and the making of the Revolving Credit Advances, the Term Loan and the Capital Expenditure Loan and the incurrence of Letter of Credit Obligations, in each case by Lenders, the application of the proceeds and repayment thereof by Borrower or such Subsidiary and the consummation of the transactions contemplated by this Agreement and the other Loan Documents will not violate any provision of any such statute or any rule, regulation or order issued by the Securities and Exchange Commission. 3.12 Margin Regulations. Neither Borrower nor any of its Subsidiaries is engaged, nor will it engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin security" within the respective meanings of each of the quoted terms under Regulation U or G of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") as now and from time to time hereafter in effect. Neither Borrower nor any of its Subsidiaries owns any "margin security", as that term is defined in Regulations G and U of the Board of Governors of the Federal Reserve Board, and none of the proceeds of the Revolving Credit Advances, the Term Loan, the Capital Expenditure Loan nor any Letter of Credit will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the loans or other extensions of credit under this Agreement to be considered a "purpose credit" within the meaning of Regulation G, T, U or X of the Federal Reserve Board. Neither Borrower nor any of its Subsidiaries will take or permit any agent acting on its behalf to take any action which -22- might cause this Agreement or any other Loan Document or any document or instrument delivered pursuant hereto to violate any regulation of the Federal Reserve Board. 3.13 Taxes. All federal, state, local and foreign tax returns, reports and statements, including, but not limited to, information returns (Form 1120-S) required to be filed by Borrower or any of its Subsidiaries, have been filed with the appropriate Governmental Authority and all Charges and other impositions shown thereon to be due and payable have been paid prior to the date on which any fine, penalty, interest or late charge may be added thereto for nonpayment thereof, or any such fine, penalty, interest, late charge or loss has been paid; provided, that, Borrower may in good faith contest, by proper legal action or proceedings, the validity or amount of any such Charges or claims, so long as, at the time of commencement of any such action or proceeding, and during the pendency thereof (i) adequate reserves with respect thereto are maintained on the books of Borrower, in accordance with GAAP, (ii) such contest operates to suspend collection of such Charges or claims and such contest is maintained and prosecuted continuously and with diligence, and (iii) Agent has not advised Borrower in writing that Agent reasonably believes that nonpayment or nondischarge thereof could have or result in a Material Adverse Effect. Borrower and each of its Subsidiaries has paid when due and payable all Charges required to be paid by it. Proper and accurate amounts have been withheld by Borrower and its Subsidiaries from its respective employees for all periods in full compliance in all material respects with the tax, social security and unemployment withholding provisions of applicable federal, state, local and foreign law and such withholdings have been timely paid to the respective Governmental Authorities. Schedule 3.13 sets forth those taxable years for which Borrower's tax returns are currently being audited by the IRS or any other applicable Governmental Authority and any assessments or threatened assessments in connection with such audit, or otherwise currently outstanding. Except as described on Schedule 3.13, neither Borrower nor any of its Subsidiaries has executed or filed with the IRS or any other Governmental Authority any agreement or other document extending, or having the effect of extending, the period for assessment or collection of any Charges. Neither Borrower nor any of its Subsidiaries has filed a consent pursuant to IRC Section 341(f) or agreed to have IRC Section 341(f) (2) apply to any dispositions of subsection (f) assets (as such term is defined in IRC Section 341(f)(4)). None of the property owned by Borrower or any of its Subsidiaries is property which Borrower or such Subsidiary is required to treat as being owned by any other Person pursuant to the provisions of IRC Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, and in effect immediately prior to the enactment of the Tax Reform Act of 1986 or is "tax-exempt use property" within the meaning of the IRC Section 168 (h). Neither Borrower nor any of its Subsidiaries has agreed or been requested to make any adjustment under IRC Section 481(a) by reason of a change in accounting method or otherwise. Neither Borrower nor any of its Subsidiaries have any obligation under any written tax sharing agreement, except, subject to Section 6.15, the Tax Sharing Agreement. 3.14 ERISA. (a) Neither Borrower nor any of its Subsidiaries has now, or has ever had, any Pension Plans and neither Borrower nor any of its Subsidiaries has any liabilities with respect to any Pension Plans. Schedule 3.14 lists all Plans maintained or contributed to by Borrower or any of its Subsidiaries and all Qualified Plans maintained or contributed to by any ERISA Affiliate, and separately identifies the Title IV Plans, Multiemployer Plans, any multiple employer plans subject to Section 4064 of ERISA, unfunded Pension Plans, Welfare Plans and Retiree Welfare Plans. Each Qualified Plan has been determined by the IRS to qualify under Section 401 of the IRC, -23- and the trusts created thereunder have been determined to be exempt from tax under the provisions of Section 501 of the IRC, and to the best knowledge of Borrower nothing has occurred which would cause the loss of such qualification or tax-exempt status. Each Plan is in compliance with the applicable provisions of ERISA and the IRC, including the filing of reports required under the IRC or ERISA which are true and correct as of the date filed, and with respect to each Plan, other than a Qualified Plan, all required contributions and benefits have been paid in accordance with the provisions of each such Plan. With respect to any Qualified Plan, neither Borrower, any of its Subsidiaries nor any ERISA Affiliate has failed to make any contribution or pay any amount due as required by Section 412 of the IRC or Section 302 of ERISA or the terms of any such Plan. With respect to all Retiree Welfare Plans, the present value of future anticipated expenses pursuant to the latest actuarial projections of liabilities does not exceed Fifty Thousand Dollars ($50,000), and copies of such latest projections have been provided to Agent. Neither Borrower nor any of its Subsidiaries has engaged in a prohibited transaction, as defined in Section 4975 of the IRC or Section 406 of ERISA, in connection with any Plan, which would subject Borrower or such Subsidiary (after giving effect to any exemption) to a material tax on prohibited transactions imposed by Section 4975 of the IRC or any other material liability. (b) Except as set forth on Schedule 3.14: (i) no Title IV Plan has any Unfunded Pension Liability; (ii) No ERISA Event or event described in Section 4062(e) of ERISA with respect to any Title IV Plan has occurred or is reasonably expected to occur; (iii) there are no pending, or to the knowledge of Borrower or any of its Subsidiaries, threatened claims, actions or lawsuits (other than claims for benefits in the normal course), asserted or instituted against (x) any Plan or its assets, (y) any fiduciary with respect to any Plan or (z) Borrower, any of its Subsidiaries or any ERISA Affiliate with respect to any Plan; (iv) neither Borrower, any of its Subsidiaries, nor any ERISA Affiliate has incurred or reasonably expects to incur any Withdrawal Liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 of ERISA as a result of a complete or partial withdrawal from a Multiemployer Plan; (v) within the last five years neither Borrower, any of its Subsidiaries, nor any ERISA Affiliate has engaged in a transaction which resulted in a Title IV Plan with Unfunded Liabilities being transferred outside of the "controlled group" (within the meaning of Section 4001(a)(14) of ERISA) of any such entity; (vi) Borrower, each of its Subsidiaries and each ERISA Affiliate have complied with the notice and continuation coverage requirements of Section 4980B of the IRC and the regulations thereunder except where the failure to comply could not have or result in any Material Adverse Effect; and (vii) no liability under any Plan has been funded, nor has such obligation been satisfied, with the purchase of a contract from an insurance company that is not rated AAA by the Standard & Poor's Corporation and the equivalent by each other nationally recognized rating agency. 3.15 No Litigation. Except as set forth on Schedule 3.15, no action, claim or proceeding is now pending or, to the knowledge of Borrower or any of its Subsidiaries, threatened against Borrower or such Subsidiary, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any federal, state, local or foreign government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, (i) which challenges Borrower's or such Subsidiary's right, power or competence to enter into or perform any of its obligations under the Loan Documents, or the validity or enforceability of any Loan Document or -24- any action taken thereunder, or (ii) which if determined adversely, could have or result in a Material Adverse Effect, nor to the best knowledge of Borrower or such Subsidiary does a state of facts exist which is reasonably likely to give rise to such proceedings. 3.16 Brokers. No broker or finder acting on behalf of Borrower or any of its Subsidiaries brought about the obtaining, making or closing of the loans made pursuant to this Agreement or the transactions contemplated by the Loan Documents and neither Borrower nor any of its Subsidiaries has any obligation to any Person in respect of any finder's or brokerage fees in connection therewith. 3.17 Employment Matters. Except as set forth on Schedule 3.17, there are no (i) employment, consulting or management agreements covering management of Borrower or any of its Subsidiaries, or (ii) collective bargaining agreements or other labor agreements covering any employees of Borrower or any of its Subsidiaries. Except as furnished pursuant to the Prior Credit Agreement, a true and complete copy of each such agreement has been furnished to Agent as of the Closing Date. 3.18 Patents, Trademarks, Copyrights and Licenses. Except as otherwise set forth on Schedule 3.18, Borrower and each of its Subsidiaries owns all material licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, and trade names necessary to continue to conduct its business as heretofore conducted by it, now conducted by it and proposed to be conducted by it, each of which is listed, together with Copyright Office or Patent and Trademark Office application or registration numbers, where applicable, on Schedule 3.18. Schedule 3.18 lists all tradenames or other names under which Borrower and each of its Subsidiaries conducts business. Borrower and each of its Subsidiaries conducts (or has within the past six (6) years conducted) its business without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of others. There is no infringement or claim of infringement by others of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of Borrower or any of its Subsidiaries. 3.19 Full Disclosure. No information contained in this Agreement, any of the other Loan Documents, the Projections, the Financial Statements, the Collateral Reports or any written statement furnished by or on behalf of Borrower or any of its Subsidiaries pursuant to the terms of this Agreement, which has previously been, or is currently being, delivered to Agent, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. The Liens granted to Agent, on behalf of itself and Lenders, pursuant to the Collateral Documents are fully perfected first priority Liens in and to the Collateral described therein and the Liens granted to Agent, on behalf of itself and Lenders, pursuant to the Mortgages are fully perfected first priority Liens in and to the Mortgaged Property described therein, subject only to Permitted Encumbrances then existing. Since December 31, 1995, no event has occurred and is continuing which has had or could have or result in a Material Adverse Effect. -25- 3.20 Hazardous Materials. Except as set forth on Schedule 3.20, the Real Property is free of contamination from any Hazardous Material. In addition, Schedule 3.20 discloses potential material environmental liabilities of Borrower or any of its Subsidiaries of which any of them have knowledge (i) related to noncompliance with the Environmental Laws, or (ii) associated with the Real Estate. Neither Borrower nor any of its Subsidiaries has caused or suffered to occur any Release with respect to any Hazardous Material at, under, above or within any real property which it owns or leases. Neither Borrower nor any of its Subsidiaries is involved in operations which could lead to the imposition of any liability or Lien on it, or any owner of any premises which it occupies, under any Environmental Law, and neither Borrower nor any of its Subsidiaries has permitted any tenant or occupant of such premises to engage in any such activity. Borrower has provided to Agent copies of all existing environmental reports, reviews and audits and all written information pertaining to actual or potential Environmental Liabilities and Costs, in each case relating to Borrower and each of its Subsidiaries. 3.21 Insurance Policies. Schedule 3.21 lists all insurance of any nature maintained for current occurrences by Borrower and its Subsidiaries, as well as a summary of the terms of such insurance. Borrower covenants that such Insurance complies with and shall at all times comply with the standards set forth on Annex H. 3.22 Deposit and Disbursement Accounts. Schedule 3.22 lists all banks and other financial institutions at which Borrower or its Subsidiaries maintains deposits and/or other accounts, including any disbursement accounts, and such Schedule correctly identifies the name, address and telephone number of each depository, the name in which the account is held, a description of the purpose of the account, and the complete account number. 3.23 Government Contracts. Except as set forth on Schedule 3.23, neither Borrower nor any of its Subsidiaries is a party to any contract or agreement with the federal government and none of the Accounts are subject to the Federal Assignment of Claims Act (31 U.S.C. Section 3727) relative to the assignment of such Accounts. 3.24 Customer and Trade Relations. There exists no actual or threatened termination or cancellation of, or any material adverse modification or change in: (a) the business relationship of Borrower or any of its Subsidiaries with any customer or group of customers whose purchases individually or in the aggregate are material to the operations of Borrower, such Subsidiary, or Borrower and its Subsidiaries taken as a whole; or (b) the business relationship of Borrower or any of its Subsidiaries with any supplier material to the operations of Borrower, such Subsidiary, or Borrower and its Subsidiaries taken as a whole. 3.25 Agreements and Other Documents. As of the Closing Date, Borrower has provided (except as provided under the Prior Credit Agreement) to Agent, on behalf of Lenders, accurate and complete copies (or summaries) of all of the following agreements or documents to which Borrower or any of its Subsidiaries is subject: (a) each Plan; (b) supply agreements not terminable by Borrower or such Subsidiary, as appropriate, within sixty (60) days following written notice issued by Borrower or such Subsidiary; (c) purchase agreements not terminable by Borrower or such Subsidiary, as appropriate, within sixty (60) days following written notice issued by -26- Borrower or such Subsidiary; (d) leases of real property; (e) any lease of equipment having a remaining term of one (1) year or longer and requiring aggregate rental and other payments in excess of Fifty Thousand Dollars ($50,000) per annum; (f) licenses and permits necessary for the conduct of Borrower's or such Subsidiary's businesses; (g) employment, consulting, severance, "golden parachute" and other similar agreements with any officer of Borrower or such Subsidiary; (h) instruments or documents evidencing Indebtedness of Borrower or such Subsidiary and any security interest granted by Borrower or such Subsidiary with respect thereto; and (i) instruments and agreements evidencing the issuance of any equity securities, warrants, rights or options to purchase equity securities of Borrower or such Subsidiary. 3.26 Kansas Indebtedness. No default or event of default has occurred and is continuing under the Kansas Loan Documents. 4. FINANCIAL STATEMENTS AND INFORMATION 4.1 Reports and Notices. (a) Borrower covenants and agrees that from and after the Closing Date and until the Commitment Termination Date, it shall deliver to Agent and/or Lenders, as required, the Financial Statements, notices and Projections at the times, to the Persons and in the manner set forth on Annex I. (b) Borrower covenants and agrees that from and after the Closing Date, it shall deliver to Agent and/or Lenders, as required, the various Collateral Reports at the times, to the Persons and in the manner set forth on Annex J. 4.2 Communication with Accountants. Borrower authorizes Agent to communicate directly with its independent certified public accountants and tax advisors, including Coopers & Lybrand, and authorizes those accountants and advisors to disclose to Agent any and all financial statements and other supporting financial documents and schedules including copies of any management letter with respect to the business, financial condition and other affairs of Borrower or any of its Subsidiaries. To permit Borrower's attendance thereat, Agent shall provide one (1) day's prior notice to Borrower of any such communications between Agent and the foregoing persons. 5. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, unless Agent shall otherwise consent in writing, from and after the Closing Date and until the Commitment Termination Date: 5.1 Maintenance of Existence and Conduct of Business. Borrower shall, and shall cause each of its Subsidiaries to: (a) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and its rights and franchises; (b) continue to conduct its business substantially as now conducted or as otherwise permitted hereunder; (c) at all times maintain, preserve and protect all of its copyrights, patents, trademarks, trade names and all other intellectual property and rights as licensee or licensor thereof in use or useful in the conduct of its business, preserve all the remainder of its property, in use or useful in the conduct of its business and keep each of the same in good repair, working order and condition (taking into consideration -27- ordinary wear and tear) and from time to time make, or cause to be made, all necessary or appropriate repairs, replacements and improvements thereto consistent with industry practices, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; and (d) transact business only in such names as are set forth on Schedule 5.1. 5.2 Payment of Obligations. (a) Borrower shall: (i) pay and discharge or cause to be paid and discharged all Obligations; and (ii) prior to an Event of Default, pay and discharge, or cause to be paid and discharged, its Indebtedness other than the Obligations at the time such amounts are due and payable, and, subject to Section 5.2(b), pay and discharge or cause to be paid and discharged promptly all (A) Charges imposed upon it, its income and profits, or any of its property (real, personal or mixed), and (B) lawful claims for labor, materials, supplies and services or otherwise, before any thereof shall become in default. (b) Borrower may in good faith contest, by proper legal action or proceedings, the validity or amount of any Charges or claims arising under Section 5.2 (a) (ii); provided, that, at the time of commencement of any such action or proceeding, and during the pendency thereof (i) no Default or Event of Default shall have occurred, (ii) adequate reserves with respect thereto are maintained on the books of Borrower, in accordance with GAAP, (iii) such contest operates to suspend collection of the contested Charges or claims and such contest is maintained and prosecuted continuously and with diligence, (iv) none of the Collateral would be subject to forfeiture or loss or any Lien by reason of the institution or prosecution of such contest, (v) no Lien shall exist, be imposed or be attempted to be imposed for such Charges or claims during such action or proceeding, (vi) Borrower shall promptly pay or discharge such contested Charges and all additional charges, interest, penalties and expenses, if any, and shall deliver to Agent evidence acceptable to Agent of such compliance, payment or discharge, if such contest is terminated or discontinued adversely to Borrower, and (vii) Agent has not advised Borrower in writing that Agent reasonably believes that nonpayment or nondischarge thereof could have or result in a Material Adverse Effect. 5.3 Books and Records. Borrower shall keep adequate records and books of account with respect to Borrower's and each of its Subsidiaries' business activities, in which proper entries, reflecting all financial transactions, are made in accordance with GAAP and on a basis consistent with the Financial Statements referred to in Section 3.4. 5.4 Litigation. Borrower shall notify Agent in writing, promptly upon learning thereof, of any litigation commenced or threatened against Borrower or any of its Subsidiaries, and of the institution against it of any suit or administrative proceeding that (a) may involve an amount in excess of One Hundred Thousand Dollars ($100,000) or (b) seeks injunctive relief or could have or result in a Material Adverse Effect if adversely determined. 5.5 Insurance. (a) Borrower shall maintain the policies of insurance described on Schedule 3.21 in form and with insurers recognized as adequate by Agent. Except to the extent permitted under Section 6.15, Borrower shall maintain such policies at its sole cost and expense. Such policies shall be in such amounts as are set forth on Schedule 3.21 and, in no event, less than the amounts maintained on the Closing Date, except for appropriate changes in such amounts resulting from acquisitions or dispositions made in accordance with this Agreement. Borrower shall -28- notify Agent promptly of any occurrence causing a material loss or decline in value of any real or personal property and the estimated (or actual, if available) amount of such loss or decline. Except as otherwise specified on Schedule 3.21, Borrower hereby directs all present and future insurers under its "All Risk" policies of insurance to pay all proceeds payable thereunder directly to Agent, on behalf of itself and Lenders. Borrower irrevocably makes, constitutes and appoints Agent (and all officers, employees or agents designated by Agent) as Borrower's true and lawful agent and attorney-in-fact for the purpose, upon the occurrence and during the continuance of a Default or an Event of Default, of making, settling and adjusting claims under the "All Risk" policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such "All Risk" policies of insurance, and for making all determinations and decisions with respect to such "All Risk" policies of insurance. Unless a Default or an Event of Default shall have occurred and be continuing, at Borrower's request, Agent shall release casualty insurance proceeds to Borrower necessary to pay for the repair, replacement or reconstruction of the assets subject to such casualty, provided that Agent reasonably believes that, in the event that the reasonably anticipated costs of such repair, replacement or reconstruction will exceed the amount of such insurance proceeds, Borrower is and will be able to meet such additional cost. In the event Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, Agent, without waiving or releasing any Obligations or Default or Event of Default hereunder, may at any time or times thereafter (but shall not be obligated to) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which Agent deems advisable. All sums so disbursed, including attorneys, fees, court costs and other charges related thereto, shall be payable, on demand, by Borrower to Agent and shall be additional Obligations hereunder secured by the Collateral, provided, that, if and to the extent Borrower fails to promptly pay any of such sums upon demand therefor, Agent is authorized to, and at its option may, make or cause to be made Revolving Credit Advances on behalf of Borrower for payment thereof. (b) Agent reserves the right at any time, upon review of Borrower's risk profile, to require additional forms and limits of insurance to, in Agent's sole opinion, adequately protect both Agent and Lenders' interests in all or any portion of the Collateral and to ensure that Borrower and each of its Subsidiaries is protected by insurance in amounts and with coverage customary for businesses engaged in their businesses. Upon the occurrence and during the continuance of any Default or Event of Default, Agent reserves the right at any time, upon review of Borrower's and/or any of its Subsidiaries' risk profile, to require additional forms and limits of insurance to, in Agent's sole opinion, adequately protect Agent's and Lenders' interests, including, but not limited to, their interests in the Collateral. Borrower shall, if so requested by Agent, deliver to Agent, from time to time upon request of Agent, a report of a reputable insurance broker, satisfactory to Agent, with respect to its insurance policies. (c) On the Closing Date and from time to time thereafter, as requested by Agent, Borrower shall deliver to Agent endorsements (i) to all "All Risk" and business interruption insurance naming Agent, on behalf of itself and Lenders, as loss payee, and (ii) to all general liability and other liability policies naming Agent, on behalf of itself and Lenders, as additional insured. -29- 5.6 Compliance with Laws. Borrower and each of its Subsidiaries shall comply in all material respects with all federal, state and local laws, regulations, orders and agreements (including conciliation agreements) applicable to it, including those relating to licensing, environmental, consumer credit, truth-in-lending, ERISA and labor matters. 5.7 Agreements. Borrower and each of its Subsidiaries shall perform in all material respects, within all required time periods (after giving effect to any applicable grace periods), all of its obligations and enforce all of its rights under each agreement to which it is a party, including any lease or customer contracts to which it is a party. Borrower or any of its Subsidiaries may terminate or modify any provision of any agreement to which it is a party, so long as such termination or modification could not have or result in a Material Adverse Effect. 5.8 Supplemental Disclosure. On the request of Agent (in the event that such information is not otherwise delivered by Borrower to Agent pursuant to this Agreement), so long as there are Obligations outstanding hereunder, and with reasonable frequency (unless a Default or an Event of Default has occurred and is continuing, then, in such case, as frequently as requested by Agent), Borrower will supplement each schedule or representation herein with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such schedule or as an exception to such representation or which is necessary to correct any information in such schedule or representation which has been rendered inaccurate thereby; provided, however, that such supplement to such schedule or representation shall not be deemed an amendment thereof unless expressly consented to in writing by Agent and Requisite Lenders, and no such supplements, except as the same may be consented to in a writing which expressly includes a waiver, shall be or be deemed a waiver of any Default or Event of Default disclosed therein. 5.9 Employee Plans. Borrower shall notify Agent of (i) any and all claims, actions, or lawsuits asserted or instituted, and of any threatened litigation or claims, against Borrower, any of its Subsidiaries, or against any ERISA Affiliate in connection with any Plan or Qualified Plan or/and against any such Plan itself, or against any fiduciary of or service provided to any such Plan and (ii) the occurrence of any Reportable Event with respect to any Pension Plan. 5.10 Environmental Matters. Borrower shall, and shall cause all of its Subsidiaries to, (i) comply in all respects with the Environmental Laws applicable to it, (ii) notify Agent promptly after Borrower or such Subsidiary becomes aware of any Release upon any premises owned or occupied by it, and (iii) promptly forward to Agent a copy of any order, notice, permit, application, or any communication or report received by Borrower or such Subsidiary in connection with any such Release or any other matter relating to the Environmental Laws that may affect such premises or Borrower or such Subsidiary. The provisions of this Section 5.10 shall apply whether or not the Environmental Protection Agency, any other federal agency or any state, local or foreign environmental agency has taken or threatened any action in connection with any Release or the presence of any Hazardous Materials. 5.11 Landlords' Agreements, Bailee Letters and Mortgagee Agreements. Borrower shall have obtained as of the Closing Date a landlord's agreement in form and substance acceptable -30- to Agent from the lessor of each leased premise currently being used by Borrower or any of its Subsidiaries and shall obtain such an agreement from the lessor of each premise leased after the Closing Date, in each case where Collateral is currently or may be located. Borrower shall have obtained as of the Closing Date a bailee letter in form and substance acceptable to Agent with respect to any warehouse currently being used by Borrower or any of its Subsidiaries and shall obtain such a letter with respect to each warehouse established after the Closing Date, in each case where Collateral is currently or may be located. Borrower shall have obtained as of the Closing Date a mortgagee's agreement in form and substance acceptable to Agent from the mortgagee of each owned property currently being used by Borrower or any of its Subsidiaries and shall obtain such an agreement from the mortgagee of each property mortgaged after the Closing Date, in each case where Collateral is currently or may be located. No real property shall be leased, established as a warehouse or acquired by Borrower or any of its Subsidiaries after the Closing Date, unless and until a landlord agreement, bailee letter or mortgagee agreement, as appropriate, shall first have been obtained in form and substance acceptable to Agent with respect to such location. 5.12 Leased Locations of Collateral. Borrower shall timely and fully pay and perform in all material respects its obligations under all leases and other agreements with respect to each leased location or public warehouse where any Collateral is or may be located. Borrower shall promptly deliver to Agent copies of (a) any and all default notices received under or with respect to any such leased location or public warehouse and (b) any and all other notices received under or with respect to any such lease or other agreement. Upon Agent's request, Borrower shall promptly deliver to Agent copies of (i) all invoices received by Borrower for the payment of rent or other obligations with respect to any such leased location or warehouse and (ii) all cancelled checks evidencing payment of such rent and other obligations. 5.13 Subsidiaries. Prior to forming any Subsidiary, Borrower shall (a) provide not less than thirty (30) days prior written notice to Agent, (b) receive the prior written consent of Agent, (c) enter into a pledge agreement with Agent, for the benefit of Agent and Lenders, pledging the capital stock of such Subsidiary as additional security for the Obligations and (d) cause such Subsidiary to enter into a guaranty, security agreement and all other mortgages, deeds of trust and other documents, instruments and agreements as Agent may request with Agent, for the benefit of Agent and Lenders, securing all of the assets of such Subsidiary as additional security for the Obligations. 5.14 Maintenance of Equipment and Fixtures. Borrower shall keep and maintain its Equipment and Fixtures in good operating condition sufficient for the continuation of Borrower's business conducted on a basis consistent with past practices, and Borrower shall provide or arrange for all maintenance and service and all repairs necessary for such purpose. 5.15 Purchase Offers. Promptly upon Borrower's receipt of any offer by any Person to acquire all or substantially all of Borrower's capital stock or assets, prior to execution or delivery of any document in response to such offer Borrower shall deliver a copy of such offer, together with all supporting documentation received by Borrower with respect thereto, to Agent for its review. Confidential information received by Agent and Lenders from Borrower pursuant to this Section 5.15 shall be subject to Section 10.14. -31- 5.16 Board of Directors. Immediately upon any change in the composition of Borrower's board of directors, Borrower shall notify Agent of the same. 6. NEGATIVE COVENANTS Borrower covenants and agrees that, without Agent's prior written consent, from and after the Closing Date until the Commitment Termination Date: 6.1 Mergers, Etc. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, directly or indirectly, by operation of law or otherwise, merge with, consolidate with, acquire all or substantially all of the assets or capital stock of, or otherwise combine with, any Person or, except as otherwise permitted by Section 5.13, form any Subsidiary. 6.2 Investments; Loans and Advances. Except as otherwise permitted by Sections 6.3 or 6.4, or by the Security Agreement, Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, make any investment in, or make or accrue loans or advances of money to any Person, through the direct or indirect lending of money, holding of securities or otherwise. 6.3 Indebtedness. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, create, incur, assume or permit to exist any Indebtedness, except (i) Indebtedness secured by Liens permitted under Section 6.7, (ii) the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan, the Letter of Credit Obligations and the other Obligations, (iii) deferred taxes, (iv) unfunded pension fund and other employee benefit plan obligations and liabilities not to exceed One Million Five Hundred Thousand Dollars ($1,500,000) in the aggregate and then only to the extent they are permitted to remain unfunded under applicable law, (v) the Kansas Indebtedness, and (vi) subordinated Indebtedness incurred solely to redeem the preferred stock of Borrower owned by PST in accordance with this Agreement, provided, that, such Indebtedness is (a) subordinated in all respects to the indefeasible payment in full in immediately available funds of all Obligations and other payments owing to Agent and Lenders under or pursuant to this Agreement or any other Loan Document and (b) on terms and conditions, and in form and substance, acceptable to Agent in its sole and absolute discretion. 6.4 Employee Loans and Transactions. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, except as otherwise expressly permitted hereunder, enter into any lending, borrowing or other commercial transaction with any of its employees, officers, directors, Subsidiaries, Affiliates or related parties without the prior written consent of Agent, including (i) downstreaming or upstreaming of cash or intercompany advances or guarantees and (ii) payment of any management consulting, advisory or similar fee based on or related to Borrower's or such Subsidiary's operating performance or income or any percentage thereof other than full-time employment agreements and incentive compensation programs with current employees in accordance with the agreements described on Schedule 6.4, and (iii) payment of all or a portion of the salaries or compensation to any Person employed by any Affiliate of Borrower, including ARTRA and its Affiliates; provided, that in the case of the foregoing clause (iii) Borrower may make payments on behalf of ARTRA in respect of "BMS Healthcare" (or a replacement primary health care insurance provider) premiums and claims so long as the amount of such payments is fully reimbursed as an -32- offset against payments (to the fullest extent of such payments in the consecutive order of their occurrence) owing by Borrower to ARTRA pursuant to the Tax Sharing Agreement. Borrower shall not: (a) permit the direct and indirect compensation of its ten (10) most highly compensated employees to exceed, in the aggregate, during any Fiscal Year one hundred twenty-five percent (125%) of the amount of such compensation during the immediately preceding Fiscal Year; or (b) amend, alter or otherwise modify Borrower's incentive or other compensation plans, or establish other such plans, except as required in accordance with Borrower's 1996 Bonus Incentive Program, as amended as of the Closing Date, provided that such program shall not permit Borrower to increase the amount of such compensation provided to its ten (10) highest paid employees above the amounts otherwise permitted in accordance with the foregoing clause (a). Notwithstanding the foregoing, ARTRA shall be permitted to offer compensation to directors or employees of Borrower pursuant to an equity incentive plan, in form and substance reasonably satisfactory to Agent. 6.5 Capital Structure and Business. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to: (i) make any changes in any of its business objectives, purposes or operations which could in any way materially adversely affect the repayment of the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan, the Letter of Credit Obligations, or any of the other Obligations or could have or result in a Material Adverse Effect, (ii) make or permit to exist any change in its capital structure as described on Schedule 3.10 (including the issuance of any shares of Stock, options, warrants or other securities or agreements convertible into Stock or any revision of the terms of its outstanding Stock other than pursuant to the Warrant), or (iii) amend its certificate or articles of incorporation or bylaws. Neither Borrower nor any of its Subsidiaries shall engage in any business other than the businesses currently engaged in by Borrower or such Subsidiary or businesses in industries related to the businesses currently engaged in by Borrower or such Subsidiary 6.6 Guaranteed Indebtedness. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, incur any Guaranteed Indebtedness except (a) by endorsement of instruments or items of payment for deposit to the general account of Borrower, and (b) for Guaranteed Indebtedness incurred for the benefit of Borrower or such Subsidiary if the primary obligation is expressly permitted by this Agreement. 6.7 Liens. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, create, incur, assume or permit to exist any Lien on or with respect to any properties or assets (including any documents or instrument with respect to Goods or Accounts) of Borrower or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, except Permitted Encumbrances. In addition, neither Borrower nor any of its Subsidiaries shall become a party to any agreement, note, indenture or instrument, or take any other action, which would prohibit the creation of a Lien on any of its properties or other assets in favor of Agent, on behalf of itself and Lenders, as additional collateral for the Obligations. 6.8 Sale of Assets. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, sell, transfer, convey, assign or otherwise dispose of any of its properties or other assets, including the capital stock of any Subsidiary or any of its Accounts; provided, however, that the foregoing shall not prohibit: (a) the sale of Inventory in the ordinary course of business; (b) the -33- disposition for fair market value of the New Jersey or Georgia Facilities after the operations thereof shall have been transferred to the Kansas Facility; or (c) the disposition of other assets (excluding dispositions of Accounts and dispositions of Inventory not sold in the ordinary course of Business) which are no longer in use or useful to Borrower or such Subsidiary in the conduct of its business in an amount or amounts not exceeding One Million Five Hundred Thousand Dollars ($1,500,000) in the aggregate per annum. 6.9 Events of Default. Borrower shall not, nor shall Borrower permit any of its Subsidiaries to, take any action or omit to take any action, which act or omission would constitute (a) a Default or an Event of Default under, pursuant to, or noncompliance with any of, the terms of this Agreement or any of the other Loan Documents or (b) a default or an event of default which could cause or result in a Material Adverse Effect pursuant to, or noncompliance with, any other contract, lease, mortgage, deed of trust or instrument to which it is a party or by which it or any of its property is bound, or any document creating a Lien. 6.10 ERISA. Neither Borrower, any of its Subsidiaries, nor any ERISA Affiliate shall without Agent's prior written consent acquire any new ERISA Affiliate that maintains or has an obligation to contribute to a Pension Plan that has either an "accumulated funding deficiency", as defined in Section 302 of ERISA, or any "unfunded vested benefits", as defined in Section 4006(a)(3)(e)(iii) of ERISA, in the case of any plan other than a Multiemployer Plan, and in Section 4211 of ERISA in the case of a Multiemployer Plan. Additionally, neither Borrower, any of its Subsidiaries, nor any ERISA Affiliate shall, without Agent's prior written consent, permit or suffer any condition set forth on Schedule 3.13 to cease to be met and satisfied at any time; terminate any Pension Plan that is subject to Title IV of ERISA where such termination could reasonably be anticipated to result in liability to such Person; permit any accumulated funding deficiency, as defined in Section 302(a)(2) of ERISA, to be incurred with respect to any Pension Plan; fail to make any contributions or fail to pay any amounts due and owing as required by the terms of any Plan before such contributions or amounts become delinquent; make a complete or partial withdrawal (within the meaning of Section 4201 of ERISA) from any Multiemployer Plan; or at any time fail to provide Agent with copies of any Plan documents or governmental reports or filings, if requested by Agent. 6.11 Financial Covenants. Borrower shall not breach or fail to comply with any of the Financial Covenants (the "Financial Covenants") set forth on Annex K. 6.12 Hazardous Materials. Except as set forth on Schedule 3.20, Borrower shall not, nor shall Borrower permit any of its Subsidiaries or any other Person within its control to, cause or permit a Release or the presence, use, generation, manufacture, installation, Release, discharge, storage or disposal of any Hazardous Materials on, under, in, above or about any of its real estate or the transportation of any Hazardous Materials to or from any real estate where such Release or such presence, use, generation, manufacture, installation, Release, discharge, storage or disposal would violate or form the basis for liability under any Environmental Laws. If a Default or Event of Default shall have occurred and be continuing, Borrower, at its own expense, shall cause the performance of such environmental audits and preparation of such environmental reports as Agent may from time -34- to time request as to any location at which Collateral is then located, by reputable environmental consulting firms acceptable to Agent, and in form and substance acceptable to Agent. 6.13 Sale-Leasebacks. Neither Borrower nor any of its Subsidiaries shall engage in any sale-leaseback or similar transaction involving any of its assets. 6.14 Cancellation of Indebtedness. Neither Borrower nor any of its Subsidiaries shall cancel any claim or debt owing to it, except for reasonable consideration negotiated on an arm's-length basis and in the ordinary course of its business. 6.15 Restricted Payments. (a) Borrower shall not, nor shall Borrower cause or permit any of its Subsidiaries to, make any Restricted Payment; provided, however, that, so long as no Default or Event of Default has occurred and is continuing or would result therefrom, Borrower may: (a) make payments pursuant to the Tax Sharing Agreement (provided that such Restricted Payments shall be prohibited to the extent ARTRA does not repay Borrower the amounts described in Section 8.1(q) in accordance with the terms thereof) and the Services Agreement, in each case not to exceed the lesser of (i) Borrower's allocated portion of the items respectively covered by each such agreement and (ii) the actual cost which Borrower would incur for each such respective item independently of Borrower's affiliation with ARTRA or any other Person party to either such agreement; (b) transfer the Harvey Receivable to ARTRA, provided, that, all of such Indebtedness shall be evidenced by one (1) note which shall duly pledged and delivered to Agent and (c) redeem against surrender of certificates therefor all of the shares of its outstanding preferred stock held by PST for an amount which does not exceed $2,100,000 in the aggregate (inclusive of all fees, costs and expenses incurred in connection therewith, and all distributions or other transfers of assets made in respect thereof). 6.16 Leases. Borrower shall not, nor shall Borrower cause or permit any of its Subsidiaries to, enter into any lease of real property or similar agreement or arrangement; provided, that, in the event of the disposal of either or both of the New Jersey or Georgia Facilities, Borrower may enter into a lease of real property or similar agreement or arrangement for the purpose of continuing the applicable business of Borrower, so long as the rents under all of such leases, agreements or arrangements do not exceed Five Hundred Thousand Dollars ($500,000) in the aggregate for any successive twelve (12) month period. 6.17 Composition. Borrower shall not, nor shall Borrower cause or permit any of its Subsidiaries to, cause or suffer the occurrence of any change in the composition of its Stockholders as of the Closing Date. 6.18 Fiscal Year. Borrower shall not, nor shall Borrower cause or permit any of its Subsidiaries to, change its Fiscal Year. 6.19 Change of Corporate Name. Borrower shall not, nor shall Borrower cause or permit any of its Subsidiaries to, change its corporate name. -35- 6.20 Sale of Stock. Borrower shall not, nor shall Borrower cause or permit any of its Subsidiaries to, sell (whether in a public or private offering or otherwise) or otherwise provide rights to any Person (other than rights provided to Borrower or Parent as of the Closing Date which are not otherwise prohibited by any Loan Document) with respect to any of its Stock, except pursuant to the exercise of the Warrant. 6.21 Cash Management. Except for petty cash accounts not to exceed Twenty Five Thousand Dollars ($25,000) in the aggregate, collectively, at any and all times, Borrower shall not, nor shall Borrower cause or permit any of its Subsidiaries to, accumulate or maintain cash in disbursement or payroll accounts as of any date of determination. 6.22 No Impairment of Upstreaming. Borrower shall not, nor shall Borrower permit or cause any of its Subsidiaries to, directly or indirectly, enter into or become bound by any agreement, instrument, indenture or other obligation which could directly or indirectly restrict, prohibit or require the consent of any Person with respect to the payment of dividends or distributions or the making of Intercompany Loans by any Subsidiary to Borrower. 6.23 No Amendment. Borrower shall not, nor shall Borrower permit or cause any of its Subsidiaries to, directly or indirectly, amend, restate, supplement or otherwise modify the Tax Sharing Agreement, the Services Agreement or that certain Employment Agreement dated as of January 1, 1994 between Borrower and Marshall E. Rodin. None of the Kansas Loan Documents shall be amended, restated, supplemented or otherwise modified. 6.24 No Change in Management. Borrower shall not cause or suffer the occurrence of any change in its senior management (including its chief executive officer, chief financial officer and chief operating officer) as of the Closing Date; provided, that, in the event of the resignation, retirement or death of any of the foregoing, Borrower shall replace the same with a Person reasonably acceptable to Agent. 6.25 Management Agreements. Except to the extent that the annual payments under all management consulting, advisory or other similar agreements of Borrower do not exceed $250,000 in the aggregate, Borrower shall not enter into any such agreement or amend, alter or otherwise modify, or renew or extend, any such agreement to which it is a party as of the Closing Date, including the consulting agreement between Borrower and Institute of Management Resources. 6.26 Overriding Agreements. Except as expressly specified in this Agreement, Borrower shall not pay, make, declare or guaranty or become obligated to pay, make, declare or guaranty, whether directly or indirectly, any dividend, distribution, payment, loan or advance, contribution, investment, Restricted Payment or other transfer of cash, property or other assets to or in respect of Parent, ARTRA, any Subsidiary of any of the foregoing, Peter R. Harvey or any of his family members, or any stockholder, employee, director, officer or Affiliate of any of the foregoing. -36- 7. TERM 7.1 Termination. The financing arrangements contemplated hereby shall be in effect until, and the Revolving Loan, Letters of Credit, Term Loan, Capital Expenditure Loan and all other Obligations shall be automatically due and payable in full on, the Commitment Termination Date; provided, however, that in the event of a prepayment of any part of the Obligations prior to the Commitment Termination Date with funds borrowed from any Person other than Lenders pursuant to this Agreement, Borrower shall simultaneously therewith pay to Agent, in full, in immediately available funds the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan, the Letter of Credit Obligations, and all other Obligations arising under this Agreement or any of the other Loan Documents. 7.2 Survival of Obligations Upon Termination of Financing Arrangements. Except as otherwise expressly provided for in the Loan Documents, no termination or cancellation (regardless of cause or procedure) of any financing arrangement under this Agreement shall in any way affect or impair the obligations, duties and liabilities of Borrower or the rights of Agent and Lenders relating to any unpaid portion of the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan, the Letter of Credit Obligations or any other Obligation, due or not due, liquidated, contingent or unliquidated or any transaction or event occurring prior to such termination, or any transaction or event, the performance of which is not required until after the Commitment Termination Date. Except as otherwise expressly provided herein or in any other Loan Document, all undertakings, agreements, covenants, warranties and representations of or binding upon Borrower, and all rights of Agent and Lenders, all as contained in the Loan Documents shall not terminate or expire, but rather shall survive such termination or cancellation and shall continue in full force and effect until such time as the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan, the Letter of Credit Obligations and all of the other Obligations have been indefeasibly paid in full in accordance with the terms of the agreements creating such Obligations. 8. EVENTS OF DEFAULT: RIGHTS AND REMEDIES 8.1 Events of Default. The occurrence of any one or more of the following events (regardless of the reason therefor) shall constitute an "Event of Default" hereunder: (a) (i) Borrower shall fail to make any payment hereunder or under any of the other Loan Documents when due and payable or declared due and payable any payment of principal of, interest on or Fees with respect to the Revolving Credit Loan, the Term Loan or the Capital Expenditure Loan, or any payment of Fees with respect to the Letter of Credit Obligations. (ii) Borrower shall fail to make any payment, other than with respect to Obligations, required by the terms hereof or of any other Loan Document, when due and payable and the same shall remain unremedied for a period ending on the first to occur of three (3) Business Days after Borrower shall (A) receive written notice of such failure from Agent or (B) become aware of such failure. (b) Borrower shall fail or neglect to perform, keep or observe any of the provisions of Section 1.12 or Section 6, including any of the provisions set forth on Annexes C and K, respectively, or there shall exist any agreement or other document accomplishing or purporting -37- to accomplish (whether on a conditional basis or otherwise) any event, condition or other occurrence prohibited by any Loan Document. (c) Borrower shall fail or neglect to perform, keep or observe any term or provision of this Agreement (other than any such term or provision referred to in other paragraphs of this Section 8.1) or of any of the other Loan Documents, and the same shall remain unremedied for a period ending on the first to occur of thirty (30) days after Borrower shall (i) receive written notice of any such failure from Agent or (ii) become aware thereof. (d) Borrower shall, or shall cause or permit any of its Subsidiaries to, fail to timely and fully pay and perform its obligations in all material respects under all leases and other agreements with respect to each leased location or public warehouse, if any, at which Collateral is located or shall fail or neglect to perform, keep or observe any of the provisions of Section 5.12; provided, that, Borrower may in good faith contest, by proper legal action or proceedings, the validity, amount or enforcement of any such obligation or provision, so long as, at the time of commencement of any such action or proceeding, and during the pendency thereof (i) no Default or Event of Default shall have occurred, (ii) adequate reserves with respect thereto are maintained on the books of Borrower, in accordance with GAAP, (iii) such contest operates to suspend collection of the contested obligations, or enforcement of the contested provisions, and such contest is maintained and prosecuted continuously and with diligence, and (iv) Agent has not advised Borrower in writing that Agent reasonably believes that nonpayment or nondischarge thereof could have or result in a Material Adverse Effect. (e) A default shall occur under any other agreement, document or instrument to which Borrower is a party or by which Borrower or Borrower's property is bound and such default (i) involves the failure to make any payment (whether of principal, interest or otherwise) due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) in respect of any Indebtedness of Borrower in an aggregate amount exceeding One Hundred Thousand Dollars ($100,000) or (ii) causes (or permits any holder of such Indebtedness or a trustee to cause) such Indebtedness, or a portion thereof in an aggregate amount exceeding One Hundred Thousand Dollars ($100,000) to become due prior to its stated maturity or prior to its regularly scheduled dates of payment. (f) Any representation or warranty herein or in any other Loan Document or in any written statement pursuant thereto or hereto, or any report, financial statement or certificate made or delivered to Agent or any Lenders by Borrower shall be untrue or incorrect in any material respect, as of the date when made or deemed made (including those made or deemed made pursuant to Section 2.2). (g) Any material amount of the assets of Borrower or any of its Subsidiaries shall be attached, seized, levied upon or subjected to a writ or distress warrant, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors of Borrower or such Subsidiary, as the case may be, and shall remain unstayed or undismissed for sixty (60) consecutive days; or any Person other than Borrower shall apply for the appointment of a receiver, trustee or custodian for any of Borrower's assets and shall remain unstayed or undismissed for sixty -38- (60) consecutive days; or Borrower or such Subsidiary, as the case may be, shall have concealed, removed or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them or made or suffered a transfer of any of its property or the incurring of an obligation which may be fraudulent under any bankruptcy, fraudulent conveyance or other similar law. (h) A case or proceeding shall have been commenced against Borrower or any of its Subsidiaries in a court having competent jurisdiction seeking a decree or order (i) under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of Borrower or any of its Subsidiaries or of any substantial part of any of their properties, or (iii) ordering the winding up or liquidation of the affairs of Borrower or such Subsidiary and such case or proceeding shall remain undismissed or unstayed for thirty (30) consecutive days or such court shall enter a decree or order granting the relief sought in such case or proceeding. (i) Borrower or any of its Subsidiaries shall (i) file a petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of Borrower or any of its Subsidiaries or of any substantial part of any of their properties, (iii) fail generally to pay its debts as such debts become due, or (iv) take any corporate action in furtherance of any such action. (j) A final judgment or judgments (after the expiration of all times to appeal therefrom) for the payment of money in excess of One Hundred Thousand Dollars ($100,000) in the aggregate shall be rendered against Borrower or any of its Subsidiaries unless the same shall be (i) fully covered by insurance in accordance with Section 5.5 or (ii) vacated, stayed, bonded, paid or discharged within a period of thirty (30) days from the date of such judgment. (k) Any event not specified in this Section 8 shall have occurred which Agent reasonably believes could have or could result in a Material Adverse Effect and Agent shall have given Borrower at least ten (10) days notice thereof. (l) Any provisions of any Collateral Document, including the Security Agreement or any Mortgage, after delivery thereof pursuant to Section 2.1, shall for any reason cease to be valid, binding and enforceable in accordance with its terms in a manner which, in Agent's sole and absolute discretion, could adversely affect Agent, Lenders or the Collateral, or any security interest created under any Collateral Document, including the Security Agreement or any Mortgage, shall cease to be a valid and perfected security interest or Lien having the first priority in any of the Collateral purported to be covered thereby (subject only to Permitted Encumbrances). (m) Without Agent's prior written consent, (i) there shall occur any Change in Control. -39- (n) Without Agent's prior written consent, there shall occur any (i) merger, acquisition or consolidation transaction involving Borrower or (ii) sale of all or substantially all of the assets of Borrower. (p) Any determination or notice is received by Borrower from the United States (or any department or agency thereof) with respect to a claim or other assertion for damages or any other amounts resulting from any violation of the Davis-Bacon Act by Borrower in the construction of its Kansas Facility, which claim or other assertion could, in the sole and absolute discretion of Agent, result in a Material Adverse Affect or otherwise adversely affect Borrower's ability to repay the Obligations pursuant to the Loan Documents or the rights and privileges of Agent or Lenders thereunder. (q) ARTRA shall fail to repay in full to Borrower as soon as possible and, in any event, in individual increments of at least $50,000 not later than March, June, September and December of 1997 and 1998, the $400,000 Loan advanced by Borrower to ARTRA pursuant to the Acknowledgment and Consent dated as of December 28, 1994 between Borrower and Agent. 8.2 Remedies. If any Default or Event or Default shall have occurred and be continuing, Agent may, without notice, take any one or more of the following actions: (a) increase the rate of interest applicable to the Revolving Credit Loan and/or Term Loan and/or the Capital Expenditure Loan to the Default Rate, as provided in Section 1.8(e); or (b) terminate this facility with respect to further Revolving Credit Advances, Capital Expenditure Advances, and/or Letter of Credit Obligations, whereupon any further Revolving Credit Advances or Letter of Credit Obligations shall be made or incurred in Agent's sole discretion. If any Event of Default shall have occurred and be continuing, Agent may, without notice, (x) declare all or any portion of the Obligations, including all or any portion of the Revolving Credit Loan and/or the Term Loan and/or the Capital Expenditure Loan and/or the Letter of Credit Obligations, to be forthwith due and payable without presentment, demand, protest or further notice of any kind, all of which are expressly waived by Borrower; and (y) exercise any rights and remedies provided to Agent under the Loan Documents and/or at law or equity, including all remedies provided under the Code; provided, however, that upon the occurrence of an Event of Default specified in Section 8.1(g), (h) or (i), all of the Obligations, including the Revolving Credit Loan, the Letter of Credit Obligations, the Term Loan and the Capital Expenditure Loan, shall become immediately due and payable without declaration, notice or demand by Agent. 8.3 Waivers by Borrower. Except as otherwise provided for in this Agreement or by applicable law, Borrower waives: (i) presentment, demand and protest and notice of presentment, dishonor, notice of intent to accelerate, notice of acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Agent on which Borrower may in any way be liable, and hereby ratifies and confirms whatever Agent may do in this regard, (ii) all rights to notice and a hearing prior to Agent's taking possession or control of, or to Agent's replevy, attachment or levy upon, the Collateral or any bond or security which might be required by any court prior to allowing Agent to exercise any of its remedies, and (iii) the benefit of all valuation, appraisal and exemption laws. Borrower -40- acknowledges that it has been advised by counsel of its choice with respect to this Agreement, the other Loan Documents and the transactions evidenced by this Agreement and the other Loan Documents and understands fully the terms, conditions and implications of each of the foregoing. 9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT 9.1 Assignments and Participations. GE Capital may assign its rights and delegate its obligations as a Lender under this Agreement and, further, may assign, or sell participations in, all or any part of its Revolving Credit Advances, its Commitments, its portion of the Letter of Credit Obligations, the Term Loan and the Capital Expenditure Loan or any other interest herein or in its Revolving Credit Note, in its Term Loan Notes or in its Capital Expenditure Loan Notes to an Affiliate or to any other Person. Unless Agent shall have otherwise agreed in writing, no other Lender shall assign any of its rights or delegate any of its obligations under this Agreement or any of the other Loan Documents or assign, or sell any participation in, all or any part of its Revolving Credit Advances, its Commitments, its portion of the Letter of Credit Obligations, Term Loan or Capital Expenditure Loan or any other interest herein or in its Revolving Credit Note, in its Term Loan Notes or in its Capital Expenditure Loan Notes to any Affiliate or other Person. In the case of an assignment by GE Capital under this Section 9.1, (or in the event, if any, that Agent shall so agree in writing, an assignment by another Lender) (a) prior to such assignment, the proposed assignee shall have complied with the then applicable provisions of Section 1.19(b) and (b) the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were a Lender hereunder. The assigning Lender shall be relieved of its obligations hereunder with respect to its Commitment or portion of the Term Loan or Capital Expenditure Loan or assigned portion of any thereof. After the consummation of any assignment hereunder, Agent shall notify Borrower of the same within a reasonable period of time. Borrower hereby acknowledges and agrees that any assignment will give rise to a direct obligation of Borrower to the assignee and that the assignee shall be considered to be a "Lender". In all instances, each Lender's liability to make Revolving Credit Advances, fund the Term Loan or the Capital Expenditure Loan or incur Letter of Credit Obligations hereunder shall be several and not joint and shall be limited to such Lender's Pro Rata Share. GE Capital may (or, in the event, if any, that Agent shall so agree in writing, another Lender may) sell participations in all or any part of any Revolving Credit Advances made, any funding of the Term Loan or Capital Expenditure Loan made, or any Letter of Credit Obligations incurred, by it as a Lender to an Affiliate or any other Person; provided that all amounts payable by Borrower hereunder shall be determined as if that Lender had not sold such participation and the holder of any such participation shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting (a) any reduction in the principal amount, interest rate or fees payable with respect to any Revolving Credit Advances or portion of the Term Loan or Capital Expenditure Loan in which such holder participates, (b) any extension of the final scheduled maturity date of the principal amount of the Revolving Credit Advances or portion of the Term Loan or Capital Expenditure Loan in which such holder participates, and (c) any release of any -41- Collateral with a value in excess of Fifty Thousand Dollars ($50,000) in the aggregate (other than in accordance with the terms of this Agreement, the Collateral Documents or the other Loan Documents). Borrower hereby acknowledges and agrees that any participation will give rise to a direct obligation of Borrower to the participant and the participant shall for purposes of Sections 1.16, 1.17 and 9.3 be considered to be a "Lender". Unless Agent shall have otherwise agreed in writing, no Lender, other than GE Capital, shall sell any participation in all or any part of any Revolving Credit Advances made, any funding of the Term Loan or Capital Expenditure Loan made, or any Letter of Credit Obligations incurred, by it to any Affiliate or other Person. Except as otherwise provided in this Section 9.1, no Lender shall, as between Borrower and that Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of participation in, all or any part of the Revolving Credit Advances, the Revolving Credit Notes, the Term Loan, the Term Loan Notes, the Capital Expenditure Loan, the Capital Expenditure Loan Notes, the Letter of Credit Obligations, or other Obligations owed to such Lender. Any Lender permitted to sell assignments and participations under this Section 9.1 may furnish any information concerning Borrower and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants). Borrower shall assist any Lender permitted to sell assignments or participations under this Section 9.1 in whatever manner reasonably necessary in order to enable or effect any such assignment or participation, including the execution and delivery of any and all agreements, notes and other documents and instruments as shall be requested and the preparation of informational materials for, and the participation of relevant management in meetings with, potential assignees or participants; provided, that, aside from nominal expenses, Borrower shall not be responsible for the due diligence expenses or attorney's fees or expenses of any such prospective assignee or participant, except as otherwise required herein and, without limiting the foregoing, in Section 1.19(c). Borrower shall certify the correctness, completeness and accuracy of all descriptions of Borrower and its affairs contained in any selling materials and all information provided by Borrower and included in such materials. 9.2 Appointment of Agent. GE Capital is hereby appointed Agent hereunder to act on behalf of all Lenders as Agent under this Agreement and the other Loan Documents. The provisions of this Section 9.2 are solely for the benefit of Agent and Lenders and neither Borrower, any of its Subsidiaries nor any other Person shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and the other Loan Documents, Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Borrower, any Subsidiary of Borrower or any other Person. Agent shall have no duties or responsibilities except for those expressly set forth in this Agreement and the other Loan Documents. The duties of Agent shall be mechanical and administrative in nature and Agent shall not have, or be deemed to have, by reason of this Agreement, any other Loan Document or otherwise a fiduciary relationship in respect of any Lender. Neither Agent nor any of its officers, directors, employees, -42- agents or representatives shall be liable to any Lender for any action taken or omitted to be taken by it hereunder or under any other Loan Document, or in connection herewith or therewith, unless caused by its or their own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction after all possible appeals have been exhausted. The agency hereby created shall in no way impose any of the rights and powers of, or impose any duties or obligations upon, Agent in its individual capacity as a Lender hereunder. Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder. Agent may resign at any time by giving thirty (30) days prior written notice thereof to Lenders and Borrower. Upon any such resignation, Requisite Lenders shall have the right, upon five (5) days notice to Borrower, to appoint a successor Agent. Upon acceptance of appointment, the successor Agent shall succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from all of its duties and obligations under this Agreement and the other Loan Documents. If Agent shall request instructions from Requisite Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any other Loan Document, then Agent shall be entitled to refrain from such act or taking such action unless and until Agent shall have received instructions from Requisite Lenders, and Agent shall not incur liability to any Person by reason of so refraining. Agent shall be fully justified in failing or refusing to take any action hereunder or under any other Loan Document (a) if such action would, in the opinion of Agent, be contrary to law or the terms of this Agreement or any other Loan Document or (b) if Agent shall not first be indemnified to its satisfaction against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or refraining from acting hereunder or under any other Loan Document in accordance with the instructions of Requisite Lenders. Except where this Agreement requires that the written consent of Lenders, or a Lender, be presented to Borrower, Borrower may rely on the signature of Agent as presumptive evidence of the consent of Lenders or such Lender. 9.3 Set-Off and Sharing of Payments. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Lender and each holder of any Revolving Credit Note is hereby authorized at any time or from time to time, without notice to Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all balances held by it at any of its offices for the account of Borrower (regardless of whether such balances are then due to Borrower) and any other properties or assets any time held or owing by that Lender or that holder to or for the credit or for the account of Borrower against and on account of any of the Obligations which are not paid when due. Any Lender or holder of any Revolving Credit Note, Term Loan Note or Capital Expenditure Loan Note having a right to set off shall, to the extent the amount of any such set off exceeds its Pro Rata Share of the Obligations, purchase for cash (and the other Lenders or holders shall sell) such participations in each such other -43- Lender's or holder's Pro Rata Share of the Obligations as would be necessary to cause such Lender to share such excess with each other Lender or holder in accordance with their respective Pro Rata Shares. Borrower agrees, to the fullest extent permitted by law, that (a) any Lender or holder may exercise its right to set off with respect to amounts in excess of its Pro Rata Share of the Obligations and may sell participations in such excess to other Lenders and holders and (b) any Lender or holders so purchasing a participation in the Revolving Credit Advances or funding of the Term Loan or the Capital Expenditure Loan made or other Obligations held by other Lenders or holders may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender or holder were a direct holder of Revolving Credit Advances, the Term Loan, the Capital Expenditure Loan and other Obligations in the amount of such participation. 9.4 Disbursement of Funds. Agent may, on behalf of Lenders, disburse funds to Borrower for Revolving Credit Advances requested. Each Lender shall reimburse Agent on demand for all funds disbursed on its behalf by Agent, or if Agent so requests, each Lender will remit to Agent its Pro Rata Share of any Revolving Credit Advance before Agent disburses same to Borrower. If any Lender fails to pay the amount of its Pro Rata Share forthwith upon Agent's demand, Agent shall promptly notify Borrower and Borrower shall immediately repay such amount to Agent. Nothing in this Section 9.4 or elsewhere in this Agreement or the other Loan Documents shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Borrower may have against any Lender as a result of any default by such Lender hereunder. 9.5 Disbursements of Advances, Payments and Information. (a) Revolving Credit Advances and Payments; Fee Payments. (i) The Revolving Credit Loan balance and Capital Expenditure Loan balance may fluctuate from day to day through Agent's disbursement of funds to, and receipt of funds from, Borrower. In order to minimize the frequency of transfers of funds between Agent and each Lender, Revolving Credit Advances and payments in respect thereof will be settled according to the procedures described in Section 9.5(a)(ii) and 9.5(a)(iii). Notwithstanding these procedures, each Lender's obligation to fund its portion of any Advances made by Agent to Borrower will commence on the date such Advances are made by Agent. Such payments will be made by each Lender without setoff, counterclaim or reduction of any kind. (ii) On the second Business Day of each week, or more frequently (including daily) if Agent so elects (each such day being a "Settlement Date"), Agent will advise each Lender by telephone, telex or telecopy of the amount of such Lender's Pro Rata Share of the Revolving Credit Loan balance and Capital Expenditure Loan balance as of the close of business on the second Business Day immediately preceding the Settlement Date. In the event that payments are necessary to adjust the amount of such Lender's portion of the Revolving Credit Loan or Capital Expenditure Loan to such Lender's Pro Rata Share of the Revolving Credit Loan or Capital Expenditure Loan as of any Settlement Date, the party from which such payment is due will pay the other, in same day funds, by wire transfer to the other's account not later than 12:00 noon (Chicago time) on the first Business Day following the Settlement Date. Notwithstanding the foregoing, if -44- Agent so elects, Agent may require that each Lender make its Pro Rata Share of any requested Revolving Credit Advance or Capital Expenditure Advance available to Agent for disbursement prior to the funding of such Revolving Credit Advance or Capital Expenditure Advance. If Agent elects to require that such funds be so made available, Agent shall advise each Lender by telephone, telex or telecopy of the amount of such Lender's Pro Rata Share of the requested Revolving Credit Advance or Capital Expenditure Advance no later than 11:00 a.m. (Chicago time) on the date of funding thereof, and each such Lender shall pay Agent such Lender's Pro Rata Share of such requested Revolving Credit Advance or Capital Expenditure Advance, in same day funds, by wire transfer to Agent's account not later than 12:00 noon (Chicago time) on the date of funding such Revolving Credit Advance or Capital Expenditure Advance (iii) For purposes of this Section 9.5(a)(iii), the following terms and conditions will have the following meanings: (A) "Daily Loan Balance" means an amount calculated as of the end of each calendar day by subtracting (i) the cumulative principal amount paid by Agent to a Lender with respect to the Revolving Credit Loan and Capital Expenditure Loan from the Closing Date through and including such calendar day, from (ii) the cumulative principal amount of the Revolving Credit Loan and Capital Expenditure Loan advanced by such Lender to Agent from the Closing Date through and including such calendar day. (B) "Daily Interest Rate" means an amount calculated by dividing the interest rate payable to a Lender on the Revolving Credit Loan and Capital Expenditure Loan (as set forth in Section 1.8) as of each calendar day by three hundred sixty (360) days. (C) "Daily Interest Amount" means an amount calculated by multiplying the Daily Loan Balance of the Revolving Credit Loan and Capital Expenditure Loan by the associated Daily Interest Rate on the Revolving Credit Loan and Capital Expenditure Loan. (D) "Interest Ratio" means a number calculated by dividing the total amount of interest on the Revolving Credit Loan and Capital Expenditure Loan received by Agent during the immediately preceding month by the total amount of interest on the Revolving Credit Loan and Capital Expenditure Loan due from Borrower during the immediately preceding month. On the first Business Day of each calendar month (an "Interest Settlement Date"), Agent will advise each Lender by telephone, telex or telecopy of the amount of such Lender's Pro Rata Share of interest paid and Fees paid for the benefit of Lenders on the Revolving Credit Loan, interest paid on the Term Loan and the Capital Expenditure Loan and Fees paid pursuant to Annex B in respect of Letter of Credit Obligations, each as of the end of the last day of the immediately preceding month. Provided that such Lender has made all payments required to be made by it under this Agreement and the other Loan Documents, Agent will pay to such Lender, by wire transfer to such Lender's account (as specified by such Lender on its signature page to this Agreement or the applicable Lender Addition Agreement, as amended by such Lender from time to time after the Closing Date pursuant to the notice provisions contained herein or in the applicable Lender Addition Agreement) -45- not later than 12:00 noon (Chicago time) on the next Business Day following the Interest Settlement Date, such Lender's Pro Rata Share of interest paid and Fees paid for the benefit of Lenders on the Revolving Credit Loan, interest paid on the Term Loan and the Capital Expenditure Loan and Fees paid pursuant to Annex B in respect of Letter of Credit Obligations. Such Lender's Pro Rata Share of interest on the Revolving Credit Loan and Capital Expenditure Loan will be calculated by adding together the Daily Interest Amounts for each calendar day of the prior month for the Revolving Credit Loan and Capital Expenditure Loan and multiplying the total thereof by the Interest Ratio for the Revolving Credit Loan and Capital Expenditure Loan. (b) Availability of Lender's Pro Rata Share. (i) Agent may assume that each Lender will make its Pro Rata Share of each Revolving Credit Advance and Capital Expenditure Advance available to Agent on the first Business Day following the next Settlement Date. If such Pro Rata Share is not, in fact, paid to Agent by such Lender when due, Agent will be entitled to recover such amount on demand from such Lender without set-off, counterclaim or deduction of any kind. (ii) Nothing contained in this Section 9.5(b) will be deemed to relieve any Lender of its obligation to fulfill its Commitments or to prejudice any rights Agent or Borrower may have against any Lender as a result of any default by such Lender under this Agreement. (iii) Without limiting the generality of the foregoing, each Lender shall be obligated to fund its Pro Rata Share of any Revolving Credit Advance made after any acceleration of the Obligations with respect to any Letter of Credit Obligations. (c) Return of Payments. (i) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender on demand without set-off, counterclaim or deduction of any kind. (ii) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other Person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Loan Document, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without set-off, counterclaim or deduction of any kind. (d) Dissemination of Information. Agent will use reasonable efforts to provide Lenders with any information received by Agent from Borrower which is required to be provided to Lenders hereunder, with any notice of Default or Event of Default received by Agent from Borrower, with any notice of Default or Event -46- of Default delivered by Agent to Borrower, with notice of any Default or Event of Default of which Agent has become aware and with notice of any action taken by Agent following any Default or Event of Default; provided, however, that Agent shall not be liable to any Lender for any failure to do so, except to the extent that such failure is attributable to Agent's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction after all possible appeals have been exhausted. 10. MISCELLANEOUS 10.1 Successors and Assigns. This Agreement and the other Loan Documents shall be binding on and shall inure to the benefit of Borrower, Agent, Lenders and their respective successors and assigns, except as otherwise provided herein or therein. Borrower may not assign, transfer, hypothecate or otherwise convey its rights, benefits, obligations or duties hereunder or under any of the other Loan Documents without the prior express written consent of Agent and Requisite Lenders. Any such purported assignment, transfer, hypothecation or other conveyance by Borrower without the prior express written consent of Agent shall be null and void, as if the same shall have never occurred. The terms and provisions of this Agreement are for the purpose of defining the relative rights and obligations of Borrower, Agent and Lenders with respect to the transactions contemplated hereby and there shall be no third party beneficiaries of any of the terms and provisions of this Agreement or any of the other Loan Documents. 10.2 Complete Agreement; Modification of Agreement. The Loan Documents constitute the complete agreement between the parties with respect to the subject matter thereof and may not be modified, altered or amended except as set forth in Section 10.2. Any Letter of Interest, Commitment Letter, proposal or other similar letter or understanding between Borrower and Agent or any of its affiliates, predating this Agreement and relating to a financing of substantially similar form, purpose or effect shall be merged with and into and superseded by this Agreement. 10.3 Amendments and Waivers. (a) Except as otherwise provided herein, no amendment, modification, termination or waiver of any provision of this Agreement or any of the Revolving Credit Notes, Term Loan Notes or Capital Expenditure Loan Notes or consent to any departure by Borrower or any of its Subsidiaries therefrom, shall in any event be effective unless the same shall be in writing and signed by Agent and/or Requisite Lenders (as required by the terms hereof) and Borrower. (b) In furtherance of and without limiting the foregoing, no amendment, modification, termination or waiver of or consent with respect to any provision of this Agreement which (i) increases the percentage advance rates set forth in the definition of Borrowing Base or (ii) makes less restrictive the nondiscretionary criteria for exclusion from Eligible Accounts and Eligible Inventory set forth in Annex F and G shall be effective unless the same shall be in writing and signed by Requisite Lenders and Borrower. (c) Notwithstanding the foregoing, except to the extent permitted by any applicable Lender Addition Agreement, no amendment, modification, termination or waiver shall, unless in writing and signed by each affected Lender, do any of the following: (a) increase the -47- principal amount of the Commitment of any affected Lender; (b) reduce the principal of, rate of interest on or Fees payable with respect to any Revolving Credit Advance, interest payable with respect to the Term Loan or Capital Expenditure Loan or Fees payable with respect to any Letter of Credit Obligation; (c) extend the final scheduled maturity date of the principal amount of the Revolving Credit Loan, the Term Loan or the Capital Expenditure Loan; (d) waive, forgive, defer, extend or postpone any payment required hereunder; (e) release any Guarantor; (f) except as otherwise contemplated herein or in one of the other Loan Documents, permit Borrower to sell or otherwise dispose of any Collateral with a value exceeding Fifty Thousand Dollars ($50,000) in the aggregate; (g) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Revolving Credit Loan which shall be required for Lenders or any of them to take any action hereunder; (h) release Collateral with a value exceeding Fifty Thousand Dollars ($50,000) in the aggregate (except if the sale or other disposition of such Collateral is permitted under the Agreement or one of the other Loan Documents); and (i) amend or waive this Section 10.2 or the definitions of the terms used in this Section 10.2 insofar as the definitions affect the substance of this Section 10.2; and provided, further, that no amendment, modification, termination or waiver affecting the rights or duties of Agent under this agreement or any other Loan Document shall in any event be effective, unless in writing and signed by Agent, in addition to Lenders required hereinabove to take such action. Each amendment, modification, termination or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination or waiver shall be required for Agent to take additional Collateral pursuant to any Loan Document. No amendment, modification, termination or waiver of any provision of any Revolving Credit Note, Term Loan Note or Capital Expenditure Loan Note shall be effective without the written concurrence of the holder of such Note. No notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 10.2 shall be binding upon each holder of the Revolving Credit Notes, the Term Loan Notes and the Capital Expenditure Loan Notes at the time outstanding and each future holder of the Revolving Credit Notes, the Term Loan Notes and the Capital Expenditure Loan Notes. 10.4 Fees and Expenses. Borrower shall reimburse Agent for all reasonable out-of-pocket expenses reasonably incurred in connection with (a) the preparation of the Loan Documents (including the reasonable fees and expenses of all of its special loan counsel, advisors, consultants and auditors retained in connection with the Loan Documents and the transactions contemplated thereby and advice in connection therewith), (b) wire transfers to the account of Borrower and (c) Letter of Credit Obligations. Borrower shall reimburse Agent for all reasonable fees, costs and expenses reasonably incurred, including the fees, costs and expenses of counsel or other advisors (including environmental and management consultants) for advice, assistance, or other representation in connection with: (a) the forwarding to Borrower or any other Person on behalf of Borrower by Lender of the proceeds of the Revolving Credit Advances, the Term Loan and the Capital Expenditure Loan; -48- (b) any amendment, modification or waiver of, or consent with respect to, any of the Loan Documents or advice in connection with the administration of the loans made pursuant hereto or its rights hereunder or thereunder; (c) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Agent, any Lender, Borrower or any other Person) in any way relating to the Collateral, any of the Loan Documents or any other agreement to be executed or delivered in connection therewith or herewith, whether as party, witness, or otherwise, including any litigation, contest, dispute, suit, case, proceeding or action, and any appeal or review thereof, in connection with a case commenced by or against Borrower or any other Person that may be obligated to Agent by virtue of the Loan Documents; (d) any attempt to enforce any rights of Agent or any Lender against Borrower or any other Person that may be obligated to Agent or any Lender by virtue of any of the Loan Documents; (e) any attempt to (i) monitor the Revolving Credit Loan, Letter of Credit Obligations, the Term Loan, the Capital Expenditure Loan or any of the other Obligations, (ii) evaluate, observe, assess Borrower, any of its Subsidiaries or their respective affairs, and (iii) verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of any of the Collateral; including all the attorneys' and other professional and service providers' fees arising from such services, including those in connection with any appellate proceedings; and all expenses, costs, charges and other fees incurred by such counsel and others in any way or respect arising in connection with or relating to any of the events or actions described in this Section 10.3 shall be payable, on demand, by Borrower to Agent. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: fees, costs and expenses of accountants, environmental advisors, appraisers, investment bankers, management and other consultants and paralegals; court costs and expenses; photocopying and duplication expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal or other advisory services. Notwithstanding the foregoing (a) Agent shall charge Borrower according to Agent's policy in effect from time to time and on the same basis that Agent charges other Borrowers with respect to fees, costs and expenses of photocopying and duplication, long distance telephone charges, air express charges, telegram charges, and secretarial overtime charges and (b) all fees, costs and expenses incurred in connection with any valuation performed pursuant to the Warrant shall be governed by the terms of the Warrant. 10.5 No Waiver. Agent's or any Lender's failure, at any time or times, to require strict performance by Borrower of any provision of this Agreement and any of the other Loan Documents shall not waive, affect or diminish any right of Agent or such Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver of an Event of Default under this Agreement or any of the other Loan Documents shall not suspend, waive or affect any other Event of Default under this Agreement and any of the other Loan Documents whether the -49- same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the other Loan Documents and no Default or Event of Default by Borrower under this Agreement and no defaults by Borrower under any of the other Loan Documents shall be deemed to have been suspended or waived by Agent or any Lender, unless such waiver or suspension is by an instrument in writing signed by an officer of or other authorized employee of Agent and Requisite Lenders and directed to Borrower specifying such suspension or waiver. 10.6 Remedies. Agent's and Lenders' rights and remedies under this Agreement shall be cumulative and nonexclusive of any other rights and remedies which Agent or any Lender may have under any other agreement, including the other Loan Documents, by operation of law or otherwise. Recourse to the Collateral shall not be required. 10.7 Severability. Wherever possible, each provision of this Agreement and the other Loan Documents shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.8 Conflict of Terms. Except as otherwise provided in this Agreement or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 10.9 Authorized Signature. Until Agent shall be notified by Borrower to the contrary, the signature upon any document or instrument delivered pursuant hereto of an officer of Borrower listed on Schedule 10.8 shall bind Borrower and be deemed to be the act of Borrower affixed pursuant to and in accordance with resolutions duly adopted by Borrower's Board of Directors. 10.10 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS AND DECISIONS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. BORROWER, AGENT AND LENDERS HEREBY CONSENT AND AGREE THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF COOK, CITY OF CHICAGO, ILLINOIS, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER, AGENT AND LENDERS PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, -50- PROVIDED, THAT AGENT, LENDERS AND BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF COOK, CITY OF CHICAGO, ILLINOIS AND, PROVIDED, FURTHER, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF AGENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND BORROWER HEREBY AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE UPON CT CORPORATION SYSTEM, 208 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60604, AND SUCH OTHER PERSONS AS MAY HEREAFTER BE SELECTED BY BORROWER WHICH IRREVOCABLY AGREE IN WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH ACTION OR SUIT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY BORROWER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH ON ANNEX L OF THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID, EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY BORROWER REFUSES TO ACCEPT SERVICE, BORROWER HEREBY AGREES THAT THE FOREGOING SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 10.11 Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon either of the parties by the other party, or whenever either of the parties desires to give or serve upon the other party any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be deemed to have been validly served, given or delivered (i) upon the earlier of actual receipt and three (3) days after deposit in the United States Mail, registered or certified mail, return receipt requested, with proper postage prepaid, (ii) upon transmission, when sent by telecopy or other similar facsimile transmission (with such telecopy or facsimile promptly confirmed by -51- delivery of a copy by personal delivery or United States Mail as otherwise provided in this Section 10.10), (iii) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid or (iv) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address or facsimile number indicated on Annex L or to such other address (or facsimile number) as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to any Person (other than Borrower or Agent) designated on Annex L to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 10.12 Section Titles. The Section titles and Table of Contents contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 10.13 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. 10.14 MUTUAL WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG AGENT, LENDERS AND BORROWER ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. BORROWER WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. 10.15 Confidentiality. So long as no Default or Event of Default has occurred, Agent and each Lender agrees to exercise reasonable efforts to keep any non-public information delivered or made available to it pursuant to this Agreement or any other Loan Document, which Borrower has identified as confidential information, confidential from all Persons other than (a) officers, employees, agents, designees, representatives or affiliates of Agent or Lenders, (b) bona fide prospective or actual assignees, transferees or participants of Agent or Lenders pursuant to Section 1.19(b) or 9.1, (c) consultants or advisors that have agreed to comply with this Section 10.14 on terms and conditions conforming to Agent's policy in effect from time to time, or (d) as required or -52- requested by any Governmental Authority or representative thereof or pursuant to a legal process or as required in connection with the exercise of any remedy under this Agreement or any of the other Loan Documents. [signature page follows] -53- IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. BAGCRAFT CORPORATION OF AMERICA By: ________________________________ Title: _____________________________ GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and as Lender By: _______________________________ Title: Duly Authorized Signatory -54- ANNEX A TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 DEFINITIONS Capitalized terms used in the Agreement shall have (unless otherwise provided elsewhere in the Agreement) the following respective meanings and all section references in the following definitions shall refer to sections of the Agreement: "Account Debtor" shall mean any Person who may become obligated to Borrower, or any of its Subsidiaries under, with respect to, or on account of, an Account. "Accounts" shall mean all "accounts," as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries, and, in any event, including (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by chattel paper, documents or instruments) now owned or hereafter received or acquired by or belonging or owing to Borrower or any of its Subsidiaries, whether arising out of goods sold or services rendered by it or from any other transaction (including any such obligations which may be characterized as an account or contract right under the Code), (b) all of Borrower's and each of its Subsidiaries' rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, (c) all of Borrower's and each of its Subsidiaries' rights to any goods represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (d) all monies due or to become due to Borrower, or any of its Subsidiaries, under all purchase orders and contracts for the sale of goods or the performance of services or both by Borrower or any of its Subsidiaries or in connection with any other transaction (whether or not yet earned by performance on the part of Borrower or such Subsidiary, as appropriate) now or hereafter in existence, including the right to receive the proceeds of said purchase orders and contracts, and (e) all collateral security and guarantees of any kind, now or hereafter in existence, given by any Person with respect to any of the foregoing. "Advance" shall mean any Revolving Credit Advance or Capital Expenditure Advance, as the context may require. "Affiliate" shall mean, with respect to any Person, (i) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 5% or more of the Stock having ordinary voting power in the election of directors of such Person, (ii) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person or (iii) each of such Person's officers, directors, joint venturers and partners. For the purposes of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall mean GE Capital or its successor appointed pursuant to Section 9.2. -1- "Agreement" shall mean the Amended and Restated Credit Agreement dated as of the Closing Date by and among Borrower, Agent and Lenders, including all restatements and modifications thereof and amendments and supplements thereto and any appendices, exhibits, schedules or annexes to any of the foregoing, and shall refer to the Agreement as the same may be in effect at any and all times such reference becomes operative. "ARTRA" shall mean ARTRA GROUP Incorporated, a Pennsylvania corporation. "Asset Disposition" shall mean the sale, transfer, conveyance, assignment, sale and leaseback or other disposition or the pledge, mortgage or other encumbrance by Borrower of any of its properties or other assets, including the capital stock of any Subsidiary or any of its Accounts, except for the sale of inventory in the ordinary course pursuant to the terms of the Agreement. "Borrower" shall mean Bagcraft Corporation of America, a Delaware corporation. "Borrowing Availability" shall have the meaning assigned to it in Section 1.1(a). "Borrowing Base" shall mean at any time an amount determined by Agent from time to time, equal to the sum at such time of: (a) Up to eighty-five percent (85%) of Eligible Accounts; and (b) up to (i) fifty-five percent (55%) of Eligible Inventory not consisting of Min- Max Inventory and (ii) sixty percent (60%) of Eligible Inventory consisting of Min-Max Inventory, valued, in each case, on a first-in, first-out basis (at the lower of cost or market). "Borrowing Base Certificate" shall mean a certificate in the form attached to the Agreement as Exhibit B. "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of New York or the State of Illinois and in reference to LIBOR Loans shall mean any such day that is also a LIBOR Business Day. "Capital Expenditure Advance" shall have the meaning assigned to it in Section 1.3(a). "Capital Expenditure Loan" shall mean the aggregate amount of Capital Expenditure Advances outstanding at any time. "Capital Expenditure Loan Availability" shall mean, as of any date of determination, the lesser of (a) the Capital Expenditure Loan Commitment as of such date less the aggregate amount of all Capital Expenditure Advances made under this Agreement through such date of determination and (b) $20,000,000 less the sum of (i) aggregate amount of all Capital Expenditure Advances made under this Agreement through such date of determination and (ii) the then outstanding aggregate principal amount of the Term Loan, all of the foregoing calculated without giving effect to any -2- payments or prepayments of principal in respect of the Capital Expenditure Loan which may have been made at any time or from time to time on or prior to such date of determination. "Capital Expenditure Loan Commitment" shall mean (a) as to any Lender with a Capital Expenditure Loan Commitment, the aggregate commitment of such Lender to make the Capital Expenditure Advances as set forth on the signature page to the Agreement or in the most recent Lender Addition Agreement executed by such Lender and (b) as to all Lenders with a Capital Expenditure Loan Commitment, the aggregate commitment of all Lenders to make Capital Expenditure Advances, which aggregate commitment shall be the lesser of (i) Three Million Dollars ($3,000,000) and (ii) eighty percent (80%) of the aggregate Hard Costs of all Equipment acquired with proceeds of the Capital Expenditure Loan. "Capital Expenditure Loan Note" shall have the meaning assigned to it in Section 1.3(b). "Capital Expenditures" shall mean all payments (including all payments under Capital Leases, installment purchase agreements and other similar purchase money financing arrangements) for any fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one (1) year and that are required to be capitalized under GAAP, to the extent so required. "Capital Lease" shall mean, with respect to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee that, in accordance with GAAP, either would be required to be classified and accounted for as a capital lease on a balance sheet of such Person or otherwise be disclosed as such in a note to such balance sheet, other than, with respect to such Person, any such lease under which such Person is the lessor. "Capital Lease Obligation" shall mean, with respect to any Capital Lease, the amount of the obligation of the lessee thereunder that, in accordance with GAAP, would appear on a balance sheet of such lessee in respect of such Capital Lease or otherwise be disclosed in a note to such balance sheet. "Change in Control" shall mean any event, transaction or occurrence as a result of which (a) after the Closing Date, any Person or "group" shall acquire "beneficial ownership" (as such terms are defined under Section 13d-3 of and Regulation 13D under the Securities Exchange Act of 1934, as amended), either directly or indirectly, of more than twenty-five percent (25%) of the outstanding shares of Stock of ARTRA having the right to vote for the election of directors of ARTRA under ordinary circumstances, (b) ARTRA shall cease to own and control all of the economic and voting rights associated with all outstanding shares of each class of capital Stock of Parent on a fully diluted basis, (c) other than the shares of Borrower's preferred stock owned by PST as of the Closing Date, Parent shall cease to own and control all of the economic and voting rights associated with all outstanding shares of each class of capital Stock of Borrower on a fully diluted basis or (d) the existence of any agreement or other document accomplishing or purporting to accomplish (whether on a conditional basis or otherwise) any of the foregoing. -3- "Charges" shall mean all federal, state, county, city, municipal, local, foreign or other governmental taxes (including taxes owed to the PBGC at the time due and payable), levies, assessments, charges, liens, claims or encumbrances upon or relating to (i) the Collateral, (ii) the Obligations, (iii) the employees, payroll, income or gross receipts of Borrower or any of its Subsidiaries, (iv) Borrower's or any of its Subsidiaries' ownership or use of any of its properties or other assets, or (v) any other aspect of Borrower's or any of its Subsidiaries' businesses. "Chattel Paper" shall mean any "chattel paper," as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries, wherever located. "Closing Date" shall mean the date of execution of the Agreement. "Code" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of Illinois; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Agent's or any Lender's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Illinois, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction solely for purposes of the provisions of the Loan Documents relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. "Collateral" shall mean the property covered by the Collateral Documents and any other property, real or personal, tangible or intangible, now existing or hereafter acquired, that may at any time be or become subject to a security interest or Lien in favor of Agent, on behalf of itself and Lenders, to secure the Obligations. "Collateral Documents" shall mean the Security Agreement, the Pledge Agreement, the Mortgages, the Copyright Assignments, the Patent and Trademark Assignments and any other agreement or other document pursuant to which a security interest or Lien is granted in favor of Agent, on behalf of itself and Lenders, to secure the Obligations. "Collateral Reports" shall mean the reports with respect to the Collateral referred to in Section 3.5. "Collection Account" shall mean that certain account of Agent, account number 502 328 54 in the name of General Electric Capital Corporation, Commercial Finance Group, at Bankers Trust Company, 17 Wall Street, New York, New York ABA number 021 001 033. "Commitment" or "Commitments" shall mean (a) as to any Lender, the aggregate of such Lender's Revolving Loan Commitment, Term Loan Commitment and Capital Expenditure Loan Commitment as set forth on the signature page to the Agreement or in the most recent Assignment Agreement executed by such Lender and (b) as to all Lenders, the aggregate of all Lenders' Revolving Loan Commitments, Term Loan Commitments and Capital Expenditure Loan Commitments, which aggregate commitment shall not exceed Thirty Eight Million Dollars -4- ($38,000,000) on the Closing Date, as such amount may be adjusted, if at all, from time to time in accordance with the Agreement. "Commitment Termination Date" shall mean the earliest of (i) September 30, 2002, (ii) the date of termination of Lenders' obligations to advance funds or permit existing advances to remain outstanding pursuant to Section 8.2, and (iii) the date of indefeasible prepayment in full by Borrower of the Revolving Credit Loan, the Term Loan and the Capital Expenditure Loan in accordance with the provisions of Section 1.5 and discharge of all Letter of Credit Obligations and all other Obligations under the Agreement and the other Loan Documents. "Concentration Account" shall have the meaning assigned to it in Annex C. "Contracts" shall mean all "contracts," as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries, and, in any event, including all contracts, undertakings, or agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which Borrower or any of its Subsidiaries may now or hereafter have any right, title or interest, including any agreement relating to the terms of payment or the terms of performance of any Account. "Copyright Assignments" shall mean the Copyright Security Agreements made in favor of Agent, on behalf of itself and Lenders, by Borrower and its Subsidiaries, as each may be amended, restated, supplemented or otherwise modified from time to time. "Copyright License" shall mean any and all rights now owned or hereafter acquired by Borrower or any of its Subsidiaries under any written agreement granting any right to use any Copyright or Copyright registration, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Copyrights" shall mean all of the following now owned or hereafter acquired by Borrower or any of its Subsidiaries: (i) all copyrights and general intangibles of like nature (whether registered or unregistered), now owned or existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof, and (ii) all reissues, extensions or renewals thereof. "Current Assets" shall mean all current assets, less cash, of Borrower and its Subsidiaries, all as determined in accordance with GAAP. "Current Liabilities" shall mean all current liabilities, less current maturities of regularly scheduled payments of principal on Funded Debt, of Borrower and its Subsidiaries, all as determined in accordance with GAAP. "Default" shall mean any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. -5- "Default Rate" shall have the meaning assigned to it in Section 1.8(e). "Disbursement Account" shall have the meaning assigned to it in Annex C. "Distributable Cash" shall mean, for any Fiscal Year of Borrower, an amount equal to EBITDA minus the sum of (i) Interest Expense, (ii) Capital Expenditures incurred (but not in excess of Capital Expenditures permitted for such Fiscal Year under the Loan Documents), (iii) current maturities of regularly scheduled payments of principal on Funded Debt actually paid, and (iv) taxes paid in cash by Borrower or any of its Subsidiaries, including payments made under the Tax Sharing Agreement pursuant to Section 6.15 of the Agreement. "DOL" shall mean the United States Department of Labor or any successor thereto. "Documents" shall mean any "documents," as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries, wherever located. "EBITDA" shall mean for any fiscal period of Borrower, income before interest, taxes, depreciation, amortization and, to the extent recognized in determining such income, extraordinary items. "Eligible Accounts" shall have the meaning assigned to it in Annex F. "Eligible Inventory" shall have the meaning assigned to it in Annex G. "Environmental Laws" shall mean all federal, state, local and foreign laws, statutes, ordinances and regulations, now or hereafter in effect, and in each case as amended or supplemented from time to time, and any applicable judicial or administrative interpretation thereof, including any applicable judicial or administrative order, consent decree or judgment, relative to the applicable real estate, relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). Environmental Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss.ss. 9601 et seq.) ("CERCLA"); the Hazardous Material Transportation Act, as amended (49 U.S.C. ss.ss. 1801 et seq.); the Federal Insecticide, Fungicide, and Rodenticide Act, as amended (7 U.S.C. ss.ss. 136 et seq.); the Resource Conservation and Recovery Act, as amended (42 U.S.C. ss.ss. 6901 et seq.) ("RCRA"); the Toxic Substance Control Act, as amended (15 U.S.C. ss.ss. 2601 et seq.); the Clean Air Act, as amended (42 U.S.C. ss.ss. 740 et seq.); the Federal Water Pollution Control Act, as amended (33 U.S.C. ss.ss. 1251 et seq.); the Occupational Safety and Health Act, as amended (29 U.S.C. ss.ss. 651 et seq.) ("OSHA"); and the Safe Drinking Water Act, as amended (42 U.S.C. ss.ss. 300(f) et seq.), and any and all regulations promulgated thereunder, and all analogous state, local and foreign counterparts or equivalents and any transfer of ownership notification or approval statutes. "Environmental Liabilities and Costs" shall mean all liabilities, obligations, responsibilities, remedial actions, removal actions, losses, damages, punitive damages, consequential -6- damages, treble damages, costs and expenses (including all fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim, suit, action or demand by any person or entity, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law (including any thereof arising under any Environmental Law, permit, order or agreement with any Governmental Authority) and which relate to any health or safety condition regulated under any Environmental Law or in connection with any other environmental matter or Release, threatened Release or the presence of a Hazardous Material or threatened Release of a Hazardous Material. "Equipment" shall mean all "equipment," as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries, wherever located and, in any event, including all Borrower's and each of its Subsidiaries' machinery and equipment, including processing equipment, conveyors, machine tools, data processing and computer equipment with software and peripheral equipment (other than software constituting part of the Accounts), and all engineering, processing and manufacturing equipment, office machinery, furniture, materials handling equipment, tools, attachments, accessories, automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor vehicles, rolling stock and other equipment of every kind and nature, trade fixtures and fixtures not forming a part of real property, all whether now owned or hereafter acquired, and wherever situated, together with all additions and accessions thereto, replacements therefor, all parts therefor, all substitutes for any of the foregoing, fuel therefor, and all manuals, drawings, instructions, warranties and rights with respect thereto, and all products and proceeds thereof and condemnation awards and insurance proceeds with respect thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time, and any regulations promulgated thereunder. "ERISA Affiliate" shall mean, with respect to Borrower or any of its Subsidiaries, any trade or business (whether or not incorporated) under common control with Borrower or such Subsidiary, as appropriate, and which, together with Borrower or such Subsidiary, as appropriate, are treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the IRC. "ERISA Event" shall mean, with respect to Borrower, any of its Subsidiaries or any ERISA Affiliate, (i) a Reportable Event with respect to a Title IV Plan or a Multiemployer Plan; (ii) the withdrawal of Borrower, any of its Subsidiaries or any ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (iii) the complete or partial withdrawal of Borrower, any of its Subsidiaries or any ERISA Affiliate from any Multiemployer Plan; (iv) the filing of a notice of intent to terminate a Title IV Plan or the treatment of a plan amendment as a termination under Section 4041 of ERISA; (v) the institution of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (vi) the failure to make required contributions to a Qualified Plan; or (vii) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any -7- Title IV Plan or Multiemployer Plan or the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA. "Event of Default" shall have the meaning assigned to it in Section 8.1. "Excess Cash Flow" shall mean the total of the following (without duplication) (i) Distributable Cash, plus (ii) the net after-tax gains arising from extraordinary items, as defined by GAAP, (iii) plus non-income cash receipts (including proceeds of the Kansas Indebtedness), (vi) plus non-cash decreases in working capital (or minus non-cash increases in working capital) other than cash and current maturities of Funded Debt and (v) minus income attributable to Asset Dispositions (other than sales of inventory in the ordinary course). "Federal Reserve Board" shall have the meaning assigned to it in Section 3.11. "Fees" shall mean any and all fees due to Agent or any Lender pursuant to the Agreement or any of the other Loan Documents. "Financial Statements" shall mean the financial statements referred to in Section 3.4. "Fiscal Month" shall mean any of the monthly accounting periods of Borrower ending on the Saturday occurring closest to the last day of each calendar month, except that the last such period occurring in each calendar year shall end on the last Saturday of such calendar year. "Fiscal Quarter" shall mean any of the quarterly accounting periods of Borrower. "Fiscal Year" shall mean any of the annual fiscal accounting periods of Borrower. "Fixed Charges" shall mean, for any fiscal period of Borrower, the sum of (i) cash interest expense (whether paid or accrued) in respect of Funded Debt (excluding, with respect to the Obligations, the difference between interest charged at the normal rates set forth in the Agreement and interest charged at the Default Rate), plus (ii) regularly scheduled payments of principal (whether paid or accrued) on Funded Debt for such fiscal period. "Funded Debt" shall mean, with respect to Borrower and its Subsidiaries, on a consolidated and consolidating basis, all of its Indebtedness which by the terms of the agreement governing or instrument evidencing such Indebtedness matures more than one (1) year from, or is directly or indirectly renewable or extendible at its option under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of more than one year from the date of creation thereof, including current maturities of long-term debt, revolving credit and short-term debt extendible beyond one year at the option of the debtor, and shall also include the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan, the Letter of Credit Obligations and the other Obligations. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time, consistently applied. -8- "GE Capital" shall mean General Electric Capital Corporation, a New York corporation having an office at 201 High Ridge Road, Stanford, Connecticut 06927-5100. "GE Capital Fee Letter" shall mean that certain letter, dated as of the Closing Date, between GE Capital and Borrower with respect to certain fees to be paid by Borrower to GE Capital. "General Intangibles" shall mean any "general intangibles," as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries and, in any event, including all right, title and interest which Borrower or any of its Subsidiaries may now or hereafter have in or under any Contract, all customer lists, Copyrights, Trademarks, Patents, service marks, trade names, business names, corporate names, trade styles, logos and other source or business identifiers, and all applications therefor and reissues, extensions or renewals thereof, rights in intellectual property, interests in partnerships, joint ventures and other business associations, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill (including the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark license), all rights and claims in or under insurance policies (including insurance for fire, damage, loss and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit, checking and other bank accounts, rights to receive tax refunds and other payments and rights of indemnification. "Georgia Facility" shall mean Borrower's facility in Forest Park, Georgia. "Goods" shall mean all "goods" as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries, wherever located. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranteed Indebtedness" shall mean, as to any Person, any obligation of such Person guaranteeing any indebtedness, lease, dividend, or other obligation ("primary obligations") of any other Person (the "primary obligor") in any manner, including any obligation or arrangement of such Person (i) to purchase or repurchase any such primary obligation, (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) to indemnify the owner of such primary obligation against loss in respect thereof. -9- "Hard Costs" shall mean the aggregate cash purchase price paid or payable by Borrower for the Equipment to which a Capital Expenditure Advance relates, excluding amounts paid or payable in connection with such assets in respect of insurance, taxes, tariffs, levies, freight, delivery, crating, installation, packing, service, maintenance or similar contracts or arrangements, warranties, software, financing costs, and/or similar costs or charges so paid or payable. "Harvey Receivable" shall mean that certain account receivable in the aggregate amount of One Million Seven Hundred Seventy-Three Thousand Eight Hundred Twenty-Four Dollars ($1,773,824), due from Peter R. Harvey and maintained on the books of Borrower in accordance with GAAP. "Hazardous Material" shall mean any substance, material or waste, the generation, handling, storage, treatment or disposal of which is regulated by or forms the basis of liability now or hereafter under, any Government Authority in any jurisdiction in which Borrower or any of its Subsidiaries has owned, leased, or operated real property or disposed of hazardous materials, or by any Federal government authority, including any material or substance which is (i) defined as a "solid waste" (other than non-hazardous waste which is routinely disposed of in the ordinary course of Borrower's business), "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste" or "restricted hazardous waste" or other similar term or phrase under any Environmental Laws, (ii) petroleum or any fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB's), any radioactive substance, methane, volative hydrocarbons or any industrial solvent, (iii) designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. ss.ss. 1251 et seq. (33 U.S.C. ss.ss. 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. ss. 1317), (iv) defined as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901, et seq. (42 U.S.C. ss. 6903), or (v) defined as a "hazardous substance" pursuant to Section 1012 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss. 9601 et seq. (42 U.S.C. ss. 9601). "Indebtedness" of any Person shall mean (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured, but excluding obligations to trade creditors incurred in the ordinary course of business), (ii) all obligations evidenced by notes, bonds, debentures or similar instruments, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all Capital Lease Obligations, (v) all Indebtedness referred to in clause (i), (ii), (iii) or (iv) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property or other assets (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (vi) the Obligations, and (vii) all liabilities under Title IV of ERISA. "Index Margin" shall have the meaning assigned to it in Section 1.8(c). -10- "Index Rate" shall mean a variable rate of interest per annum equal to the highest of the "prime rate," "base rate" or other similar rate most recently published or announced from time to time by any of the five (5) largest member banks of the New York Clearing House Association (whether or not such rate is actually charged by such bank). "Index Rate Loan" shall mean a Loan or portion thereof bearing interest by reference to the Index Rate. "Instruments" shall mean any "instrument," as such term is defined in the Code, now owned or hereafter acquired by Borrower or any of its Subsidiaries, wherever located, and, in any event, including all certificated securities, all certificates of deposit, including all notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Interest Expense" shall mean, for any fiscal period of Borrower, cash interest expense of Borrower for such period paid in respect of Funded Debt. "Inventory" shall mean any "inventory," as such term is defined in the Code, now or hereafter owned or acquired by, Borrower or any of its Subsidiaries, wherever located, and, in any event, including inventory, merchandise, goods and other personal property which are held by or on behalf of Borrower or any of its Subsidiaries, for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in Borrower's or any of its Subsidiaries' businesses or in the processing, production, packaging, promotion, delivery or shipping of the same, including other supplies. "IRC" shall mean the Internal Revenue Code of 1986, as amended, and any successor thereto. "IRS" shall mean the Internal Revenue Service, or any successor thereto. "Kansas Collateral" shall mean that certain (a) second Lien in favor of the Kansas Lender on all of Borrower's business machinery, equipment, furnishings and fixtures located, or to be located, at the Kansas Facility, which Lien is fully subordinated to Agent's first priority Lien pursuant to the terms of the Kansas Loan Documents and (b) first Lien in favor of the Kansas Lender on the Real Estate constituting the Kansas Facility. "Kansas Developer" shall mean JFB Developments, Inc., a Missouri corporation, the developer of the Kansas Facility. "Kansas Facility" shall mean Borrower's facility to be acquired and constructed in Baxter Springs, Kansas. "Kansas Indebtedness" shall mean, collectively, the subordinated secured loans made by the Kansas Lender to Borrower, consisting of (a) two (2) term loans made by the City of Baxter -11- Springs, Kansas, each in the original maximum principal amount of Two Hundred Fifty Thousand Dollars ($250,000), (b) a six (6) year term loan made by the City of Baxter Springs, Kansas in an original maximum principal amount of Five Million Dollars ($5,000,000) and (c) a minimum five (5) year term loan made by the City of Baxter Springs, Kansas in an original maximum principal amount of Seven Million Dollars ($7,000,000) and guaranteed by the State of Kansas and the United States Department of Housing and Urban Development, all of the foregoing in form and substance satisfactory to Agent in its sole discretion. "Kansas Guaranteed Indebtedness" shall mean the Indebtedness of Borrower referred to in clause (c) of the definition of Kansas Indebtedness. "Kansas Lender" shall mean the City of Baxter Springs, Kansas. "Kansas Loan Documents" shall mean the loan agreements, security agreements, guarantees, notes and other instruments, documents, certificates and agreements executed by Borrower and evidencing or relating to the Kansas Indebtedness and the Kansas Collateral, including the subordination provisions contained therein and the Kansas Intercreditor Agreements, as each of the same may be amended, restated, supplemented or otherwise modified and in effect from time to time, all of the foregoing in form and substance satisfactory to Agent in its sole discretion. "Kansas Restructuring" shall mean the relocation of the Missouri Facility after the operations thereof are transferred to the Kansas Facility. "Kansas Intercreditor Agreements" shall mean the Intercreditor Agreements entered into among Agent, on behalf of itself and Lenders (as senior lenders), Kansas Lender (as subordinated lender), and Borrower, including all amendments, modifications and supplements thereto, all in form and substance satisfactory to Agent in its sole discretion, and shall refer to the Intercreditor Agreements as the same may be in effect at the time such reference becomes operative. "Leases" shall mean all leasehold estates in real property now owned or hereafter acquired by Borrower or any of its Subsidiaries, as lessee, as each may be amended, restated, supplemented or otherwise modified from time to time. "Lenders" shall mean GE Capital and, if at any time GE Capital shall decide to assign or syndicate all or any portion of the Obligations, such term shall include such assignee or such other members of the syndicate. "Letter of Credit Obligations" shall mean all outstanding obligations incurred by Lenders at the request of Borrower, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance or guarantee, by Lenders or another, of letters of credit. The amount of Letter of Credit Obligations outstanding at any time shall equal the maximum amount which may be payable by Lenders thereupon or pursuant thereto at such time. "Letters of Credit" shall mean commercial or standby letters of credit issued at the request and for the account of Borrower for which Lenders have incurred Letter of Credit -12- Obligations, as each may be amended, restated, supplemented or otherwise modified from time to time. "LIBOR Business Day" shall mean a Business Day on which banks in the city of London are generally open for interbank or foreign exchange transactions. "LIBOR Loan" shall mean a Loan or any portion thereof bearing interest by reference to the LIBOR Rate. "LIBOR Margin" shall have the meaning assigned to it in Section 1.8(c). "LIBOR Period" shall mean, with respect to any LIBOR Loan, each period commencing on a LIBOR Business Day selected by Borrower pursuant to the Agreement and ending one, two or three months thereafter, as selected by Borrower's irrevocable notice to Agent as set forth in Section 1.8(f); provided that the foregoing provision relating to LIBOR Periods is subject to the following: (a) if any LIBOR Period would otherwise end on a day that is not a LIBOR Business Day, such LIBOR Period shall be extended to the next succeeding LIBOR Business Day unless the result of such extension would be to carry such LIBOR Period into another calendar month in which event such LIBOR Period shall end on the immediately preceding LIBOR Business Day; (b) any LIBOR Period that would otherwise extend beyond the Commitment Termination Date shall end two (2) LIBOR Business Days prior to such date; (c) any LIBOR Period pertaining to a LIBOR Loan that begins on the last LIBOR Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Period) shall end on the last LIBOR Business Day of a calendar month; (d) Borrower shall select LIBOR Periods so as not to require a payment or prepayment of any LIBOR Loan during a LIBOR Period for such Loan; and (e) Borrower shall select LIBOR Periods so that there shall be no more than three (3) separate LIBOR Loans in existence at any one time. "LIBOR Rate" shall mean for each LIBOR Period, a rate of interest determined by Agent equal to: (a) the offered rate for deposits in United States Dollars for the applicable LIBOR Period which appears on Telerate Page 3750 as of 11:00 a.m., London time, on the second full LIBOR Business Day next preceding the first day of each LIBOR Period (unless such date is not a Business Day, in which event the next succeeding Business Day will be used); divided by -13- (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day which is two (2) LIBOR Business Days prior to the beginning of such LIBOR Period (including basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve system or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of such Board which are required to be maintained by a member bank of the Federal Reserve System (such rate to be adjusted to the nearest one sixteenth of one percent (1/16th of 1%) or, if there is not a nearest one sixteenth of one percent (1/16th of 1%), to the next highest one sixteenth of one percent (1/16th of 1%). If such interest rates shall cease to be available from Telerate News Service, the LIBOR Rate shall be determined from such financial reporting service or other information as shall be mutually acceptable to Agent and Borrower. "License" shall mean any Copyright License, Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by Borrower or any of its Subsidiaries. "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction), any right of any Person (other than Agent or Lenders) with respect to Collateral not expressly permitted in accordance with the specific terms of the Loan Documents, or the existence of any agreement or other document accomplishing or purporting to accomplish (whether on a conditional basis or otherwise) any of the foregoing. "Loan Account" shall have the meaning assigned to it in Section 1.15. "Loan Documents" shall mean the Agreement, the Revolving Credit Notes, the Term Loan Notes, the Capital Expenditure Loan Notes, the Collateral Documents, the Warrant and all other agreements, instruments, documents and certificates identified in Annex D in favor of Agent and/or Lenders and including all other pledges, powers of attorney, consents, assignments, contracts, notices, and all other written matter whether heretofore, now or hereafter executed by or on behalf of Borrower or any of its Affiliates, or any employee of Borrower, or any of its Affiliates, and delivered to Agent or any Lender in connection with the Agreement or the transactions contemplated hereby, together with all documents delivered in connection with the Prior Credit Agreement, to the extent not amended and restated pursuant to the Agreement, as each may be amended, restated, supplemented or otherwise modified from time to time. -14- "Loans" shall mean the Revolving Credit Loan, the Term Loan and the Capital Expenditure Loan collectively. "Lock Box Account" shall have the meaning assigned to it in Annex C. "Margins" means collectively the Index Margin and the LIBOR Margin. "Material Adverse Effect" shall mean (a) a material adverse effect on (i) the business, assets, operations or financial or other condition of Borrower or Borrower and its Subsidiaries considered as a whole, (ii) Borrower's ability to pay the Revolving Credit Loan, the Term Loan, the Capital Expenditure Loan, the Letter of Credit Obligations or any of the other Obligations in accordance with the terms thereof, (iii) the Collateral or Agent's Liens, on behalf of itself and Lenders, on the Collateral or the priority of any such Lien, or (iv) Agent's or any Lender's rights and remedies under the Agreement and the other Loan Documents or (b) except as otherwise permitted under the Agreement or the other Loan Documents, the incurrence by Borrower of any material liability, contingent or liquidated. "Maximum Capital Expenditure Advance Amount" shall mean, with respect to any Capital Expenditure Advance, an amount not in excess of 80% of the Hard Costs of the Equipment to be acquired with the proceeds of such Advance. "Maximum Lawful Rate" shall have the meaning assigned to it in Section 1.8(g). "Maximum Revolving Credit Loan" shall mean, at any particular time, an amount equal to Eighteen Million Dollars ($18,000,000) as such amount may be adjusted, if at all, from time to time in accordance with the Agreement. "Min-Max Contract" shall mean a written agreement between Borrower and a customer of Borrower containing a firm obligation of such customer to purchase an amount of Inventory which is not less than the minimum amount specified therein and not more than the maximum amount specified therein. "Min-Max Inventory" shall mean Eligible Inventory which is the subject of a Min- Max Contract, but only to the extent not exceeding the maximum amount prescribed by the relevant Min-Max Contract. "Missouri Facility" shall mean Borrower's facility in Joplin, Missouri. "Mortgaged Properties" shall mean all Real Estate owned by Borrower. "Mortgages" shall mean each of the mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, collateral assignments of leases or other real estate security documents delivered by Borrower to Agent, with respect to the Mortgaged Properties, all in form and substance satisfactory to Agent, as each may be amended, restated, supplemented or otherwise modified from time to time. -15- "Multiemployer Plan" shall mean a "multiemployer plan", as defined in Section 4001(a)(3) of ERISA, to which Borrower, any of its Subsidiaries or any ERISA Affiliate is making, is obligated to make, or within the last six (6) years has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Net Income" shall mean for any period Borrower's consolidated net income (or loss) after income and franchise taxes and shall have the meaning given such term by GAAP; provided, that, there shall be specifically excluded therefrom the net after-tax gains and losses arising from extraordinary items, as defined by GAAP. "Net Proceeds" shall mean all cash proceeds received by Borrower from any Asset Disposition (including insurance proceeds and awards of compensation and all payments in respect of any promissory notes or other non-cash consideration taken as consideration), net of the direct taxes and reasonable costs and expenses of such Asset Disposition and amounts, if any, required to be applied to repayment of Indebtedness (other than the Obligations) secured by any lien, security interest, claim or encumbrance on the asset or assets so disposed of. "New Jersey Facility" shall mean Borrower's vacant land in Carteret, New Jersey. "Non-use Fee" shall have the meaning assigned to it in Section 1.11(b). "Notes" shall mean the Revolving Credit Notes, the Term Loan Notes and the Capital Expenditure Loan Notes, collectively. "Notice of Capital Expenditure Advance" shall have the meaning assigned to it in Section 1.3(a). "Notice of Revolving Credit Advance" shall have the meaning assigned to it in Section 1.1(a). "Obligations" shall mean all loans, advances, debts, liabilities and obligations, for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or amounts are liquidated or determinable) owing by Borrower to Agent or any Lender, and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether or not evidenced by any note, agreement or other instrument, arising under the Agreement or any of the other Loan Documents. This term includes all principal, interest, Fees, Charges, expenses, attorneys' fees and any other sum chargeable to Borrower under the Agreement or any of the other Loan Documents. "Other Taxes" shall have the meaning assigned to it in Section 1.18. "Parent" shall mean BCA Holdings, Inc., a Delaware corporation. "Patent and Trademark Assignments" shall mean the patent and trademark assignments made in favor of Agent, on behalf of itself and Lenders, by Borrower and its -16- Subsidiaries, as each may be amended, restated, supplemented or otherwise modified from time to time. "Patent License" shall mean rights under any written agreement now owned or hereafter acquired by Borrower or any of its Subsidiaries granting any right with respect to any invention on which a Patent is in existence, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Patents" shall mean all of the following in which Borrower or any of its Subsidiaries now holds or hereafter acquires any interest: (i) all letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or any other country, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State or Territory thereof, or any other country, and (ii) all reissues, continuations, continuations-in-part or extensions thereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Pension Plan" shall mean an employee pension benefit plan, as defined in Section 3(2) of ERISA (other than a Multiemployer Plan), which is not an individual account plan, as defined in Section 3(34) of ERISA, and which Borrower or any of its Subsidiaries or, if a Title IV Plan, any ERISA Affiliate maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Permitted Encumbrances" shall mean the following encumbrances: (i) Liens for taxes or assessments or other governmental Charges or levies, either not yet due and payable or to the extent that nonpayment thereof is permitted by the terms of Section 5.2(b); (ii) pledges or deposits securing obligations under workmen's compensation, unemployment insurance, social security or public liability laws or similar legislation; (iii) pledges or deposits securing bids, tenders, contracts (other than contracts for the payment of money) or leases to which Borrower is a party as lessee made in the ordinary course of business; (iv) deposits securing public or statutory obligations of Borrower; (v) inchoate and unperfected workers', mechanics', suppliers' or similar Liens arising in the ordinary course of business; (vi) carriers', warehousemen's or other similar possessory liens arising in the ordinary course of business and securing indebtedness not yet due and payable in an outstanding aggregate amount not in excess of Ten Thousand Dollars ($10,000) at any time; (vii) deposits securing, or in lieu of, surety, appeal or customs bonds in proceedings to which Borrower is a party; (viii) any attachment or judgment Lien, unless the judgment it secures shall not, within thirty (30) days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within thirty (30) days after the expiration of any such stay; (ix) zoning restrictions, easements, licenses, or other restrictions on the use of real property or other minor irregularities in title (including leasehold title) thereto, so long as the same do not materially impair the use, value, or marketability of such real property, lease or leasehold estate; (x) purchase money Liens with respect to Equipment acquired in the ordinary course of business in accordance with past practice (subject to the limitations on Capital Expenditures set forth in the Agreement, -17- including Annex K thereto), so long as such liens attach only to the Equipment so acquired without the proceeds of any Loan or Advance; (xi) Liens on the Real Estate constituting the Kansas Facility; and (xii) Liens, other than those referred to in clause (xi) above, on the Kansas Collateral securing the Kansas Indebtedness, provided, however, that such Liens are subordinated in full to the Liens of Agent securing the Obligations. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, other entity or government (whether federal, state, county, city, municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or department thereof). "Plan" shall mean an employee benefit plan, as defined in Section 3(3) of ERISA, which Borrower or any of its Subsidiaries, on behalf of participants who are or were employed by any of them (a) currently maintains, contributes to or has an obligation to contribute to or (b) within the last six (6) years has maintained, contributed to or had an obligation to contribute to. "Pledge Agreement" shall mean the Pledge Agreement made by Parent in favor of Agent, on behalf of itself and Lenders, including all amendments, restatements and modifications thereof and supplements thereto, and shall refer to the Pledge Agreement as the same may be in effect at the time such reference becomes operative. "Proceeds" shall mean "proceeds," as such term is defined in the Code and, in any event, shall include (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Borrower or any of its Subsidiaries from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to Borrower or any of its Subsidiaries from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), (iii) any claim of Borrower or any of its Subsidiaries against third parties (a) for past, present or future infringement of any Patent or Patent License, (b) for past, present or future infringement or dilution of any Copyright or Copyright License or (c) for past, present or future infringement or dilution of any Trademark or Trademark License or for injury to the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark License, (iv) any recoveries by Borrower or any of its Subsidiaries against third parties with respect to any litigation or dispute concerning any of the Collateral, and (v) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral, upon disposition or otherwise. "Projections" shall mean any and all projections delivered pursuant to or in connection with the Agreement. "Pro Rata Share" shall mean with respect to matters relating to (a) a Lender's portion of the Term Loan, the percentage obtained by dividing (i) the portion of the Term Loan held by such Lender, by (ii) the outstanding amount of the Term Loan, (b) a Lender's portion of the Capital Expenditure Loan, the percentage obtained by dividing (i) the portion of the Capital Expenditure -18- Loan held by such Lender, by (ii) the outstanding amount of the Capital Expenditure Loan, and (c) a Lender's Commitment with respect to Revolving Credit Advances and Letter of Credit Obligations (including the making or repayment of Revolving Credit Advances and incurrence of Letter of Credit Obligations pursuant to those Commitments) and, with respect to all other matters, the percentage obtained by dividing (i) the Revolving Loan Commitment of that Lender by (ii) the aggregate Revolving Loan Commitments of all Lenders, as each of the foregoing percentages may be adjusted by assignments permitted pursuant to Section 9.1. "PST" shall mean Plastic Specialties and Technologies, Inc., a Delaware corporation. "Qualified Plan" shall mean an employee pension benefit plan, as defined in Section 3(2) of ERISA, which is intended to be tax-qualified under Section 401(a) of the IRC, and which Borrower, any of its Subsidiaries or any ERISA Affiliate, on behalf of participants who are or were employed by any of them (a) currently maintains, contributes to or has an obligation to contribute to or (b) within the last six (6) years has maintained, contributed to or had an obligation to contribute to. "Real Estate" shall mean all of the real estate of Borrower listed in Schedule 3.7. "Release" shall mean, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials in the indoor or outdoor environment by such Person, including the movement of Hazardous Materials through or in the air, soil, surface water, ground water or property. "Reportable Event" shall mean any of the events described in Section 4043(b) (1), (2), (3), (5), (6), (8) or (9) of ERISA. "Requisite Lenders" shall mean (a) Lenders having more than sixty-six and two-thirds percent (66 2/3%) of the total Commitments of all Lenders, or (b) if all Commitments have been terminated, more than sixty-six and two-thirds percent (66 2/3%) of the aggregate outstanding amount of all outstanding Loans and Letter of Credit Obligations. "Restricted Payment" shall mean (i) the declaration or payment of any dividend or the incurrence of any liability to make any other payment or distribution of cash or other property or assets in respect of a Person's Stock, (ii) any payment on account of the purchase, redemption, defeasance or other retirement of a Person's Stock or any other payment or distribution made in respect thereof, either directly or indirectly, (iii) any payment, loan, contribution, or other transfer of funds or other property to any Stockholder of such Person, (iv) any dividend, distribution, payment, loan, contribution, fee or other transfer of cash, property or other assets to any stockholder or Affiliate of Borrower, including ARTRA or any of its employees, officers, directors or Affiliates, including Peter R. Harvey or any of his family members or Affiliates or (v) the existence of any agreement or other document accomplishing or purporting to accomplish (whether on a conditional basis or otherwise) any of the foregoing. -19- "Retiree Welfare Plan" shall mean any Welfare Plan providing for continuing coverage or benefits for any participant or any beneficiary of a participant after such participant's termination of employment, other than continuation coverage provided pursuant to Section 4980B of the IRC and at the sole expense of the participant or the beneficiary of the participant. "Revolving Credit Advance" shall have the meaning assigned to it in Section 1.1(a). "Revolving Credit Loan" shall mean the aggregate amount of Revolving Credit Advances outstanding at any time. "Revolving Credit Note" shall have the meaning assigned to it in Section 1.1(b). "Revolving Loan Commitment" shall mean (a) as to any Lender with a Revolving Loan Commitment, the aggregate commitment of such Lender to make Revolving Credit Advances and incur Letter of Credit Obligations as set forth on the signature page to the Agreement or in the most recent Lender Addition Agreement executed by such Lender and (b) as to all Lenders with a Revolving Loan Commitment, the aggregate commitment of all Lenders to make Revolving Credit Advances and incur Letter of Credit Obligations, which maximum aggregate commitment shall be Eighteen Million Dollars ($18,000,000). "Schedule of Accounts" shall mean the schedules of Accounts to be delivered by Borrower to Agent pursuant to Annex F. "Schedule of Documents" shall mean the schedule, including all appendices, exhibits, schedules or annexes thereto, listing certain documents and information to be delivered in connection with the Agreement, the other Loan Documents and the transactions contemplated thereunder, substantially in the form attached as Annex D to the Agreement. "Schedule of Inventory" shall mean the schedules of Inventory to be delivered by Borrower to Agent pursuant to Annex G of the Agreement, including Borrower's internal reports classifying and valuing Inventory. "Security Agreement" shall mean the Security Agreement entered into among Agent, on behalf of itself and Lenders and Borrower, including all amendments, restatements and modifications thereof and supplements thereto, and shall refer to the Security Agreement as the same may be in effect at the time such reference becomes operative. "Services Agreement" shall mean the agreement pursuant to which Borrower and ARTRA each share certain costs and expenses of insurance, including all amendments, modifications and supplements thereto, all in form and substance satisfactory to Agent in its sole discretion, and shall refer to such agreement as the same may be in effect at the time such reference becomes operative. "Stock" shall mean all shares, options, warrants, general or limited partnership interests or other equivalents (regardless of how designated) of or in a corporation, partnership or -20- equivalent entity whether voting or nonvoting, including common stock, preferred stock or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). "Stockholder" shall mean each holder of Stock of Borrower or any of its Subsidiaries, as the context may require. "Subsidiary" shall mean, with respect to any Person, (i) any corporation of which an aggregate of more than fifty percent (50%) of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person and/or one or more Subsidiaries of such Person, or with respect to which any such Person has the right to vote or designate the vote of fifty percent (50%) or more of such Stock whether by proxy, agreement, operation of law or otherwise and (ii) any partnership in which such Person and/or one or more Subsidiaries of such Person shall have an interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%) or of which any such Person is a general partner or may exercise the powers of a general partner. "Tangible Net Worth" shall mean the (a) total assets of Borrower on a consolidated basis (less applicable reserves and other properly deductible items), after deducting therefrom organizational expenses, General Intangibles, goodwill, covenants not to compete, research and development costs, training costs, and all unamortized debt discount, deferred charges (other than prepaid insurance and deferred financing fees relating to the Obligations and the Kansas Indebtedness) and all receivables from Affiliates, including Peter R. Harvey and ARTRA, less (b) total liabilities of Borrower on a consolidated basis, which, in the case of all of the foregoing items, would be reflected on a consolidated balance sheet of Borrower and its Subsidiaries under GAAP. "Tax Sharing Agreement" shall mean, collectively, each of those certain Tax Sharing Agreements by and between ARTRA, Borrower and Parent dated as of January 1, 1991 and March 7, 1991, respectively, including all amendments, modifications and supplements thereto, all in form and substance satisfactory to Agent in its sole discretion, and shall refer to the Tax Sharing Agreement as the same may be in effect at the time such reference becomes operative. "Taxes" shall mean taxes, levies, imposts, deductions, Charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on or measured by the net income of Agent or a Lender by the jurisdictions under the laws of which Agent and Lenders are organized or any political subdivision thereof. "Term Loan" shall have the meaning assigned to it in Section 1.2(a). "Term Loan Note" shall have the meaning assigned to it in Section 1.2(c). -21- "Term Loan Commitment" shall mean (a) as to any Lender with a Term Loan Commitment, the aggregate commitment of such Lender to make the Term Loan as set forth on the signature page to the Agreement or in the most recent Lender Addition Agreement executed by such Lender and (b) as to all Lenders with a Term Loan Commitment, the aggregate commitment of all Lenders to make the Term Loan, which maximum aggregate commitment shall be Twenty Million Dollars ($20,000,000) including the consolidation of the $12,000,000 principal balance of Term Loan A outstanding under the Prior Credit Agreement. "Title IV Plan" shall mean a Pension Plan, other than a Multiemployer Plan, which is covered by Title IV of ERISA. "Trademark License" shall mean rights under any written agreement now owned or hereafter acquired by Borrower or any of its Subsidiaries granting any right to use any Trademark or Trademark registration, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Trademarks" shall mean all of the following now owned or hereafter acquired by Borrower or any of its Subsidiaries: (i) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature (whether registered or unregistered), now owned or existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof; and (ii) all reissues, extensions or renewals thereof. "Unfunded Pension Liability" shall mean, at any time, the aggregate amount, if any, of the sum of (i) the amount by which the present value of all accrued benefits under each Title IV Plan exceeds the fair market value of all assets of such Title IV Plan allocable to such benefits in accordance with Title IV of ERISA, all determined as of the most recent valuation date for each such Title IV Plan using the actuarial assumptions in effect under such Title IV Plan, and (ii) for a period of five (5) years following a transaction reasonably likely to be covered by Section 4069 of ERISA, the liabilities (whether or not accrued) that could be avoided by Borrower, any of its Subsidiaries or any ERISA Affiliate as a result of such transaction. "Warrant" shall mean the Warrant issued as of December 17, 1993 by Borrower in favor of GE Capital, as heretofore amended, and as substituted as of the Closing Date, including all other amendments, restatements, substitutions and modifications thereof and supplements thereto, all in form and substance satisfactory to Agent in its sole discretion, and shall refer to the Warrant as the same may be in effect at the time such reference becomes operative. "Welfare Plan" shall mean any welfare plan, as defined in Section 3(1) of ERISA, which is maintained or contributed to by Borrower or any of its Subsidiaries. -22- "Withdrawal Liability" shall mean, at any time, the aggregate amount of the liabilities, if any, pursuant to Section 4201 of ERISA, and any increase in contributions pursuant to Section 4243 of ERISA, with respect to all Multiemployer Plans. Any accounting term used in the Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP consistently applied. That certain items or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. In the event that any "Accounting Changes" (as defined below) occur and such changes result in a change in the calculation of the financial covenants, standards or terms used in the Agreement or any other Loan Document, then Borrower, Agent and Lenders agree to enter into negotiations in order to amend such provisions of this Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating Borrower's and its Subsidiaries' financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made; provided, further, that the agreement of Requisite Lenders to any required amendments of such provisions shall be sufficient to bind all Lenders. "Accounting Changes" means (a) changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants (or successor thereto or any agency with similar functions), and (b) changes in accounting principles concurred in by Borrower's certified public accountants. In the event, if any, that Agent, Borrower and Requisite Lenders shall have agreed upon the required amendments, then after such agreement has been evidenced in writing and the underlying Accounting Change with respect thereto has been implemented, any reference to GAAP contained in this Agreement or in any other Loan Document shall, only to the extent of such Accounting Change, refer to GAAP, consistently applied after giving effect to the implementation of such Accounting Change. If Agent, Borrower and Requisite Lenders cannot agree upon the required amendments within sixty (60) days following the date of implementation of any Accounting Change, then all financial statements delivered and all calculations of financial covenants and other standards and terms in accordance with the Agreement and the other Loan Documents shall be prepared, delivered and made without regard to the underlying Accounting Change. All other undefined terms contained in the Agreement or any of the other Loan Documents shall, unless the context indicates otherwise, have the meanings provided for by the Code as in effect in the State of Illinois to the extent the same are used or defined therein. The words "herein," "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole, including the Exhibits, Schedules and Annexes thereto, as the same may from time to time be amended, modified or supplemented, and not to any particular section, subsection or clause contained in the Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter genders. The words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to Persons include their respective successors and assigns (to the extent and -23- only to the extent permitted by the Loan Documents) or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. -24- ANNEX B to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 LETTERS OF CREDIT (a) Subject to the terms and conditions of this Agreement, the Revolving Credit Loan Commitment may, in addition to Revolving Credit Loan Advances, be utilized, upon the request of Borrower, for the issuance of Letters of Credit or guaranties thereof by Agent so long as GE Capital is Agent, on behalf of each Lender (severally and not jointly) according to such Lender's Pro Rata Share of the Revolving Loan Commitment to guaranty payment to banks (whether or not such banks are Lenders) which issue Letters of Credit for the account of Borrower; provided, however, that the aggregate amount of all Letter of Credit Obligations incurred by Agent and Lenders pursuant to this paragraph (a) shall not exceed Three Million Dollars ($3,000,000) and, provided, further, that (1) no such Letter of Credit shall have an expiry date which is more than one year following the date of issuance thereof and (2) Agent and Lenders shall be under no obligation to incur Letter of Credit Obligations in respect of any Letter of Credit having an initial or extended expiry date, or extension option, which is later than the Commitment Termination Date. It is understood that the bank or other legally authorized Person (including any Lender) which shall issue any Letter of Credit contemplated by this paragraph (a) shall be selected by Borrower and acceptable to Agent, in its sole discretion. (b) In the event that any Lender shall make any payment on or pursuant to any Letter of Credit Obligation, such payment shall then be deemed automatically to constitute a Revolving Credit Advance under Section 1.1(a) of the Agreement. (c) In the event that any Letter of Credit Obligation, whether or not then due and payable, shall for any reason be outstanding on the Commitment Termination Date, Borrower will pay to Agent for the benefit of Lenders cash or cash equivalents acceptable to Agent ("Cash Equivalents") in an amount equal to the maximum amount then available to be drawn under the applicable Letter of Credit plus all outstanding fees and expenses relating thereto. Such funds or Cash Equivalents shall be held by Agent in a cash collateral account (the "Cash Collateral Account") maintained at Bankers Trust Company, 17 Wall Street, New York, New York, ABA#: 021 001 033, in the name of General Electric Capital Corporation, Commercial Finance Group, Acct.#: 502 328 54. The Cash Collateral Account shall be in the name of Agent (as a cash collateral account), and shall be under the sole dominion and control of Agent and subject to the terms of this Annex B. Borrower hereby pledges, and grants to Lender a security interest in, all such funds and Cash Equivalents held in the Cash Collateral Account from time to time and all proceeds thereof, as security for the payment of all amounts due in respect of the Letter of Credit Obligations, whether or not then due. This Agreement shall constitute a security agreement under applicable law. From time to time after funds are deposited in the Cash Collateral Account, Agent may apply such funds or Cash Equivalents then held in the Cash Collateral Account to the payment of any amounts, in such order as Agent may elect, as shall be or shall become due and payable by Borrower to Lenders with respect to such Letter of Credit Obligations. -1- Neither Borrower nor any Person claiming on behalf of or through Borrower shall have any right to withdraw any of the funds or Cash Equivalents held in the Cash Collateral Account, except that upon the termination of all Letter of Credit Obligations and the payment of all amounts payable by Borrower to Lenders in respect thereof, any funds remaining in the Cash Collateral Account in excess of the then remaining Letter of Credit Obligations shall be returned to Borrower. Agent shall not have any obligation to invest the funds in the Cash Collateral Account or deposit such funds in an interest bearing account, and interest and earnings thereon, if any, shall be the property of Lenders. (d) In the event that Lenders shall incur any Letter of Credit Obligation pursuant hereto at the request or on behalf of Borrower, Borrower agrees to pay to Agent for the benefit of Lenders, as compensation to Lenders for such Letter of Obligation, (i) all costs and expenses incurred by any Lender on account of such Letter of Credit Obligation and (ii) commencing with the month in which such Letter of Credit Obligation is incurred by Lenders and monthly thereafter for each month during which such Letter of Credit Obligation shall remain outstanding, a fee in an amount equal to two percent (2.0%) per annum of the maximum amount available from time to time to be drawn under the applicable Letter of Credit, calculated on the basis of a 360-day year and the actual number of days elapsed; provided, however, that during any period while an Event of Default has occurred and is continuing such fee shall be increased to four percent (4.0%) per annum, calculated on the basis of a 360-day year and the actual number of days elapsed. Fees payable in respect of Letter of Credit Obligations shall be paid to Agent for the benefit of Lenders in arrears, on the first day of each month. The fees, costs and expenses provided for in this paragraph (d) are in addition to any fees, costs and expenses payable to the issuers of the Letters of Credit, all of which are solely for the account of Borrower. (e) Request for Lender Guaranties. Borrower shall give Agent at least two (2) days prior written notice as to the issuance of a Letter of Credit or letter credit guaranty, specifying the date such Letter of Credit or guaranty is to be issued, identifying the beneficiary and describing the nature of the transactions proposed to be supported thereby. The notice shall be accompanied by the form of the Letter of Credit to be guarantied. (f) The obligation of Borrower to reimburse Lenders for payments made with respect to any Letter of Credit Obligation shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms hereof under all circumstances including the following circumstances: (1) any lack of validity or enforceability of any Letter of Credit or any other agreement; (2) the existence of any claim, set-off, defense or other right which Borrower or any of its Affiliates or any Lender may at any time have against a beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such transferee may be acting), any Lender, or any other Person, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Borrower or any of its Affiliates and the beneficiary for which the Letter of Credit was procured); -2- (3) any draft, demand, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (4) payment by Agent, any Lender, or the issuing bank under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit, provided that, in the case of any payment by Agent or any Lender under any Letter of Credit, Agent or such Lender has not acted with gross negligence or willful misconduct (as finally determined by a court of competent jurisdiction) in determining that the demand for payment under such Letter of Credit or guaranty thereof complies on its face with any applicable requirements for a demand for payment under such Letter of Credit or guaranty thereof; (5) any other circumstance or happening whatsoever, which is similar to any of the foregoing; or (6) the fact that a Default or an Event of Default shall have occurred and be continuing. (g) Indemnification; Nature of Lenders' Duties. In addition to amounts payable as elsewhere provided in this Agreement, Borrower hereby agrees to protect, indemnify, pay and save Agent and each Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees and allocated costs of internal counsel) which Agent or any Lender may incur or be subject to as a consequence, direct or indirect, of (1) the issuance of any Letter of Credit or guaranty thereof, other than as a result of the gross negligence or willful misconduct of Agent or such Lender as finally determined by a court of competent jurisdiction or (2) the failure of Agent or any Lender to honor a demand for payment under any Letter of Credit or guaranty thereof as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority. As between Agent and Borrower and any Lender and Borrower, Borrower assumes all risks of the acts and omissions of, or misuse of any Letter of Credit by beneficiaries of any Letter of Credit. In furtherance and not in limitation of the foregoing, neither Agent nor any Lender shall be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document issued by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of any Letter of Credit to comply fully with conditions required in order to demand payment under such Letter of Credit; provided that, in the case of any payment by Agent under any Letter of Credit or guaranty thereof, Agent has not acted with gross negligence or willful misconduct (as finally determined by a court of competent jurisdiction) in determining that the demand for payment under such Letter of Credit or guaranty thereof complies on its face with any applicable requirements for a demand for payment under such Letter of Credit or guaranty thereof; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by -3- mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a payment under any Letter of Credit or guaranty thereof or of the proceeds thereof; (vii) for the credit of the proceeds of any drawing under any Letter of Credit or guaranty thereof; and (viii) for any consequences arising from causes beyond the control of Agent or any Lender. None of the above shall affect, impair, or prevent the vesting of any of Agent's or any Lender's rights or powers hereunder. -4- ANNEX C TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 CASH MANAGEMENT SYSTEMS The Borrower shall, and shall cause its Subsidiaries to, establish and maintain the Cash Management Systems described below: (a) Prior to the Closing Date and for so long as the Revolving Credit Loan, any of the Term Loans or any other Obligations are outstanding, Borrower shall deposit and shall cause its Subsidiaries to deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all cash, checks, drafts or other similar items of payment relating to or constituting payments made in respect of any and all Collateral into bank accounts in Borrower's name or such Subsidiary's name (collectively, the "Borrower Accounts") at banks set forth on Schedule 3.22. Prior to the Closing Date, Borrower shall have established a concentration account in Borrower's name (the "Concentration Account") at LaSalle National Bank, which shall be designated as the Concentration Account bank on Schedule 3.22, in accordance with a blocked account agreement in form and substance satisfactory to Agent, in its sole discretion. (b) Prior to the Closing Date, LaSalle National Bank, as Concentration Account bank, and all of the banks set forth on Schedule 3.22 with which Borrower or any Subsidiary thereof has any relationship other than as the holder of a deposit account, including by way of example any mortgage or other lending relationship (each such bank a "Relationship Bank"), shall have entered into triparty blocked account agreements with Agent, for the benefit of itself and Lenders, and Borrower and/or each such Subsidiary, as applicable, in form and substance acceptable to Agent, which shall become operative prior to the Closing Date at LaSalle National Bank, as the bank where the Concentration Account is maintained, and all Relationship Banks at which Borrower Accounts are maintained. Borrower shall clearly designate each bank which is a Relationship Bank as such on Schedule 3.22. Each such blocked account agreement shall provide, among other things, that: (i) all items of payment deposited in such Borrower Account and proceeds thereof deposited in such Concentration Account are held by such bank as agent or bailee-in- possession for Agent; (ii) the bank executing such agreement has no rights of setoff or recoupment or any other claim against such Borrower Account or Concentration Account, as the case may be, other than for payment of its service fees and other charges directly related to the administration of such account and for returned checks or other items of payment; and (iii) prior to the Closing Date (A) with respect to each bank at which a Borrower Account is located, such bank agrees to forward immediately all amounts in Borrower Account to the Concentration Account and to commence the process of daily sweeps from such Borrower Account into the Concentration Account and (B) with respect to the bank at which the Concentration Account is located, such bank agrees to forward immediately all -1- amounts received in the Concentration Account to the Collection Account through daily sweeps from such Concentration Account into the Collection Account. (c) Prior to the Closing Date, Borrower shall cause each and every bank at which any Borrower Account is located, including each Relationship Bank and each of the other banks at which any Borrower Account is located, to (i) forward immediately, and in no event less frequently than once each Business Day, all amounts in Borrower Accounts at such bank to the Concentration Account and (ii) commence, and continue each Business Day, the process of daily sweeps from each such Borrower Account into the Concentration Account. Prior to the Closing Date, Borrower shall cause LaSalle National Bank, as the bank where the Concentration Account is located, to forward immediately all amounts received in the Concentration Account to the Collection Account through daily sweeps from such Concentration Account into the Collection Account. (d) So long as no Default or Event of Default has occurred and is continuing, Borrower may amend Schedule 3.22 to add or replace a Borrower Account or replace the Concentration Account; provided, however, that (i) Agent shall have consented in writing to the opening of such account with the relevant bank, and (ii) prior to the time of the opening of such account, Borrower and/or the Subsidiaries thereof, as applicable, and such bank shall have executed and delivered to Agent a triparty blocked account agreement, in form and substance satisfactory to Agent. (e) The Borrower Accounts and the Concentration Account shall be cash collateral accounts, with all cash, checks and other similar items of payment in such accounts securing payment of the Revolving Credit Loan, each of the Term Loans and all other Obligations, and in which Borrower or such Subsidiary shall have granted a Lien to Agent, on behalf of itself and Lenders, pursuant to the Security Agreement. (f) All amounts deposited in the Collection Account shall be deemed received by Agent in accordance with Section 1.13 of the Agreement and shall be applied (and allocated) by Agent in accordance with Section 1.14 of the Agreement. In no event shall any amount be so applied unless and until such amount shall have been credited in immediately available funds to the Collection Account. (g) The Borrower may maintain, in its name, an account (the "Disbursement Account") at a bank acceptable to Agent into which, Agent shall, from time to time, deposit proceeds of Revolving Credit Advances made pursuant to Section 1.1 of the Agreement for use by Revolver Borrower solely in accordance with the provisions of Section 1.7 of the Agreement. The Disbursement Account shall be a cash collateral account, with all cash, checks and other similar items of payment in such account securing payment of the Revolving Credit Loan, each of the Term Loans and all other Obligations, and in which Borrower shall have granted a Lien to Agent, for the benefit of itself and Lenders, pursuant to the Security Agreement. The Disbursement Account shall be subject to a triparty blocked account agreement identical to the agreement governing Borrower Accounts and the Concentration Account; provided, however, that, according to the terms thereof, such agreement shall become effective upon the occurrence of a default or an Event of Default. -2- (h) The Borrower shall and shall cause its Subsidiaries to (i) hold in trust for Agent, for the benefit of itself and Lenders, all checks, cash and other items of payment received by Borrower or any such Subsidiary, and (ii) within one (1) Business Day after receipt by Borrower or any such Subsidiary of any checks, cash or other items or payment, deposit the same into a Borrower Account. The Borrower and its Subsidiaries acknowledge and agree that all cash, checks or items of payment constituting proceeds of Collateral are the property of Lenders. All proceeds of the sale or other disposition of any Collateral, other than sales of Inventory by Borrower in the ordinary course of business, shall be deposited directly into the Concentration Account. -3- ANNEX D TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 SCHEDULE OF DOCUMENTS In addition to, and not in limitation of, the conditions described in Section 2.1 of the Agreement, pursuant to Section 2.1(b) of the Agreement, the following items must be received by Agent in form and substance satisfactory to Agent on or prior to the Closing Date (each capitalized term used but not otherwise defined herein shall have the meaning ascribed thereto in Annex A to the Agreement): (a) Exhibits, Schedules and Annexes. All Exhibits, Schedules and Annexes to the Agreement, in form and substance satisfactory to Agent. (b) Revolving Credit Notes. For each Lender, one (1) duly executed original Revolving Credit Note, dated the Closing Date. (c) Term Loan Notes. For each Lender, one (1) duly executed original Term Loan Note, dated the Closing Date. (d) Capital Expenditure Loan Notes. For each Lender, one (1) duly executed original Capital Expenditure Loan Note, dated the Closing Date. (e) Warrant. A duly executed Warrant, dated the Closing Date, signed by Borrower, in form and substance satisfactory to Agent, and all instruments, documents and agreements executed pursuant thereto. (f) Loan Documents. Evidence satisfactory to Agent that all other Loan Documents are in full force and effect as of the Closing Date. (g) Initial Notice of Revolving Credit Advance. Duly executed originals of a Notice of Revolving Credit Advance, dated on or prior to the Closing Date, with respect to the initial Revolving Credit Advance to be requested by Borrower on the Closing Date. (h) Financial Statements and Collateral Reports. All Financial Statements and Collateral Reports required to be delivered prior to the Closing Date pursuant to the Prior Credit Agreement. (i) Officer's Certificate. Duly executed originals of a certificate of the chief executive officer and chief financial officer of Borrower, dated the Closing Date, stating that since December 31, 1995, there has been: (i) no Material Adverse Effect on the business, operations, financial condition, prospects or projections of Borrower, the industries in which it operates, the Collateral, or any of its Subsidiaries; (ii) no litigation will has commenced which, if successful, could have any such Material Adverse Effect or could challenge any of the transactions contemplated by this Agreement and the other Loan Documents; (iii) except for the redemption of preferred stock of Borrower owned by PST in accordance with this Agreement and the Prior Credit Agreement, no dividends, distributions, payments, loans, contributions, fees or other transfers of cash, property or -1- other assets to any stockholders or Affiliate of Borrower, including ARTRA or its employees, directors, officers or Affiliates; and (iv) no material increase in liabilities, liquidated or contingent, and no material decrease in assets of Borrower or any of its Subsidiaries. (j) Charter and Good Standing. For Parent, Borrower and each of its Subsidiaries, such Person's (a) certificate or articles of incorporation and all amendments thereto, (b) good standing certificates (including verification of tax status) in its state of incorporation and (c) good standing certificates (including verification of tax status) and certificates of qualification to conduct business in each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, each of the foregoing dated a recent date prior to the Closing Date and certified by the applicable Secretary of State or other authorized governmental entity. (k) Bylaws and Resolutions. For Parent, Borrower and each of its Subsidiaries (a) such Person's bylaws, together with all amendments thereto, and (b) resolutions of such Person's Board of Directors and, as required, stockholders, approving and authorizing the execution, delivery and performance of the Loan Documents to which such Person is a party and the transactions to be consummated in connection therewith, each of the foregoing certified as of the Closing Date by such Person's corporate secretary or an assistant secretary as being in full force and effect without any modification or amendment. (l) Incumbency Certificates. For Parent, Borrower and each of its Subsidiaries, signature and incumbency certificates of the officers of each such Person executing any of the Loan Documents, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary as being true, accurate, correct and complete. (m) Opinions of Counsel. Duly executed originals of an opinion of Kwiatt, Silverman and Ruben, Ltd., General Counsel for Parent, Borrower and its Subsidiaries, in form and substance satisfactory to Agent and its counsel, dated the Closing Date, and accompanied by a letter addressed to such counsel from Parent, Borrower and its Subsidiaries, authorizing and directing such counsel to address its opinion to Agent, on behalf of Lenders, and to include in such opinion an express statement to the effect that Agent and Lenders are authorized to rely on such opinion. (n) Other Documents. Such other certificates, documents and agreements respecting Borrower or any of its Subsidiaries, as Agent may request in its sole discretion, including the GE Capital Fee Letter. -2- ANNEX E to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 RESPONSIBLE INDIVIDUAL Telephone # Name and Title Notice Address Telecopy # -------------- -------------- ---------- Robert T. Battle General Electric 203-316-7500 Vice President, Capital Corporation 203-316-7893 Portfolio Commercial Finance, Inc. 201 High Ridge Road Stamford, CT 06927-5100 ANNEX F TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 ELIGIBLE ACCOUNTS In determining whether an account constitutes an Eligible Account, Agent shall not include any Account: (a) which does not arise from the sale of goods or the performance of services by Borrower in the ordinary course of its business; (b) upon which (i) Borrower's right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatsoever or (ii) Borrower is not able to bring suit or otherwise enforce its remedies against the Account Debtor through judicial process; (c) against which is asserted any defense, counterclaim, setoff or dispute, but only to the full extent of such defense, counterclaim, setoff or dispute; (d) that is not a true and correct statement of a bona fide indebtedness incurred in the amount of the Account for merchandise sold and accepted by the Account Debtor obligated upon such Account; (e) with respect to which an invoice, acceptable to Agent in form and substance, has not been sent; (f) that (i) is not owned by Borrower or (ii) is subject to any right, claim, security interest or other interest of any other Person, other than the Lien in favor of Agent, on behalf of itself and Lenders; (g) that arises from a sale to any director, officer, other employee or Affiliate of Borrower or any Subsidiary thereof, or to any entity which has any common officer or director with Borrower or any Subsidiary thereof; (h) that is the obligation of an Account Debtor that is the United States government or a political subdivision thereof, unless Agent, in its sole discretion, has agreed to the contrary in writing and Borrower, if necessary or desirable as determined by Agent, has complied with the Federal Assignment of Claims Act of 1940, and any amendments thereto, with respect to such obligation; (i) that is the obligation of an Account Debtor located in a foreign country, other than (i) Canada, provided, that, such obligation is denominated entirely in United States dollars and is fully payable within the United States or (ii) a foreign country, provided, that, such obligation is backed by a letter of credit or other credit enhancement in form and substance acceptable to Agent in its sole discretion and the same has been delivered to Agent and, provided, further, that, if any Default or Event of Default shall have occurred and be continuing, Borrower shall notify the issuer -1- of such letter of credit or other credit enhancement that the same has been assigned to Agent, on behalf of Agent and Lenders, in accordance with Section 5-116(2)(b) of the Code; (j) that is the obligation of an Account Debtor to whom Borrower or any Subsidiary thereof is liable for goods sold or services rendered by the Account Debtor to Borrower or any Subsidiary thereof, but only to the full extent of all such liabilities in the aggregate with respect to such Account Debtor; (k) that arises with respect to goods which are delivered on a cash-on-delivery basis or placed on consignment, guaranteed sale or other terms by reason of which the payment by the Account Debtor is or may be conditional; (l) that is in default; provided, further, that, without limiting the generality of the foregoing, an Account shall be deemed in default upon the occurrence of any of the following: (i) the Account is not paid within the earlier of: sixty (60) days past its due date or ninety (90) days past its original invoice date; (ii) if any Account Debtor obligated upon such Account suspends business, makes a general assignment for the benefit of creditors or fails to pay its debts generally as they come due; or (iii) if any petition is filed by or against any Account Debtor obligated upon such Account under any bankruptcy law or any other federal, state or foreign (including any provincial) receivership, insolvency relief or other law or laws for the relief of debtors; (m) which is the obligation of an Account Debtor that has failed to make a payment within sixty (60) days past the applicable due date on fifty percent (50%) or more of the dollar amount of Accounts upon which such Account Debtor is obligated (Borrower shall be entitled to notify Agent regarding the circumstances of such payment failure, and, thereafter, Agent, in its sole and absolute discretion, may choose to include all or a portion, if any, of such account as an Eligible Account); (n) which is due more than ninety (90) days from the date of determination of eligibility thereof; (o) which arises from any bill-and-hold or other sale of goods which remain in Borrower's or any Subsidiary thereof's possession or under Borrower's or any such Subsidiary's control, but only to the fullest extent of that portion of such goods not actually billed and shipped at the time of Agent's determination thereof; (p) as to which Agent's interest, on behalf of itself and Lenders, therein is not a first priority perfected security interest; -2- (q) as to which any of the representations or warranties pertaining to Accounts set forth in the Agreement or any of the other Loan Documents is untrue; (r) to the extent such Account exceeds any credit limit established by Agent, in its reasonable discretion; (s) to the extent such Account is evidenced by any note; or (t) which is otherwise unacceptable to Agent in its sole discretion. -3- ANNEX G TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 ELIGIBLE INVENTORY In determining whether Inventory constitutes Eligible Inventory, Agent shall not include Inventory which: (a) is not owned by Borrower free and clear of all Liens and rights of any other Person, except the Liens in favor of Agent, on behalf of itself and Lenders, and encumbrances set forth in clause (v) or (vi) of the definition of Permitted Encumbrances; (b) except as set forth in clause (c) below with respect to goods which are "in transit," is not located on premises owned, operated or leased by Borrower; (c) consists of goods which are "in transit", but only to the full extent the same are not shipped (i) F.O.B. point of shipment and/or (ii) on vehicles owned by Borrower or common carriers employed by, or subject to the direction of, Borrower; provided, that, Borrower maintains (A) appropriate and adequate casualty insurance with respect to goods shipped on such common carriers, in form and with insurers recognized as adequate by Agent, together with appropriate evidence showing loss payable clauses or endorsements in favor of Agent, on behalf of Lenders, in form and substance satisfactory to Agent and (B) adequate reserves on its books, in accordance with GAAP, with respect to all amounts charged by, and all other fees and expenses associated with, such common carriers; (d) is covered by a negotiable document of title, unless such document and evidence of acceptable insurance covering such Inventory has been delivered to Agent; (e) in Agent's reasonable credit judgement, is obsolete, unsalable, shopworn, damaged or unfit for sale; (f) consists of display items or shipping materials; (g) consists of packing materials, but only to the full extent that the same are (i) customized or specialized for or on behalf of Borrower or (ii) not maintained in "full pallets" or are otherwise maintained in broken or incomplete packages or sets; (h) consists of goods which have been returned by the buyer; (i) consists of discontinued or slow-moving items or finished goods of substandard quality; (j) is placed by Borrower on consignment; (k) is not of a type held for sale in the ordinary course of Borrower's business; -1- (l) as to which Agent's interest, on behalf of itself and Lenders, therein is not a first priority perfected security interest; (m) as to which any of the representations or warranties pertaining to Inventory set forth in the Agreement or any of the other Loan Documents is untrue; (n) is located at a public warehouse, unless Agent has received therefrom a copy of a duly executed bailee letter, in form and substance acceptable to Agent in its sole discretion; (o) consists of supplies or work-in-process; (p) is otherwise unacceptable to Agent in its sole discretion. In addition, Inventory located at an owned or leased location shall be subject to the provisions set forth in Section 5.11 and 5.12 of the Agreement. -2- ANNEX H to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 Insurance Standards 1. Borrower shall, and shall cause each of its Subsidiaries to, at its sole cost and expense, maintain "All Risk" physical damage insurance on all real and personal property, including fire and extended coverage, boiler and machinery coverage, flood, earthquake, liquids, theft, explosion, collapse and all other hazards and risks ordinarily insured against by owners or users of such properties in similar businesses. All policies of insurance on such property shall contain an endorsement, in form and substance satisfactory to Agent, showing loss payable to Agent as its interests appear. 2. Borrower shall, at its sole cost and expense, maintain commercial general liability insurance on an "occurrence basis" (unless such insurance cannot be reasonably obtained at commercially reasonable rates, in which case such insurance shall be on a "claims made" basis) against claims for personal injury, bodily injury and property damage with a minimum limit of $1,000,000 per occurrence and $2,000,000 in the aggregate. Such coverage shall include, but not be limited to, premises/operations, broad form contractual liability, underground, explosion and collapse hazard, independent contractors, broad form property coverage, products and completed operations liability. Borrower shall, at its sole cost and expense, maintain workers' compensation insurance including employer's liability in the amount of $500,000 for each accident, $500,000 disease-policy limit, and $500,000 disease-each employee. 3. Borrower shall, at its sole cost and expense, maintain automobile liability insurance for all owned, non-owned or hired automobiles against claims for personal injury, bodily injury and property damage with a minimum combined single limit of $1,000,000 per occurrence. 4. Borrower shall, at its sole cost and expense, maintain umbrella policies of insurance in form and substance substantially similar to each of the umbrella policies which it maintains on the Closing Date, with, in any event, a minimum combined limit of $25,000,000 in the aggregate. 5. All policies of insurance required to be maintained under this Agreement shall (i) include Agent as an additional insured, (ii) contain a 30-day advance notice of alteration or cancellation, (iii) provide that no act or default by Borrower, any Subsidiary or any other Person shall affect the right of Agent to recover under such policy or policies of insurance in case of loss or damage, (iv) be in form substantially similar to those in effect on the Closing Date and be with insurers rated at least A by A.M. Best and (v) be in not less than the amounts set forth herein. ANNEX I TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FINANCIAL STATEMENTS AND PROJECTIONS -- REPORTING Borrower shall deliver or cause to be delivered to Agent (with adequate copies for each Lender), the following: (a) To Agent (with adequate copies for each Lender), within thirty (30) days after the end of each Fiscal Month, consolidated and consolidating financial and other information regarding Borrower and its Subsidiaries, certified by the chief financial officer of Borrower, including (i) unaudited balance sheets as of the close of such Fiscal Month and the related statements of income and cash flow for that portion of the Fiscal Year ending as of the close of such Fiscal Month and (ii) unaudited statements of income and cash flows for such Fiscal Month, in each case setting forth in comparative form the figures for the corresponding period in the prior year and the figures contained in the budget, all prepared in accordance with GAAP (subject to normal year-end adjustments), except for the absence of footnotes and except as otherwise disclosed therein in reasonable detail, and accompanied by (A) a statement in reasonable detail showing the calculations used in determining compliance with the financial covenants set forth on Annex K and (B) the certification of the chief executive officer or chief financial officer of Borrower that all of such financial and other information is true, complete and correct and presents fairly in accordance with GAAP (subject to normal year-end adjustments), except for the absence of footnotes and except as otherwise disclosed therein in reasonable detail, the financial position, results of operations and statements of cash flows of Borrower and its Subsidiaries, on both a consolidated and consolidating basis, as at the end of such Fiscal Month and for the period then ended, and that there was no Default or Event of Default in existence as of such time or, if a Default or Event of Default shall have occurred and be continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default. In addition, Borrower shall deliver to Agent (with adequate copies for each Lender), within thirty (30) days after the end of each Fiscal Month, a management discussion and analysis which includes a comparison to budget for that Fiscal Month and a comparison of performance for that Fiscal Month to the corresponding period in the prior year; (b) To Agent (with adequate copies for each Lender), within sixty (60) days after the end of each Fiscal Year, an operating plan, approved by the Board of Directors of Borrower, for such applicable Fiscal Year, which will include a complete statement of the assumptions on which such plan is based, will include monthly balance sheets and a monthly budget for such applicable Fiscal Year and will integrate sales, gross profits, operating expenses, operating profit, cash flow projections and borrowing availability projections all prepared on the same basis as that on which operating results are reported, and plans for personnel, capital expenditures (with a separate description for Capital Expenditures constituting the acquisition cost of Equipment to be financed with proceeds of the Capital Expenditure Loan) and facilities; all of which shall be in detail acceptable to Agent in its sole discretion; -1- (c) To Agent (with adequate copies for each Lender), contemporaneously with ARTRA's filing thereof with the Securities and Exchange Commission, audited financial statements, for Borrower and its Subsidiaries, on a consolidated basis, consisting of balance sheets and statements of income and retained earnings and cash flows, setting forth in comparative form in each case the figures for the previous Fiscal Year and the figures contained in the budget, which financial statements shall be prepared in accordance with GAAP, certified (only with respect to the consolidated financial statements) without qualification, by an independent certified public accounting firm of national standing or otherwise acceptable to Agent, and accompanied by (i) a statement prepared in reasonable detail showing the calculations used in determining compliance with each of the financial covenants set forth on Annex K, (ii) a report from such accounting firm to the effect that, in connection with their audit examination, nothing has come to their attention to cause them to believe that a Default or Event of Default has occurred (or specifying those Defaults and Events of Default that they became aware of), (iii) a letter addressed to Agent, on behalf of itself and Lenders, in form and substance reasonably satisfactory to Agent, signed by such accounting firm acknowledging that Agent and Lenders are entitled to rely upon such accounting firm's certification of such audited financial statements, (iv) the annual letters to such accountants in connection with their audit examination detailing contingent liabilities and material litigation matters and (v) the certification of the chief executive officer or chief financial officer of Borrower that all such financial statements are true, complete and correct and present fairly in accordance with GAAP the financial position, results of operations and statements of cash flows of Borrower and its Subsidiaries, on a consolidated basis, as at the end of such year and for the period then ended, and that there was no Default or Event of Default in existence as of such time or, if a Default or Event of Default shall have occurred and be continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default; (d) To Agent (with adequate copies for each Lender), within five (5) Business Days after receipt thereof by Borrower, copies of all management letters, exception reports or similar letters or reports, if any, received by Borrower from its independent certified public accountants; (e) To Agent (with adequate copies for each Lender), as soon as practicable, and in any event within five (5) Business Days after Borrower becomes aware of the existence of any Default or Event of Default, or any development or other information which could have or result in a Material Adverse Effect, telephonic or telecopied notice specifying the nature of such Default or Event of Default or development or information, including the anticipated effect thereof, which notice, if given telephonically, shall be promptly confirmed in writing on the next Business Day; and (f) To Agent (with adequate copies for each Lender), as soon as reasonably practicable after Agent's request therefor, such other financial and other information respecting Borrower's or its Subsidiaries', businesses, financial condition or prospects as Agent (or any Lender through Agent) shall request from time to time with reasonable frequency (unless a Default or Event of Default shall have occurred and be continuing, in which event Agent or Lenders may make requests at any and all times). -2- ANNEX J TO AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 COLLATERAL REPORTS (a) To Agent, upon its request, and in no event less frequently than for each Fiscal Month received within fifteen (15) days after the end of such Fiscal Month, a Borrowing Base Certificate, in each case accompanied by such supporting detail and documentation as shall be requested by Agent in its sole discretion. (b) To Agent, on a weekly basis (but, in any event, daily, if Agent, in its sole discretion, shall so request), collateral reports, including all additions and reductions (cash and non-cash) with respect to Accounts, in each case accompanied by such supporting detail and documentation as shall be requested by Agent in its sole discretion; (c) To Agent, upon its request, and in no event less frequently than fifteen (15) days after the last day of each Fiscal Month, and, in the event, if any, that Borrowing Availability less the then outstanding balance of the Revolving Credit Loan falls below $1,000,000, no less frequently than fifteen (15) days after both the fifteen (15th) day and the last day of each Fiscal Month, a summary of Inventory by location and type with a supporting perpetual Inventory report, in each case accompanied by such supporting detail and documentation as shall be requested by Agent in its sole discretion; (d) To Agent, within twenty (20) days of the end of each Fiscal Month, (i) a monthly trial balance showing Accounts outstanding aged from invoice due date as follows: current, 1 to 30 days, 31 to 60 days, 61 to 90 days and 91 days or more, and (ii) a complete Inventory report in detail satisfactory to Agent; in each case accompanied by such supporting detail and documentation as shall be requested by Agent in its sole discretion; (e) To Agent, at the time of delivery of each of the monthly financial statements delivered pursuant to Annex I, a reconciliation of the Accounts trial balance and month-end Inventory reports to Borrower's general ledger and monthly financial statements delivered pursuant to such Annex I, in each case accompanied by such supporting detail and documentation as shall be requested by Agent in its sole discretion; and (f) Such other reports, statements and reconciliations with respect to the Borrowing Base or Collateral as Agent shall from time to time request in its sole discretion. ANNEX K to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FINANCIAL COVENANTS Borrower shall not breach or fail to comply with any of the following financial covenants, each of which shall be calculated in accordance with GAAP, consistently applied: (a) EBITDA. Borrower and its Subsidiaries on a consolidated basis shall have, measured for the trailing twelve (12) Fiscal Month period ended on the last day of each Fiscal Quarter set forth below, EBITDA equal to or greater than the amounts set forth opposite each of such periods: Trailing 12 Fiscal Month Period Ended Amount ------------------ ------ September, 1996 $ 7,815,000 December, 1996 $ 8,800,000 March, 1997 $ 9,400,000 June, 1997 $ 9,360,000 September, 1997 $ 9,350,000 December, 1997 $10,525,000 March, 1998 $10,750,000 June, 1998 $10,975,000 September, 1998 $11,200,000 December, 1998 and each Fiscal $12,600,000 Quarter thereafter (b) EBITDA to Interest Expense. Borrower and its Subsidiaries on a consolidated basis shall have, measured for the trailing twelve (12) Fiscal Month period ended on the last day of each Fiscal Quarter set forth below, a ratio of (i) EBITDA to (ii) Interest Expense equal to or greater than the ratios set forth opposite each of such periods: Trailing 12 Fiscal Month Period Ended Ratio ------------------ ----- September, 1996 2.20 to 1.00 December, 1996 2.60 to 1.00 March, 1997 2.75 to 1.00 June, 1997 2.80 to 1.00 September, 1997 2.80 to 1.00 December, 1997 and each Fiscal 4.00 to 1.00 Quarter thereafter -1- (c) EBITDA to the sum of Fixed Charges and Capital Expenditures. Borrower and its Subsidiaries on a consolidated basis shall have, measured for the trailing twelve (12) Fiscal Month period ended on the last day of each Fiscal Quarter set forth below, a ratio of (i) EBITDA to (ii) the sum of (x) Fixed Charges and (y) Capital Expenditures equal to or greater than the ratios set forth opposite each of such periods: Trailing 12 Fiscal Month Period Ended Ratio ------------------ ----- September, 1996 0.85 to 1.00 December, 1996 1.00 to 1.00 March, 1997 1.05 to 1.00 June, 1997 1.05 to 1.00 September, 1997 1.05 to 1.00 December, 1997 and each Fiscal 1.15 to 1.00 Quarter thereafter (d) Consolidated Tangible Net Worth. Borrower, its Subsidiaries on a consolidated basis shall have, measured as of the end of the trailing twelve (12) Fiscal Month period ended on the last day of each Fiscal Quarter set forth below, Tangible Net Worth equal to or greater than the amounts set forth opposite each of such dates: Trailing 12 Fiscal Month Period Ended Amount ------------------ ------ September, 1996 ($5,654,000) December, 1996 ($5,076,000) March, 1997 ($4,700,000) June, 1997 ($4,400,000) September, 1997 ($4,000,000) December, 1997 ($3,236,000) March, 1998 ($2,464,000) June, 1998 ($1,690,000) September, 1998 ($ 921,000) December, 1998 ($ 150,000) March, 1999 $ 0 June, 1999 $ 100,000 September, 1999 $ 200,000 December, 1999 $ 300,000 March, 2000 $ 400,000 June, 2000 $ 500,000 September, 2000 and each Fiscal $ 600,000 Quarter thereafter -2- (e) Maximum Capital Expenditures. Borrower and its Subsidiaries on a consolidated basis shall not make Capital Expenditures that exceed in the aggregate $3,000,000 during any Fiscal Year. (f) Notwithstanding anything contained in the Agreement or any other Loan Document to the contrary, for purposes of calculating compliance with (i) clauses (a), (b) and (c) above, in calculating EBITDA for any period of determination there shall be included therein non-cash ESOP and 401K expenses for such period, as reflected on the books of Borrower in accordance with GAAP, (ii) clauses (c) and (e) above, in calculating Capital Expenditures for any period of determination there shall be excluded therefrom Capital Expenditures made during such period pursuant to Section 1.5(d) of the Agreement, and (iii) clause (d) above, in calculating Tangible Net Worth for any period of determination there shall be excluded therefrom any write-downs taken by Borrower or its Subsidiaries with respect to machinery or equipment used to manufacture Inventory consisting of popcorn containers, to the extent properly classified as such on the consolidated financial statements of Borrower and its Subsidiaries in accordance with GAAP. -3- ANNEX L to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 NOTICE ADDRESSES* (a) If to Borrower: Bagcraft Corporation of America 3900 West 43rd Street Chicago, Illinois 60632 Attention: Chief Financial Officer Telecopy No.: (773) 254-5216 With copies to: Kwiatt, Silverman and Ruben, Ltd. 500 North Central Avenue Northfield, Illinois 60093 Attention: Philip E. Ruben Telecopy No.: (847) 441-7696 (b) If to Agent or GE Capital: General Electric Capital Corporation Commercial Finance, Inc. 201 High Ridge Road Stamford, CT 06927-5100 Attention: Vice President, Portfolio Telecopy No.: (203) 316-7893 With copies to: General Electric Capital Corporation 201 High Ridge Road Stamford, Connecticut 06927-5100 Attention: Corporate Counsel Telecopy No.: (203) 316-7889 Winston & Strawn 35 West Wacker Drive Chicago, Illinois 60601 Attention: David G. Crumbaugh Telecopy No.: (312) 558-5700 * Each Loan Document in which a notice address appears for Agent or Borrower is hereby amended as set forth above. EXHIBIT A to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF NOTICE OF REVOLVING CREDIT ADVANCE Reference is made to that certain Amended and Restated Credit Agreement dated as of December 30, 1996 by and among the undersigned ("Borrower"), General Electric Capital Corporation ("Agent") and all Lenders named therein (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"). Capitalized terms used herein without definition are so used as defined in the Credit Agreement. Borrower hereby gives irrevocable notice, pursuant to Section 1.1(a) of the Credit Agreement, of Borrower's request hereby for a Revolving Credit Advance in the aggregate amount of $[___________] to be made on [____________, ____] as a(n) [________] Loan and, in the case of a LIBOR Loan, having an interest period of [_____] month(s). Borrower hereby certifies that all of the statements contained in Section 2.2 of the Credit Agreement and in Section 4 of the Security Agreement are true and correct on the date hereof, and will be true and correct on the date of the Advance(s) requested hereby, before and after giving effect thereto and to the application of the proceeds therefrom. IN WITNESS WHEREOF, Borrower has caused this Notice of Revolving Credit Advance to be executed and delivered by its duly authorized officer as of ____________, ____. BAGCRAFT CORPORATION OF AMERICA By:_____________________________ Title: EXHIBIT B to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF BORROWING BASE CERTIFICATE Reference is made to that certain Credit Agreement dated as of December 30, 1996 by and among the undersigned ("Borrower"), General Electric Capital Corporation ("Agent") and all Lenders named therein (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"). Capitalized terms used herein without definition are so used as defined in the Credit Agreement. The undersigned, being the chief financial officer or chief executive officer of Borrower, hereby certifies that the Borrowing Base calculated herein is true and correct in all respects and, without limiting the generality of the foregoing, with respect to the information supporting the determination of Eligible Accounts and Eligible Inventory. 1. Gross Accounts Receivable (per attached Accounts Receivable Roll Forward Report) $---------- 2. Less: Accounts Receivable Ineligibles a) Over 60 Days Past Due ----------- b) 50% Rule Account ----------- c) Credit Balances Over 60 Days ----------- d) Foreign Accounts ----------- e) Government Accounts ----------- f) Contra Accounts ----------- g) Freight Claims Receivable ----------- h) Customers in Bankruptcy ----------- i) Additional Sales Accrual ----------- j) Miscellaneous Sales ----------- k) Other ----------- 3. Total Ineligible Accounts Receivable $---------- 4. Total Eligible Accounts Receivable $---------- 5. 85% of Eligible Accounts Receivable $--------- 6. Total Inventory per G/L Inventory Record $---------- 7. Less: Inventory under min./max. contracts $---------- 8. Less: Inventory Ineligibles a) Raw Materials/In-transit other than goods insured and shipped F.O.B. shipping point on Bagcraft operated vehicles or common carriers directed by Bagcraft ----------- b) Cartons other than those not customized and in complete packages or sets ----------- c) Raw Materials - Roll Press ----------- d) Raw Materials - Pre Printed ----------- e) Work-in-Process ----------- f) Finished Goods - Roll Press ----------- g) Reserve for Deficit Adjustment ----------- h) Excess/Obsolete Inventory not covered under min./max. contracts ----------- i) Reserve for Cost Conversion Factor ----------- j) Other ----------- 9. Total Inventory Ineligibles (excluding Inventory covered under min/max contracts) $---------- 10. Total Eligible Inventory (excluding Inventory covered under min/max contracts) $---------- 11. 55% of Eligible Inventory (excluding Inventory covered under min/max contracts) $--------- 12. Common carrier shipping charges $--------- 13. Total Inventory covered under min/max contracts $---------- 14. Less: Inventory Ineligibles a) 4 Digit Excess/Obsolete Inventory under min/max contracts $---------- b) Other $---------- 15. Total Ineligible Inventory for inventory covered under min/max contracts $---------- 16. Total Eligible Inventory for inventory covered under min/max contracts $---------- 17. 60% of Eligible Inventory covered under min/max contracts $--------- 18. Loan value of collateral (line 5 plus line 11 less line 12 plus line 17) $---------- 19. Outstanding Revolving Credit Loan $---------- 20. Reserves $---------- 21. Letter of Credit obligations $---------- 22. Collateral Availability (line 18 less lines 19, 20, and 21) $--------- 23. Maximum Revolving Credit Loan $18,000,000 24. Unused Revolving Credit Loan (line 23, less lines 19, 20 and 21) $--------- 25. Loan Formula (lesser of line 22 or line 24) $--------- IN WITNESS WHEREOF, the undersigned duly authorized officer of Borrower has executed and delivered this Borrowing Base Certificate as of ____________, ____. BAGCRAFT CORPORATION OF AMERICA By:__________________________ Title:_______________________ EXHIBIT C to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF AMENDED AND RESTATED REVOLVING CREDIT NOTE Chicago, Illinois $__________.00 ___________, ____ FOR VALUE RECEIVED, the undersigned, BAGCRAFT CORPORATION OF AMERICA, a Delaware corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of _________________________________ ("Lender"), at the address of General Electric Capital Corporation, as Agent for Lenders, 201 High Ridge Road, Stamford, CT 06927-5100, or at such other place as Agent may designate from time to time in writing, in lawful money of the United States of America and in immediately available funds, the amount of ________ MILLION DOLLARS AND NO CENTS ($__________.00) or, if less, the aggregate unpaid amount of all Revolving Credit Loans under the "Credit Agreement" (as hereinafter defined). Capitalized terms, unless otherwise defined herein, shall have the respective meanings assigned to such terms in the Credit Agreement and Schedule A thereof. This Amended and Restated Revolving Credit Note (this "Note") is issued pursuant to that certain Amended and Restated Credit Agreement, dated as of December 30, 1996, by and between Borrower, GE Capital, as Agent, and the Lenders named therein (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), and is entitled to the benefit and security of the Credit Agreement, the Security Agreement and all of the other Loan Documents referred to therein. Reference is hereby made to the Credit Agreement for a statement of all of the terms and conditions under which the loans evidenced hereby were made and are to be repaid. The principal amount of the indebtedness evidenced hereby shall be payable in the amounts and on the dates specified in the Credit Agreement, the terms of which are hereby incorporated herein by reference. Interest thereon shall be paid until such principal amount is paid in full at such interest rates and at such times as are specified in the Credit Agreement. If any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Upon and after the occurrence of any Event of Default, this Note may, as provided in the Credit Agreement, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable. Demand, presentment, protest and notice of nonpayment and protest are hereby waived by Borrower. THIS NOTE HAS BEEN EXECUTED, DELIVERED AND ACCEPTED AT CHICAGO, ILLINOIS AND SHALL BE INTERPRETED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS. This Note is issued in replacement of the Revolving Credit Note dated December 17, 1993 and not in repayment of the Obligations evidenced thereby, which Obligations are continuing and evidenced by this Note. BAGCRAFT CORPORATION OF AMERICA By:____________________________ Title:_________________________ EXHIBIT D to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF AMENDED AND RESTATED TERM LOAN NOTE Chicago, Illinois $__________.00 ___________, ____ FOR VALUE RECEIVED, the undersigned, BAGCRAFT CORPORATION OF AMERICA, a Delaware corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of __________________________________ ("Lender"), at the address of General Electric Capital Corporation, as Agent for Lenders, 201 High Ridge Road, Stamford, CT 06927-5100, or at such other place as Agent may designate from time to time in writing, in lawful money of the United States of America and in immediately available funds, the amount of ______ MILLION DOLLARS AND NO CENTS ($__________.00). Capitalized terms, unless otherwise defined herein, shall have the respective meanings assigned to such terms in the Credit Agreement (as hereinafter defined) and Schedule A thereof. This Amended and Restated Term Loan Note (this "Note") is issued pursuant to that certain Amended and Restated Credit Agreement, dated as of December 30, 1996, by and between Borrower, GE Capital, as Agent, and the Lenders named therein (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), and is entitled to the benefit and security of the Credit Agreement, the Security Agreement and all of the other Loan Documents referred to therein. Reference is hereby made to the Credit Agreement for a statement of all of the terms and conditions under which the loan evidenced hereby was made and is to be repaid. The principal amount of the indebtedness evidenced hereby shall be payable in the amounts and on the dates specified in the Credit Agreement, the terms of which are hereby incorporated herein by reference. Interest thereon shall be paid until such principal amount is paid in full at such interest rates and at such times as are specified in the Credit Agreement. If any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Upon and after the occurrence of any Event of Default, this Note may, as provided in the Credit Agreement, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable. Demand, presentment, protest and notice of nonpayment and protest are hereby waived by Borrower. THIS NOTE HAS BEEN EXECUTED, DELIVERED AND ACCEPTED AT CHICAGO, ILLINOIS AND SHALL BE INTERPRETED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS. This Note is issued in replacement of the Term Loan A Note dated December 17, 1993 and not in repayment of the Obligations evidenced thereby, which Obligations are continuing and evidenced by this Note. BAGCRAFT CORPORATION OF AMERICA By:_____________________________ Title:__________________________ EXHIBIT E to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF NOTICE OF CAPITAL EXPENDITURE ADVANCE Reference is made to that certain Amended and Restated Credit Agreement dated as of December 30, 1996 by and among the undersigned ("Borrower"), General Electric Capital Corporation ("Agent") and all Lenders named therein (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"). Capitalized terms used herein without definition are so used as defined in the Credit Agreement. Borrower hereby gives irrevocable notice, pursuant to Section 1.3(a) of the Credit Agreement, of Borrower's request hereby for a Capital Expenditure Advance in the aggregate amount of $[___________] to be made on [____________, ____] as a(n) [________] Loan and, in the case of a LIBOR Loan, having an interest period of [_____] month(s). Borrower hereby certifies that all of the statements contained in Sections 2.2 and 2.3 of the Credit Agreement and in Section 4 of the Security Agreement are true and correct on the date hereof, and will be true and correct on the date of the Advance requested hereby, before and after giving effect thereto and to the application of the proceeds therefrom. IN WITNESS WHEREOF, Borrower has caused this Notice of Capital Expenditure Advance to be executed and delivered by its duly authorized officer as of ________, _____. BAGCRAFT CORPORATION OF AMERICA By:____________________________ Title:_________________________ EXHIBIT F to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF CAPITAL EXPENDITURE ADVANCE COMPLIANCE CERTIFICATE Reference is made to that certain Amended and Restated Credit Agreement dated as of December 30, 1996 by and among the undersigned ("Borrower"), General Electric Capital Corporation ("Agent") and all Lenders named therein (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"). Capitalized terms used herein without definition are so used as defined in the Credit Agreement. The undersigned, being the chief financial officer or chief executive officer of Borrower, hereby certifies that (a) the proceeds of the Capital Expenditure Advance (the "Current Advance") requested in connection with the Capital Expenditures to which this certificate relates shall be used solely to fund Capital Expenditures constituting the Hard Cost of Equipment, (b) on the date of the Current Advance, the aggregate amount of the Current Advance and all prior Capital Expenditure Advances shall not exceed the lesser of (i) the Maximum Capital Expenditure Advance Amount or (ii) Capital Expenditure Loan Availability as of such date, (c) after giving effect to the Current Advance, the aggregate principal amount of the Capital Expenditure Advances made during the term of this Agreement shall not exceed the Capital Expenditure Loan Commitment, (d) attached hereto is a description of the nature and amount of Equipment to be acquired in connection with the Current Advance and (e) such Equipment can and shall be used by Borrower in the ordinary course of its business consistent with past practices. IN WITNESS WHEREOF, the undersigned duly authorized officer of Borrower has executed and delivered this Capital Expenditure Advance Compliance Certificate as of __________, ____. BAGCRAFT CORPORATION OF AMERICA By:____________________________ Title:_________________________ EXHIBIT G to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF CAPITAL EXPENDITURE LOAN NOTE Chicago, Illinois $__________.00 ___________, ____ FOR VALUE RECEIVED, the undersigned, BAGCRAFT CORPORATION OF AMERICA, a Delaware corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of ________________________________ ("Lender"), at the address of General Electric Capital Corporation, as Agent for Lenders, 201 High Ridge Road, Stamford, CT 06927-5100, or at such other place as Agent may designate from time to time in writing, in lawful money of the United States of America and in immediately available funds, the amount of ________ MILLION DOLLARS AND NO CENTS ($__________.00) or, if less, the aggregate unpaid amount of all Capital Expenditure Loans under the "Credit Agreement" (as hereinafter defined). Capitalized terms, unless otherwise defined herein, shall have the respective meanings assigned to such terms in the Credit Agreement and Schedule A thereof. This Capital Expenditure Loan Note (this "Note") is issued pursuant to that certain Amended and Restated Credit Agreement, dated as of December 30, 1996, by and between Borrower, GE Capital, as Agent, and the Lenders named therein (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), and is entitled to the benefit and security of the Credit Agreement, the Security Agreement and all of the other Loan Documents referred to therein. Reference is hereby made to the Credit Agreement for a statement of all of the terms and conditions under which the loans evidenced hereby were made and are to be repaid. The principal amount of the indebtedness evidenced hereby shall be payable in the amounts and on the dates specified in the Credit Agreement, the terms of which are hereby incorporated herein by reference. Interest thereon shall be paid until such principal amount is paid in full at such interest rates and at such times as are specified in the Credit Agreement. If any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Upon and after the occurrence of any Event of Default, this Note may, as provided in the Credit Agreement, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable. Demand, presentment, protest and notice of nonpayment and protest are hereby waived by Borrower. THIS NOTE HAS BEEN EXECUTED, DELIVERED AND ACCEPTED AT CHICAGO, ILLINOIS AND SHALL BE INTERPRETED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS. BAGCRAFT CORPORATION OF AMERICA By:____________________________ Title:_________________________ EXHIBIT H to AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF DECEMBER 30, 1996 FORM OF NOTICE OF CONVERSION/CONTINUATION Reference is made to that certain Amended and Restated Credit Agreement dated as of December 30, 1996 by and among the undersigned ("Borrower"), General Electric Capital Corporation ("Agent") and all Lenders named therein (including all annexes, exhibits or schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"). Capitalized terms used herein without definition are so used as defined in the Credit Agreement. Borrower hereby gives irrevocable notice, pursuant to Section 1.8(f) of the Credit Agreement, of Borrower's request hereby to: (a)convert $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the [________] Rate, into a(n) [________] Loan and, in the case of a LIBOR Loan, having an interest period of [_____] month(s) (b)continue $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the LIBOR Rate, as a LIBOR Loan having an interest period of [_____] month(s) Borrower hereby certifies that all of the statements contained in Section 2.2 (and 2.3, in the case of a conversion/continuation of a Capital Expenditure Loan) of the Credit Agreement and in Section 4 of the Security Agreement are true and correct on the date hereof, and will be true and correct on the date of the conversion/continuation requested hereby, before and after giving effect thereto. IN WITNESS WHEREOF, Borrower has caused this Notice of Conversion/ Continuation to be executed and delivered by its duly authorized officer as of ____________, ____. BAGCRAFT CORPORATION OF AMERICA By:____________________________ Title:_________________________ EX-10 4 WARRANT TO PURCHASE COMMON STOCK EXHIBIT 10.2 THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF TIES WARRANT. WARRANT NO. 2 To Purchase Common Stock of BAGCRAFT CORPORATION OF AMERICA Warrant No. 2 No. of Shares of Common Stock: 1419.54 TABLE OF CONTENTS Section 1. DEFINITIONS 2. EXERCISE OF WARRANT 2.1. Manner of Exercise 2.2. Payment of Taxes 2.3. Fractional Sham 2.4. Continued Validity 3. TRANSFER, DIVISION AND COMBINATION 3. 1. Transfer 3.2. Division and Combination 3.3. Expenses 3 4. Maintenance of Books 4. ADJUSTMENTS 4.1. Stock Dividends, Subdivisions and Combinations 4.2. Certain Other Distributions 4.3. Issuance of Additional Shares of Common Stock 44. Issuance of Warrants or Other Rights 4.5. Issuance of Convertible Securities 4.6. Superseding Adjustment 4.7 Other Provisions Applicable to Adjustments under this Section 4.8 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets 4.9 Other Action Affecting Common Stock 4.10. Certain Limitations 5. NOTICES TO WARRANT HOLDERS 5.1 Notice of Adjustments 5.2. Notice of Corporate Action 6. NO IMPAIRMENT 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY 8. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS 9. RESTRICTIONS ON TRANSFERABILITY 9.1. Restrictive Legend 9.2. Notice of Proposed Transfers, Request for Registration - i - 9.3. Required Registration 9.4. Incidental Registration 9.5. Registration Procedures 9.6. Expenses 9.7. Indemnification and Contribution 9.8. Termination of Restrictions 9.9. Listing on Securities Exchange 9.10. Certain Limitations on Registration Rights 9.11. Selection of Manning Underwriters 10. SUPPLYING INFORMATION 11. LOSS OR MUTILATION 13. FINANCIAL AND BUSINESS INFORMATION 13.1. Monthly and Quarterly Information 13.2. Annual Information 13.3 Filings 14. REPURCHASE BY COMPANY OF WARRANT 14.1. Obligation to Repurchase Warrant 14.2. Option to Repurchase Warrant 14.3. Subsequent Value Transactions 14.4. Determination and Payment of Repurchase Price 15. APPRAISAL 16. LIMITATION OF LIABILITY 17. PARTICIPATION IN CORPORATE DISTRIBUTIONS AND TAKE-ALONG RIGHTS 18. MISCELLANEOUS 18.1. Nonwaiver and Expenses 18.2. Notice Generally 18.3. Indemnification 18.4. Remedies 18.5. Successors and Assigns 18.6. Amendment 18.7. Severability 18.8. Headings 18.9. Governing Law - ii - EXHIBITS AND ANNEXES Exhibit A - Subscription Form Exhibit B - Assignment Form Annex A - Take-Along Letter Agreement - iii - THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT. No. of Shares of Common Stock: 1419.54 Warrant No. 2 AMENDED AND RESTATED WARRANT To Purchase Common Stock of BAGCRAFT CORPORATION OF AMERICA THIS IS TO CERTIFY THAT GENERAL ELECTRIC CAPITAL CORPORATION, or registered assigns, is entitled, at any time prior to the Expiration Date (as hereinafter defined), to purchase from BAGCRAFT COMPANY OF AMERICA, a Delaware corporation ("Company"), 1419.54 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, including fractional parts, at a purchase price of $0.001 per share, all on the terms and conditions and pursuant to the provisions hereinafter set forth. This Warrant No. 2 is given in substitution for Warrant No. I which was issued by Company to General Electric Capital Corporation on December 17, 1993 for 1055.6 shares of Warrant Stock. increased to 1,419.54 shares of Warrant Stock by that First Amendment to Warrant dated as of February 1, 1996, and surrendered for cancellation on the date hereof concurrently with the issuance of this Warrant No. 2. 1. DEFINITIONS As used in this Warrant, the following -terms have the respective meanings set forth "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by Company after the Closing Date, other than Warrant Stock. "Appraised Value" shall mean, in respect of any share of Common Stock on any date of determination, the fair market value of such share of Common Stock determined (a) without giving effect to the discount for (i) a minority interest or (h) any lack of liquidity of the Common Stock or to the fact that Company may have no class of equity registered under the Exchange Act, and (b) assuming that any and all then outstanding shares of preferred stock of the Company and accrued dividends thereon were canceled and permanently retired as of any date of determination without any requirement of payment by the Company in respect thereof and assuming that any unpaid interest on any Qualified Subordinated Debt accrued for periods after the Closing Date was then forgiven, except that Appraised Value as of any date of determination shall be calculated without giving effect to, without duplication (A) then outstanding PST-Held Shares, (B) the redemption of PST-Held Shares in accordance with the "Redemption" (as defined in the Limited Consent and Sixth Amendment to Credit Agreement dated February 1, 1996 between Company and Holder), (C) then outstanding dividends which were accrued as of the Closing Date on PST-Held Shares, (D) the repurchase (but not the forgiveness) of dividends which were accrued as of the Closing Date on PST-Held Shares in accordance With the Redemption and (E) the then outstanding aggregate principal amount of Qualified Subordinated Debt issued pursuant to a Qualified Transaction. Such fair market per share of Common Stock shall be based on the value of Company in a sale as a whole and on a going concern basis between a willing buyer and a willing seller, neither acting under compulsion, as determined by an investment banking firm selected in accordance with the terms of Section 15, divided by the number of Fully Diluted Outstanding shares of Common Stock. "Book Value" shall mean, in respect of any share of Common Stock on any date of determination. the consolidated book value of Company as of the last day of any month immediately preceding, such date of determination, divided by the number of Fully Diluted Outstanding shares of Common Stock as determined in accordance with GAAP by Coopers & Lybrand or any other firm of independent certified public accountants of recognized national standing selected by Company and reasonable acceptable to the Majority Holders, provided that, for purposes of any such determination it shall be assumed that any and all then outstanding shares of preferred stock of the Company and accrued dividends thereon were then canceled and permanently retired without any requirement of payment by the Company in respect thereof and assuming that any unpaid interest on any Qualified Subordinated Debt accrued for periods after the Closing Date was then forgiven, except that Book Value as of any date of determination shall be calculated without giving effect to, without duplication (a) then outstanding PST-Held Shares, (b) the redemption of PST-Held Shares in accordance with the Redemption, (c) then outstanding dividends which were accrued as of the Closing Date on PST-Held Shares, (d) the repurchase (but not the forgiveness) of dividends which were accrued as of the Closing Date on PST-Held Shares in accordance with the Redemption and (e) the then outstanding aggregate principal amount of Qualified Subordinated Debt issued pursuant to a Qualified Transaction. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of Illinois. "Closing Date" shall mean December 17, 1993. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "Common Stock" shall mean (except where the context otherwise indicates) the Common Stock, S.001 par value, of Company as constituted on the Closing Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.8) received by or distributed to the holders of Common Stock of Company in the circumstances contemplated by Section 4.8. "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Market Price" shall mean, in respect of any share of Common Stock on any date of determination, the highest of: (a) the Book Value per share of Common Stock at such date; (b) the Appraised Value per share of Common Stock as at such date, and (c) if there shall then be a public market for the Common Stock, an amount determined in accordance with (i) and (ii) of this definition. (i) The average of the daily market prices for 30 consecutive Business Days commencing 45 days before such date shall be determined in accordance with (ii) below (the "Unadjusted Price Per Share"). The Unadjusted Price Per Share shall then be multiplied the number of shares of Common Stock Fully Diluted Outstanding (the result being referred to as the "Unadjusted Gross Value"). The Unadjusted Gross Value shall then be increased by an amount equal to the aggregate amount which would then be payable by the Company if it then redeemed and permanently retired all shares of its outstanding preferred stock, including accrued dividends and paid all unpaid interest on Qualified Subordinated Debt accrued for periods after the Closing Date, (collectively, the "Gross-Up Amount"), except that the Gross-Up Amount as of any date of determination shall be calculated without giving effect to, without duplication (A) then outstanding PST-Held Shares, (B) the redemption of PST-Held Shares in accordance with the Redemption, (C) then outstanding dividends which were accrued as of the Closing Date on PST-Held Shares, (D) the repurchase (but not the forgiveness) of dividends which were accrued as of the Closing Date on PST-Held Shares in accordance with the Redemption and (E) the then outstanding aggregate principal amount of Qualified Subordinated Debt issued pursuant to a Qualified Transaction. The sum of the Unadjusted Gross Amount and the Gross-Up Amount is herein referred to as the "Adjusted Gross Amount". The Adjusted Gross Amount shall then be divided by the number of shares of Common Stock Fully Diluted Outstanding to yield a per share amount. (ii) For purposes of clause (i) of this definition, the daily market price for each such usiness Day shall be (A) the last sale price on such day on the principal stock exchange on which such Common Stock is then listed or admitted to trading, (B) if no sale takes place on such day on any such exchange, the average of the last reported closing bid and asked prices on such day as officially quoted on any such exchange, (C) if the Common Stock is not then listed or admitted to trading on any stock exchange, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (D) if neither such corporation at the time is engaged in the business of reporting such prices, as furnished by any similar firm then engaged in such business, or (E) if there is no such firm, as furnished by any member of the NASD selected mutually by the Majority Holders and Company or, if they cannot agree upon such selection, as selected by two such members of the NASD, one of which shall be selected by the Majority Holders and one of which shall be selected by Company. "Current Warrant Price" shall mean, in respect of a share of Common Stock at any date herein specified, the price at which a share of Common Stock may be purchased pursuant to this Warrant on such date. "Deferral Notice" shall have the meaning set forth in Section 14.1 (a). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1. "Expiration Date" shall mean the sixth anniversary of the Closing Date, "Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding at such date and all shares of Common Stock issuable in respect of this Warrant, and other options or warrants to purchase, or securities convertible into, shares of Common Stock outstanding on such date which would be deemed outstanding in accordance with GAAP for purposes of determining book value or net income per share. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "GE Capital" shall mean General Electric Capital Corporation, a New York corporation. "Holder" shall mean the Person in whose name the Warrant set forth herein is registered on the books of Company maintained for such purpose. "Initial Holder" shall mean GE Capital. "Liabilities" shall mean the "Obligations" as defined in the Loan Agreement. "Loan Agreement" shall mean the Amended and Restated Credit Agreement dated as of December 30, 1996 by and between Company and GE Capital as Agent and Lender, or any successor agreement between such parties, as the same may be amended, restated, modified or supplemented and in effect from time to time. "Majority Holders" shall mean the holders of Warrants exercisable for in excess of 50% of the aggregate number of shares of Common Stock then purchasable upon exercise of all Warrants, whether or not then exercisable. "NASD" shall mean the National Association of Securities Dealers, Inc., or any successor corporation thereto. "Notes" shall mean the Revolving Note and the Term Notes and "Note" shall mean any such note. "Other Property" shall have the meaning set forth in Section 4.8. "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of Company or any subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust. incorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "PST" shall mean Plastic Specialties and Technologies, Inc., a Delaware corporation. "Qualified Subordinated Debt" shall mean indebtedness of the Company incurred or arising after the Closing Date, which: (a) is issued in exchange for shares of preferred stock of the Company held by PST on the Closing Date on a dollar-for-dollar basis such that the aggregate principal amount of such subordinated debt at the time of issuance is equal to the aggregate redemption value (including accrued dividends thereon as of the Closing Date but excluding any dividends accruing thereon for periods after the Closing Date) of the shares of preferred stock then being redeemed; and (b) is subordinated to a obligations of the Company to GE Capital on terms and conditions satisfactory to GE Capital pursuant to agreements, instruments and documents which are reasonably satisfactory in all other respects to GE Capital. "Qualified Transaction" shall mean a transaction in which Qualified Subordinated Debt is issued by the Company in exchange for shares of preferred stock held by PST which were outstanding on the Closing Date and accrued dividends thereon for periods through the Closing Date and in which no other consideration is granted or issued by the Company and, following such redemption, all such shares of preferred stock are permanently canceled and retired by the Company. "Repurchase Price" shall have the meaning set forth in Section 14.4. "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "Revolving Note" shall mean the "Revolving Note" as defined in the Loan Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute. and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Term Notes" shall mean the "Term Notes" as defined in the Loan Agreement. "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act. "Transfer Notice" shall have the meaning set forth in Section 9.2. "Warrants" shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2. 1, multiplied by (ii) the Current Warrant Price as of the date of such exercise. "Warrant Stock" shall mean the shares of Common Stock purchased by the holders of the Warrants upon the exercise thereof. 2. EXERCISE OF WARRANT 2.1. Manner of Exercise. From and after the Closing Date and until 5:00 P.M., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder. - In order to exercise this Wan-ant, in whole or in part, Holder shall deliver to Company at its principal office at 3900 West 43rd Street, Chicago, Illinois 60632 or at the office or agency designated by Company pursuant to Section 12: (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased; (ii) payment of the Warrant Price applicable with respect to the shares being purchased; and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt thereof, Company shall. as promptly as practicable, and in any event within five (5) Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as such Holder shall request in the notice and shall be registered in the name of Holder or. subject to Section 9, such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice and the Warrant Price and this Warrant are received by Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid If this Warrant shall have been exercised in part, Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. Notwithstanding any provision herein to the contrary, Company shall not be required to register shares in the name of any Person who acquired this Warrant (or part hereof) or any Warrant Stock otherwise than in accordance with this Warrant. At the option of the holder hereof, payment of the Warrant Price shall be made by: (a) wire transfer of funds to an account in a bank located in the United States designated by the Company for such purpose; (b) certified or official bank check payable to the order of the Company; (c) deducting from the shares delivered upon exercise hereof a number of shares having an aggregate Current Market Price on the date of exercise equal to the aggregate purchase price for all shares as to which this Warrant is then being exercised (and so directing the Company in the notice); (d) by application of the Liabilities as provided in Section 2.5 hereof, or (e) by any combination of such methods. If a Holder surrenders any Note having an aggregate value which exceeds the aggregate Warrant Price, a new Note shall be issued in the principal amount equal to that portion of such surrendered principal amount not applied to the Warrant Price not paid in cash to the Holder; provided, however, that such Note shall be in a principal amount equal to the next lowest integral multiple of $1,000 and the Company shall pay in cash to the Holder the difference between the Warrant Price and such in next lowest integral multiple of $1,000. 2.2. Payment of Taxes. All shares of Common Stock issuable upon the exercise of this, Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable and without any preemptive fights. Company shall pay all expenses in connection with, and all taxes and other Governmental charges that may be imposed with respect to, the issue or delivery thereof (other than any income taxes imposed on Holder in connection herewith), unless such tax or charge is imposed by law upon Holder, in which case such taxes or charges shall be paid by Holder and (except with respect to any such income taxes) reimbursed to Holder by Company. 2.3. Fractional Shares. Company shall not be required to issue a fractional share of Common Stock upon exercise o: any Warrant. As to any fraction of a share which the Holder of one or more Warrants, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the Current Market Price per share of Common Stock on the date of exercise. 2.4. Continued Validity. A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part (other than a holder who acquires such shares after the same have been publicly sold pursuant to a Registration Statement under the Securities Act or sold pursuant to Rule 144 thereunder), shall continue to be entitled with respect to such shares to all rights to which it would have been entitled as Holder under Sections 9, 10, 13 and 17 of this Warrant. Company will, at the time of each exercise of this Warrant, in whole or in part, upon the request of the holder of the shares of Common Stock issued upon such exercise hereof, acknowledge in writing, in form reasonably satisfactory to such holder, its continuing obligation to afford to such holder all such rights; provided, however, that if such holder shall fail to make any such request, such failure shall not affect the continuing obligation of Company to afford to such holder all such rights. 3. TRANSFER, DIVISION AND COMBINATION 3.1. Transfer. Subject to compliance with Sections 9 and 14, transfer of this Warrant and all fights hereunder, in whole or in part, shall be registered on the books of Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of Company referred to in Section 2.1 or the office or agency designated by Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney and if such transfer is not to be made pursuant to Section 14, funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new Warrant issued. 3.2. Division and Combination. Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of , Company. top-ether with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as to any transfer which may be involved in such division or combination, Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 3.3. Expenses. Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 3. 3.4. Maintenance of Books. Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. 4. ADJUSTMENTS The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. Company shall give each Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event. 4.1. Stock Dividends, Subdivisions and Combinations. If at any time Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable 'a or other distribution of, Additional Shares of Common Stock, (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then: (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event-, and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 4.2. Certain Other Distributions. If at any time Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distributed of: (a) cash (other than a cash distribution or dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of Company), (b) any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), or (c) any warrants or other fights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), then: (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment by a fraction; \ (A) the numerator of which shall be the Current Market Price per share of Common Stock at the date of taking such record, and (B) the denominator of which shall be such Current Market Price per share of Common Stock minus the amount allocable to one share of Common Stock of (x) any such cash so distributable, plus (y) the fair value (as determined in good faith by the Board of Directors of Company and supported by an opinion from an investment banking firm of recognized national standing acceptable to the Majority Holders) of any and all such evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights so distributable; and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4. 1. 4.3. Issuance of Additional Shares of Common Stock. (a) If at any time Company shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock in exchange for consideration in an amount per Additional Share of Common Stock less than the Current Warrant Price at the time the Additional Shares of Common Stock are issued, then: (i) the Current Warrant Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be reduced to a price determined by multiplying the Current Warrant Price then in effect by a fraction: (A) the numerator of which is an amount equal to (x) the number of shares of Common Stock Outstanding immediately prior to such issue or sale multiplied by the then existing Current Warrant Price, plus (y) the consideration, if any, received by Company upon such issue or sale, and (B) the denominator of which is the total number of shares of Common Stock Outstanding immediately after such issue or sale; and (ii) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the Current Warrant Price in effect immediately prior to such issue or sale by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale and dividing the product thereof by the Current Warrant Price resulting from the adjustment made pursuant to clause (i) above. [Example: Assume Current Warrant Price is $1.00 per share, 90,000 shares outstanding and Warrant is for 10,000 shares. Company issues 10,000 shares for $.10 per share or $1,000 total. Current Warrant Price is adjusted by multiplying $1.00 by the following fraction: numerator = (90,000 x $1.00) + S1,002 = $ 91,000 ------------------------- denominator = 90,000 + 10,000 = 100,000 Resulting Current Warrant Price = $0.91 per share. Number of Warrant Shares is then adjusted by multiplying 10,000 by $1.00 and dividing the result (which is $10,000) by the new Current Warrant Price of $0.91. $10,000/$0.91 = 10,989. So the adjusted number of shares for which Warrant may be exercised is 10,989.] (b) If at any time Company shall (except as hereinafter provided) at any time issue or sell any Additional Shares of Common Stock for consideration in an amount per Additional Share of Common Stock less than the Current Market Price, then: (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale by a fraction (A) the numerator of which shall be the number of shares of Common Stock Outstanding immediately after such issue or sale, and (B) the denominator of which shall be the number of shares of Common Stock Outstanding immediately prior to such issue or sale plus the number of shares which the aggregate offering price of the total number of such Additional Shares of Common Stock would purchase at the then Current Market Price; and (ii) the Current Warrant Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be adjusted by multiplying such Current Warrant Price by a fraction (X) the numerator of which shall be the number of shares for which this Warrant is exercisable immediately prior to such issue or sale; and (Y) the denominator of which shall be the number of shares of Common Stock purchasable immediately after such issue or sale. [Example: Assume Current Market Price is $10.00 per share, 90,000 shares outstanding, Warrant is for I 0,000 shares and Current Warrant Price is $1.00 per share. Company issues 10,000 shares for $.10 per share or $10,000 total. Current Warrant Price is adjusted by multiplying $1.00 by the following fraction: numerator = (90,000 + 10,000) = $100,000 ------- denominator = 90,000 + $10,000 divided by $10) = 91,000 10,000 x (100,000/91,000) = 10,989. So the adjusted number of shares for which Warrant may be exercised is 10,989.] Current Warrant Price is then adjusted by multiplying $1.00 by the following fraction: numerator = 10,000 ------ denominator = 10,989 (c) If at any time Company (except as hereinafter provided) shall issue or sell any Additional Shares of Common Stock in exchange for consideration in an amount per Additional Shares of Common Stock which is less than the Current Wan-ant Price and less than the Current Market Price (as defined above) at the time the Additional Shares of Common Stock are issued, the adjustment required under Section 4.3 shall be made in accordance with the formula in paragraph (a) or (b) above which results in the lower Current Warrant Price Mowing such adjustment. The provisions of paragraphs (a) and (b) of Section 4.3 shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under Section 4.1 or 4.2. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (a) or (b) of Section 4.3 upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 4.4 or Section 4.5. (d) If any Additional Shares of Common Stock are issued or sold in exchange for consideration in an amount per Additional Share of Common Stock equal to or greater than the Current Warrant Price and the Current Market Price at the time the Additional Shares are issued, then. (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment by a fraction (A) the numerator of which shall be the number of shares of Common Stock Outstanding immediately after the issuance of such Additional Shares of Common Stock, and (B) the denominator of which shall be the number of shares of Common Stock Outstanding immediately prior to the issuance of such Additional Shares of Common Stock, and (ii) the Current Warrant Price as to the number of shares of Common Stock for which this Warrant is exercisable prior to such adjustment shall not change but the Current Warrant Price for each of the incremental number of shares of Common Stock for which this Warrant becomes exercisable after such adjustment shall be equal to the fair value of such consideration per Additional Share of Common Stock. [Example: Assume Current Market Price is $10.00 per share, 90,000 shares outstanding, Warrant is for 10,000 shares and Current Warrant Price is $1.00 per share. Company issues 10,000 shares for $20.00 per share or $200,000 total. Number of Warrant Shares is adjusted by multiplying 10,000 by the following fraction: numerator = (90,000 + 10,000) = 100,000 ----------------- ------- denominator = 90,000 = 90,000 10,000 x (100,000/90,000) = 11,111. This equals 10% on a fully-diluted basis. Current Warrant Price for the original 10,000 Warrant Shares remains $1.00 per share. Current Warrant Price for the additional 1, I I I Warrant Shares is equal to the fair value of the consideration received for the shares sold by the Company, in this case $20.00 per share. The effect is to give the Holder a pre-emptive right to maintain the I 0% by acquiring the additional shares at the sale price.] 4.4. Issuance of Warrants or Other Rights. If at any time Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such warrants or other rights or upon conversion or exchange of such Convertible Securities shall be less than either the Current Warrant Price or the Current Market Price in effect immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Current Warrant Price shall be adjusted as provided in Section 4.3 on the basis that the maximum number of Additional Shares of Common Stock issuable pursuant to all such warrants or other fights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of the number of Shares for which this Warrant is exercisable and such warrants or other rights. No further adjustments of the Current Warrant Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 4.5 Issuance of Convertible Securities. If at any time Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporations issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than either the Current Warrant Price or Current Market Price in effect immediately prior to the time of such issue or sale, then the number of Shares for which this Warrant is exercisable and the Current Warrant Price shall be adjusted as provided in Section 4.3 on the basis that the maximum number of Additional Shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and Company shall have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the number of Shares for which this Warrant is exercisable and the Current Warrant Price shall be made under this Section 4.5 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 4.4. No further adjustments of the number of Shares for which this Warrant is exercisable and the Current Warrant Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the number of Shares for which this Warrant is exercisable and the Current Warrant Price have been or are to be made pursuant to other provisions of this Section 4, no further adjustments of the number of Shares for which this Warrant is exercisable and the Current Warrant Price shall be made by reason of such issue or sale. 4.6 Superseding Adjustment. (a) If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall have been made pursuant to Section 4.4 or Section 4.5 as the result of any issuance of warrants, rights or Convertible Securities, such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire or be rescinded or canceled or be determined to be illegal, and all or a portion of such warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised (because they have expired, been rescinded or canceled or determined to be illegal), then, for each outstanding Warrant: (i) such previous adjustment to the Warrant made with respect to the issuance of such warrants, rights or Convertible Securities shall be rescinded and annulled and any Additional Shares of Common Stock which were deemed to have been issued (but not in fact issued) by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation; and (ii) a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall be made on the basis of: (A) treating any Additional Shares of Common Stock which were in fact issued pursuant to such warrants, rights or Convertible Securities as having been issued for the consideration per share which was received; and (B) treating any such warrants or rights or Convertible Securities (if any) which then remain outstanding and are not expired, rescinded, canceled or declared illegal as having been newly granted or issued immediately after the time of such expiration, rescinding, cancellation or declaration of illegality and treating the number of Additional Shares of Common Stock or other property issuable pursuant to such warrants, rights or Convertible Securities as having been issued on such date for the consideration receivable therefor thereunder on such date. (b) If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall have been made pursuant to Section 4.4 or Section 4.5 as the result of any issuance of warrants, rights or Convertible Securities, the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or fights or Convertible Securities shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event then, for each outstanding Warrant: (i) such previous adjustment made with respect to the issuance of such warrants, rights or Convertible Securities shall be rescinded and annulled and any Additional Shares of Common Stock which were deemed to have been issued (but not in fact issued) by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation; and (ii) a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall be made on the basis of: (A) treating the number of Additional Shares of Common Stock or other property, I if any, theretofore actually issued pursuant to the previous exercise of any such warrants or rights or Convertible Securities as having been issued on the date or dates of any such exercise and for the consideration actually received therefor; and (B) treating any such warrants or rights or Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such warrants or rights or other Convertible Securities and treating the number of Additional Shares of Common Stock or other property issuable pursuant to such warrants, rights or Convertible Securities as having been issued on such date for the consideration receivable therefor after giving effect to such increase in the consideration per share. 4.7. Other Provisions Applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price provided for in this Section 4: (a) Computation of Consideration. To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants or other fights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by Company therefor shall be the amount of the cash received by Company therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by Company for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of Company. In case any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of Company, of such portion of the assets and business of the non-surviving corporation as such Board in good faith shall determine to be attributable to such Additional Shares of Common Stock, Convertible Securities, warrants or other fights, as the case may be. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by Company for issuing such warrants or other fights plus the additional consideration payable to Company upon exercise of such warrants or other fights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, Company shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (b) When Adjustments to Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 4.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than 1% of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 4 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share. (d) When Adjustment Not Required. If Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (e) Escrow of Warrant Stock. If after any property becomes distributable pursuant to this Section 4 by reason of the taking of any record of the holders of Common Stock, but prior to the occurrence of the event for which such record is taken, and Holder exercises this Warrant, any Additional Shares of Common Stock issuable upon exercise by reason of such adjustment shall be deemed the last shares of Common Stock for which this Warrant is exercised (notwithstanding any other provision to the contrary herein) and such shares or other property shall be held in escrow for Holder by Company to be issued to Holder upon and to the extent that the event actually takes place, upon payment of the then Current Warrant Price. Notwithstanding any other provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed shares shall be canceled by Company and escrowed property returned. (f) Challenge to Good Faith Determination. Whenever the Board of Directors of Company shall be required to make a determination in good faith of the fair value of any item under this Section 4, such determination may be challenged in good faith by the Majority Holders, and any dispute shall be resolved by an investment banking firm of recognized national standing selected by Company and acceptable to the Majority Holders. 4.8. Reorganization. Reclassification, Merger, Consolidation or Disposition of Assets. In case Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of Company, then each Holder shall have the right thereafter to receive, upon exercise of such Holder's Warrant, the number of shares of common stock of the successor or acquiring corporation or of Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of Company acting in good faith) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of Ns Section 4.8, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock The foregoing provisions of this Section 4.8 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.9. Other Action Affecting Common Stock. In case at any time or from time to time Company shall take any action in respect of its Common Stock, other than the payment of dividends permitted by Section 4.2(a) or any other action described in this Section 4, then, unless such action will not have a materially adverse effect upon the rights of the Holders, the number of shares of Common Stock or other stock for which this Warrant is exercisable and/or the purchase price thereof shall be adjusted in such manner as may be equitable in the circumstances. 4.10 Certain Limitations. Notwithstanding anything herein to the contrary, Company agrees not to enter into any transaction which, by reason of any adjustment hereunder, would cause the Current Warrant Price to be less than the par value per share of Common Stock. 5. NOTICES TO WARRANT HOLDERS 5.1. Notice of Adjustments. Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock - may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, Company shall forthwith prepare a certificate to be executed by the chief financial officer of Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of Company determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.2 or 4.7(a)), specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.8 or 4.9) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. Company shall promptly cause a signed copy of such certificate to be delivered to each Holder in accordance with Section 17.2. Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by any Holder or any prospective purchaser of a Warrant designated by a Holder thereof. 5.2. Notice of Corporate Action. If at any time (a) Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of Company, any reclassification or recapitalization of the capital stock of Company or any consolidation or merger of Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of Company to, another corporation, or (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of Company; then, in any one or more of such cases, Company shall give to Holder (i) at least ten (10) days' prior written notice of the date on which a record date shall be selected for such dividend distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least ten (10) days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or r1uht, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or rip-ht, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of Company and delivered in accordance with Section 17.2. 6. NO IMPAIRMENT Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any Public regulatory body having jurisdiction thereof as may be necessary to enable Company to perform its obligations under this Warrant. Upon the request of Holder, Company will at any time during the period this Warrant is outstanding (but not more often than twice in any year) acknowledge in writing, in form reasonably satisfactory to Holder, the continuing validity of this Warrant and the obligations of Company hereunder 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY From and after the Closing Date, Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares available of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and non-assessable, and not subject to pre-emptive rights. Before taking any action which would cause an adjustment reducing the current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, Company shall take any corporate action which may be necessary in order that Company may validly and legally issue fully paid and non-assessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. If any shares of Common Stock required to be reserved for issuance upon exercise of Warrants require registration or qualification with any governmental authority or other governmental approval or filing under any federal or state law (otherwise than as provided in Section 9) before such shares may be so issued, Company will in good faith and as expeditiously as possible and at its expense endeavor to cause such shares to be duly registered or qualified. 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS In the case of all dividends or other distributions by Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, Company will in each such case take such a record and will take such record as of the close of business on a Business Day. Company will not at any time, except upon dissolution, liquidation or winding up of Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 9. RESTRICTIONS ON TRANSFERABILITY The Warrants and the Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. 9 1. Restrictive Legend. (a) Except as otherwise provided in this Section 9, each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and are subject to the conditions specified in a certain Warrant No. 2 dated December 30, 1996, originally issued by Bagcraft Corporation of America. No transfer of the shares represented by this certificate shall be valid or effective until such conditions have been fulfilled. A copy of the form of said Warrant is on file with the Secretary of Bagcraft Corporation of America. The holder of this certificate, by acceptance of this certificate, agrees to be bound by the provisions of such Warrant " (b) Except as otherwise provided in this Section 9, each Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and the securities represented hereby have not been registered under the Securities Act of 1933, as amended, and may not be transferred in violation of such Act, the rules and regulations thereunder or the provisions of this Warrant." 9.2. Notice of Proposed Transfers; Request for Registration. Prior to any Transfer or attempted Transfer of any Warrants or any shares of Restricted Common Stock, the holder of such Warrants or Restricted Common Stock shall give ten (10) days' prior written notice (a "Transfer Notice") to Company of such holder's intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to such holder who shall be reasonably satisfactory to Company, an opinion that the proposed Transfer of such Warrants or such Restricted Common Stock may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, Company shall, within five days thereof, notify the holder of such Warrants or such Restricted Common Stock as to whether such opinion is reasonably satisfactory and, if so, such holder shall thereupon be entitled to Transfer such Warrants or such Restricted Common Stock, in accordance with the terms of the Transfer Notice. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9. 1 (a), and each Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.l(b), unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. The holder of the Warrants or the Restricted Common Stock, as the case may be, giving the Transfer Notice shall not be entitled to Transfer such Warrants or such Restricted Common Stock until receipt of notice from Company under this Section 9.2(a) that such opinion is reasonably satisfactory. The holders of Warrants and War-rant Stock shall have the right to request registration of such Warrant Stock pursuant to Sections 9.3 and 9.4. 9.3. Required Registration. After receipt of a written request from the holder of Warrants and/or Warrant Stock representing at least an aggregate of fifty percent (50%) of the total of (1) all shares of Warrant Stock then subject to purchase upon exercise of all warrants and (ii) all shares of Warrant Stock then outstanding, and which are Restricted Common Stock requesting that Company effect the registration of Warrant Stock issuable upon the exercise of such holder's Warrants or of any of such holder's Warrant Stock under the Securities Act and specifying the intended method or methods of disposition thereof (which the Company shall be reasonably satisfied in writing, of the receipt of such request and each such holder, in addition to any rights under Section 9.4, may elect (by written notice sent to Company within ten (10) Business Days from the date of such holder's receipt of the aforementioned Company's notice) to have its shares of Warrant Stock included in such registration thereof pursuant to this Section 9.3. Thereupon Company shall, as expeditiously as is possible, use its best efforts to effect the registration under the Securities Act of ail shares of Warrant Stock which Company has been so requested to register by such holders for sale, all to the extent required to permit the disposition (in accordance with the intended method or methods thereof as aforesaid) of the Warrant Stock so registered; provided, however, that Company shall not be required to effect more than two (2) registrations of any Warrant Stock pursuant to this Section 9.3, unless Company shall be eligible to file a registration statement on Form S-3 (or other comparable short form) under the Securities Act, in which event there shall be no limit on the number of such registrations pursuant to this Section 9.3. If the managing underwriter advises the prospective sellers in writing that the aggregate number of shares of Warrant Stock and other shares of Common Stock, if any, requested to be registered by other holders of registration rights or proposed to be included in such registration by the Company should be less than the number of shares of Warrant Stock and other shares of Common Stock requested or proposed to be registered, the number of shares of Warrant Stock and other shares of Common Stock to be sold by each prospective seller (including the Company) shall be reduced as follows: first, the number of shares of Common Stock proposed to be registered by the holders of Common Stock possessing registration rights granted by the Company other than under or arising from this Warrant shall be reduced to zero, if necessary; second, the number of shares of Common Stock proposed to be registered by the Company shall be reduced to zero, if necessary; second the the number of shares of Warrant Stock proposed to be included in such registration shall be reduced pro rata among the prospective sellers of shares of Warrant Stock to be sold in the proposed distribution. If such underwriter determines that the number of shares of Common Stock proposed to be sold is insufficient to proceed with such registration or qualification, the Company shall immediately recapitalize its Common Stock to enable such registration and qualification to be completed as such underwriter advises. 9.4. Incidental Registration. If Company at any time proposes to file on its behalf and/or on behalf of any of its security holders (the "demanding security holders") a Registration Statement under the Securities Act on any form (other than a Registration Statement on Form S-4 or S-8 or any successor form for securities to be offered in a transaction of the type referred to in Rule 145 under the Securities Act or to employees of Company pursuant to any employee benefit plan, respectively) for the general registration of securities to be sold for cash with respect to its Common Stock or any other class of equity security (as defined in Section 3(a)(1 1) of the Exchange Act) of Company, it will give written notice to all holders of Warrants or Warrant Stock at least 60 days before the initial filing with the Commission of such Registration Statement, which notice shall set forth the intended method of disposition of the securities proposed to be registered by Company. The notice shall offer to include in such filing any or all of the aggregate number of shares of Warrant Stock then outstanding and any or all of the shares of Common Stock for which this Warrant is then exercisable, as such holders may request. Each holder of any such Warrants or any such Warrant Stock desiring to have Warrant Stock registered under this Section 9.4 shall advise Company in writing within 30 days after the date of receipt of such offer from Company, setting forth the amount of such Warrant Stock for which registration is requested. Company shall thereupon include in such filing the number of shares of Warrant Stock for which registration is so requested, subject to the next sentence, and shall use its best efforts to effect registration under the Securities Act of such shares. If the managing underwriter of a proposed public offering shall advise Company in writing that, in its opinion, the distribution of the Warrant Stock requested to be included in the registration concurrently with the securities being registered by Company or such demanding security holder would materially and adversely affect the distribution of such securities by Company or any selling stockholders, then the Company and each prospective seller may sell that proportion of the shares of Common Stock to be sold in the proposed distribution which the number of shares of Common Stock proposed to be sold by such prospective seller bears to the aggregate number of Common Stock proposed to be sold by all prospective sellers including the Company. Except as otherwise provided in Section 9.6, all expenses of such registration shall be borne by Company. 9.5. Registration Procedures. If Company is required by the provisions of this Section 9 to use its best efforts to effect the registration of any of its securities under the Securities Act, Company will, as expeditiously as possible: (a) prepare and file with the Commission a Registration Statement with respect to such securities and use its best efforts to cause such Registration Statement to become and remain effective for a period of time required for the disposition of such securities by the holders thereof, but not to exceed 90 days; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such Registration Statement until the earlier of such time as all of such securities have been disposed of in a public offering or the expiration of 90 days; (c) furnish to such selling security holders such number of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such selling security holders may reasonably request; (d) use its best efforts to register or qualify the securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions within the United States and Puerto Rico as each holder of such securities shall reasonably request or as shall be required by the managing underwriter (provided, however, that Company shall not be obligated to qualify as a foreign corporation to do business under the laws of any jurisdiction in which it is not then qualified or to file any general consent to service or process), and do such other reasonable acts and things as may be required of it to enable such holder to consummate the disposition in such jurisdiction of the securities covered by such Registration Statement; (e) furnish, at the request of any holder requesting registration of Warrant Stock pursuant to Section 9.3), on the date that such shares of Warrant Stock are delivered to the underwriters for sale pursuant to such registration or, if such Warrant Stock is not being sold through underwriters, on the date that the Registration Statement with respect to such shares of Warrant Stock becomes effective, (1) an opinion, dated such date, of the independent counsel representing Company for the purposes of such registration, addressed to the underwriters, if any, and if such Warrant Stock is not being sold through underwriters, then to the holders making such request, in customary form and covering matters of the type customarily covered in such legal opinions; and (2) a comfort letter dated such date, from the independent certified public accountants of Company, addressed to the underwriters, if any, and if such Warrant Stock is not being sold through underwriters, then to the holder making such request and, if such accountants refuse to deliver such letter to such holder, then to Company in a customary form and covering matters of the type customarily covered by such comfort letters as the underwriters or such holders shall reasonably request. Such opinion of counsel shall additionally cover such other legal matters with respect to the registration in respect of which such opinion is being given as such holders holding a majority of the Warrant Stock being so registered may reasonably request. Such letter from the independent certified public accountants shall additionally cover such other financial matters (including information as to the period ending not more than five (5) Business Days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as the holders holding a majority of the Warrant Stock being so registered may reasonably request; (f) enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities; and (g) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, but not later than 18 months after the effective date of the Registration Statement, an earnings statement covering the period of at least twelve (12) months beginning with the first full month after the effective date of such Registration Statement. which earnings statements shall satisfy the provisions of Section II (a) of the Securities Act It shall be a condition precedent to the obligation of Company to take any action pursuant to this Section 9 in respect of the securities which are to be registered at the request of any holder of Warrants or Warrant Stock that such holder shall furnish to Company such information regarding the securities held by such holder and the intended method of disposition thereof as Company shall reasonably request, and as shall be required in connection with the action taken by Company, and, if such registration is pursuant to an underwriting, such holder shall enter into an underwriting agreement customary for such transactions. 9.6 Expenses. All expenses incurred in complying with Section 9, including, without limitation, all registration and filing fees (including all expenses incident to filing with the NASD), printing expenses, fees and disbursements of counsel for Company, the reasonable fees and expenses of one firm acting as counsel for the selling security holders (selected by those holding a majority of the shares being registered), expenses of any special audits incident to or required by any 91such registration and expenses of complying with the securities or blue sky laws of any jurisdictions pursuant to Section 9.5(d), shall be paid by Company, except that: (a) all such expenses in connection with any amendment or supplement to the Registration Statement or prospectus filed more than 90 days after the effective date of such Registration Statement because any holder of Warrant Stock has not effected the disposition of the securities requested to be registered shall be paid by such holder; and (b) Company shall not be liable for any fees, discounts or commissions to any underwriter or any fees or disbursements of counsel for any underwriter in respect of the securities sold by such holder of Warrant Stock except to the same extent that the Company has agreed to pay fees, discounts or commissions to any underwriter and/or fees and disbursements of counsel for any underwriter in respect of the securities being sold by any other selling stockholder of the Company. 9.7. Indemnification and Contribution. (a) In the event of any registration of any of the Warrant Stock under the Securities Act pursuant to this Section 9, Company shall indemnify and hold harmless the holder of such Warrant Stock, such holder's directors and officers, and each other Person (including each underwriter) who participated in the offering of such Warrant Stock and each other Person, if any, who controls such holder or such participating Person within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director or officer or participating Person or controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in' respect thereof) arise out of or are based upon: (i) any alleged untrue statement of any material fact contained, on the effective date thereof in any Registration Statement under which such securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or (ii) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and s hall reimburse such holder or such director, officer or participating Person or controlling Person for any legal or any other expenses reasonably incurred by such holder or such director, officer or participating Person or controlling Person in connection with investigating or defending any such loss, claim. damage, liability or action; provided; however, that Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any alleged untrue statement or alleged omission made in such Registration Statement, preliminary prospectus, prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to Company by such holder specifically for use therein or (in the case of any registration pursuant to Section 9.3) so furnished for such purposes by any underwriter. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or such director, officer or participating Person or controlling Person, and shall survive the transfer of such securities by such holder. (b) Each holder of any Warrant Stock, by acceptance thereof, agrees to indemnify, and hold harmless Company, its directors and officers and each other Person, if any, who controls Company within the meaning of the Securities Act against any losses, claims, damages or liabilities, Joint or several, to which Company or any such director or officer or any such Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon information in writing provided to Company by such holder of such Warrant Stock specifically for use in the following documents and contained, on the effective date thereof- any Registration Statement under which securities were registered under the Securities Act at the request of such holder, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto. (c) If the indemnification provided for in this Section 9 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution . pursuant to this Section 9.7(c) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 9.8. Termination of Restrictions. Notwithstanding the foregoing provisions of Section 9, the restrictions imposed by this Section upon the transferability of the Warrants, the Warrant Stock and the Restricted Common Stock and the legend requirements of Section 9.1 shall terminate as to any particular Warrant or share of Warrant Stock or Restricted Common Stock: (a) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto; or (b) when Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act. Whenever the restrictions imposed by Section 9 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from Company, at the expense of Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTION 9 HEREOF TERMINATED ON ____________, 199_, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from Company, at Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 9. 1 (a). 9.9. Listing on Securities Exchange. If Company shall list any shares of Common Stock on any securities exchange, it will, at its expense, list thereon, maintain and, when necessary, increase such listing of, all shares of Common Stock issued or, to the extent permissible under the applicable securities exchange rules, issuable upon the exercise of this Warrant so long as any shares of Common Stock shall be so listed during any such Exercise Period. 9.10. Certain Limitations on Registration Rights. Notwithstanding the other provisions of Section 9: (a) Company shall not be obligated to register the Warrant Stock of any holder if, in the opinion of counsel to Company reasonably satisfactory to the holder and its counsel (or. if the holder has engaged an investment banking firm, to such investment banking firm and its counsel), the sale or other disposition of such holder's Warrant Stock, in the manner proposed by such holder (or by such investment banking firm), may be effected without registering such Warrant Stock under the Securities Act; and (b) if Company has had a registration statement under which a holder had a fight to have its Warrant Stock included pursuant to Sections 9.3 or 9.4 declared effective within one year prior to the date of any request pursuant to Section 9.3, then, until such one year period has expired, Company shall not be obligated to register the Warrant Stock of any holder pursuant to Section 9.31 provided, however, that if any holder elected to have shares of its Warrant Stock included under such registration statement but some or all of such shares were excluded pursuant to the penultimate sentence of Section 9.4, then such one-year period shall be reduced to six months 9.11. Selection of Managing Underwriters. The managing underwriter or underwriters for any offering of Warrant Stock to be registered pursuant to Section 9.3 shall be selected by the holders of a majority of the shares being so registered (other than any shares being registered pursuant to Section 9.4) and shall be reasonably acceptable to Company. The managing underwriter or underwriters for any offering of Warrant Stock to be registered pursuant to Section 9.4 shall be selected by the Company but shall be reasonably acceptable to holders of a majority of the shares of Warrant Stock being registered in such registration. 10. SUPPLYING INFORMATION Company shall cooperate with each Holder of a Warrant and each holder of Restricted Common Stock in supplying such information as may be reasonably necessary for such holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrant or Restricted Common Stock. 11. LOSS OR MUTILATION Upon receipt by Company from any Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of GE Capital shall be sufficient indemnity, so long as GE Capital is not then the subject of a bankruptcy or insolvency proceeding and has not made an assignment for the benefit of its creditors), and in case of mutilation upon surrender and cancellation hereof, Company will execute and deliver in lieu hereof a new Warrant of like tenor to such Holder; provided, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to Company for cancellation. 12. OFFICE OF COMPANY As long as any of the Warrants remain outstanding, Company shall maintain an office or agency (which may be the principal executive offices of Company) where the Warrants may be . presented for exercise, registration of transfer, division or combination as provided in this Warrant. 13. FINANCIAL AND BUSINESS INFORMATION 13.1. Monthly and Quarterly Information. (a) While the Loan Agreement is in effect, the Company will deliver to each Holder copies of the monthly financial statements required to be delivered to the agent under the Loan Agreement (the 'Agent"), as and when the same are delivered to the Agent. Thereafter, until such time (if ever) as the Company shall become a reporting company under the Exchange Act, the Company will deliver to each Holder, within thirty (30) days after the end of each fiscal month of the Company (a "Fiscal Month"), consolidated and consolidating financial and other information regarding the Company and its Subsidiaries, certified by the chief financial officer of the Company, including (1) unaudited balance sheets as of the close of such Fiscal Month and the related statements of income and cash flow for that portion of the Fiscal Year ending as of the close of such Fiscal Month and (ii) unaudited statements of income and cash flows for such Fiscal Month, in each case setting forth in comparative form the figures for the corresponding period in the prior year and the figures contained in the budget, all prepared in accordance with GAAP (subject to normal year-end adjustments and except for the absence of footnotes and except as otherwise disclosed therein in reasonable detail), and accompanied by the certification of the chief executive officer or chief financial officer of the Company that all of such financial and other information is true, complete and correct and presents fairly in accordance with GAAP (subject to normal year-end adjustments and except for the absence of footnotes and except as otherwise disclosed therein in reasonable detail), the financial position, results of operations and statements of cash flows of the Company and its Subsidiaries, on both a consolidated and consolidating basis, as at the end of such Fiscal Month and for the period then ended. (b) From and after the date, if ever, upon which the Company shall become a reporting company under the Exchange Act, the Company shall provide to each Holder, as and when required to be filed with the Commission, copies of all quarterly financial statements and other financial reports required to be filed with the Commission or which the Company elects to file with the Commission or otherwise to publicly disclose. 13.2. Annual Information. (a) While the Loan Agreement is in effect, the Company will deliver to each Holder copies of the annual financial statements required to be delivered to the Agent as and when the same are delivered to the Agent. Thereafter, until such time (if ever) as the Company shall become a reporting 'company under the Exchange Act, for each fiscal year of the Company (a "Fiscal Year"), the Company will deliver to each Holder audited financial statements for the Company and its Subsidiaries, on a consolidated and consolidating basis, consisting of balance sheets as of the end of such Fiscal Year and statements of income and retained earnings and cash flows for such Fiscal Year, setting forth in comparative form in each case the figures for the previous Fiscal Year, which financial statements shall be prepared in accordance with GAAP, certified (only with respect to the consolidated financial statements) without qualification, by an independent certified public accounting firm of national standing and accompanied by: (i) the annual letters to such accountants in connection with their audit examination detailing contingent liabilities and material litigation matters, and (@) the certification of the chief executive officer or chief financial officer of the Company that all such financial statements are true, complete and correct and present fairly in accordance with GAAP the financial position, results of operations and statements of cash flows of the Company and its Subsidiaries, on a consolidated basis, as at the end of such year and for the period then ended. Such annual financial statements shall be delivered to each Holder contemporaneously with filing thereof with the Commission by the Company's parent corporation, ARTRA Group, Incorporated ("ARTRA") so long as ARTRA shall be a reporting company under the Exchange Act, but within one hundred twenty (120) days after the end of each Fiscal Year for any period occurring after the date (if ever) upon which ARTRA shall cease to be a reporting company under the Exchange Act. (b) From and after the date, if ever, upon which the Company shall become a reporting company under the Exchange Act, the Company shall provide to each Holder, as and when required to be filed with the Commission, copies of all annual financial statements, annual reports to stockholders and proxy statements required to be filed with the Commission. 13.3. Filings. Company will file on or before the required date au regular or periodic reports (pursuant to the Exchange Act) required to be filed with the Commission and will deliver to Holder promptly upon their becoming available one copy of each report, notice or proxy statement sent by Company or ARTRA to the Company's or ARTRA's stockholders generally, and of each regular or periodic report (pursuant to the Exchange Act) and any Registration Statement, prospectus or written communication (other than transmittal letters) (pursuant to the Securities Act), filed by Company or ARTRA with (i) the Commission or (ii) any securities exchange on which shares of Common Stock or any class of securities of ARTRA are listed. 14. REPURCHASE BY COMPANY OF WARRANT 14.1. Obligation to Repurchase Warrant. (a) From time to time during the period ending on the Expiration Date and commencing on the earliest to occur of (i) the fourth anniversary of the Closing Date; (ii) the occurrence of a merger (other than where Company is the surviving corporation and there is no change in or distribution with respect to its Common Stock), sale of substantially all of the assets or sale of the majority of the outstanding shares of Common Stock of Company; (iii) repayment of a material portion of the indebtedness evidenced by the Notes with funds derived from any source other than (A) operating income of the Company, or (B) additional capital contributed by the Company's stockholders and obtained by them without any direct or indirect credit support (by guaranty or otherwise) from the Company; (iv) the date upon which a public offering of any class of the Company's securities becomes effective; and (v) the acceleration of the maturities of the Notes pursuant to the occurrence of an Event of Default under the Loan Agreement; (the "Repurchase Period"), upon written notice from any Holder, Company shall repurchase, on the date and in the manner set forth in Section 14.4 below, from such Holder all or the portion of this Warrant designated in such notice for an amount determined by multiplying (x) the number of shares of Common Stock subject to this Warrant or portion thereof being repurchased by (y) the difference between the Current Market Price per share of Common Stock as of the date of such notice and the Current Warrant Price per share of Common Stock as of the date of such notice; provided, however, that if no Event of Default under the Loan Agreement shall have occurred and then be continuing, Company shall have the fight, upon delivery of a written notice (the "Deferral Notice") to the Holder within thirty (30) days following its receipt of the repurchase notice, to satisfy its obligations under this Section 14.1 to repurchase this Warrant or a portion thereof by effecting, at Company's expense, within one hundred twenty (120) days after the date of the Deferral Notice, an underwritten public offering on a firm commitment basis of the shares of Common Stock subject to the Warrant requested to be repurchased, the net proceeds (after underwriting discounts and commissions) of which shall not be less than the amount required for such repurchase, in which event such repurchase of the Warrant shall be deferred and such underlying Common Stock shall be sold pursuant to such public offering. Nothing herein shall preclude the exercise by Holder of any portion of this Warrant exercisable at any time prior to such repurchase. (b) Notwithstanding the provisions of Section 14. 1 (a), if, at any time during the period between the date on which any Holder shall have exercised its rights under Section 14.1 to cause Company to repurchase all or a portion of such Holder's Warrant and, on or prior to the date of such repurchase, Company shall consolidate or merge with, or sell all or substantially all of its property and assets to, any Person and the consideration received by stockholders in connection with such merger, consolidation or sale shall consist solely of cash, then such Holder shall (whether or not such Holder shall have previously surrendered such Holder's Warrant for repurchase by Company pursuant to this Section 14) be entitled to receive, on the date of such repurchase, the higher of (i) the amount payable to such Holder as determined pursuant to Section 14.1 (a) and (ii) an amount equal to the amount of cash such Holder would have received upon such consolidation, merger or sale had such Holder's Warrant (or t he portion thereof being repurchased) been fully exercised immediately prior thereto less the aggregate Current Warrant Price payable at such time for the purchase of the shares of Common Stock then subject to such Holder's Warrant (or the portion thereof being repurchased). (c) Notwithstanding any provision contained in this Warrant to the contrary, should Company for any reason fail to perform its obligations arising under Section 14.1 hereof, such obligations shall in all respects continue until Company has fulfilled such obligations. 14.2. Option to Repurchase Warrant. (a) From time to time on or after the fourth anniversary of the Closing Date until the Expiration Date, and, with respect to any shares of Warrant Stock requested to be registered pursuant to Section 9.3 hereof, Company shall have the right, upon written notice to any Holder, to repurchase from such Holder, from any source of funds legally available therefor, on the date and in the manner set forth in Section 14.4 below, all or any part of the Warrant then held by such Holder for an amount (subject to the adjustment provided in Section 14.3 below) determined by multiplying the number of shares of Common Stock subject to such Warrant or portion thereof being repurchased by the difference between the Current Market Price per share of Common Stock as of the date of such notice and the Current Warrant Price per share of Common Stock as of the date of such notice, provided, however, that nothing herein shall preclude the exercise by Holder of any portion of this Warrant exercisable at any time prior to such repurchase. (b) In addition to the repurchase rights granted in clause (a) above, Company shall have the right, upon written notice to Holder, to repurchase from such Holder, from any source of funds legally available therefor, 709.77 shares of Warrant Stock for $1,500,000 in immediately available funds during the period of January 15, 1997 through January 31, 1997. If such repurchase rights are not exercised and the repurchase of those shares of Warrant Stock is not consummated during that period, the repurchase price of $1,500,000 shall not be deemed to be indicative of the Appraised Value of any Warrant Stock for purposes of any subsequent repurchase of Warrant Stock hereunder. 14.3. Subsequent Value Transactions. If Company exercises its repurchase right pursuant to Section 14.2(b) hereof and at any time on or prior December 17, 1997, (i) 5% or more of Company's Fully Diluted Outstanding Common Stock is sold, transferred or otherwise disposed of, (ii) 5% or more of the capital stock of BCA Holdings, Inc. ("BCA") outstanding on a fully diluted basis is sold, transferred or otherwise disposed of, (iii) 5% or more of ARTRA's capital stock outstanding on a fully diluted basis is sold, transferred or otherwise disposed of by Peter R. Harvey or any of his Affiliates, collectively, (iv) Company, BCA or ARTRA is merged with or into, acquired by or otherwise combined with, any other Person and, in the case of ARTRA, the practical effect of which is equivalent to a disposition referred to in clause (iii) above, or (v) 5% or more of the assets or business of Company or BCA is sold, transferred or otherwise disposed of, in each of the foregoing cases whether directly or indirectly, in a single transaction or a series of related transactions, then a "Value Transaction" shall be deemed to have occurred. Notwithstanding the foregoing, a Value Transaction also shall be deemed to have occurred if any of the transactions described in the preceding sentence occurs at any time pursuant to or otherwise in connection with any agreement or other document in existence on or prior to December 17, 1997. If the value of a share of Common Stock indicated or determinable by reference to any Value Transaction exceeds the price per share of Common Stock paid in any repurchase under Section 14.2(b), then on the date on which that Value Transaction is consummated, Company shall pay to Holder in immediately available funds that excess value per share multiplied by the number shares of Warrant Stock previously repurchased under Section 14.2(b). 14.4 Determination and Payment of Repurchase Price. (a) The purchase price for any repurchase pursuant to this Section 14 other than pursuant to Section 14.2(b) (the "Repurchase Price") shall be determined within ninety (90) days of the date of the repurchase notice received or Oven by Company pursuant to Section 14.1 or 14.2(a), and shall be payable in cash within twenty (20) days following the date of such determination of the Repurchase Price. On the date of any repurchase of Warrants pursuant to this Section 14, each Holder shall assign to Company such Holder's Warrant or portion thereof being repurchased, as the case may be, without any representation or warranty (other than customary representations and warranties as to ownership, absence of liens and due authority to consummate such transaction), by the surrender of such Holder's Warrant at the principal office of Company referred to in Section 2.1 against payment therefor of the Repurchase Price by, at the option of such Holder, (i) wire transfer to an account in a bank located in the United States designated by such Holder for such purpose or (ii) a certified or official bank check drawn on a member of the New York Clearing House payable to the order of such Holder. If less than all of any Holder's War-rant is being repurchased, Company shall, pursuant to Section 3, cancel such Warrant and issue in the name of, and deliver to, such Holder a new Warrant for the portion not being repurchased. (b) Each Holder shall have the fight at any time to object to the determination of Current Market Value pursuant to this Section 14 by specifying in writing to Company the nature of its objection and, unless such objection is resolved by agreement of Company and such Holder, Company and such Holder shall each have the night to subject the disputed determination to separate firms of independent accountants of recognized national standing for a joint resolution of the objection of such Holder (which firms of independent accountants may, in either case, be the firms of accountants regularly retained by Company or such Holder). If such firms cannot jointly resolve the objection of such Holder, then, unless otherwise directed by agreement of Company and such Holder, such firms shall in their sole discretion choose another firm of independent certified public accountants of recognized national standing, which is not the regular auditor of such Holder or Company, which firm shall resolve such objection. In either case, for purposes hereof the determination so made shall be conclusive and binding on Company, such Holder and all Persons claiming under or through any of them, and any adjustment in the determination of Book Value and the Repurchase Price per share of Common Stock resulting from such determination shall be made. The cost of any such determination shall be borne: (i) by Company if it results in an increase of the aggregate Repurchase Price for all shares of Common Stock issuable upon the exercise hereof of ten percent (101/6) or more; (ii) by such Holder if it results in a decrease of the aggregate Repurchase Price for all shares of Common Stock issuable upon the exercise hereof of ten percent (10%) or more; and (iii) equally by the Company and the Holder in any other case. (c) Any repurchase by Company of all or any portion of the Warrant pursuant to Section 14.1 which is delayed by the failure of Company to determine the Repurchase Price within the time periods required in Section 14.4(a) shall be consummated within 10 days after, as the case may be, the determination of the Repurchase Price or the resolution of such objection. (d) In the event that the determination of the Repurchase Price requires an opinion from an investment banking firm or accounting firm, all costs and fees associated therewith shall be paid by Company. 15. APPRAISAL The determination of the Appraised Value per share of Common Stock shall be made by an investment banking firm of nationally recognized standing selected by Company and acceptable to the Majority Holders. If the investment banking firm selected by Company is not acceptable to the Majority Holders and Company and the Majority Holders cannot agree on a mutually acceptable investment banking firm, then the Majority Holders and Company shall each choose one such investment banking firm and the respective chosen firms shall agree on another investment banking firm which shall make the determination. Company shall retain, at its sole cost, such investment banking firm as may be necessary for the determination of Appraised Value required by the terms of this Warrant, except as otherwise provided in Section 14.4(b). 16. LIMITATION OF LIABILITY No provision hereof in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the fights or privileges of Holder hereof, shall give rise to any liability of such Holder for the purchase price of any Common Stock or as a stockholder of Company, whether such liability is asserted by Company or by creditors of Company. 17. PARTICIPATION IN CORPORATE DISTRIBUTIONS AND TAKE-ALONG RIGHT 17.1 Company's Obligation to Make Payments. (a) Company shall not declare, make or pay any dividend or other distribution, whether in cash, securities or other property, with respect to its Common Stock (a "Distribution") unless it concurrently makes a cash payment to the holder of this Warrant equal to (1) the amount of cash plus the fair value of any property or securities distributed with respect to each outstanding share of Common Stock at the time, as determined in good faith by the Board of Directors of Company, multiplied by (2) the number of shares of Common Stock then issuable upon exercise of this Warrant. (b) Except for repurchases of Warrant Shares upon the exercise of the repurchase options contained in Section 14 hereof, Company shall not repurchase or redeem any of its equity securities or any securities convertible into or exchangeable for such equity securities or any warrants or other rights to purchase such equity securities unless it concurrently makes a cash payment to the holder of this Warrant equal to the product of (i) the quotient obtained by dividing (x) the aggregate amount of cash and the aggregate fair value of any property paid out by Company in connection with any such repurchase or redemption at the time, as determined in good faith by the Board of Directors of Company, by (y) the number of shares of Common Stock outstanding on a fully diluted (excluding shares of Common Stock then issuable upon exercise of this Warrant) immediately after such repurchase or redemption, and (ii) the number of shares of Common Stock then issuable upon the exercise of this Warrant. Upon any such payment by the Company, the number of shares of Common Stock then issuable upon the exercise of this Warrant shall be adjusted by multiplying the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such payment by a fraction (A) the numerator of which shall be the number of shares of Common Stock Outstanding immediately after such repurchase or redemption, and (B) the denominator of which shall be the number of shares of Common Stock Outstanding immediately prior to such repurchase or redemption. Concurrently, the Holder of this Wan-ant shall deliver the same to the Company for cancellation and the Company shall deliver to Holder a new Warrant evidencing the adjusted number of unpurchased shares of Common Stock called for by this Section 17. 1 (b), which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. [Example: 90 shares are outstanding and Warrant is for 10 shares (10% on a fully diluted basis). Company redeems 10 shares for $8 each ($80 total). 80 shares are left outstanding. $80 divided by 80 shares = $1 per share. 10 x $1 = $10 to be delivered to Holder. Warrant is then adjusted by multiplying 10 (prepayment number of exercisable shares) by 80/90. Resulting Warrant is for 8.89 shares or 10% of post-redemption stock on a fully-diluted basis.] 17.2. Take-Along Rights. Each holder of Warrants or Warrant Shares shall have the right to be taken along in the sale of any Common Stock by BCA, the principal stockholder of the Company, or in any sale of capital stock of BCA by ARTRA, in accordance with the letter addressed to each holder, and any assignee, transferee or successor, a copy of which is attached as Annex A hereto and made a part hereof . 18. MISCELLANEOUS 18.1. Non-waiver and Expenses. No course of dealing or any delay or failure to exercise any fight hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. If Company fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its fights, powers or remedies hereunder. 18.2. Notice Generally. Any notice, demand, request, consent, approval, declaration. delivery or other communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, or by telecopy and confirmed by telecopy answerback, addressed as follows: (a) If to any Holder or holder of Warrant Stock, at its last known address appearing on the books of Company maintained for such purpose. (b) If to Company, at: Bagcraft Corporation of America 3900 West 43rd Street Chicago, Illinois 60632 Attention: Mark Santacrose, Esq. Telecopy Number: (312) 254-8204 with a copy to: Philip E. Ruben Kwiatt, Silverman & Ruben, Ltd. 500 Central Avenue Northfield, IL 60093 Telecopy: (847) 441-7696 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied and confirmed by telecopy answerback, or three (3) Business Days after the same shall have been deposited in the United States mail, certified, or one (1) Business Day after the same has been deposited with a reputable overnight courier with instructions to deliver the same on the next Business Day. Failure or delay in delivering copies of any notice, demand, request, approval, declaration, delivery or other communication to the person designated above to receive a copy shall in no way adversely affect the effectiveness of such notice, demand, request, approval, declaration, delivery or other communication. 18.3. Indemnification. Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of (i) Holder's exercise of this Warrant and/or ownership of any shares of Warrant Stock issued in consequence thereof, or (ii) any litigation to which Holder is made a party in its capacity as a stockholder of Company; provided, however, that Company will] not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements are found in a final non-appealable judgment by a court to have resulted from Holder's gross negligence, bad faith or willful misconduct in its capacity as a stockholder or warrant holder of Company. 18.4. Remedies. Each holder of Warrant and Warrant Stock, in addition to being entitled to exercise all fights granted by law, including recovery of damages, will be entitled to specific performance of its fights under Section 9 of this Warrant. Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of Section 9 of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 18.5. Successors and Assigns. Subject to the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and, with respect to Section 9 hereof holders of Warrant Stock, and shall be enforceable by any such Holder or holder of Warrant Stock. 18.6. Amendment. This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of Company and the Majority Holders, provided that no such Wan-ant may be modified or amended to reduce the number of shares of Common Stock for which such Warrant is exercisable or to increase the price at which such shares may be purchased upon exercise of such Warrant (before giving effect to any adjustment as provided therein) without the prior written consent of the Holder thereof. 18.7. Severability. Wherever possible, each provision of this Warrant shall be prohibited by or invalid under applicable law interpreted in such manner as to be effective and valid under applicable law, but if any provision, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 18.8. Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 18.9. Governing Law. This Warrant shall be governed by the internal laws and decisions of the State of Illinois, without regard to the provisions thereof relating to conflict of laws. [Balance of page left intentionally blank; signature page follows.] IN WITNESS WHEREOF, Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: December 30, 1996 BAGCRAFT CORPORATION OF AMERICA By: _____________________________ Name: _____________________________ Title: _____________________________ Attest: By: _____________________________ Name: _____________________________ Title: _____________________________ EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of Shares of Common Stock of Bagcraft Corporation of America and herewith makes payment therefor in the amount of $___________ as follows: $______________ by wire transfer; $______________ by certified or official bank check enclosed herewith; $______________ by deducting from the shares delivered upon exercise hereof a number of shares having an aggregate Current Market Price on the date of exercise equal to the aggregate purchase price for all shares as to which this Warrant is then being exercised; $_____________ by application of the Liabilities as provided in Section 2.5 of this Warrant; all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to whose address is - and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. -------------------------------------- (Name of Registered Owner) -------------------------------------- (Signature of Registered Owner) -------------------------------------- (Street Address) -------------------------------------- (city) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Name and Address of Assignee No. of Shares of Common Stock and does hereby irrevocably constitute and appoint _____________________ attorney-in-fact to register such transfer on the books of Bagcraft Corporation of America maintained for the purpose, with full power of substitution in the premises Date: _______________ Print Name: ________________________ Signature: ________________________ Witness: ________________________ NOTICE: The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any chance whatsoever. ANNEX A December 30, 1996 To Each Holder of a Warrant to Purchase Common Stock of Bagcraft Corporation of America and all Assignees, Transferees and Successors of such Holder: Reference is made to the Warrant dated as of December 30, 1996 to purchase the Common Stock of Bagcraft Corporation of America, a Delaware corporation (the "Company"), issued to General Electric Capital Corporation, a New York corporation ("GE Capital"), (as from time to time amended, replaced, refinanced, restated, superseded, supplemented or otherwise modified). All capitalized terms used in this agreement which are defined in the Warrant are used as defined in the Warrant unless the context otherwise requires. The undersigned BCA Holdings, Inc., a Delaware corporation ('BCA') and ARTRA GROUP Incorporated, a Pennsylvania corporation ("ARTRA"- collectively, BCA and ARTRA are referred to herein as the "Controlling Stockholders"), warrant, covenant and agree with the holders of the Warrant and the Warrant Stock, their assignees, transferees and successors (the "Warrantholders") as follows: If any Controlling Stockholder proposes any sale (other than pursuant to a public offering) (a "Sale") of all or a portion of its common stock of the Company ("Common Stock") or any class of capital stock of BCA ("BCA Stock") (collectively, Common Stock and BCA Stock are referred to herein as "Controlling Stock"), the Controlling Stockholders shall provide for such Sale on a basis which includes a ratable share of all shares which have been issued or then are issuable under the Warrant (collectively "Warrant Stock") on a pro-rata basis. 1. The Controlling Stockholders shall Live each Warrantholder written notice of a proposed Sale of Controlling Stock not less than 45 days before such Sale is to take place. The notice ("Sale Notice") shall set forth: a. the name and address of the Proposed Purchaser, b. the name and address of each Warrantholder as shown on the records of the Company, the number of shares of Warrant Stock held by or issuable to each Warrantholder; c. the number and nature of shares of Controlling Stock proposed to be transferred by the Controlling Stockholders; d. the proposed amount and form of consideration and terms and conditions of payment offered by such Proposed Purchaser; and e. the signed agreement of the Proposed Purchaser acknowledging that he has been informed of this letter agreement and has agreed to purchase Warrant Stock in accordance with the terms hereof. 2. The take-along rights provided in this agreement may be exercised by any Warrantholder (an "Electing Warrantholder") by delivery of a written notice (a "Take-Along-Notice") to the Company or ARTRA (with a copy to each other Warrantholder) within thirty (30) days after receipt of the Sale Notice. A Take-Along Notice shall state the number of shares of Warrant Stock which the Warrantholder, wishes to include in such Sale to the Proposed Purchaser. 3. The Warrantholders shall be entitled to sell to the Proposed Purchaser Warrant Stock at the same price per share as the price per share to be paid for Controlling Stock and otherwise on the same terms as are to be applicable to the sale of the Controlling Stock, except as provided in paragraph 5 below. The Warrantholders shall be entitled to sell the same percentage of the Warrant Stock held by them, as that percentage of the Controlling Stock ultimately sold by the Controlling Stockholders (after reductions to permit the sale of the Warrant Stock). 4. Any shares of Warrant Stock purchased from the Warrantholders pursuant to this . agreement shall be purchased on terms and conditions which do not include the making of any representations and warranties, indemnities or other similar agreements other than the representations, warranties and indemnities as to the ownership of such shares of Warrant Stock and the due authority to sell such shares. BCA HOLDINGS, INC. ARTRA GROUP INCORPORATED By: ___________________________ By: ________________________ Title: ___________________________ Title: ________________________ EX-10 5 SETTLEMENT AND RELEASE AGREEMENT EXHIBIT 10.3 SETTLEMENT AND RELEASE AGREEMENT THIS SETTLEMENT AND RELEASE AGREEMENT (this "Agreement") is entered into as of the 19th day of December, 1996, by and among ARTRA GROUP Incorporated, a Pennsylvania corporation ("ARTRA"), Fill-Mor Holding, Inc., a Delaware corporation ("Fill-Mor"), and Peter R. Harvey ("Harvey") (referred to collectively as the "ARTRA Parties"), and COMFORCE Corporation, a Delaware corporation formerly known as The Lori Corporation (including any predecessors, "COMFORCE"), James L. Paterek, Michael Ferrentino, Christopher P. Franco and Kevin W. Kiernan (such individuals referred to as the "Designated Individuals" and, together with COMFORCE, referred to collectively as the "COMFORCE Parties"), and Kwiatt, Silverman & Ruben, Ltd. ("KSR"). WHEREAS, under that certain letter agreement dated June 29, 1995, as amended as of October 6, 1995, among ARTRA and the COMFORCE Parties (the "Letter Agreement"), the Designated Individuals agreed to, inter alia, direct COMFORCE's entry into the technical staffing business; and WHEREAS, pursuant to the Assumption Agreement dated as of October 17, 1995 between ARTRA and COMFORCE (the "Assumption Agreement"), COMFORCE agreed to issue to ARTRA 100,000 shares of the common stock of COMFORCE ("Common Stock") in consideration of the cancellation of all issued and outstanding shares of the Series C Preferred Stock of COMFORCE, all of which shares were held by ARTRA (the "Series C Preferred Stock"), and ARTRA agreed to assume substantially all pre-existing liabilities of COMFORCE; and WHEREAS, as of September 30, 1995, COMFORCE discontinued its jewelry business and, on October 17, 1995, entered the technical staffing business upon acquiring all of the capital stock of Spectrum Global Services Inc. (formerly d/b/a YIELD Global and now known as COMFORCE Telecom, Inc.) ("Global"); and WHEREAS, in connection with ARTRA's guarantee of certain obligations in connection with the Global acquisition, COMFORCE issued (but did not deliver to ARTRA) 100,000 shares of Common Stock; and WHEREAS, COMFORCE has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (Registration No. 33-60403) to register for resale certain shares of Common Stock, to be offered pursuant to Rule 415 of the Commission's Rules (the "Shelf Registration Statement"), which registration statement has not yet been declared effective by the Commission, and proposes to file with the Commission a registration statement on Form S-1 (the "Underwritten Registration Statement") for the registration of shares to be publicly offered by COMFORCE (the "Underwritten Offering") and certain selling stockholders, such offering to be underwritten by PaineWebber Incorporated and Unterberg Harris, and/or such other underwriters as may agree to participate in such offering (the "Underwriters"); and 1 WHEREAS, Fill-Mor, a wholly-owned subsidiary of ARTRA, is the record and beneficial owner of 1,769,703 shares of Common Stock representing 1,769,703 shares held of record for in excess of three years; and WHEREAS, by unanimous consent in lieu of a meeting dated October 16, 1995, the Board of Directors of COMFORCE caused certain existing employee options under COMFORCE's Long-Term Stock Investment Plan (the "Option Plan") not to terminate in certain circumstances as provided under the Option Plan, including 90 days after the termination of an employee's employment with COMFORCE; and WHEREAS, the ARTRA Parties and the COMFORCE parties desire to amicably settle various disputes and interpretive questions which have arisen concerning the Letter Agreement, the Option Plan and other matters; and WHEREAS, as a part of the transactions contemplated hereby, the parties have agreed to give to each other mutual releases as set forth herein. NOW, THEREFORE, in consideration of the agreements set forth herein, the parties, intending to be legally bound hereby, agree as follows: 1. ARTRA hereby waives any right it may have under the Letter Agreement to designate any person for nomination or election to the Board of Directors (except to the extent such rights, if any, may be exercised by any stockholder of COMFORCE in accordance with Delaware law or the bylaws of COMFORCE). COMFORCE agrees not to dispute the claims of Fill-Mor that it is not an "affiliate" of COMFORCE within the meaning of that term under Rule 144 of the Rules of the Commission. Subject to Fill-Mor's compliance with the terms of the Lock-up Agreement in the form attached hereto as Exhibit 3 (the "Lock-up Agreement"), with respect to any shares of Common Stock held by Fill-Mor for in excess of three years and presented to COMFORCE's transfer agent either for (a) removal of the legend thereon restricting the transfer of such shares except upon registration or an exemption therefrom under the Securities Act of 1933 (the "Restrictive Legend"), or (b) transfer free of the Restrictive Legend, COMFORCE shall either (i) cause its counsel to issue an opinion permitting the removal of the Restrictive Legend or the transfer free of the Restrictive Legend or (ii) cause such shares to be registered under the Shelf Registration Statement. 2. Simultaneously with the execution of this Agreement, (i) COMFORCE will deliver to ARTRA certificates evidencing 200,000 shares of Common Stock in consideration of ARTRA's guarantee of the Global obligations and the cancellation of the Series C Preferred Stock, and (ii) ARTRA shall deliver to COMFORCE certificates evidencing 9,701 shares of Series C Preferred Stock, marked "Canceled." 3. COMFORCE agrees to include in the Underwritten Registration Statement for registration for resale 200,000 shares of Common Stock held by ARTRA and 180,000 shares of Common Stock held by Fill-Mor (collectively, the "Registration Shares"). Simultaneously with the execution of this Agreement, Fill-Mor and ARTRA shall enter into a Lock-up Agreement in the form 2 attached hereto as Exhibit 3 with respect to 1,589,703 shares of Common Stock (the "Lock-up Shares"), being all of the shares of Common Stock held by either Fill-Mor or ARTRA (including the 125,000 shares held in the escrow account described in paragraph 11 hereof) other than the 380,000 Registration Shares. Notwithstanding the foregoing, in the event that the market price of the Common Stock as reported on the American Stock Exchange is less than $10.00 per share at the close of trading on the date 10 days prior to the scheduled commencement date of the road show for the Underwritten Offering, ARTRA and Fill-Mor shall have the right, upon written notice given to COMFORCE on such date (which notice may be sent by fax), to withdraw all or any portion of the Registration Shares from the Underwritten Registration Statement. In such event, COMFORCE shall not be obligated to register for resale any of the withdrawn Registration Shares, but the terms of this Agreement shall continue in full force and effect in all other respects. 4. ARTRA agrees to appoint KSR to serve as the custodian (in such capacity, referred to as the "Custodian") of (i) the Registration Shares (on a interim basis pending release to the Underwriters to be held under a custody agreement among the Underwriters and all of the selling stockholders in the Underwritten Offering (the "Underwriters Custody Agreement")) and (ii) the Lock-up Shares (except for Lock-up Shares held in the escrow account described in paragraph 11 hereof for so long as such shares are held thereunder) pursuant to the terms of a custody agreement to be negotiated in good faith by ARTRA, Harvey and COMFORCE and entered into within 15 days after the execution of this Agreement (the "KSR Custody Agreement"). The KSR Custody Agreement shall provide that the Lock-up Shares held under the KSR Custody Agreement will not be released by the Custodian except upon the joint direction of the Custodian and Doepken Keevican & Weiss ("DKW"), which direction shall not be withheld so long as the conditions for release of the Lock-up Shares hereunder and under the KSR Custody Agreement are satisfied (including without limitation to effect any pledge permitted hereunder so long as the pledgee acknowledges and agrees to the terms set forth herein). The KSR Custody Agreement shall also provide that the Registration Shares shall be held by the Custodian from the date of execution of this Agreement until 10 days prior to the scheduled commencement date of the road show for the Underwriters Offering and, thereupon, shall be released to the custodian under the Underwriters Custody Agreement, except for any Registration Shares as to which ARTRA or Fill-Mor elect not to include in Underwriters Registration Statement. Any such shares not included in the Underwriters Registration Statement shall thereupon be deemed to be Lock-up Shares and shall continue to be held by the Custodian under the KSR Custody Agreement. The KSR Custody Agreement shall also provide that the Lock-up Shares shall be held by the Custodian for as long as such shares continue to be Lock-up Shares, and neither such shares nor any direct or indirect beneficial interest therein shall be sold, transferred, pledged, hypothecated, margined or placed in street name with any broker-dealer or otherwise directly or indirectly disposed of during the term of the Lock-up Agreement and the KSR Custody Agreement, except that the Lock-up Shares may be pledged to a lender so long as (i) the pledgee is not a registered broker-dealer firm, (ii) the pledgee agrees to be bound by the terms of the Lockup Agreement and (iii) the Lock-up Shares pledged shall not be placed in street name and shall not 3 be loaned (or made available to any broker-dealer to be loaned) to any person who maintains or proposes to maintain a short position in COMFORCE's securities. 5. Effective upon the closing of the offering pursuant to the Underwritten Registration Statement (the "Offering"), COMFORCE shall direct the disbursement agent to disburse to Manufacturer's Bank ("Manufacturer's") from the proceeds of the sale of the Registration Shares an amount equal to the outstanding principal and accrued, unpaid interest on the loan of Manufacturer's to Fill-Mor, currently aggregating approximately $2.5 million (the "Manufacturer's Loan"), with all remaining net proceeds from the sale of the Registration Shares to be disbursed at the direction of ARTRA. Simultaneously with the execution of this Agreement, ARTRA agrees to execute and deliver to Manufacturer's a notice in a form reasonably acceptable to COMFORCE which directs Manufacturer's, upon repayment of the Manufacturer's Loan, (i) to deliver directly to the Custodian certificates evidencing 800,000 shares of Common Stock pledged to collateralize the Manufacturer's Loan, such certificates to be held pursuant to the terms of the Custody Agreement and the Lock-up Agreement, and (ii) not to honor any contrary instructions as to release of such shares except upon its receipt of joint written instructions from ARTRA and COMFORCE as to the same. Within 10 days after the execution of this Agreement, ARTRA agrees to take all reasonable steps to cause Manufacturer's to acknowledge receipt of the notice and to be bound by the terms thereof. 6. COMFORCE agrees to recognize and honor the action of its Board of Directors by unanimous written consent dated October 16, 1995 with respect to the options granted under the Option Plan to certain employees of COMFORCE named therein (the "Employee Options") (a copy of which consent is attached hereto as Exhibit 6). The ARTRA Parties acknowledge and understand that COMFORCE is not required and does not presently intend to register any of the shares issuable upon the exercise of Employee Options, and that, if any optionee desires to have option shares held by such optionee registered, such optionee must individually negotiate with COMFORCE as to the terms under which such registration will be effected, if at all. 7. The ARTRA Parties agree that the Designated Individuals are entitled to receive in the aggregate not less than 3,888,084 shares of Common Stock pursuant to the terms of the Letter Agreement, including not less than 796,782 shares to be issued in respect of the anti-dilution provisions thereof, and options to purchase in the aggregate ___________ shares of Common Stock pursuant to the terms of the Letter Agreement and the action of the Board of Directors of COMFORCE, and shall not hereafter make statements in any regulatory filings or pleadings or otherwise which question the right of the Designated Individuals to receive such shares or options. 8. ARTRA agrees to cause its employees and representatives to deliver or make available to COMFORCE all files and records relating to COMFORCE and its predecessors not 4 previously delivered to COMFORCE, provided, however, that COMFORCE agrees to make available to ARTRA and/or its counsel for review and copying, subject to any confidentiality agreement in customary form as to information not in the public domain or as to which the attorney-client privilege obtains, such information in such files (and all files previously delivered by ARTRA to COMFORCE) reasonably required (i) to enable ARTRA to determine the nature or scope of any continuing obligation of ARTRA for liabilities of COMFORCE, including pursuant to the Assumption Agreement or otherwise, or to defend itself against any claims therefor, (ii) to enable ARTRA to verify, correct or defend any of its consolidated tax returns, (iii) to enable ARTRA to prepare or verify the accuracy of any of its securities law disclosures, (iv) to enable any prospective underwriter of ARTRA or any prospective lender or acquiror of an interest in ARTRA to conduct a due diligence review of any matters relating to any potential continuing obligation of ARTRA for liabilities of COMFORCE, or (v) for any like proper business purpose. 9. ARTRA hereby represents and warrants to COMFORCE that the warrant and related put purported to be held by IBJ Schroder Bank & Trust Company ("Schroder"), a copy of which is attached hereto as Exhibit 9 (the "Schroder Warrant"), has been terminated pursuant to an agreement of the parties. ARTRA agrees to assume full responsibility and liability for any loss or damage suffered or incurred by COMFORCE by reason of the purported exercise of the Schroder Warrant. ARTRA, at its sole cost and expense, shall indemnify and hold COMFORCE harmless from and against any losses, damages or claims, including legal fees and expenses, in connection with the Schroder Warrant. In the event any legal action is brought or threatened to be brought by Schroder to enforce the Schroder Warrant or to recover damages for COMFORCE's failure to honor the same, ARTRA shall defend against such action or claim, at its expense; provided, however, that COMFORCE shall receive notices of all petitions and motions filed, and any other actions taken in connection therewith (including the taking of depositions) and may participate in the defense of the case at its cost, to the extent it desires, or at ARTRA's cost, if ARTRA fails to diligently prosecute or defend the action. 10. ARTRA acknowledges and affirms its obligations under the Assumption Agreement and agrees that (i) it shall assume all liabilities for the operations of Lawrence Jewelry Corporation, Rosecraft, Inc. and New Dimensions Accessories Ltd. (the "Jewelry Subsidiaries") that COMFORCE would, absent this assumption, otherwise be liable for, and (ii) all environmental liabilities of COMFORCE which have arisen or may arise by reason of any actions occurring prior to October 17, 1995, including the environmental matters at the Gary, Indiana site identified in Exhibit 10A attached hereto (the "Gary Site"). COMFORCE acknowledges and understands that ARTRA does not assume any liabilities for the Jewelry Subsidiaries which are the obligation of any subsidiary corporation and not of COMFORCE, as its parent (the "Subsidiary Obligations"). In this connection, simultaneously with the execution of this Agreement, ARTRA and COMFORCE shall enter into the Stock Transfer Agreement in the form attached as Exhibit 10B hereto, and shall execute the stock powers attached thereto. ARTRA represents to COMFORCE that it has, to its knowledge, satisfied all of the liabilities of the Jewelry Subsidiaries except for (i) the Subsidiary Obligations and (ii) $350,000 of obligations 5 owed to certain creditors as part of the reorganization in bankruptcy of New Dimensions Accessories Ltd., which creditors cannot be located by ARTRA (the "NDA Creditors"). 11. To secure its obligations with respect to (i) the Schroder Warrant, (ii) the Gary Site and (iii) the NDA Creditors, ARTRA agrees to deposit with Firstar Trust Company, a Wisconsin banking corporation, as escrow agent, or another mutually acceptable bank or trust company if Firstar Trust Company declines to serve as escrow agent (the "Escrow Agent"), certificates evidencing 125,000 shares of Common Stock (the "Escrowed Shares"). Such shares shall be held by the Escrow Agent pursuant to the terms of an escrow agreement to be negotiated by the parties in good faith and executed within 30 days after the date this Agreement is executed (the "Escrow Agreement"). ARTRA acknowledges that its liabilities with respect to (i) the Schroder Warrant, (ii) the Gary Site and (iii) the NDA Creditors are not limited by the amount held pursuant to the Escrow Agreement. If any such matter shall now or hereafter be the subject of legal proceedings, COMFORCE shall receive notices of all petitions and motions filed, and any other actions taken in connection therewith in any such matter (including the taking of depositions) and may participate in the defense of any case at its cost, to the extent it desires, or at ARTRA's cost, if ARTRA fails to diligently defend any such matter. The Escrow Agreement shall provide that the Escrowed Shares shall be held by the Escrow Agent and shall be released only as follows: (a) Upon the earliest to occur of (i) the final determination by a court of competent jurisdiction, and the expiration of all periods of appeal, that the Schroder Warrant has been extinguished, (ii) the expiration of the Schroder Warrant by its own terms without the warrant or put option thereunder being exercised or (iii) the expiration of all applicable statutes of limitation under which an action could be maintained by Schroder with respect to the Schroder Warrant, 50,000 of the Escrowed Shares shall be released to ARTRA; (b) Upon the final determination by a court of competent jurisdiction, and the expiration of all periods of appeal, that the Schroder Warrant is effective in accordance with its terms, such number of the Escrowed Shares shall be sold by the Escrow Agent as may be necessary to satisfy the judgment and fully discharge any liability to Schroder; (c) In accordance with the terms of any settlement agreement entered into with Schroder with respect to the Schroder Warrant, with the Escrow Agent to sell such number of the Escrowed Shares as may be necessary to satisfy the terms thereof; (d) If the number of Escrowed Shares needed to satisfy any judgment pursuant to subparagraph (b) or the terms of any settlement agreement pursuant to 6 subparagraph (c) (in either case, the "Schroder Satisfaction Shares") is less than 50,000, the number of shares determined by subtracting the Schroder Satisfaction Shares from 50,000 shall thereupon be released to ARTRA; (e) Upon the final determination by a court of competent jurisdiction, and the expiration of all periods of appeal, that COMFORCE has no liability for any clean-up costs for or other damages in connection with the Gary Site, 50,000 of the Escrowed Shares shall be released to ARTRA; (f) Upon the final determination by a court of competent jurisdiction, and the expiration of all periods of appeal, that COMFORCE has liability for clean-up costs for or other damages in connection with the Gary Site, such number of the Escrowed Shares shall be sold by the Escrow Agent as may be necessary to satisfy the judgment and fully discharge any liability therefor; (g) In accordance with the terms of any settlement agreement entered into with the plaintiffs in the case involving the Gary Site, with the Escrow Agent to sell such number of the Escrowed Shares as may be necessary to satisfy the terms thereof; (h) If the number of Escrowed Shares needed to satisfy any judgment pursuant to subparagraph (f) or the terms of any settlement agreement pursuant to subparagraph (g) (in either case, the "Gary Satisfaction Shares") is less than 50,000, the number of shares determined by subtracting the Gary Satisfaction Shares from 50,000 shall thereupon be released to ARTRA; (i) In accordance with the terms of any settlement agreements entered into with any of the NDA Creditors, with the Escrow Agent to sell such number of the Escrowed Shares as may be necessary to satisfy the terms thereof; and (j) 25,000 of the Escrowed Shares shall be released on the earliest to occur of (i) 360 days after the closing of the Underwritten Offering, (ii) the full satisfaction of all obligations owed to all of the NDA Creditors or (iii) February 28, 1998. 12. ARTRA agrees to cause to be prepared and delivered to COMFORCE within 14 days after the execution of this Agreement minutes of the meeting of the Board of Directors of COMFORCE held on or about October 16, 1995, at which meeting the Global acquisition was approved; provided, however, that, if required by the Underwriters, as a condition to the filing of the Underwritten Registration Statement, ARTRA shall cause the secretary of the meeting to certify to the Underwriters as to the action taken at the meeting so as not to delay such filing. ARTRA agrees to deliver to COMFORCE within three days after the execution of this 7 Agreement minutes of the meeting of the Board of Directors of ARTRA approving the Global acquisition, if any such meeting was held. 13. Within five days after the execution of this Agreement, KSR shall deliver or make available to COMFORCE any remaining files relating to COMFORCE or its predecessors not previously delivered to COMFORCE; provided, however, that COMFORCE agrees to make available to KSR and/or its counsel for review and copying, subject to any confidentiality agreement in customary form as to information not in the public domain or as to which the attorney-client privilege obtain, such information in such files (and all files previously delivered by KSR to COMFORCE) reasonably required (i) to enable KSR to defend itself in connection with the claims made by any person in connection with any legal services performed by KSR on behalf of COMFORCE or (ii) for any other like purpose. KSR shall hold for the benefit of COMFORCE such files as are listed on Exhibit 13 attached hereto (except such of those files which have previously been delivered to COMFORCE or previously destroyed by KSR in accordance with its customary file retention procedures), to make such files available to COMFORCE upon request and not to destroy any such files unless first offering to deliver such files to COMFORCE. 14. To the extent required in connection with the Underwritten Registration Statement, the Shelf Registration Statement, or any listing application which may be filed with the American Stock Exchange or Nasdaq, KSR shall deliver its opinion to the effect that all shares of Common Stock of COMFORCE issued by COMFORCE on or before December 31, 1995 were issued pursuant to available exemptions from registration under the Securities Act of 1933, as amended. COMFORCE agrees to pay the KSR's customary fees for issuing any such opinions. 15. Within three days after the date of execution of this Agreement, ARTRA shall cause its margin account with Donaldson, Lufkin & Jenrette to be fully paid, and the certificates evidencing the shares held therein to be delivered to and held by the Custodian pursuant to the terms of the Lock-up Agreement and the Custody Agreement. 16. COMFORCE shall cause to be issued to Harvey simultaneously with the execution of this Agreement a certificate evidencing 150,000 shares of Common Stock. COMFORCE agrees to cause 22,500 of such shares to be included in the Underwritten Registration Statement and the remaining 127,500 of such shares to be included in the Shelf Registration Statement, subject to Harvey agreeing to enter into a lock-up agreement in the form attached hereto as Exhibit 16. The shares to be issued to Harvey that are to be included in the Shelf Registration Statement shall be held by the Custodian under the KSR Custody Agreement as if such shares were "Lock-up Shares," as described in paragraph 4 hereof. 17. The COMFORCE Parties and the ARTRA Parties, and their successors and assigns, each hereby release and discharge the other and their agents, representatives, officers, directors, employees, successors and assigns, from and against all claims, demands, damages, attorney's fees and costs, rights, actions, causes of action, suits, debts, obligations, liabilities and all other claims of whatsoever nature and kind which such Parties may have, or could have 8 brought, against the other or their representatives, officers, directors, employees, successors and assigns, from any cause whatsoever arising from any events arising prior to or on the date hereof relating to any of the matters which are the subject of this Agreement, including without limitation, any of the matters described in the Letter Agreement or the Assumption Agreement or relating to the Global acquisition. 18. COMFORCE hereby acknowledges that it is holding certificates evidencing 31,667 shares of Common Stock owned of record by Fill-Mor, which shares shall be delivered to KSR to be held under the KSR Custody Agreement as Lock-up Shares. 19. Each of the parties hereto hereby certifies that he or it has carefully read and fully understands all of the provisions of this Agreement, has thoroughly discussed all aspects of this Agreement with counsel, has been given a reasonable period of time within which to consider the settlement proposed herein and knowingly and voluntarily enters into this Agreement. 20. Should any part, term or provision of this Agreement be declared or be determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and the illegal or invalid part, term or provision shall not be deemed to be a part of this Agreement. 21. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall be deemed to constitute one agreement. 22. This Agreement sets forth the entire agreement between the parties hereto, and fully supersedes any and all prior agreements or understandings between the parties hereto pertaining to the subject matter hereof. 9 IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the day and year first set forth above. COMFORCE CORPORATION BY:___________________________________ ___________________________________ James L. Paterek ___________________________________ Michael Ferrentino ___________________________________ Christopher P. Franco _____________________________________ Kevin W. Kiernan ARTRA GROUP INCORPORATED BY:___________________________________ FILL-MOR HOLDING, INC. BY:___________________________________ _____________________________________ Peter R. Harvey KWIATT, SILVERMAN & REUBEN, LTD. BY:___________________________________ 10 EX-10 6 LOCK-UP AGREEMENT EXHIBIT 10.4 LOCK-UP AGREEMENT December 19, 1996 Paine Webber Incorporated COMFORCE Corporation 1285 Avenue of the Americans 2001 Marcus Avenue New York, N.Y. 10019 Lake Success, 11042 Ladies and Gentlemen: Each of the undersigned understands that COMFORCE Corporation, a Delaware corporation (the "Company"), proposes to enter into an underwriting agreement with Paine Webber Incorporated, as the representative of the several underwriters as may thereafter be listed in a schedule thereto (collectively, the "Underwriters") relating to a proposed public offering (the "Public Offering") of shares of the common stock of the Company, par value $.01 per share (the "Shares" or the "Common Stock"). In this connection, the Company intends to file with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") to register Shares for the Public Offering, including Shares to be issued by the Company and Shares offered for resale by existing stockholders of the Company. Subject to the restrictions hereinafter set forth, the Company will register for resale under the Registration Statement 200,000 shares of the Company's Common Stock held by Fill-Mor Holding, Inc. and 180,000 shares of the Company's Common Stock held by ARTRA GROUP Incorporated (collectively, the "Registration Shares"). In consideration thereof, each of the undersigned hereby agrees that, without the prior written consent of the Underwriters and the Company, it will not, during the period from the date hereof until 180 days after the date of the effective date of the Registration Statement (the "Effective Date") (1) offer, pledge to sell, announce the intention to sell, sell, issue, contract to sell, sell any option or contract to purchase, purchase any option or contact to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, (i) the Registration Shares except pursuant to the Public Offering or (ii) any shares of Common Stock of the Company held by it which are not Registration Shares (other than shares subsequently purchased after the date hereof by either of the undersigned in open market purchases) (the "Lock-up Shares"), or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. 1 During the period from 181 days to 270 days after the Effective Date, each of the undersigned may sell up to 33% of the Lock-up Shares. During the period from 271 days to 360 days after the Effective Date, each of the undersigned may sell (i) any Lock-up Shares that it was permitted to, but did not, sell pursuant to the preceding sentence and (ii) 33% of the remaining Lock-up Shares. From and after 361 days after the Effective Date, each of the undersigned may sell all remaining Lock-up Shares. Notwithstanding the preceding paragraph, this lock-up agreement shall not prohibit any transfer or other disposition by either of the undersigned involving any of the following: (1) a transfer or disposition of shares of Common Stock as a bona fide gift; or (2) a pledge of Common Stock as collateral so long as (i) the pledgee is not a registered broker-dealer and (ii) the pledged shares shall not be placed in street name, shall not be loaned (or made available to any broker-dealer to be loaned) to any person who maintains or proposes to maintain a short position in the Company's securities; provided, in each case, that the transferee, pledges or other person receiving such shares shall be subject to all of the restrictions set forth in this lock-up agreement and, if required by the Company, shall agree in writing to be bound by such provisions. Each of the undersigned hereby represents and warrants that it has full power and authority to enter into this lock-up agreement, and that, upon request, will execute any additional documents necessary or desirable in connection with the enforcement hereof. All authority herein conferred or agreed to be conferred and any obligations of each of the undersigned shall be binding upon its successors and assigns. In furtherance of the foregoing, the Company, and any duly appointed transfer agent for the registration or transfer of the securities described herein, are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this lock-up agreement. Each of the undersigned further agrees that, if required by the Company, an appropriate restrictive legend in substantially the form attached hereto as Exhibit A and a stop transfer order restricting transfer of the shares of Common Stock in violation of the terms of this lock-up agreement may be imposed with respect to all shares of Common Stock which are subject to this lock-up agreement, provided that any such legend shall be removed upon termination of the restrictions imposed hereby. Each of the undersigned understands that the Company and the Underwriters will not enter into an underwriting agreement or proceed with the Public Offering except in reliance upon this lock-up agreement. Each of the undersigned understands and agrees that, if an underwriting agreement does not become effective on or before April 30, 1997, if the Company earlier announces publicly that the Public Offering has been abandoned, or if an underwriting agreement shall terminate or be terminated prior to payment for and delivery of the Registration Shares included for resale in the Registration Statement, each of the undersigned and the Company shall be released from all obligations under this lock-up agreement; provided, however, that if the Company enters into an underwriting agreement with a lead underwriter other than Paine Webber Incorporated or if the Underwriters do not permit either of the undersigned to fully 2 include the Registration Shares in the Registration Statement, this lock-up agreement shall nonetheless continue in effect and shall be enforceable by the Company and the Underwriters as they may be constituted, except that in no event shall the number of either of the undersigned's Registration Shares be reduced (i) except on a proportional basis with all persons whose shares are to be included in the Registration Statement offer for resale or (ii) by more than 50% of the number of Registration Shares provided herein for inclusion in the Registration Statement. Notwithstanding the foregoing, if an underwriting agreement does not become effective on or before March 15, 1997, Fill-Mor Holding, Inc. shall be released from its obligations with respect to this lock-up agreement with respect to such number of shares as are necessary to be sold to discharge its obligations to Manufacturer's Bank, currently aggregating approximately $2.5 million (the "Manufacturer's Loan"); provided, however, that no shares shall be released from this lock-up agreement to pay any amounts then due and payable (after the expiration of any grace periods) under the Manufacturer's Loan unless the Company shall have failed, after being given at least five business days' notice, to purchase (at the then current market price) any shares proposed to be sold to pay the amounts then due under the Manufacturer's Loan or to otherwise cause the Manufacturer's Loan not to be in default. Each of the undersigns agrees that the provisions of this lock-up agreement shall also be binding upon its successors or assigns, as the case may be. 3 EX-23.1 7 CONSENT OF COUNSEL January 29, 1997 ARTRA GROUP Incorporated 500 Central Avenue Northfield, IL 60093 RE: Registration Statement on Form S-1 Ladies and Gentlemen: We hereby consent to the use of our name under the caption "Legal Matters" in connection with the Registration Statement of the Company on Form S-1 and in the Prospectus forming a part thereof and to the reference to our firm in Item 15 of Part II of the aforementioned Registration Statement of the Company on Form S-1. Very truly yours, Kwiatt, Silverman & Ruben, Ltd. EX-23.2 8 CONSENT OF COOPERS & LYBRAND L.L.P. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of ARTRA GROUP Incorporated on Form S-1 (File No. 333-16965) of our report, which includes an uncertainty concerning the Company's ability to continue as a going concern, dated April 9, 1996 on our audits of the consolidated financial statements and financial statement schedules of ARTRA GROUP Incorporated as of December 28, 1995 and December 29, 1994, and for each of the three fiscal years in the period ended December 28, 1995. We also consent to the reference to our firm under the caption "Experts." COOPERS & LYBRAND L.L.P. Chicago, Illinois January 28, 1997 -----END PRIVACY-ENHANCED MESSAGE-----