-----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, SGVjGgiegTQShb7Ncy3RsK8RUIahYCoicXs7maqID7yB/tj1QOihxXIo5anaHSf9 53M77iXUtUNPvt8/bDOuRQ== 0000200243-99-000001.txt : 19990202 0000200243-99-000001.hdr.sgml : 19990202 ACCESSION NUMBER: 0000200243-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTRA GROUP INC CENTRAL INDEX KEY: 0000200243 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 251095978 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03916 FILM NUMBER: 99518607 BUSINESS ADDRESS: STREET 1: 500 CENTRAL AVE CITY: NORTHFIELD STATE: IL ZIP: 60093 BUSINESS PHONE: 8474416650 MAIL ADDRESS: STREET 1: 500 CENTRAL AVE CITY: NORTHFIELD STATE: IL ZIP: 60093 FORMER COMPANY: FORMER CONFORMED NAME: TELEPRO INDUSTRIES INC DATE OF NAME CHANGE: 19820225 FORMER COMPANY: FORMER CONFORMED NAME: ELT INC DATE OF NAME CHANGE: 19760503 FORMER COMPANY: FORMER CONFORMED NAME: DUTCH BOY INC DATE OF NAME CHANGE: 19750630 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the fiscal year ended December 31, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from _________ to __________ Commission file number 1-3916 ARTRA GROUP INCORPORATED (Exact name of registrant as specified in its charter) Commission file number 1-3916 ARTRA GROUP INCORPORATED (Exact name of registrant as specified in its charter) Commonwealth of Pennsylvania 25-1095978 ---------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 500 Central Avenue, Northfield, IL 60093 ---------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 441-6650 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------------------- ---------------------- Common stock, without par value New York Stock Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant at January 29, 1999: $36,435,000. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 29, 1999 - ------------------------------- ------------------------------- Common stock, without par value 7,864,228 Documents Incorporated by Reference: None PART I Item 1. Business ARTRA Group Incorporated, (hereinafter "ARTRA" or the "Company"), is a Pennsylvania corporation incorporated in 1933. Through November 20, 1998, ARTRA operated in one industry segment as a manufacturer of packaging products principally serving the food industry. The packaging products business was conducted by the Company's wholly-owned subsidiary, Bagcraft Corporation of America ("Bagcraft"). Effective August 26, 1998, ARTRA and its wholly-owned subsidiary BCA Holdings, Inc. ("BCA", the parent of Bagcraft), agreed to sell the business assets of Bagcraft. Additionally, the buyer agreed to assume certain Bagcraft liabilities. The transaction was completed on November 20, 1998 and ARTRA received gross consideration of approximately $88,100,000 in cash. A substantial portion of the cash proceeds received were used to pay certain Bagcraft debt obligations, including, but not limited to amounts owed under Bagcraft's credit agreement (see Note 8 to the Company's consolidated financial statements). After paying the Bagcraft obligations noted above, ARTRA received net cash proceeds of approximately $28,000,000 from the sale of Bagcraft's assets. Approximately $15,200,000 of the cash received was used to pay ARTRA debt obligations. The Company does not intend to be deemed an "Investment Company" as defined by the Investment Company Act of 1940 and, accordingly, is actively investigating new business opportunities. At December 31, 1998 ARTRA held approximately 9% of the outstanding common stock of COMFORCE Corporation ("COMFORCE", formerly The Lori Corporation "Lori"). Prior to September 28, 1995, COMFORCE/Lori was a majority owned subsidiary of ARTRA operating as a designer and distributor of popular-priced fashion costume jewelry and accessories. In September 1995 COMFORCE discontinued its jewelry business and later in 1995 entered the telecommunications and computer technical staffing and consulting services business. COMFORCE subsequently expanded this business through various acquisitions. After the issuance of the COMFORCE common shares, plus the effects of other transactions, ARTRA's ownership interest in COMFORCE common stock was reduced to approximately 25% at December 28, 1995. Accordingly, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements. See Note 5 to the Company's consolidated financial statements for a further discussion of ARTRA's investment in COMFORCE. Employees At December 31, 1998, the Company employed approximately 10 persons. The Company considers its relationships with its employees to be good. Item 2. Properties At December 31, 1998, the only property used by the Company was its headquarters facility of approximately 7,000 sq. ft. in Northfield, Illinois. In December 1995 the building was purchased by a trust owned by John Harvey, the Company's Chairman of the board of directors. The lease for this property expired in December 1998 and the Company is currently renting its headquarters on a month to month basis. Item 3. Legal Proceedings The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. At December 31, 1998 and December 31, 1997, the Company had accrued current liabilities of $1,500,000 and $1,800,000, respectively, for potential business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. 1 In November, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth Judicial Circuit for the state of Illinois against Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K. Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P. Kelly & Associates, L.P., ("DPK"), Donald P. Kelly ("Kelly Defendants" along with DPK), James F. Massey and William Rifkind relating to the acquisition of Envirodyne Industries, Inc. ("Envirodyne") in 1989 by Emerald Acquisition Corp.("Emerald"). Effective December 31, 1997, the above parties reached a settlement agreement and all pending litigation was dismissed. ARTRA recognized a gain from the settlement agreement of $10,416,000, net of related legal fees and other expenses. The discontinued Bagcraft subsidiary's Chicago facility has been the subject of allegations that it violated laws and regulations associated with the Clean Air Act. The facility has numerous sources of air emissions of volatile organic materials ("VOMs") associated with its printing operations and is required to maintain and comply with permits and emissions regulations with regard to each of these emission sources. In November of 1995, the EPA issued a Notice of Violation ("NOV") against Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act and related regulations. In May 1998 Bagcraft paid $170,000 to formally extinguish this claim. In April 1994, the EPA notified the Company that it was a potentially responsible party for the disposal of hazardous substances (principally waste oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing facility formerly operated by the Clearshield Plastics Division ("Clearshield") of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In 1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been included on the EPA's National Priorities List. In February 1983, Harvel sold the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in 1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA for indemnification in connection with this proceeding. The cost of clean-up at the Palmer, Massachusetts site has been estimated to be approximately $7 million according to proofs of claim filed in the adversary proceeding. A committee formed by the named potentially responsible parties has estimated the liability respecting the activities of Clearshield to be $400,000. ARTRA has not made any independent investigation of the amount of its potential liability and no assurances can be given that it will not substantially exceed $400,000. In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in 1991 in the United States District Court for Maryland, Sherwin-Williams Company ("Sherwin-Williams") brought suit against ARTRA and other former owners of a paint manufacturing facility in Baltimore, Maryland for recovery of costs of investigation and clean-up of hazardous substances which were stored, disposed of or otherwise released at this manufacturing facility. This facility was owned by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from 1969 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 recent years, the Company has been a party to certain product liability claims relating to the former Synkoloid subsidiary. The Company's product liability insurance has covered all such claims settled to date. As of December 31, 1998, the Company anticipates that its product liability insurance is adequate to cover any additional pending claims. 2 Several cases have arisen from ARTRA's purchase of Dutch Boy Paints which owned a facility in Chicago which it purchased from NL Industries. In a case titled City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in the Circuit Court of Cook County, Illinois, the City of Chicago brought a nuisance action and alleged that ARTRA (and NL Industries, Inc.) had improperly stored, discarded and disposed of hazardous substances at the Dutch Boy site, and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At the time the suit was filed, the City of Chicago claimed that it would cost $1,000,000 to remediate the site. ARTRA and NL Industries, Inc. have counter sued each other and have filed third party actions against the subsequent owners of the property. The Company is presently unable to determine its liability, if any, in connection with this case. The parties were conducting discovery but the case was stayed pending the resolution of the EPA action described below. In 1986, in a case titled People of the State of Illinois v. NL Industries, Inc., ARTRA GROUP Incorporated, et al., the Cook County State's attorney filed suit seeking response costs in excess of $2,000,000 and treble punitive damages for costs expended by IEPA in remediating contamination at the Dutch Boy site, alleging that all former owners contributed to the contamination. In 1989, the Circuit Court dismissed the action, holding that the state had failed to exhaust its administrative procedures. In 1992, this holding was reversed by the Illinois Supreme Court. In 1996, the Illinois Appellate Court affirmed the District Court's decision to dismiss the case based on lack of due diligence on the part of the State of Illinois. The State of Illinois has filed a Petition for Rehearing which was granted. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case. On November 17, 1995, the EPA issued letters to ARTRA, NL Industries and others alleging that they were potentially responsible parties with respect to releases at the Dutch Boy facility in Chicago and demanding that they remediate the site. NL Industries entered into a consent decree with EPA in which it agreed to remediate the site. The Company is presently unable to determine its liability, if any, in connection with this case. Item 4. Submission of Matters to a Vote of Security Holders. On November 16, 1998, the Company held annual meeting of shareholders, who voted on and approved the following matters: 1. The election of the Board of Directors for a term of one year. A summary of the voting results is as follows: Shares Shares Director For Withheld -------------- --------- -------- Edward A. Celano 7,346,470 10,748 Howard R. Conant 7,345,580 11,638 Peter R. Harvey 7,346,014 11,204 John Harvey 7,345,964 11,254 Robert L. Johnson 7,346,520 10,698 Gerard M. Kenny 7,346,520 10,698 Maynard K. Louis 7,345,470 11,748 Mark Santacrose 7,346,370 10,848 2. The authorization of the sale of substantially all of the net assets of Bagcraft Corporation of America pursuant to an Assets Purchase Agreement dated as of August 26, 1998. For 5,091,381 Against 4,260 Abstain 3,606 3 3. The appointment of PricewaterhouseCoopers LLP as ARTRA's independent certified public accountants for the fiscal year ending December 31, 1998. A summary of the voting results is as follows: For 7,336,615 Against 18,096 Abstain 2,507 PART II Item 5. Market For the Registrant's Common Equity and Related Shareholder Matters. 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 31, 1998, the approximate number of holders of its common stock was 2,300. 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: 1998 1997 --------------------- ------------------------ High Low High Low --------- ---------- ------------ ---------- First quarter 4 - 1/16 3 - 3/16 6 - 3/8 4 - 1/2 Second quarter 3 - 15/16 3 5 - 3/4 3 - 7/8 Third quarter 4 3 - 1/4 5 - 1/8 3 - 1/2 Fourth quarter 4 - 1/4 2 - 1/8 4 - 1/16 2 - 1/2 The Company did not pay dividends in 1998 or 1997 and has no plan to pay dividends on its common stock in 1999. There are no legal restrictions preventing the payment of cash dividends at this time. 4 Item 6. Selected Financial Data. This table is a consolidated summary of selected financial data of the Company for each of the last five fiscal years. The operations of the Bagcraft subsidiary (sold effective November 20, 1998) are included in discontinued operations. The information for fiscal years 1995 and 1994 presents the operations of Arcar Graphics, Inc. ("Arcar") in discontinued operations. The sale of Arcar (acquired effective April 9, 1994) was completed on October 26, 1995. The information for fiscal years 1995 and 1994 presents the operations of the Company's former jewelry business in discontinued operations.
Fiscal Year Ended (I) ----------------------------------------------------------- 1998 1997 1996 1995 1994 ----- ----- ----- ----- ---- (In thousands except per share data) Net sales $ -- $ -- $ -- $ -- $ -- Earnings (loss) from continuing operations (A) (B) (C) (5,707) 1,066 (445) (11,113) (5,833) Earnings (loss) from discontinued operations (D) (E)(F) 38,930 (293) 3,994 (5,820) (23,602) Extraordinary credits (G) -- -- 9,424 14,030 8,965 Net earnings (loss) 33,223 773 12,973 (2,903) (20,470) Earnings (loss) per share (H): Basic Continuing operations (.78) -- (.19) (1.84) (1.17) Discontinued operations 4.94 (.04) .53 (.86) (4.14) Extraordinary credits -- -- 1.25 2.07 1.57 Net earnings (loss) 4.16 (.04) 1.59 (.63) (3.74) Diluted Continuing operations (.78) -- (.19) (1.84) (1.17) Discontinued operations 4.94 (.04) .53 (.86) (4.14) Extraordinary credits -- -- 1.25 2.07 1.57 Net earnings (loss) 4.16 (.04) 1.59 (.63) (3.74) Weighted average number of shares outstanding Basic 7,891 7,970 7,525 6,776 5,702 Diluted 7,891 7,970 7,939 6,776 5,702 Total assets 21,268 73,206 77,379 77,949 93,429 Long-term debt -- 50,619 34,207 34,113 19,673 Debt subsequently discharged -- -- -- -- 9,750 Cash dividends -- -- -- -- --
5 ________________________________________________ (A) Earnings from continuing operations for the years ended December 31, 1998, December 31, 1997 and December 26, 1996 include realized gains of $320,000. $2,531,000 and $5,818,000, respectively, from dispositions of COMFORCE common stock. (B) Earnings from continuing operations for the year ended December 31, 1997 includes a gain from settlement of litigation of $10,416,000, net of related legal fees and other expenses, and net related party compensation/expense reimbursement costs of $2,816,000 (see Notes 15 and 16 to the Company's consolidated financial statements). (C) Earnings from continuing operations for the year December 26, 1996 includes a gain of $838,000 from an exchange of redeemable preferred stock of its Bagcraft subsidiary. (D) Earnings from discontinued operations for the year December 31, 1998 includes a net gain on disposition of the Bagcraft subsidiary of $35,985,000 (see Note 3 to the Company's consolidated financial statements). (E) The loss from discontinued operations for the year ended December 28, 1995 includes a charge to operations of $6,430,000 to write-off the remaining goodwill of COMFORCE's jewelry business effective June 29, 1995, and a provision of $1,000,000 for loss on disposal of COMFORCE's jewelry business. The loss from discontinued operations for the year ended December 28, 1995 includes a gain on sale of Bagcraft's Arcar subsidiary of $8,483,000. (F) 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 goodwill at COMFORCE's New Dimensions subsidiary. (G) The 1996, 1995 and 1994 extraordinary credits represent gains from net discharge of bank indebtedness. (H) In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share" and restated prior periods accordingly. (I) In 1997, the Company changed its fiscal year end to December 31. In prior years the Company had operated on a 52/53 week fiscal year ending the last Thursday of December. 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion supplements the information found in the financial statements and related notes: Results of Operations The Company changed significantly during the fourth quarter of fiscal year 1998. It exited its one industry segment, the packaging products business, conducted by its discontinued Bagcraft subsidiary, and is actively investigating new business opportunities. The Company's consolidated financial statements for the years ended December 31, 1997 and December 26, 1996 have been reclassified to report separately the results of operations of the Bagcraft subsidiary in discontinued operations. Year Ended December 31, 1998 vs. Year Ended December 31, 1997 Continuing Operations Selling, general and administrative expenses from continuing operations were $2,660,000 for the year ended December 31, 1998 as compared to $5,708,000 for the year ended December 31, 1997. The 1998 decrease in selling, general and administrative expenses was principally attributable to the 1997 net related party compensation/expense reimbursement costs of $2,816,000 (see discussion of Peter R. Harvey advances below). Interest expense from continuing operations for the year ended December 31, 1998 decreased $2,786,000 as compared to the year ended December 31, 1997. The 1998 decrease is principally attributable to fees and costs associated with the Company's 1997 loan agreements. During 1998, certain officers, directors and/or key employees exercised options to acquire 84,750 COMFORCE common shares from ARTRA, resulting in a realized gain of $320,000. These COMFORCE common shares had been removed from the Company's portfolio of "Available-for-sale securities" in 1996. See Note 5 to the Company's financial statements for the year ended December 31, 1998 for additional information about this transaction. During the year ended December 31, 1997 the Company sold or otherwise disposed of 302,203 shares of COMFORCE common stock resulting in a realized gain of $2,531,000. Effective December 31, 1997, ARTRA settled certain litigation relating to the acquisition of Envirodyne in 1989 by Emerald. ARTRA recognized a gain from the settlement agreement of $10,416,000, net of related legal fees and other expenses. Discontinued Operations Earnings from discontinued operations of $38,930,000 for the year ended December 31, 1998 consisted of earnings from operations of $2,945,000 at the discontinued Bagcraft subsidiary and a net gain on disposal of Bagcraft of $35,985,000. The loss from discontinued operations of $293,000 for the year ended December 31, 1997 consisted of an operating loss at the discontinued Bagcraft subsidiary. Earnings from operations in 1998 are principally attributable to a significant reduction in interest expense due to the February 1998 amendment and restatement of Bagcraft's Credit Agreement, as well as decreased depreciation and amortization expense. 7 Year Ended December 31, 1997 vs. Year Ended December 26, 1996 Continuing Operations Selling, general and administrative expenses from continuing operations were $5,708,000 for the year ended December 31, 1997 as compared to $2,042,000 for the year ended December 26, 1996. The 1997 increase in selling, general and administrative expenses was principally attributable to net related party compensation/expense reimbursement costs of $2,816,000 (see discussion of Peter R. Harvey advances below). Interest expense from continuing operations for the year ended December 31, 1997 increased $1,977,000 as compared to the year ended December 26, 1996. The 1997 increase is principally attributable to fees and costs associated with the Company's 1997 loan agreements. During the year ended December 31, 1997 the Company sold or otherwise disposed of 302,203 shares of COMFORCE common stock resulting in a realized gain of $2,531,000. During the year ended December 26, 1996 the Company sold or otherwise disposed of 331,333 shares of COMFORCE common stock resulting in a realized gain of $5,818,000. Effective December 31, 1997, ARTRA settled certain litigation relating to the acquisition of Envirodyne in 1989 by Emerald. ARTRA recognized a gain from the settlement agreement of $10,416,000, net of related legal fees and other expenses. Discontinued Operations The loss from discontinued operations of $293,000 for the year ended December 31, 1997 consisted of a loss from operations at the discontinued Bagcraft subsidiary. Earnings from discontinued operations of $3,994,000 for the year ended December 26, 1996 consisted of earnings from operations at the discontinued Bagcraft subsidiary. The 1997 loss from discontinued operations was principally attributable to decreased operating margins at the discontinued Bagcraft subsidiary and additional interest charges and fees attributable to the December 1996 amendment and restatement of Bagcraft's Credit Agreement. Liquidity and Capital Resources Cash and Cash Equivalents and Working Capital The Company's unrestricted cash and cash equivalents increased $5,762,000 to $11,753,000 at December 31, 1998. The Company had consolidated working capital of $6,813,000 at December 31, 1998 as compared to a consolidated working capital deficiency of $435,000 at December 31, 1997. In November 1998 the Company received cash proceeds from the sale of the assets of the discontinued Bagcraft subsidiary and used a significant portion of them to pay off borrowings due on its various loan agreements. The Company does not intend to be deemed an "Investment Company" as defined by the Investment Company Act of 1940 and, accordingly, is actively investigating new business opportunities. In order to finance new business opportunities, the Company could use sources such as its cash and cash equivalents, its available-for-sale securities, borrowings from various potential sources and issuances of the Company's equity securities. Status of Debt Agreements and Operating Plan ARTRA Corporate At December 31, 1997 the Company's corporate entity had outstanding short-term indebtedness of $15,451,000. In November and December 1998, all such indebtedness, as well certain additional 1998 borrowings were repaid with net proceeds from the sale of the assets of the discontinued Bagcraft subsidiary (see discussion below). 8 Promissory Notes 1998 Private Placement In January 1998, ARTRA completed a private placement of $5,975,000 of 12% promissory notes due January 14, 1999. As additional consideration the noteholders received warrants to purchase an aggregate of 119,500 ARTRA common shares at a price of $3.00 per share. The warrants expire January 14, 2000. The warrantholders have the right to put these warrants back to ARTRA at any time during a six-month period commencing in January 1999 and ending in July 1999, at a price of $1.50 per share. The cost of this obligation ($179,250 if all warrants are put back to the Company) was accrued in the Company's financial statements as a charge to interest expense. The proceeds from the private placement were used principally to pay down other debt obligations. These notes were repaid in November 1998 with net proceeds from the sale of assets of the discontinued Bagcraft subsidiary. 1997 Private Placements In December 1997, ARTRA completed private placements of $5,375,000 of 12% promissory notes due in December 1998. As additional consideration the noteholders received warrants to purchase an aggregate of 107,500 ARTRA common shares at a price of $3.00 per share. The warrants expire in November and December 1999. The warrantholders have the right to put these warrants back to ARTRA at any time during a period commencing in December 1998 and ending in May 1999, at a price of $1.50 per share. The cost of this obligation ($161,250 if all warrants are put back to the Company) was accrued in the Company's financial statements as a charge to interest expense. These notes were repaid in November 1998 with net proceeds from the sale of assets of the discontinued Bagcraft subsidiary. In July 1997, ARTRA completed private placements of $7,475,000 of 12% promissory notes due in January 1998. As additional consideration the noteholders received warrants to purchase an aggregate of 199,311 ARTRA common shares at a price of $3.75 per share. The warrants expire in August 1999. The warrantholders have the right to put these warrants back to ARTRA at any time during a period commencing in January 1998 and ending in August 1999, at a price of $3.00 per share. The cost of this obligation ($598,000 if all warrants are put back to the Company) was amortized in the Company's financial statements as a charge to interest expense over the period July 1997 (the date of the private placement) through January 1998 (the scheduled maturity date of the notes). The proceeds from the July 1997 private placement were advanced to Peter R. Harvey. See discussion and disposition of Mr. Harvey's advances in Note 16 to the consolidated financial statements. The July 1997 private placement notes were repaid and /or refinanced with proceeds of the January 1998 private placement of 12% notes and with proceeds from the litigation settlement discussed in Note 11 to the consolidated financial statements. Amounts Due To Related Parties At December 26, 1996, ARTRA had outstanding borrowings of $500,000 from an outside director of the Company evidenced by a short-term note bearing interest at 10%. As additional compensation for the loan and a December 1996 extension, the director received five year warrants to purchase an aggregate of 50,000 ARTRA common shares at prices ranging from $5.00 to $5.875 per share. The proceeds of the loan were used for working capital. In January 1997, ARTRA borrowed an additional $300,000 from this director evidenced by a short-term note, due December 23, 1997, bearing interest at 8%. As additional compensation for the loan, the director received a warrant, expiring in 2002, to purchase 25,000 ARTRA common shares at a price of $5.75 per share. In March 1997, ARTRA borrowed an additional $1,000,000 from this director evidenced by a short-term note, due May 26, 1997, bearing interest at 12%. As additional compensation, the lender received an option to purchase 25,000 shares of COMFORCE common stock, owned by the Company's Fill-Mor subsidiary, at a price of $4.00 per share. The proceeds from this loan were used in part to repay certain ARTRA debt obligations. 9 In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by a note, due April 20, 1998, bearing interest at 10%. As additional compensation, the director received a warrant to purchase 333,333 ARTRA common shares at a price of $5.00 per share. The director has the right to put this warrant back to ARTRA at any time during the period April 21, 1998 to April 20, 2000, for a total purchase price of $1,000,000. The cost of this obligation was amortized in the Company's financial statements as a charge to interest expense over the period April 21, 1997 (the date of the loan) through April 21, 1998 (the date the warrantholder has the right to put the warrant back to ARTRA). The proceeds from this loan were used to repay $1,800,000 of prior borrowings from this director and pay down other ARTRA debt obligations. In June 1997, ARTRA borrowed an additional $1,000,000 from the above director evidenced by a note, due December 10, 1997, bearing interest at 12%. As additional compensation, the director received a warrant to purchase 40,000 ARTRA common shares at a price of $5.00 per share. The warrantholder has the right to put this warrant back to ARTRA at any time during the period December 10, 1997 to June 10, 1999, for a total purchase price of $80,000. The cost of this obligation was amortized in the Company's financial statements as a charge to interest expense over the period June 10, 1997 (the date of the loan) through December 10, 1997 (the date the warrantholder has the right to put the warrant back to ARTRA). The proceeds from this loan were used to pay down other ARTRA debt obligations. In July 1997, borrowings from this lender were reduced to $3,000,000 with proceeds advanced to ARTRA from a Bagcraft term loan. In December 1997 borrowings from this lender were reduced to $2,000,000 with proceeds from other short-term borrowings. In April 1998, the $2,000,000 in outstanding borrowings from the above director was extended by a demand note bearing interest at 10%. As additional compensation, the director received a warrant to purchase 50,000 ARTRA common shares at a price of $3.25 per share. In August 1998, ARTRA borrowed an additional $500,000 from the above director evidenced by a note, due December 20, 1998, bearing interest at 15%. As additional compensation, the director received a warrant to purchase 20,000 ARTRA common shares at a price of $3.94 per share. All borrowings from this director were repaid with proceeds from the sale of assets of the discontinued Bagcraft subsidiary. The borrowings from this director were collaterallized by a secondary interest in all of the common stock of BCA (the parent of Bagcraft). Other At December 31, 1997, ARTRA also had outstanding short-term borrowings from other unrelated parties aggregating $601,000, with interest rates varying between 10 % and 12%. In April 1998 the Company and its Fill-Mor subsidiary entered into a margin loan agreement with a financial institution which provided for borrowings of $1,000,000, with interest at 8.5%. Borrowings under the loan agreement were collateralized by 490,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. The proceeds of the loan were used for working capital. In October 1997 a lender agreed to accept 357,270 ARTRA common shares in payment of the principal amount of approximately $1,500,000 due on certain demand notes. In January 1998 the lender returned the 357,270 ARTRA common shares to the Company for cash consideration of approximately $1,500,000. 10 Advances to Peter R. Harvey As discussed in Note 16 to the Company's consolidated financial statements, ARTRA had total advances due from its president, Peter R. Harvey, of which $18,226,000 remained outstanding at December 31, 1997, before the offset of such advances as discussed below. These advances provided for interest at varying rate from 10.5% to 12%. This receivable from Peter R. Harvey had been classified as a reduction of common shareholders' equity. Commencing January 1, 1993 to date, interest on the advances to Peter R. Harvey had been accrued and fully reserved. In March 1998, ARTRA's Board of Directors ratified a proposal to settle Mr. Harvey's advances as follows: Effective December 31, 1997, Mr. Harvey's net advances from ARTRA were offset by $2,816,000 ($5,605,000 net of interest accrued and reserved for the period 1993 - 1997) to $12,621,000. This offset of Mr. Harvey's advances represented a combination of compensation for prior year guarantees of ARTRA obligations to private and institutional lenders, compensation in excess of the nominal amounts Mr. Harvey received for the years 1995 - 1997 and reimbursement for expenses incurred to defend ARTRA against certain litigation. Effective January 31, 1998, Mr. Harvey's remaining advances totaling $12,787,000 were paid with consideration consisting of certain ARTRA/BCA preferred stock held by Mr. Harvey. Redeemable Preferred Stock As discussed in Note 9 to the Company's consolidated financial statements, ARTRA has outstanding redeemable preferred stock with a carrying value of $2,857,000 at December 31, 1998. Certain redeemable preferred stock issues of the BCA and Bagcraft subsidiaries are included in liabilities of discontinued operations at December 31, 1998 (also see note 3 to the Company's consolidated financial statements). Bagcraft At December 31, 1997, the discontinued Bagcraft subsidiary had outstanding borrowings under its credit agreement ("Credit Agreement") totaling $40,388,000. The Credit Agreement, amended and restated February 27, 1998, provided for a revolving loan agreement and three term loans. Amounts due under the Credit Agreement were repaid with proceeds from the sale of assets of the discontinued Bagcraft subsidiary. 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, consisted of certain loan agreements payable by Bagcraft directly to the City of Baxter Springs. At December 31, 1997, the outstanding borrowings under these loans totaled $9,968,000. Obligations due under these loans were assumed by the buyer of the assets of the discontinued Bagcraft subsidiary. Capital Expenditures ARTRA's corporate entity has no material commitments for capital expenditures. Investment in COMFORCE Corporation ARTRA, along with its wholly owned Fill-Mor subsidiary, owns a significant minority interest in COMFORCE Corporation ("COMFORCE"), consisting of 1,525,000 shares or approximately 9% of the outstanding common stock of COMFORCE as of December 31, 1998 with an aggregate value as of that date of $8,200,000. 11 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. 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. In January 1996, the Company's Board of Directors approved the sale of 200,000 of ARTRA's COMFORCE common shares to certain officers, directors and key employees of ARTRA for non-interest bearing notes totaling $400,000. The notes are collateralized by the related COMFORCE common shares. Additionally, the noteholders have the right to put their COMFORCE shares back to ARTRA in full payment of the balance of their notes. Based upon the preceding factors, the Company had concluded that, for reporting purposes, it had effectively sold options to certain officers, directors and key employees to acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly, in January 1996 these 200,000 COMFORCE common shares were removed from the Company's portfolio of "Available-for-sale securities" and were classified in the Company's condensed consolidated balance sheet as other receivables with an aggregate value of $400,000, based upon the value of proceeds to be received upon future exercise of the options. The disposition of these 200,000 COMFORCE common shares resulted in a gain that was deferred and will not be recognized in the Company's financial statements until the options to purchase these 200,000 COMFORCE common shares are exercised. Prior to the fourth quarter of 1997 no options to acquire any of the 200,000 COMFORCE common shares had been exercised. During the fourth quarter of 1997, options to acquire 59,500 of these COMFORCE common shares were exercised resulting in a realized gain of $225,000. During 1998, options to acquire 84,750 of these COMFORCE common shares were exercised resulting in a realized gain of $320,000. At December 31, 1998, options to acquire 55,750 COMFORCE common shares remained unexercised and were classified in the Company's consolidated balance sheet as other receivables with an aggregate value of $112,000, based upon the value of proceeds to be received upon future exercise of the options. During 1997 ARTRA sold 219,203 COMFORCE common shares in the market, with the net proceeds of approximately $1,700,000 used for working capital. During 1997 a lender received 25,000 COMFORCE common shares held by the Company as additional consideration for a short-term loan. The disposition of these 244,703 COMFORCE common shares resulted in realized gains of $2,306,000 during the year ended December 31, 1997, with cost determined by average cost. During 1996 ARTRA sold 193,000 COMFORCE common shares in the market, with the net proceeds of approximately $3,700,000 used for working capital. During 1996 certain lenders received 105,000 COMFORCE common shares held by the Company as additional consideration for short-term loans. In October 1996, a lender exercised the conversion rights of a short-term loan and received 33,333 COMFORCE common shares in settlement of the Company's obligation. The disposition of these 331,333 COMFORCE common shares resulted in realized gains of $5,818,000 during the year ended December 26, 1996, with cost determined by average cost. Litigation The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. See Note 11 to the Company's consolidated financial statements. At December 31, 1998 and December 31, 1997, the Company had accrued current liabilities of $1,500,000 and $1,800,000, respectively, for potential business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. 12 Net Operating Loss Carryforwards At December 31, 1998, the Company and its subsidiaries had Federal income tax loss carryforwards of approximately $10,000,000 expiring principally in 2010 - 2012, available to be applied against future taxable income, if any. In recent years, the Company has issued shares of its common stock to repay various debt obligations, as consideration for acquisitions, to fund working capital obligations and as consideration for various other transactions. Section 382 of the Internal Revenue Code of 1986 limits a corporation's utilization of its Federal income tax loss carryforwards when certain changes in the ownership of a corporation's common stock occurs. In the opinion of management, the Company is not currently subject to such limitations regarding the utilization of its Federal income tax loss carryforwards. Should the Company continue to issue a significant number of shares of its common stock, it could trigger a limitation that would prevent it from utilizing a substantial portion of its Federal income tax loss carryforwards. Impact of Inflation and Changing Prices Inflation has become a less significant factor in our economy; however, to the extent permitted by competition, the Company generally has passed increased costs to its customers by increasing sales prices over time. Recently Issued Accounting Pronouncements Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting comprehensive income to present a measure of all changes in equity that result from renegotiated transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes net income. Required changes are reported in the consolidated statement of operations. During 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". In February 1998 the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and other Postretirement Benefits. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. This standard requires that management identify operating segments based on the way that management desegregates the entity for making internal operating decisions. SFAS No. 132 standardizes the disclosure requirements for pension and other postretirement benefits. As a result of the November 1998 sale of the assets of the discontinued Bagcraft subsidiary, the Company exited its only industry segment, a manufacturer of packaging products principally serving the food industry. Accordingly, the guidelines of SFAS No. 131 - Disclosures About Segments of an Enterprise and Related Information are not applicable to the Company's financial statements as of December 31, 1998. The Company typically does not offer the types of benefit programs that fall under the guidelines of Statement of Financial Accounting Standards No. 132 - Employers' Disclosures about Pensions and other Postretirement Benefits. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 1999. Management has not determined what impact this standard, when adopted, will have on the Company's financial statements. 13 Year 2000 Compliance The Year 2000 ("Y2K") issue refers to the inability of many computer programs and systems to process accurately dates later than December 31, 1999. Unless these programs are modified to handle the century change, they will likely interpret the Year 2000 as the year 1900. We anticipate that the Year 2000 Issue will not have a material adverse effect on our financial position or results of operations. We have not incurred any significant costs for Y2K compliance to date and do not expect to incur any significant additional costs to complete such compliance. Item 8. Financial Statements and Supplementary Data. Financial Statements and Schedules as listed on Page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 14 PART III Item 10. Directors and Executive Officers of the Registrant Information called for by Item No. 10 of Part III is incorporated by reference to the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of the Company's last fiscal year. Item 11. Executive Compensation Information called for by Item No. 11 of Part III is incorporated by reference to the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of the Company's last fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management Information called for by Item No. 12 of Part III is incorporated by reference to the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of the Company's last fiscal year. Item 13. Certain Relationships and Related Transactions Information called for by Item No. 13 of Part III is incorporated by reference to the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of the Company's last fiscal year. 15 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements as listed on Page F-1. 2. Financial Statement Schedules as listed on Page F-1. 3. Exhibits as listed on Page E-1. (b) Reports on Form 8-K. On November 20, 1998, the Registrant filed Form 8-K to report the sale of the business assets, subject to the buyer's assumption of certain liabilities, of the Registrant's Bagcraft Corporation of America subsidiary. 16 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARTRA GROUP INCORPORATED By: /s/ JOHN HARVEY ----------------------- John Harvey Chairman and Director Dated: February 1, 1999 Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant, in the capacities and on the dates indicated. /s/ JOHN HARVEY Chairman and Director February 1, 1999 - -------------------------- John Harvey Chief Executive Officer /s/ PETER R. HARVEY President and Director February 1, 1999 - -------------------------- Peter R. Harvey Chief Operating Officer /s/ JAMES D. DOERING Vice President /Treasurer February 1, 1999 - -------------------------- James D. Doering Chief Financial Officer /s/ EDWARD A. CELANO Director February 1, 1999 - -------------------------- Edward A. Celano /s/ HOWARD R. CONANT Director February 1, 1999 - -------------------------- Howard R. Conant /s/ ROBERT L. JOHNSON Director February 1, 1999 - -------------------------- Robert L. Johnson /s/ GERARD M. KENNY Director February 1, 1999 - -------------------------- Gerard M. Kenny /s/ MAYNARD K. LOUIS Director February 1, 1999 - -------------------------- Maynard K. Louis /s/ MARK F. SANTACROSE Director February 1, 1999 - -------------------------- Mark F. Santacrose /s/ JOHN K. TULL Director February 1, 1999 - -------------------------- John K.Tull /s/ LAWRENCE D. LEVIN Controller February 1, 1999 - -------------------------- Lawrence D. Levin 17 INDEX TO FINANCIAL STATEMENTS Page ---- ARTRA GROUP INCORPORATED AND SUBSIDIARIES Report of Independent Accountants F- 2 Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 F- 3 Consolidated Statements of Operations for each of the three fiscal years in the period ended December 31, 1998 F- 5 Consolidated Statements of Changes in Shareholders' Equity (Deficit) for each of the three fiscal years in the period ended December 31, 1998 F- 6 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended December 31, 1998 F- 8 Notes to Consolidated Financial Statements F- 10 Schedules: II. Valuation and Qualifying Accounts F- 31 Schedules other than those listed are omitted as they are not applicable or required or equivalent information has been included in the financial statements or notes thereto. F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors ARTRA GROUP Incorporated Northfield, Illinois In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of ARTRA GROUP Incorporated and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. In our report on the 1997 financial statements, dated March 26, 1998, we expressed an opinion that indicated substantial doubt as to the ability of the Company to continue as a going concern. This was the result of the Company suffering recurring losses and experiencing difficulty in obtaining adequate financing to replace its existing credit arrangements and satisfy liquidity requirements. As described in Note 3, as a result of the disposition of the business assets of Bagcraft Corporation of America, the Company has been able to retire a significant portion of its obligations. Accordingly, our present opinion on the 1997 financial statements as presented herein is different from that expressed in our previous report. PricewaterhouseCoopers LLP Chicago, Illinois February 1, 1999 F-2 ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 31, December 31, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and equivalents $11,753 $5,991 Restricted cash and equivalents 1,045 - Receivables, less allowance for doubtful accounts of $275 in 1997 171 10,004 Inventories - 15,749 Available-for-sale securities 8,200 12,013 Other 99 774 ------------ ------------ Total current assets 21,268 44,531 ------------ ------------ Property, plant and equipment Land - 417 Buildings - 12,742 Machinery and equipment - 35,657 Construction in progress - 675 ------------ ------------ - 49,491 Less accumulated depreciation and amortization - 24,397 ------------ ------------ - 25,094 ------------ ------------ Other assets: Excess of cost over net assets acquired, net of accumulated amortization of $2,388 in 1997 - 2,729 Other - 852 ------------ ------------ - 3,581 ------------ ------------ $21,268 $73,206 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-3 ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 31, December 31, 1998 1997 ------------ ------------ LIABILITIES Current liabilities: Notes payable, including amounts due to related parties of $2,000 in 1997 $ - $ 10,726 Current maturities of long-term debt - 4,462 Accounts payable - 5,841 Accrued expenses 568 8,692 Income taxes 1,854 324 Common stock put warrants 1,705 2,966 Redeemable preferred stock - 11,955 Liabilities of discontinued operations 10,328 - ------------ ------------ Total current liabilities 14,455 44,966 ------------ ------------ Long-term debt - 50,619 Other noncurrent liabilities - 4,675 Commitments and contingencies Redeemable preferred stock 2,857 9,110 SHAREHOLDERS' EQUITY (DEFICIT) Common stock, no par value; authorized 20,000,000 shares; issued 8,302,110 shares in 1998 and 8,297,810 shares in 1997 6,227 6,223 Additional paid-in capital 42,734 42,721 Unrealized appreciation of investments 10,920 14,733 Receivable from related party, including accrued interest - (12,621) Accumulated deficit (54,300) (87,113) ------------ ------------ 5,581 (36,057) Less treasury stock, 437,882 shares in 1998 and 80,612 shares in 1997, at cost 1,625 107 ------------ ------------ 3,956 (36,164) ------------ ------------ $21,268 $73,206 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-4 ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Fiscal Year -------------------------------- 1998 1997 1996 -------- -------- -------- Net sales $ -- $ -- $ -- -------- -------- -------- Costs and expenses: Cost of goods sold, exclusive of depreciation and amortization -- -- -- Selling, general and administrative 2,660 5,708 2,042 Depreciation and amortization -- 7 19 -------- -------- -------- 2,660 5,715 2,061 -------- -------- -------- Operating loss (2,660) (5,715) (2,061) -------- -------- -------- Other income (expense): Interest expense (3,392) (6,178) (4,201) Realized gain on disposal of available-for-sale securities 320 2,531 5,818 Litigation settlement, net -- 10,416 -- Other income (expense), net 25 12 (1) -------- -------- -------- (3,047) 6,781 1,616 -------- -------- -------- Earnings (loss) from continuing operations before income taxes (5,707) 1,066 (445) Provision for income taxes -- -- -- -------- -------- -------- Earnings (loss) from continuing operations (5,707) 1,066 (445) Earnings (loss) from discontinued operations 38,930 (293) 3,994 -------- -------- -------- Earnings before extraordinary credit 33,223 773 3,549 Extraordinary credit, net discharge of indebtedness -- -- 9,424 -------- -------- -------- Net earnings 33,223 773 12,973 Dividends applicable to redeemable preferred stock (410) (693) (621) Reduction of retained earnings applicable to redeemable common stock -- (400) (390) -------- -------- -------- Earnings (loss) applicable to common shares 32,813 (320) 11,962 Other comprehensive income (loss): Net unrealized appreciation (depreciation) of investments (3,813) (10,986) 4,672 -------- -------- -------- Comprehensive income (loss): $ 29,000 ($11,306) $ 16,634 ======== ======== ======== Per share earnings (loss) applicable to common shares: Basic Continuing operations ($ 0.78) $ -- ($ 0.19) Discontinued operations 4.94 (0.04) 0.53 -------- -------- -------- Earnings (loss) before extraordinary credit 4.16 (0.04) 0.34 Extraordinary credit -- -- 1.25 -------- -------- -------- Net earnings (loss) $ 4.16 ($ 0.04) $ 1.59 ======== ======== ======== Weighted average number of shares of common stock outstanding 7,891 7,970 7,525 ======== ======== ======== Diluted Continuing operations ($ 0.78) $ -- ($ 0.19) Discontinued operations 4.94 (0.04) 0.53 -------- -------- -------- Earnings (loss) before extraordinary credit 4.16 (0.04) 0.34 Extraordinary credit -- -- 1.25 -------- -------- -------- Net earnings (loss) $ 4.16 ($ 0.04) $ 1.59 ======== ======== ======== Weighted average number of shares of common stock and common stock equivalents outstanding 7,891 7,970 7,525 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data)
Accumulated Total Receivable Other Share- Common Stock Additional From Comphre- Treasury Stock holders' ------------------ Paid-in Related hensive Accumulated --------------- Equity Shares Dollars Capital Party Income (Deficit) Shares Dollars Deficit) ---------- ------- -------- -------- --------- --------- -------- -------- ---------- Balance at December 28, 1995 7,102,979 $5,540 $38,526 ($4,318) $21,047 ($98,755) 57,038 ($805) ($38,765) Comprehensive income (loss): Net earnings - - - - - 12,973 - - 12,973 Net increase in unrealized appreciation of investments - - - - 4,672 - - - 4,672 Redeemable preferred stock dividends - - - - - (621) - - (621) Redeemable common stock accretion - - - - - (390) - - (390) --------- Comprehensive income 16,634 --------- Other changes in shareholders' equity: Common stock issued to pay liabilities 125,012 94 362 - - - (120,554) 818 1,274 Common stock issued as additional consideration for short-term borrowings 50,544 38 (398) - - - (99,456) 1,021 661 Net increase in receivable from related party, including accrued interest - - - (2,150) - - - - (2,150) Common stock loaned by related party - - - 587 - - 100,000 (587) 0 Repay common stock loaned by related party 100,000 75 512 (587) - - - - - Exercise of stock options and warrants 61,000 46 213 - - - (16,900) 109 368 Common stock received as consideration for short-term note - - - - - - 87,500 (608) (608) Reclassification of redeemable common stock 185,231 - 996 - - - - - 996 --------- Other changes in shareholders' equity 541 --------- ---------- ------- -------- -------- --------- --------- --------- -------- --------- Balance at December 26, 1996 7,624,766 5,793 40,211 (6,468) 25,719 (86,793) 7,628 (52) (21,590) Comprehensive income (loss): Net earnings - - - - - 773 - - 773 Net decrease in unrealized appreciation of investments - - - - (10,986) - - - (10,986) Redeemable preferred stock dividends - - - - - (693) - - (693) Redeemable common stock accretion - - - - - (400) - - (400) --------- Comprehensive (loss) (11,306) --------- Other changes in shareholders' equity: Common stock issued to pay liabilities 444,717 333 1,606 - - - - - 1,939 Net increase in receivable from related party, including accrued interest - - - (6,153) - - - - (6,153) Exercise of stock options and warrants 39,800 30 148 - - - - - 178 Redeemable common stock obligation paid by the issuance of additional common shares 115,543 67 612 - - - - - 679 Exercise of redeemable common stock put option 72,984 - 55 - - - 72,984 (55) - Purchase of redeemable preferred stock - - 89 - - - - - 89 --------- Other changes in shareholders' equity (3,268) --------- ---------- ------- -------- -------- --------- --------- --------- -------- --------- Balance at December 31, 1997 8,297,810 6,223 42,721 (12,621) 14,733 (87,113) 80,612 (107) (36,164)
The accompanying notes are an integral part of the consolidated financial statements. F-6 ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data)
Accumulated Total Receivable Other Share- Common Stock Additional From Comphre- Treasury Stock holders' ------------------ Paid-in Related hensive Accumulated --------------- Equity Shares Dollars Capital Party Income (Deficit) Shares Dollars Deficit) ---------- ------- -------- -------- --------- --------- -------- -------- ---------- Balance at December 31, 1997 8,297,810 6,223 42,721 (12,621) 14,733 (87,113) 80,612 (107) (36,164) Comprehensive income (loss): Net earnings - - - - 33,223 - - 33,223 Net decrease in unrealized appreciation of investments - - - - (3,813) - - - (3,813) Redeemable preferred stock dividends - - - - - (410) - - (410) ---------- Comprehensive income 29,000 ---------- Other changes in shareholders' equity: Repurchase of common stock previously issued to pay down short-term notes - - - - - - 357,270 (1,518) (1,518) Net decrease in receivable from related party, including accrued interest - - - 12,621 - - - - 12,621 Exercise of stock options 4,300 4 13 - - - - - 17 ---------- Other changes in shareholders' equity 11,120 ---------- ---------- -------- --------- --------- ---------- ---------- -------- -------- ---------- Balance at December 31, 1998 8,302,110 $6,227 $42,734 $0 $10,920 ($54,300) 437,882 ($1,625) $3,956 ========== ======== ========= ========= ========== ========== ======== ======== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-7 ARTRA GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
Fiscal Year -------------------------------- 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net earnings $ 33,223 $ 773 $ 12,973 Adjustments to reconcile net earnings to cash flows from operating activities: Depreciation of property, plant and equipment 2,446 4,059 3,622 Amortization of excess of cost over net assets acquired 272 305 305 Decrease in receivable from related party 400 2,816 -- Extraordinary gain from net discharge of indebtedness -- -- (9,424) Gain on disposal of discontinued operations (35,585) -- -- Amortization of other assets, principally financing costs 1,121 4,754 548 Inventory valuation reserve 21 172 191 Gain on sale of property, plant and equipment -- (70) 78 Gain on sale of idle machinery and equipment -- (932) -- Litigation settlement, net -- (10,416) -- Gain on sale of COMFORCE common stock (320) (2,531) (5,818) Minority interest 509 1,109 526 Other, principally common stock issued as compensation -- 454 220 Changes in assets and liabilities, net of effects of businesses acquired and discontinued: (Increase) decrease in receivables (35) (1,631) 2,630 (Increase) decrease in inventories (2,010) 132 1,476 (Increase) decrease in other current and noncurrent assets (456) 517 (169) Increase (decrease) in payables and accrued expenses (8,771) 321 (5,980) Decrease in other current and noncurrent liabilities (1,745) (119) (4,497) -------- -------- -------- Net cash flows used by operating activities (10,930) (287) (3,319) -------- -------- -------- Cash flows from investing activities: Proceeds from sale of COMFORCE common stock 170 1,821 3,717 Proceeds from sale of Bagcraft assets 89,000 -- -- Increase in restricted cash (1,045) -- -- Net proceeds from litigation settlement -- 9,761 -- Proceeds from sale of property, plant and equipment 537 132 Additions to property, plant and equipment (2,177) (3,066) (2,645) (Increase) decrease in receivable from related party (8,969) (1,061) Proceeds from collection of notes receivable -- -- 342 Decrease in restricted cash -- -- 552 Acquistion of AB Specialty, net of deposit -- (1,131) -- AB Specialty acquisition deposit -- -- (1,183) Proceeds from sale of idle machinery and equipment -- 932 -- -------- -------- -------- Net cash flows from (used by) investing activities 85,948 (115) (146) -------- -------- --------
The accompanying notes are an integral part of the consolidated financial statements. F-8 ARTRA GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
Fiscal Year ----------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from financing activities: Net increase (decrease) in short-term debt ($ 15,451) ($ 1,508) $ 286 Proceeds from long-term borrowings 124,077 146,891 141,896 Reduction of long-term debt (175,019) (133,781) (140,850) Proceeds from exercise of stock options and warrants 17 178 369 Repurchase of common stock previously issued to pay down short-term notes (1,518) -- -- Exercise of redeemable common stock put options -- (3,379) (510) Redemption of detachable put warrants (1,440) (1,728) -- Purchase of redeemable preferred stock 78 (426) -- Other (25) 98 --------- --------- --------- Net cash flows from (used by) financing activities (69,256) 6,222 1,289 --------- --------- --------- Increase (decrease) in cash and cash equivalents 5,762 5,820 (2,176) Cash and equivalents, beginning of year 5,991 171 2,347 --------- --------- --------- Cash and equivalents, end of year $ 11,753 $ 5,991 $ 171 ========= ========= ========= Supplemental cash flow information: Cash paid during the year for: Interest $ 6,087 $ 7,058 $ 5,320 Income taxes paid (refunded), net 189 177 157 Supplemental schedule of noncash investing and financing activities: ARTRA/BCA redeemable preferred stock received as payment of Peter Harvey advances $ 12,787 -- -- Issue common stock and redeemable common stock to pay down current liabilities -- $ 1,939 $ 1,274 Issue common stock to pay redeemable common stock put obligation -- 679 -- Issue common stock as additional consideration for short-term borrowings -- -- 661 COMFORCE common stock given to lenders as additional consideration for short-term borrowings -- 169 1,511 BCA Holdings redeemable preferred stock issued in exchange for Bagcraft redeemable preferred stock -- -- 8,135
The accompanying notes are an integral part of the consolidated financial statements. F-9 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION ARTRA Group Incorporated, (hereinafter "ARTRA" or the "Company"), is a Pennsylvania corporation incorporated in 1933. Through November 20, 1998, ARTRA operated in one industry segment as a manufacturer of packaging products principally serving the food industry. The packaging products business was conducted by the Company's wholly-owned subsidiary, Bagcraft Corporation of America ("Bagcraft"), which business was sold on November 20, 1998. The Company does not intend to be deemed an "Investment Company" as defined by the Investment Company Act of 1940 and, accordingly, is actively investigating new business opportunities. In 1997, the Company changed its fiscal year end to December 31. The Company had operated on 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/Restricted Cash Short-term investments with an initial maturity of less than ninety days are considered cash equivalents. The fair value of cash and cash equivalents is assumed to approximate the carrying value of these assets due to the short duration of these assets. At December 31, 1998, restricted cash represents amounts deposited in escrow accounts to pay certain Bagcraft liabilities retained by ARTRA. These accounts were established in accordance with provisions of the agreement to sell the assets of the discontinued Bagcraft subsidiary discussed in Note 3. C. Inventories Inventories reflected in the Company's consolidated financial statements at December 31, 1997 were stated at the lower of cost or market. Cost was determined by the first-in, first-out (FIFO) method. D. Property, Plant and Equipment Property, plant and equipment reflected in the Company's consolidated financial statements at December 31, 1997 were stated at cost. Expenditures for maintenance and repairs were charged to operations as incurred and expenditures for major renovations were capitalized. Depreciation was 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 were 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 were applied against the related accumulated depreciation to the extent thereof, and any profit or loss on the disposition was recognized in earnings. E. Investments in Equity Securities The Company's investment in COMFORCE Corporation ("COMFORCE", see Note 5) common stock is classified in current assets as available-for-sale securities and stated at fair value in accordance with the provisions of F-10 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Unrealized holding gains and losses are included in a separate component of shareholders' equity (deficit) until realized. F. Intangible Assets The net assets of a purchased business were recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of net assets acquired (goodwill) was reflected as intangible assets and amortized on a straight-line basis principally over 40 years. Effective for the fiscal year ending December 26, 1996 the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ". The pronouncement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use or sale of the asset and its eventual disposition, to the carrying amount of the asset. The adoption of SFAS No. 121 did not have a material impact on the Company's financial statements. G. Revenue Recognition Sales to customers of the Company's discontinued Bagcraft were recorded at the time of shipment. H. Income Taxes Income taxes are accounted for as prescribed in SFAS No. 109 - Accounting for Income Taxes. Under the asset and liability method of Statement No. 109, the Company recognizes the amount of income taxes payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. I. Use of Estimates In Preparation of Financial Statements The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. J. Stock-Based Compensation Effective for the fiscal year ending December 26, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". The pronouncement encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on new fair value accounting rules. The Company did not adopt the new fair value accounting, but instead chose to comply with the disclosure requirements of SFAS No. 123. Accordingly, the adoption of SFAS No. 123 did not have a material impact on the Company's financial statements. K. Earnings Per Share The Company adopted SFAS No. 128, "Earnings Per Share" for the year ended December 31, 1997. The pronouncement, F-11 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued which specifies the computation, presentation, and disclosure requirements for earnings per share, did not have a material impact on the Company's financial statements. L. Recently Issued Accounting Pronouncements Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting comprehensive income to present a measure of all changes in equity that result from renegotiated transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes net income. Required changes are reported in the consolidated statement of operations. During 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". In February 1998 the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and other Postretirement Benefits. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. This standard requires that management identify operating segments based on the way that management desegregates the entity for making internal operating decisions. SFAS No. 132 standardizes the disclosure requirements for pension and other postretirement benefits. As a result of the November 1998 sale of the assets of the discontinued Bagcraft subsidiary, the Company exited its only industry segment, a manufacturer of packaging products principally serving the food industry. Accordingly, the guidelines of SFAS No. 131 - Disclosures About Segments of an Enterprise and Related Information are not applicable to the Company's financial statements as of December 31, 1998. The Company typically does not offer the types of benefit programs that fall under the guidelines of Statement of Financial Accounting Standards No. 132 - Employers' Disclosures about Pensions and other Postretirement Benefits. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 1999. Management has not determined what impact this standard, when adopted, will have on the Company's financial statements. 3. CHANGE OF BUSINESS Bagcraft Effective August 26, 1998, ARTRA and its wholly-owned subsidiary BCA Holdings, Inc. ("BCA", the parent of Bagcraft), agreed to sell the business assets of Bagcraft. Additionally, the buyer agreed to assume certain Bagcraft liabilities. The transaction was completed on November 20, 1998 and ARTRA received gross consideration of approximately $88,100,000 in cash. The disposition of the Bagcraft business resulted in a net gain of $35,985,000. A substantial portion of the cash proceeds received from the Bagcraft disposition was used to retire or otherwise settle certain Bagcraft debt obligations, including, but not limited to Bagcraft's credit agreement as discussed in Note 8. After the disposition of certain Bagcraft obligations noted above, ARTRA received net proceeds of approximately $28,000,000 from the sale of Bagcraft. Approximately $15,200,000 of these net proceeds was used to retire F-12 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ARTRA debt obligations. The Company plans to use the remainder of the proceeds principally to acquire or participate in new business opportunities. AB Specialty Effective January 2, 1997, Bagcraft purchased the business assets, subject to buyer's assumption of certain liabilities, of AB Specialty Holding Company, Inc. ("AB") for consideration consisting of cash of approximately $2.3 million. The purchased assets consisted principally of plant and equipment of approximately $1.3 million and inventory of approximately $1.1 million. The acquisition of AB, funded through borrowings under Bagcraft's Credit Agreement, was accounted for by the purchase method and, accordingly, the assets and liabilities of AB were included in the Company's financial statements at their estimated fair market value at the date of acquisition. The business and related assets of AB were part of the Bagcraft disposition. The Company's consolidated financial statements have been reclassified to report separately the results of operations of Bagcraft. The operating results (in thousands) for fiscal years 1996 - 1998 of the discontinued Bagcraft subsidiary and net gain on disposal consist of: 1998 1997 1996 --------- --------- --------- Net sales $ 111,342 $ 125,027 $ 120,699 ========= ========= ========= Earnings from operations before and minority interest income taxes $ 3,534 $ 797 $ 4,672 (Provision) credit for income taxes (80) 19 (152) Minority interest (509) (1,109) (526) --------- --------- --------- Earnings (loss) from operations 2,945 (293) 3,994 --------- --------- --------- Gain on sale of Bagcraft subsidiary 37,505 Provision for income taxes (1,520) --------- Gain on disposal of business 35,985 --------- --------- --------- Earnings(loss)from discontinued operations $ 38,930 $ (293) $ 3,994 ========= ========= ========= Liabilities of discontinued operations at December 31, 1998 of $10,328,000 include BCA/Bagcraft redeemable preferred stock issues (see Note 9), contractual obligations, environmental matters and other future estimated costs for various discontinued operations. Additionally, liabilities of discontinued operations at December 31, 1998 includes an adjustment to the sales price of the Bagcraft business of approximately $900,000. F-13 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. INVENTORIES Inventories of the discontinued Bagcraft at December 31, 1997 (in thousands) consisted of: Raw materials and supplies $5,901 Work in process 274 Finished goods 9,574 ------- $15,749 ======= 5. INVESTMENT IN COMFORCE CORPORATION At December 31, 1998 and 1997 ARTRA's investment in COMFORCE Corporation ("COMFORCE"), 1,525,500 shares, currently a common stock ownership interest of approximately 9%, was classified in the Company's consolidated balance sheet in current assets as "Available-for-sale securities." At December 31, 1998 the gross unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a separate component of shareholders' equity, was $10,920,000. In January 1996, the Company's Board of Directors approved the sale of 200,000 of ARTRA's COMFORCE common shares to certain officers, directors and key employees of ARTRA for non-interest bearing notes totaling $400,000. The notes are collateralized by the related COMFORCE common shares. Additionally, the noteholders have the right to put their COMFORCE shares back to ARTRA in full payment of the balance of their notes. Based upon the preceding factors, the Company had concluded that, for reporting purposes, it had effectively sold options to certain officers, directors and key employees to acquire 200,000 of ARTRA's COMFORCE common shares. Accordingly, in January 1996 these 200,000 COMFORCE common shares were removed from the Company's portfolio of "Available-for-sale securities" and were classified in the Company's condensed consolidated balance sheet as other receivables with an aggregate value of $400,000, based upon the value of proceeds to be received upon future exercise of the options. The disposition of these 200,000 COMFORCE common shares resulted in a gain that was deferred and will not be recognized in the Company's financial statements until the options to purchase these 200,000 COMFORCE common shares are exercised. During the fourth quarter of 1997, options to acquire 59,500 of these COMFORCE common shares were exercised resulting in a realized gain of $225,000. During 1998, options to acquire 84,750 of these COMFORCE common shares were exercised resulting in a realized gain of $320,000. At December 31, 1998, options to acquire 55,750 COMFORCE common shares remained unexercised and were classified in the Company's consolidated balance sheet as other receivables with an aggregate value of $112,000, based upon the value of proceeds to be received upon future exercise of the options. During 1997 ARTRA sold 219,203 COMFORCE common shares in the market, with the net proceeds of approximately $1,700,000 used for working capital. During 1997 a lender received 25,000 COMFORCE common shares held by the Company as additional consideration for a short-term loan. The disposition of these 244,703 COMFORCE common shares resulted in realized gains of $2,306,000 during the year ended December 31, 1997, with cost determined by average cost. During 1996 ARTRA sold 193,000 COMFORCE common shares in the market, with the net proceeds of approximately $3,700,000 used for working capital. During 1996 certain lenders received 105,000 COMFORCE common shares held by the Company as additional consideration for short-term loans. In October 1996, a lender exercised the conversion rights of a short-term loan and received 33,333 COMFORCE common shares in settlement of the Company's obligation. The disposition of these 331,333 COMFORCE common shares resulted in realized gains of $5,818,000 during the year ended December 26, 1996, with cost determined by average cost. F-14 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. EXTRAORDINARY GAIN 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. 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). 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 ======== 7. NOTES PAYABLE Notes payable at December 31, 1997 (in thousands) consisted of: ARTRA 12% promissory notes - 1997 private placements $12,850 Amounts due to related parties, interest at10% 2,000 Other, interest from 10% to 12% 601 ------- 15,451 Less ARTRA 12% promissory notes refinanced in January 1998 (4,725) ------- $10,726 ======= F-15 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Promissory Notes 1998 Private Placement In January 1998, ARTRA completed a private placement of $5,975,000 of 12% promissory notes due January 14, 1999. As additional consideration the noteholders received warrants to purchase an aggregate of 119,500 ARTRA common shares at a price of $3.00 per share. The warrants expire January 14, 2000. The warrantholders have the right to put these warrants back to ARTRA at any time during a six-month period commencing in January 1999 and ending in July 1999, at a price of $1.50 per share. The cost of this obligation ($179,250 if all warrants are put back to the Company) was accrued in the Company's financial statements as a charge to interest expense. The proceeds from the private placement were used principally to pay down other debt obligations. These notes were repaid in November 1998 with net proceeds from the sale of assets of the discontinued Bagcraft subsidiary. 1997 Private Placements In December 1997, ARTRA completed private placements of $5,375,000 of 12% promissory notes due in December 1998. As additional consideration the noteholders received warrants to purchase an aggregate of 107,500 ARTRA common shares at a price of $3.00 per share. The warrants expire in November and December 1999. The warrantholders have the right to put these warrants back to ARTRA at any time during a period commencing in December 1998 and ending in May 1999, at a price of $1.50 per share. The cost of this obligation ($161,250 if all warrants are put back to the Company) was accrued in the Company's financial statements as a charge to interest expense. These notes were repaid in November 1998 with net proceeds from the sale of assets of the discontinued Bagcraft subsidiary. In July 1997, ARTRA completed private placements of $7,475,000 of 12% promissory notes due in January 1998. As additional consideration the noteholders received warrants to purchase an aggregate of 199,311 ARTRA common shares at a price of $3.75 per share. The warrants expire in August 1999. The warrantholders have the right to put these warrants back to ARTRA at any time during a period commencing in January 1998 and ending in August 1999, at a price of $3.00 per share. The cost of this obligation ($598,000 if all warrants are put back to the Company) was amortized in the Company's financial statements as a charge to interest expense over the period July 1997 (the date of the private placement) through January 1998 (the scheduled maturity date of the notes). The proceeds from the July 1997 private placement were advanced to Peter R. Harvey. See discussion and disposition of Mr. Harvey's advances in Note 16. The July 1997 private placement notes were repaid and /or refinanced with proceeds of the January 1998 private placement of 12% notes and with proceeds from the litigation settlement discussed in Note 11 to the consolidated financial statements. Amounts Due To Related Parties At December 26, 1996, ARTRA had outstanding borrowings of $500,000 from an outside director of the Company evidenced by a short-term note bearing interest at 10%. As additional compensation for the loan and a December 1996 extension, the director received five year warrants to purchase an aggregate of 50,000 ARTRA common shares at a prices ranging from $5.00 to $5.875 per share. The proceeds of the loan were used for working capital. In January 1997, ARTRA borrowed an additional $300,000 from this director evidenced by a short-term note, due December 23, 1997, bearing interest at 8%. As additional compensation for the loan, the director received a warrant, expiring in 2002, to purchase 25,000 ARTRA common shares at a price of $5.75 per share. In March 1997, ARTRA borrowed an additional $1,000,000 from this director evidenced by a short-term note, due May 26, 1997, bearing interest at 12%. As additional compensation, the lender received an option to purchase 25,000 shares F-16 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) of COMFORCE common stock, owned by the Company's Fill-Mor subsidiary, at a price of $4.00 per share. The proceeds from this loan were used in part to repay certain ARTRA debt obligations. In April 1997, ARTRA borrowed $5,000,000 from the above director evidenced by a note, due April 20, 1998, bearing interest at 10%. The proceeds from this loan were used to repay $1,800,000 of prior borrowings from this director and pay down other ARTRA debt obligations. As additional compensation, the director received a warrant to purchase 333,333 ARTRA common shares at a price of $5.00 per share. In May 1998, the director exercised the option and put the warrant back to ARTRA for a total purchased price of $1,000,000. The cost of this obligation was amortized in the Company's financial statements as a charge to interest expense over the period April 1997 (the date of the loan) through April 1998 (the date the warrantholder first had the right to put the warrant back to ARTRA). In June 1997, ARTRA borrowed an additional $1,000,000 from the above director evidenced by a note, due December 10, 1997, bearing interest at 12%. As additional compensation, the director received a warrant to purchase 40,000 ARTRA common shares at a price of $5.00 per share. The warrantholder has the right to put this warrant back to ARTRA at any time during the period December 10, 1997 to June 10, 1999, for a total purchase price of $80,000. The cost of this obligation was amortized in the Company's financial statements as a charge to interest expense over the period June 10, 1997 (the date of the loan) through December 10, 1997 (the date the warrantholder has the right to put the warrant back to ARTRA). The proceeds from this loan were used to pay down other ARTRA debt obligations. In July 1997, borrowings from this lender were reduced to $3,000,000 with proceeds advanced to ARTRA from a Bagcraft term loan. In December 1997 borrowings from this lender were reduced to $2,000,000 with proceeds from other short-term borrowings. In April 1998, the $2,000,000 in outstanding borrowings from the above director was extended by a demand note bearing interest at 10%. As additional compensation, the director received a warrant to purchase 50,000 ARTRA common shares at a price of $3.25 per share. In August 1998, ARTRA borrowed an additional $500,000 from the above director evidenced by a note, due December 20, 1998, bearing interest at 15%. As additional compensation, the director received a warrant to purchase 20,000 ARTRA common shares at a price of $3.94 per share. The borrowings from this director were collaterallized by a secondary interest in all of the common stock of BCA (the parent of Bagcraft). In November 1998, the borrowings from this director were repaid with proceeds received from the sale of the discontinued Bagcraft subsidiary. Other At December 31, 1997, ARTRA also had outstanding short-term borrowings from other unrelated parties aggregating $601,000, with interest rates varying between 10 % and 12%. In April 1998 the Company and its Fill-Mor subsidiary entered into a margin loan agreement with a financial institution which provided for borrowings of $1,000,000, with interest at 8.5%. Borrowings under the loan agreement were collateralized by 490,000 shares of COMFORCE common stock owned by the Company's Fill-Mor subsidiary. The proceeds of the loan were used for working capital. This loan was repaid in December 1998 with proceeds received from the sale of the discontinued Bagcraft subsidiary. F-17 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) In October 1997 a lender agreed to accept 357,270 ARTRA common shares in payment of the principal amount of approximately $1,500,000 due on certain demand notes. In January 1998 the lender returned the 357,270 ARTRA common shares to the Company for cash consideration of approximately $1,500,000. The weighted average interest rate on all short-term borrowings at December 31, 1997 was 11.5%. 8. LONG-TERM DEBT Long-term debt at December 31, 1997 (in thousands) consisted of: Bagcraft: Credit Agreement: Term Loan A, interest at the lender's index rate plus .25% $ 20,000 Term Loan B, interest at the lender's index rate plus .75% 5,000 Term Loan C, interest at the lender's index rate plus 1% 7,500 Revolving credit loan, interest at the lender's indexrate 9,313 Unamortized discount (1,425) City of Baxter Springs, Kansas loan agreements, interest at varying rates 9,968 ------- 50,356 ARTRA 12% promissory notes refinanced in January 1998 4,725 ------- 55,081 Current scheduled maturities (4,462) ------- $50,619 ======= Bagcraft At December 31, 1997, the discontinued Bagcraft subsidiary had outstanding borrowings under its credit agreement ("Credit Agreement") totaling $40,388,000. The Credit Agreement, amended and restated February 27, 1998, provided for a revolving loan agreement and three term loans. Amounts due under the Credit Agreement were repaid with proceeds from the sale of assets of the discontinued Bagcraft subsidiary. 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, consisted of certain loan agreements payable by Bagcraft directly to the City of Baxter Springs. At December 31, 1997, the outstanding borrowings under these loans totaled $9,968,000. Obligations due under these loans were assumed by the buyer of the assets of the discontinued Bagcraft subsidiary. F-18 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ARTRA As discussed in Note 7, $7,475,000 of ARTRA 12% promissory notes due in January 1998 were repaid and /or refinanced principally with proceeds of a January 1998 private placement of 12% notes payable in January 1999. Private placement notes in the principal amount of $4,725,000 refinanced by the January 1998 private placement notes were classified as long-term debt at December 31, 1997. 9. REDEEMABLE PREFERRED STOCK
December 31, December 31, 1998 1997 ---- ---- Currently payable: BCA Holdings preferred stock, Series B, $1.00 par value, 6% cumulative, including accumulated dividends; redeemable on demand with a liquidation preference of $1,000 per share; authorized 8,135 shares; issued and outstanding 1,675.79 shares in 1998 and 7,847.79 shares in 1997 $ * 9,831 Bagcraft redeemable preferred stock originally issued to a related party, $.01 par value, 13.5% cumulative; including accumulated dividends; redeemable on demand with a liquidation preference equal to $100 per share; issued 8,650 shares * $ 2,124 ------- ------- $ - $11,955 ======= ======= Noncurrent: ARTRA redeemable preferred stock, Series A, $1,000 par value, 6% cumulative payment-in-kind, including accumulated dividends, net of unamortized discount of $239 in 1998 and 859 in 1997; redeemable March 1, 2000 at $1,000 per share plus accrued dividends; authorized 2,000,000 shares all series; issued and outstanding 1,849.34 shares in 1998 and 3,583.62 shares in 1997 $ * $ 4,799 BCA Holdings preferred stock, Series A, $1.00 par value, 6% cumulative, including accumulated dividends; liquidation preference of $1,000 per share; 10,000 shares authorized; issued and outstanding 1,672.15 shares in 1998 and 3,456.18 shares in 1997 2,857 4,311 ------- ------- $ 2,857 $ 9,110 ======= =======
- -------------------------------- * Included in liabilities of discontinued operations at December 31, 1998, see discussion below. F-19 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In March 1990, ARTRA issued 3,750 shares of $1,000 par value junior non-convertible payment-in-kind redeemable Series A Preferred Stock with an estimated fair value of $1,012,000, net of unamortized discount of $2,738,000 as partial consideration for the acquisition of the discontinued Bagcraft subsidiary. In August and September 1997 ARTRA repurchased 166.38 shares of ARTRA Series A redeemable preferred stock with a carrying value of $209,000 for cash of $120,000. The redeemable preferred stock purchase resulted in a gain of $89,000, which was reflected in the Company's consolidated financial statements as a credit to additional paid-in capital. The Series A Preferred Stock accrues dividends at the rate of 6% per annum and is redeemable by ARTRA on March 1, 2000 at a price of $1,000 per share plus accrued dividends. Accumulated dividends of $1,246,000 and $2,074,000 were accrued at December 31, 1998 and December 31, 1997, respectively. BCA Holdings/ Bagcraft During 1992 and 1993, in exchange for cash consideration of $3,675,000, a former related party received 3,675 shares of BCA Series A preferred stock (6% cumulative, redeemable preferred stock with a liquidation preference equal to $1,000 per share). At December 31, 1998, liabilities of discontinued operations included 1,672.18 BCA Series A redeemable preferred shares with accumulated dividends of $514,000. Effective February 15, 1996, BCA, Bagcraft and a former related party entered into an agreement to exchange certain preferred stock between the Companies. Per terms of the exchange agreement BCA issued 8,135 shares of BCA Series B preferred stock (13.5% cumulative, redeemable preferred stock with a liquidation preference equal to $1,000 per share) to the former related party in exchange for 41,350 shares of Bagcraft redeemable preferred stock. At December 31, 1998, liabilities of discontinued operations included 1,675.79 BCA Series B redeemable preferred shares with accumulated dividends of $650,000. At December 31, 1998, liabilities of discontinued operations included 8,650 shares of Bagcraft 13.5% cumulative, redeemable preferred stock (liquidation preference equal to $100 per share). Accumulated dividends of $1,315,000 were accrued at December 31, 1998. As discussed in Note 16, effective January 31, 1998, Peter R. Harvey exchanged certain ARTRA/BCA preferred stock to retire advances from ARTRA totaling $12,787,000. 10. STOCK OPTIONS AND WARRANTS Stock Option Plans In August, 1996, ARTRA's shareholders approved a stock option plan (the "1996 Plan") for certain officers, key employees and others who render services to the Company or its subsidiaries. The 1996 Plan reserves 2,000,000 shares of the Company's common stock for the granting of options on or before August 29, 2006. Options granted under the Plan shall be in the form of incentive stock options ("ISOs"), as defined under the Internal Revenue Code of 1986, as amended (the "Code") or non-statutory options which do not qualify under the Code ("NSOs"), or both, at the discretion of the Company. The purchase price of options granted under the 1996 Plan shall be not less than fair market value at the date of grant for ISOs, not less than 110% of fair market value on the date of grant for an ISO granted to a shareholder possessing 10% more of the voting stock of the Company and the fair market value per share on the date of grant in the case of NSOs. Effective October 4, 1996, the Company issued certain officers and key employees of ARTRA options to purchase 532,750 shares of ARTRA common stock at $5.25 per share, the fair market value on the date of grant. The options vested immediately and expire ten years from the date of grant. In August 1996, ARTRA's shareholders also approved a 1996 Disinterested Directors Stock Option Plan (the "1996 Director Plan") for directors of the Company who are not employees or officers. The 1996 Director Plan reserves 200,000 shares of F-20 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) the Company's common stock for the granting of NSOs on or before August 29, 2006 at a price equal to fair market value per share on the date of grant. In May 1998 the Company issued its outside directors options to purchase an aggregate of 62,500 ARTRA common shares at $3.75 per share, the fair market value on the date of grant. The options vested immediately and expire ten years from the date of grant. In July 1985, ARTRA's shareholders approved a stock option plan (the "1985 Plan") for certain officers and key employees of the Company and its subsidiaries. The 1985 Plan, as amended, reserved 1,000,000 shares of the Company's common stock and authorized the granting of options on or before February 1, 1995. The purchase price of such options granted under the 1985 Plan was not less than the market value at the date of grant for ISOs and not less than 110% of the market value on the date of grant for an ISO granted to a shareholder possessing 10% more of the voting stock of the Company. Effective for the fiscal year ending December 26, 1996, the Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". In 1998 and 1996 all stock options were granted at an exercise price equal to fair market value at the date of grant and, accordingly, no compensation expense has been recognized in connection with the Company's stock option plans. Had compensation cost for the Company's stock option plan been determined based on the fair value on the date of grant for awards in 1998 and 1996 consistent with the provisions of SFAS No. 123, the Company's earnings applicable to common shares would have been reduced to the pro forma amounts indicated below:
Year Ended December 31, 1998 Year Ended December 26, 1996 ---------------------------- ---------------------------- As Reported Pro forma As Reported Pro forma ---------- ---------- ---------- ---------- (in thousands, except per share data) Earnings (loss) applicable to common shares: Continuing operations $ (6,117) $ (6,216) $ (1,456) $ (2,906) Discontinued operations 38,930 38,930 3,994 3,994 ---------- ---------- ---------- ---------- Earnings before extraordinary credit 32,813 32,714 2,538 1,088 Extraordinary credit -- -- 9,424 9,424 ---------- ---------- ---------- ---------- Net earnings $ 32,813 $ 32,714 $ 11,962 $ 10,512 ========== ========== ========== ========== Earnings (loss) per share: Basic Continuing operations $ (.78) $ (.79) $ (.19) $ (.39) Discontinued operations 4.94 4.94 .53 .53 ---------- ---------- ---------- ---------- Earnings before extraordinary credit 4.16 4.15 .34 .14 Extraordinary credit -- -- 1.25 1.25 ---------- ---------- ---------- ---------- Net earnings $ 4.16 $ 4.15 $ 1.59 $ 1.39 ========== ========== ========== ========== Diluted Continuing operations $ (.78) $ (.79) $ (.19) $ (.39) Discontinued operations 4.94 4.94 .53 .53 ---------- ---------- ---------- ---------- Earnings before extraordinary credit 4.16 4.15 .34 .14 Extraordinary credit -- -- 1.25 1.25 ---------- ---------- ---------- ---------- Net earnings $ 4.16 $ 4.15 $ 1.59 $ 1.39 ========== ========== ========== ==========
F-21 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The fair value of stock options granted in 1998 and 1996 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: 1998 1996 ---- ---- Expected life (years) 5 5 Interest rate 5.0% 6.5% Volatility 50.0% 50.0% Dividend yield - - Information regarding all stock option plans for the three years in the piod ended December 31, 1998 is as follows:
1998 1997 1996 ---------- ---------- ----------- Options outstanding at beginning of year 913,050 917,850 431,500 Options granted 62,500 -- 532,750 Options exercised (4,300) (4,800) (40,400) Options canceled -- -- (6,000) ---------- ---------- ----------- Options outstanding at end of year 971,250 913,050 917,850 ========== ========== =========== Options exercisable at end of year 971,250 913,050 917,850 ========== ========== =========== Options available for grant at end of year 1,604,750 1,667,250 1,667,250 ========== ========== =========== Weighted average option prices: Outstanding at beginning of year $ 4.61 $ 4.61 $ 3.89 Options granted $ 3.125 -- $ 5.25 Options exercised $ 3.70 $ 3.70 $ 5.01 Options canceled -- -- $ 10.00 Outstanding at end of year $ 4.52 $ 4.61 $ 4.61 Exercisable at end of year $ 4.52 $ 4.61 $ 4.61
Significant option groups outstanding at December 31, 1998 and related weighted average price and remaining life information are as follows: Options Options Exercise Remaining Grant Date Outstanding Exercisable Price Life (Years) ---------- ----------- ----------- ----- ------------ 05-27-98 62,500 62,500 $3.125 9 10-04-96 532,750 532,750 $5.25 7 01-08-93 143,500 143,500 $3.75 4 06-22-92 6,000 6,000 $5.25 3 09-19-91 51,667 51,667 $3.65 2 12-19-90 174,833 174,833 $3.65 1 F-22 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Effective January 6, 1999, the Company issued certain officers and key employees of ARTRA options to purchase 413,250 shares of ARTRA common stock at $4.75 per share, the fair market value on the date of grant. The options vested immediately and expire ten years from the date of grant. Additionally, effective January 6, 1999, the Company issued its outside directors options to purchase an aggregate of 20,000 ARTRA common shares at $4.75 per share, the fair market value on the date of grant, to certain outside directors. The options vested immediately and expire ten years from the date of grant. These outside directors were not board members at the time of the May 1998 disinterested director option grants. Warrants Information regarding warrants to purchase shares of the Company's common stock for the three years in the period ended December 31, 1998 is as follows:
1998 1997 1996 ---------- ---------- ---------- Warrants outstanding at beginning of year 2,592,350 1,711,032 1,148,549 Warrants granted 192,500 1,196,894 632,583 Warrants exercised -- (35,000) (37,500) Warrants put back (500,000) (114,000) -- Warrants expired (214,850) (166,576) (32,600) ---------- ---------- ---------- Warrants outstanding at end of year 2,070,000 2,592,350 1,711,032 ========== ========== ========== $3.00 $3.50 $3.50 Exercise prices per share to to to $8.00 $8.00 $9.875
The warrants, exercisable from the date of issue, expire at various dates through 2003. These warrants were issued principally as additional compensation for various short-terms loans. At December 31, 1998, warrantholders had the right to put warrants to purchase 833,144 shares of ARTRA common stock back to the Company for total consideration of $1,705,000. During 1998 warrants to purchase 500,000 shares of ARTRA common stock at prices ranging from $3.75 per share to $5.00 per share were put back to ARTRA for total consideration of $1,420,000. During 1997 warrants to purchase 114,000 shares of ARTRA common stock at prices ranging from $5.00 per share to $6.00 per share were put back to ARTRA for total consideration of $228,000. 11. COMMITMENTS AND CONTINGENCIES Rental expense from continuing operations was $138,000, $134,000 and $134,000 in fiscal years 1998, 1997 and 1996, respectively. Effective December 1995, John Harvey, the Company's Chairman of the board of directors purchased the building in which the Company leases office for its corporate headquarters. The lease expired in December 1998 and has been extended on a month-to-month basis. Rental expense for this lease was $126,000 annually for fiscal years 1998, 1997 and 1996. The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. At December 31, 1998 and December 31, 1997, the Company had accrued current liabilities of $1,500,000 and $1,800,000, respectively, for potential business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. F-23 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The discontinued Bagcraft subsidiary's Chicago facility has been the subject of allegations that it violated laws and regulations associated with the Clean Air Act. The facility has numerous sources of air emissions of volatile organic materials ("VOMs") associated with its printing operations and is required to maintain and comply with permits and emissions regulations with regard to each of these emission sources. In November of 1995, the EPA issued a Notice of Violation ("NOV") against Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act and related regulations. In May 1998 Bagcraft paid $170,000 to formally extinguish this claim. In April 1994, the EPA notified the Company that it was a potentially responsible party for the disposal of hazardous substances (principally waste oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing facility formerly operated by the Clearshield Plastics Division ("Clearshield") of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In 1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been included on the EPA's National Priorities List. In February 1983, Harvel sold the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in 1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA for indemnification in connection with this proceeding. The cost of clean-up at the Palmer, Massachusetts site has been estimated to be approximately $7 million according to proofs of claim filed in the adversary proceeding. A committee formed by the named potentially responsible parties has estimated the liability respecting the activities of Clearshield to be $400,000. ARTRA has not made any independent investigation of the amount of its potential liability and no assurances can be given that it will not substantially exceed $400,000. In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in 1991 in the United States District Court for Maryland, Sherwin-Williams Company ("Sherwin-Williams") brought suit against ARTRA and other former owners of a paint manufacturing facility in Baltimore, Maryland for recovery of costs of investigation and clean-up of hazardous substances which were stored, disposed of or otherwise released at this manufacturing facility. This facility was owned by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from 1969 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 recent years, the Company has been a party to certain product liability claims relating to the former Synkoloid subsidiary. The Company's product liability insurance has covered all such claims settled to date. As of December 31, 1998, the Company anticipates that its product liability insurance is adequate to cover any additional pending claims. 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, F-24 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At the time the suit was filed, the City of Chicago claimed that it would cost $1,000,000 to remediate the site. ARTRA and NL Industries, Inc. have counter sued each other and have filed third party actions against the subsequent owners of the property. The Company is presently unable to determine its liability, if any, in connection with this case. The parties were conducting discovery but the case was stayed pending the resolution of the EPA action described below. In 1986, in a case titled People of the State of Illinois v. NL Industries, Inc., ARTRA GROUP Incorporated, et al., the Cook County State's attorney filed suit seeking response costs in excess of $2,000,000 and treble punitive damages for costs expended by IEPA in remediating contamination at the Dutch Boy site, alleging that all former owners contributed to the contamination. In 1989, the Circuit Court dismissed the action, holding that the state had failed to exhaust its administrative procedures. In 1992, this holding was reversed by the Illinois Supreme Court. In 1996, the Illinois Appellate Court affirmed the District Court's decision to dismiss the case based on lack of due diligence on the part of the State of Illinois. The State of Illinois has filed a Petition for Rehearing which was granted. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case. On November 17, 1995, the EPA issued letters to ARTRA, NL Industries and others alleging that they were potentially responsible parties with respect to releases at the Dutch Boy facility in Chicago and demanding that they remediate the site. NL Industries entered into a consent decree with EPA in which it agreed to remediate the site. The Company is presently unable to determine its liability, if any, in connection with this case. 12. INCOME TAXES The provision (credit) for income taxes (in thousands) is included in the statements of operations as follows: 1998 1997 1996 ------- ------- ------- Continuing operations $ -- $ -- $ -- Extraordinary credit -- -- 200 Discontinued operations 1,600 (19) 152 ------- ------- ------- $ 1,600 $ (19) $ 352 ======= ======= ======= A summary of the provision (credit) for income taxes (in thousands) is as follows: 1998 1997 1996 ------- ------- ------- Current: Federal $ 700 $ -- $ 200 State 900 (19) 152 ------- ------- ------- $ 1,600 $ (19) $ 352 ======= ======= ======= Due to the utilization of tax loss carryforwards, no Federal income tax expense is reflected in the Company's financial statements resulting from the 1998 earnings from discontinued operations or the 1996 extraordinary credit, except for Federal alternative minimum tax. The 1996 extraordinary credit represents a net gain from discharge of indebtedness. F-25 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. INCOME TAXES, continued In 1998, 1997 and 1996, the effective tax rates from operations, including discontinued operations were 4.5%, (1.0)% and 2.5%, respectively, as compared to the statutory Federal rate, which are reconciled (in thousands) as follows: 1998 1997 1996 -------- -------- -------- Provision (credit) for income taxes using statutory rate $ 12,013 $ 633 $ 4,709 State and local taxes, net of Federal benefit 900 (19) 152 Current year tax loss not utilized -- (1,680) -- Deferred finance fee -- 919 127 Amortization of goodwill -- 104 104 Previously unrecognized benefit from utilizing tax loss carryforwards (12,035) -- (4,767) Alternative minimum tax 700 -- -- Other 22 24 27 -------- -------- -------- $ 1,600 $ (19) $ 352 ======== ======== ======== F-26 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. INCOME TAXES, continued The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to the deferred tax liabilities and deferred tax assets at December 31, 1998 and December 31, 1997 and their approximate tax effects (in thousands) are as follows:
1998 1997 -------------------------- ------------------------ Temporary Tax Temporary Tax Difference Difference Difference Difference Investment in COMFORCE Corporation $ 36,000 $ 14,000 $ 36,000 $ 14,000 Accrued personnel costs -- -- 1,200 500 Restructuring reserve -- -- 600 200 Environmental reserve -- -- 300 100 Other 2,500 1,000 3,400 1,300 Capital loss carryforward -- -- 3,500 1,400 Net operating loss 10,200 4,000 40,000 15,600 -------- -------- Total deferred tax assets 19,000 33,100 -------- -------- Inventories -- -- (1,900) (700) Accumulated depreciation -- -- (5,100) (2,000) Other (800) (300) (800) (300) -------- -------- Total deferred tax liabilities (300) 3,000 -------- -------- Valuation allowance (18,700) (30,100) -------- -------- 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 31, 1998, the Company and its subsidiaries had Federal income tax loss carryforwards of approximately $10,000,000 expiring principally in 2010 - 2012, available to be applied against future taxable income, if any. In recent years, the Company has issued shares of its common stock to repay various debt obligations, as consideration for acquisitions, to fund working capital obligations and as consideration for various other transactions. Section 382 of the Internal Revenue Code of 1986 limits a corporation's utilization of its Federal income tax loss carryforwards when certain changes in the ownership of a corporation's common stock occurs. In the opinion of management, the Company is not currently subject to such limitations regarding the utilization of its Federal income tax loss carryforwards. Should the Company continue to issue a significant number of shares of its common stock, it could trigger a limitation that would prevent it from utilizing a substantial portion of its Federal income tax loss carryforwards. F-27 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution 401 (k) plan covering substantially all employees. Both employee and employer contributions are generally determined as a percentage of the covered employee's annual compensation. The total expense charged to operations relating to this plan amounted to $45,000, $38,000 and $28,000 in 1998, 1997 and 1996, respectively. The Company typically does not offer the types of benefit programs that fall under the guidelines of Statement of Financial Accounting Standards No. 132 - Employers' Disclosures about Pensions and Other Postretirement Benefits. 14. EARNINGS PER SHARE The Company adopted SFAS No. 128, "Earnings per Share," for the year ended December 31, 1998. Adoption of this pronouncement, which was applied to prior periods presented, did not have a material impact on the Company's financial statements. Basic earnings (loss) per share is computed by dividing the income available to common shareholders, net earnings (loss), less redeemable preferred stock dividends and redeemable common stock accretion, by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing the income available to common shareholders, net earnings (loss), less redeemable preferred stock dividends and redeemable common stock accretion, by the weighted average number of shares of common stock and common stock equivalents (redeemable common stock, stock options and warrants), unless anti-dilutive, during each period. Earnings (loss) per share for each of the three fiscal years in the period ended December 31, 1998 was computed as follows (in thousands, except per share amounts):
Year Ended Year Ended Year Ended December 31, 1998 December 31, 1997 December 26, 1996 --------------------- --------------------- ------------------------ Basic Diluted Basic Diluted Basic Diluted -------- -------- -------- -------- -------- -------- AVERAGE SHARES OUTSTANDING: Weighted average shares outstanding 7,891 7,891 7,970 7,970 7,525 7,525 Common stock equivalents (options/warrants) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- 7,891 7,891 7,970 7,970 7,525 7,525 ======== ======== ======== ======== ======== ======== EARNINGS (LOSS): Earnings (loss) from continuing operations $ (5,707) $ (5,707) $ 1,066 $ 1,066 $ (445) $ (445) Dividends applicable to redeemable preferred stock (410) (410) (693) (693) (621) (621) Redeemable common stock accretion -- -- (400) (400) (390) (390) -------- -------- -------- -------- -------- -------- Loss from continuing operations applicable to common shareholders (6,117) (6,117) (27) (27) (1,456) (1,456) Earnings (loss) from discontinued operations 38,930 38,930 (293) (293) 3,994 3,994 -------- -------- -------- -------- -------- -------- Earnings (loss) before extraordinary credit 32,813 32,813 (320) (320) 2,538 2,538 Extraordinary credit -- -- -- -- 9,424 9,424 -------- -------- -------- -------- -------- -------- Net earnings (loss) $ 32,813 $ 32,813 $ (320) $ (320) $ 11,962 $ 11,962 ======== ======== ======== ======== ======== ========
F-28 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. EARNINGS PER SHARE, continued
Year Ended Year Ended Year Ended December 31, 1998 December 31, 1997 December 26, 1996 -------------------- ------------------ ------------------- Basic Diluted Basic Diluted Basic Diluted PER SHARE AMOUNTS: Loss from continuing operations applicable to common shares $ (.78) $ (.78) $ -- $ -- $ (.19) $ (.19) Earnings (loss) from discontinued operations 4.94 4.94 (.04) (.04) .53 .53 -------- -------- ------- ------- -------- -------- Earnings (loss) before extraordinary credit 4.16 4.16 (.04) (.04) .34 .34 Extraordinary credit -- -- -- -- 1.25 1.25 -------- -------- ------- ------- -------- -------- Net earnings (loss) applicable to common shares $ 4.16 $ 4.16 $ (.04) $ (.04) $ 1.59 $ 1.59 ======== ======== ======= ======= ======== ========
15. LITIGATION In November, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth Judicial Circuit for the state of Illinois against Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K. Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P. Kelly & Associates, L.P., ("DPK"), Donald P. Kelly ("Kelly Defendants" along with DPK), James F. Massey and William Rifkind relating to the acquisition of Envirodyne Industries, Inc. in 1989 by Emerald Acquisition Corp. Effective December 31, 1997, the above parties reached a settlement agreement and all pending litigation was dismissed. ARTRA recognized a gain from the settlement agreement of $10,416,000 ($1.31 per share), net of related legal fees and other expenses. The Company and its subsidiaries are the defendants in various other business-related litigation and environmental matters (see Note 11). Management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. 16. RELATED PARTY TRANSACTIONS At December 31, 1997, advances to Peter R. Harvey, ARTRA's president, classified in the consolidated balance sheet as a reduction of common shareholders' equity, (in thousands) consisted of: Total advances, including accrued interest $18,226 Less interest for the period January 1, 1993 to date, accrued and fully reserved (2,789) ------- 15,437 Less compensation/expense reimbursement (2,816) ------- Net advances $12,621 ======= F-29 ARTRA GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ARTRA had total advances due from its president, Peter R. Harvey, of which $18,226,000, including accrued interest, remained outstanding at December 31, 1997. These advances provided for interest at varying rate from 10.5% to 12%. This receivable from Peter R. Harvey had been classified as a reduction of common shareholders' equity. Commencing January 1, 1993 to date, interest on the advances to Peter R. Harvey had been accrued and fully reserved. In March 1998, ARTRA's Board of Directors ratified a proposal to settle Mr. Harvey's advances as follows: Effective December 31, 1997, Mr. Harvey's net advances from ARTRA were offset by $2,816,000 ($5,605,000 net of interest accrued and reserved for the period 1993 - 1997) to $12,621,000. This offset of Mr. Harvey's advances represented a combination of compensation for prior year guarantees of ARTRA obligations to private and institutional lenders, compensation in excess of the nominal amounts Mr. Harvey received for the years 1995 - 1997 and reimbursement for expenses incurred to defend ARTRA against certain litigation. Effective January 31, 1998, Mr. Harvey's remaining advances totaling $12,787,000 were paid with consideration consisting of the following ARTRA/BCA preferred stock held by Mr. Harvey: Face Value Plus Security Accrued Dividends ------------------------------------------------------ ----------------- ARTRA redeemable preferred stock, 1,734.28 shares $ 2,751,000 BCA Holdings Series A preferred stock, 1,784.029 shares 2,234,000 BCA Holdings Series B preferred stock, 6,172 shares 7,802,000 ------------- $ 12,787,000 ============= For a discussion of certain other related party debt obligations see Note 7. F-30 ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS for each of the three fiscal years in the period ended December 31, 1998 (in thousands)
Column A Column B Column C Column D Column E ----------- --------------- ------------------------------- --------------- ------------ Additions ------------------------------ (a) (b) 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 31, 1998: Deducted from assets to which they apply: Allowance for inventory valuation $ 277 $ 21 $ (298)(C) $ - ===== ====== ====== ===== Allowance for doubtful accounts $ 275 $ 45 $ (320)(C) $ - ===== ====== ====== ====== For the fiscal year ended December 31, 1997: Deducted from assets to which they apply: Allowance for inventory valuation $ 249 $ 172 $ (144)(B) $ 277 ===== ======= ====== ===== Allowance for doubtful accounts $ 512 $ 63 $ (300)(A) $ 275 ===== ====== ====== ===== For the fiscal year ended December 26, 1996: Deducted from assets to which they apply: Allowance for inventory valuation $ 290 $ 191 $ (232)(B) $ 249 ===== ======= ====== ===== Allowance for markdowns $ 250 $ 365 $ (103)(A) $ 512 ===== ====== ====== ===== (A) Principally markdowns taken. (B) Principally inventory written off, net of recoveries. (C) Principally amounts of discontinued operations.
F-31 INDEX OF EXHIBITS (A) Exhibits included herein: EXHIBIT 21 Subsidiaries. EXHIBIT 23 Consent of Independent Accountants. EXHIBIT 27 Financial Data Schedule (B) Exhibits incorporated herein by reference: EXHIBIT 3 Articles of Incorporation and By-laws 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. 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. 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. 3.4 Statement with Respect to Shares of Rights and Preferences of Series B Preferred Stock of Registrant, filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993. EXHIBIT 10 Material contracts 10.1 AMENDMENT NO. 2 TO ASSETS PURCHASE AGREEMENT, dated as of October 26, 1998, to the Assets Purchase Agreement, dated as of August 26, 1998 by and among ARTRA GROUP Incorporated, BCA Holdings, Inc., Bagcraft Corporation of America ("Bagcraft"), ("Seller") and Packaging Dynamics L.L.C. and Bagcraft Acquisition L.L.C. ("Buyer") regarding purchase of the business assets, subject to Buyer's assumption of certain liabilities, of Bagcraft, filed as an exhibit to Registrant's Form 10-Q, for the quarter ended September 30, 1998. 10.2 NON-COMPETE AGREEMENT, by and among Packaging Dynamics L.L.C., Bagcraft Acquisition L.L.C. ("Buyer") and ARTRA GROUP Incorporated and BCA Holdings, Inc. ("Seller"), filed as an exhibit to Registrant's Form 10-Q, for the quarter ended September 30, 1998. 10.3 Assets Purchase Agreement, dated as of August 26, 1998, by and among ARTRA GROUP Incorporated, BCA Holdings, Inc., Bagcraft Corporation of America "Bagcraft"), ("Sellers") and Packaging Dynamics L.L.C. and Bagcraft Acquisition L.L.C.("Buyers") regarding purchase of the business assets, subject to Buyer's assumption of certain liabilities, of Bagcraft, filed as an exhibit to Registrant's Form 8-K, dated September 2, 1998. E-1 EX-21 2 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES (As of February 1, 1999) ARTRA GROUP INCORPORATED (1) | | | ------------------------------------------------------------- | | | | | | | | | | A. G. Fill-Mor ARTRA ARTRA BCA Holding Corp. (2) Holding Inc (2) Resources Subsidiary Inc. Holdings Inc. 100% 100 % Corp. (2) 100 % (3) 100 %(2) 100 % | | Bagcraft Corporation of America (2) 100 % (1) Pennsylvania Corporation (2) Delaware Corporation (3) lllinois Corporation EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTS We consent to the incorporation by reference in the registration statement of ARTRA GROUP Incorporated on Form S-8 (File No. 2-61375) of our report dated February 1, 1999 on our audits of the consolidated financial statements and financial statement schedules of ARTRA GROUP Incorporated as of December 31, 1998 and December 31, 1997, and for each of the three fiscal years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Chicago, Illinois February 1, 1999 EX-27 4 FDS -- FORM 10-K
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 0000200243 ARTRA GROUP INCORPORATED 1,000 dollars 12-mos DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 11,753 8,200 0 0 0 21,268 0 0 21,268 14,455 0 2,857 0 6,227 (2,271) 21,268 0 0 0 0 2,315 0 3,392 (5,707) 0 (5,707) 38,930 0 0 33,223 4.16 4.16
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