Item 1. Business
At December 29, 1994 and, through September 1995, ARTRA Group Incorporated, a Pennsylvania corporation incorporated in 1933, and its majority-owned subsidiaries (hereinafter "ARTRA" or the "Company") principally operated in two industry segments as: 1) a manufacturer of packaging products principally serving the food industry; and 2) a designer and distributor of popular-priced fashion costume jewelry.
During 1995, the Company's packaging products business was conducted by the wholly-owned Bagcraft Corporation of America ("Bagcraft") subsidiary and its then wholly-owned subsidiary Arcar Graphics, Inc. ("Arcar") acquired effective April 9, 1994. As discussed in Note 3 to the Company's consolidated financial statements, effective October 26, 1995, Bagcraft completed the sale of the business assets, subject to the buyer's assumption of certain liabilities, of Arcar.
During 1995, the Company's fashion costume jewelry business was conducted by its then majority-owned subsidiary The Lori Corporation ("Lori") through its wholly-owned subsidiaries:
Rosecraft, Inc. ("Rosecraft") Lawrence Jewelry Corporation ("Lawrence")
In recent years, Lori's fashion costume jewelry operations had experienced a pattern of significantly lower sales levels and related operating losses primarily due to a shift in the buying patterns of its major customers (i.e. certain mass merchandisers) from participation in Lori's service program to purchases of costume jewelry and accessories directly from manufacturers and due to a continued unfavorable retail environment. Accordingly, in September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business as discussed in Note 3 to the Company's consolidated financial statements.
As discussed in Note 3 to the Company's consolidated financial statements, on October 17, 1995, Lori completed the acquisition of one hundred percent of the capital stock of COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc. for consideration of approximately $6.4 million, net of cash acquired, consisting of cash of approximately $5.6 million and 500,000 shares of Lori common stock issued as consideration for various fees and guarantees associated with the transaction. Global provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. The acquisition of Global was completed on October 17, 1995. In connection with the re-focus of its business, Lori changed its name to COMFORCE Corporation ("COMFORCE"). Additionally, in conjunction with the Global acquisition, ARTRA has agreed to assume certain pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation.
Effective July 4, 1995, Lori and ARTRA entered into employment or consulting services agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business. As additional compensation, the agreements provided for the issuance in aggregate of a 35% common stock interest in Lori. After the issuance of the Lori common shares, plus the effects of the issuance of Lori common shares sold by private placements and other Lori common shares issued in conjunction with the Global acquisition, ARTRA's common stock ownership interest in COMFORCE was reduced to approximately 25% at December 28, 1995.
Packaging Products Segment
Effective March 3, 1990, ARTRA entered into the packaging products business with its acquisition of Bagcraft. Bagcraft, established in 1947, is a leading manufacturer and supplier of flexible packaging products to the fast food, bakery, microwave popcorn and supermarket industries and is also a significant supplier to the theater industry. Several of Bagcraft's products are widely recognized and have become standard items within various segments of the food industry.
Bagcraft is a full-service supplier complete with its own laboratory and engineering departments. Bagcraft's sales and technical staff work in conjunction with Bagcraft's customers to determine the proper components of the package. Bagcraft's art department creates packaging designs, subject to customer approval, or duplicates customer-supplied designs. Thereafter, the packaging is produced in accordance with customer specifications using a variety of papers, film, foil and lamination. Bagcraft has developed a number of proprietary innovations in the manufacture of its packaging products. Such innovations include the Dubl-Wax(TM) bag, which introduced specialty waxed bags to the retail bakery industry. Bagcraft is also credited with being instrumental in developing and producing the first microwave popcorn bags.
Bagcraft currently produces over two billion bags and two billion sheets and wrappers annually for the packaging of more than 1,000 different products. Bagcraft purchases the paper, foil, films and chemicals it uses from a number of different unaffiliated suppliers. Since Bagcraft purchases each of the raw materials it requires from more than one supplier, it is not dependent upon a single supplier for any specific materials or supplies.
Sales orders are processed, and manufacturing and delivery schedules are determined primarily at Bagcraft's headquarters and principle production facility in Chicago. In September, 1994, Bagcraft completed the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The new Kansas facility, which has added production capacity in Bagcraft's growing food service products business, has replaced Bagcraft's production facility in Joplin, Missouri (which was conveyed to a contractor involved in constructing the Baxter Springs facility in partial consideration of such contractor's fees), its facility in Carteret, New Jersey (which was sold in 1994) and its facility in Forest Park, Georgia (which was converted into a distribution facility).
Bagcraft's products are sold throughout the United States by a sales force of approximately 20 full-time salespersons who sell to wholesale distributors and a number of independent brokers who sell Bagcraft product lines to large food processors and food chains. Bagcraft presently sells its products to more than 1,000 customers. Although some of these are the largest and most recognizable companies in the food industry, no single customer accounted for more than 10% of ARTRA's consolidated net sales in 1995.
Sales to customers are made pursuant to orders placed in advance for periods of up to one year. In certain instances Bagcraft and a customer can enter into an agreement to maintain a specified minimum inventory for the customer. The contracts entered into by Bagcraft with its customers vary in length depending on the customer's needs and Bagcraft's capacity to meet the customer's requirements. Generally, Bagcraft's contracts provide advance notice of from 30 days to one year to terminate a contract. The contracts typically provide for delivery of goods at an agreed-upon fixed price, subject to adjustment upon timely notice in advance. Bagcraft usually grants its customers rights of return, subject to penalty, except in the case of goods produced to specification. In addition, Bagcraft typically requires payment for goods 30 days after shipment, but gives its customers a 1% discount if payment is made within 10 days after shipment.
Bagcraft believes that it is the manufacturer of the most diversified line of flexible packaging products in the United States. However, there are a number of domestic and foreign companies which compete directly with Bagcraft in each of its major product lines, certain of which have a larger market share with respect to specific product lines. Bagcraft's competitors range from small companies to divisions of large corporations which have substantially greater financial resources than those available to Bagcraft. Bagcraft competes on the basis of quality, service and the price of its products.
Bagcraft believes that a modest level of continuing research and development and strict quality and process control will be necessary to maintain and improve its position in the flexible packaging industry. All product modifications and manufacturing innovations reflect input from its personnel in general management, sales, marketing design, R&D and engineering.
Bagcraft's products are sold by four marketing divisions as described below:
Paper Division
Bagcraft believes it is the industry leader in specialty paper bags, which represented approximately 32% of Bagcraft's 1995 sales. Bakeries account for approximately 60% of the paper division's sales which also include supermarkets
and various retail food chains. A number of the paper division's products, including Dubl-Wax(TM), Dubl-Panel(TM), Dubl-Clear(TM) and Sealing-Strip(TM) represent significant manufacturing innovations which have contributed to Bagcraft's position as the industry leader. Major customers include Walmart, Walgreen's, Albertson's, Dunkin' Donuts and Boston Market. Bagcraft believes the outlook for the future indicates stability and growth.
Bagcraft's Paper Division stocks approximately 150 generic products, which enables Bagcraft to lead the industry in providing the widest variety of immediately available unprinted and stock printed bags and sheets in the industry. Stock products are bought and inventoried by distributors who, in turn, sell them in varying quantities to end-users for a multitude of purposes. The stock line is sold mainly through Bagcraft field salespeople and telemarketing from Bagcraft's Chicago home office.
Food Service Division
The Food Service Division, which represented approximately 47% of Bagcraft's 1995 sales, is a leader among its competitors. Bagcraft's products sold to the food service industry include foil and paper bags and sheets for sandwiches, french fries, chicken and other prepared foods. Major customers in this industry include Wendy's, Burger King, Taco Bell, Dairy Queen and McDonald's.
The development of the Honeycomb sheet helped propel Bagcraft to its industry leading position. The Honeycomb sheet incorporates a moisture absorbing layer which prevents buns from becoming soggy and tends to keep food warm for a longer period of time. Additionally, when used to replace rigid packaging, it represents significant source reduction to the solid waste system.
Specialty Bag Division
The Specialty Bag Division represented approximately 15% of Bagcraft's 1995 sales. Many of the division's products represent unique additions to Bagcraft's standard products. The Cue-Pon Bag(TM) has a "tear out" coupon affixed near the window on the bag which offers the shopper the immediate benefit of the coupon upon purchase. The Cue-Pon Pocket Bag(TM) has a pouch on the front of the bag which can be filled with novelty items by the retailer.
The division features products for the packaging of bakery goods, such as cookies and donuts, coffee, pre-popped popcorn and specialized promotional items such as premiums for kids meals sold by food service chains. This division provides bags with transparent windows, metal tin tie attachments and convenient self-opening bottoms.
This division also produces theater popcorn bags, which provide the theater chains with a more economical package that is easy to dispose of and substantially reduces the amount of space needed to inventory the product as well as providing a conveniently resealable bag by using Tac-Labels(TM) in lieu of Tin Ties. Bagcraft is the leading supplier of popcorn bags to theater chains such as General Cinema Corporation and Mann Theaters. The newest addition to this division is the "To Go!" Bags(TM). These double wall bags provide many of the properties of rigid containers such as tubs and cartons with the environmental and storage advantages of bags. Although in the early stages of production, "To Go!" Bags(TM) have been enthusiastically received and now are subject to a backlog. Other customers for the division include Bake-Line Products and Interstate Brands.
Microwave Popcorn Division
The Microwave Popcorn Division, which represented approximately 5% of Bagcraft's 1995 sales, represents an example of Bagcraft's high technology advancements. Bagcraft supplies microwave popcorn packaging to several industry leaders, including Hunt-Wesson (Orville Redenbacher) and U.S.A. Family Foods.
Bagcraft was instrumental in the development of the first microwave popcorn bag and played an important role in developing "susceptor" accelerator technology
which it has incorporated into its products. The susceptor technology involves placing a metallized material into the popcorn bag which accelerates the heat transfer and results in a higher percentage of the popcorn kernels being popped.
In recent years, Bagcraft has experienced a decline in its domestic microwave popcorn business due to the acquisition of one of its major customers by a company with its own packaging ability. Accordingly, at December 31, 1995, Bagcraft incurred a charge to operations of approximately $1,500,000 to write-down the carrying value of idle machinery and equipment dedicated to the production of microwave popcorn products.
As discussed in Note 3 to the Company's consolidated financial statements, effective April 8, 1994, Bagcraft acquired the business assets, subject to buyer's assumption of certain liabilities of Arcar Graphics, Inc. ("Arcar"), a manufacturer and distributor of waterbase inks for the flexographic and rotogravure printing industries. Arcar is one of the larger waterbase ink suppliers in the United States and serves over 500 customers. The principal markets of Arcar's products included printers of tags and labels, flexible packaging manufacturers and polycoated cup manufacturers. As discussed in Note 3 to the Company's consolidated financial statements, effective October 26, 1995, Bagcraft completed the sale of the business assets, subject to the buyer's assumption of certain liabilities, of Arcar.
Employees
At December 28, 1995, the Company employed approximately 1,000 persons. The Company considers its relationships with its employees to be good.
Item 2.
Item 2. Properties
The following table sets forth a brief description of the properties of the Company and its subsidiaries. The Company and its subsidiaries believe that all of their facilities are adequate for their present and reasonably anticipated future business requirements.
Item 3.
Item 3. Legal Proceedings
As discussed in Note 7 to the Company's consolidated financial statements in March, 1989, Envirodyne Industries, Inc. ("Envirodyne") and Emerald Acquisition Corporation ("Emerald") entered into a definitive agreement for a subsidiary of Emerald to acquire all of the issued and outstanding shares of Envirodyne common stock. Pursuant to the terms of certain letter agreements, ARTRA agreed to participate in the transaction and received Envirodyne's consent to sell its then 4,830,000 Envirodyne common shares (a 26.3% interest) to Emerald. On May 3, 1989 the transaction was consummated. ARTRA received consideration consisting of cash of $75,000,000, a 27.5% common stock interest in Emerald andEmerald junior debentures.
On January 6, 1993, a group of bondholders filed an involuntary petition for reorganization of Envirodyne under Chapter 11 of the U.S. Bankruptcy Code. On January 7, 1993, Envirodyne and certain of its subsidiaries (the "Debtor") filed petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. Subsequently, Emerald filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the same court.
Envirodyne's plan of reorganization did not provide for any distribution or value to Emerald and Emerald, therefore, is without assets to provide value to ARTRA for ARTRA's investment in Emerald common stock and Emerald Junior Debentures. See discussion below and in Note 20 Litigation for remedies being pursued by ARTRA as damages for the lost value of its investment in Emerald common stock and Emerald Junior Debentures.
On July 18, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court Action for breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation, breach of contract and promissory estopel. In the State Court Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of $408.6 million and approximately $33 million in fees paid to Salomon. The causes of action for breach of the fiduciary duty of due care were repleaded to reserve ARTRA's right to appeal the State Court's dismissal of the causes of action in the Third Amended Complaint. Defendant Kelly was dismissed with prejudice pursuant to a stipulation between ARTRA and the Kelly Defendants.
On or about March 1, 1996, DPK brought a motion for summary judgment as to ARTRA's claims for breach of contract and promissory estoppel. DPK's motion is currently pending.
Effective December 31, 1989, ARTRA completed the disposal of its former scientific products segment with the sale of its Welch subsidiary, formerly Sargent-Welch Scientific Company, to a privately held corporation whose president and sole shareholder was a vice president of Welch prior to the sale. The consideration received by ARTRA consisted of $2,625,000 payable June 30, 1997, with interest at 10% beginning June 30, 1990, under terms of a noncompetition agreement and the buyer's subordinated note in the principal amount of $2,500,000. The receivable due June 30, 1997 under terms of the noncompetition agreement was reflected in ARTRA's condensed consolidated balance sheet at December 29, 1994 in other assets at $2,625,000. The subordinated security, due in 1997, was originally scheduled to be non-interest bearing for a period of three years, after which time interest will accrue at the rate of 10% per annum. The note was discounted at a rate of 10% during the non-interest bearing period and was reflected in ARTRA's consolidated balance sheet at December 29, 1994 in other assets at $1,375,000, net of a discount of $1,125,000.
In December, 1991 Welch filed a lawsuit against ARTRA alleging that certain representations, warranties and covenants made by ARTRA, which were contained in the parties' Stock Purchase Agreement, were false. Welch was seeking compensatory damages in the amount of $3,800,000. Subsequently, ARTRA had filed a counterclaim predicated upon Welch's breach of the payment terms of the parties' Non-Competition Agreement and the Subordinated Note executed by Welch. ARTRA was seeking damages in the amount of approximately $5,300,000 plus accrued interest. On November 23, 1994, the Circuit Court of Cook County Law Division in Chicago granted a judgment in favor of ARTRA affirming the validity of the amounts due under the Non-Competition Agreement and the Subordinated Note of $2,625,000 and $2,500,000, respectively.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by Welch under terms of the noncompetition agreement and the subordinated security. Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a subordinated note in the principal amount of $640,000 payable June 30, 2001.
The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. At December 28, 1995 and December 29, 1994, the Company had accrued $1,800,000 and $1,500,000, respectively, for potential business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. However, ARTRA may not have available funds to pay liabilities arising out of these business-related litigation and environmental matters or, in certain instances, to provide for its legal defense.
In January, 1985 the United States Environmental Protection Agency ("EPA") notified the Company's Bagcraft subsidiary that it was a potentially responsible party under the Comprehensive Environmental Responsibility Compensation and Liability Act ("CERCLA") for alleged release of hazardous substances at the Cross Brothers site near Kankakee, Illinois.
Although Bagcraft has denied liability for the site, it has entered into a settlement agreement with the EPA, along with the other third party defendants, to resolve all claims associated with the site except for state claims. In May, 1994 Bagcraft paid $850,000 plus accrued interest of $29,000 to formally extinguish the EPA claim. Bagcraft filed suit in 1993 in the United States District Court for the Northern District of Illinois, against its insurers to recover its liability costs in connection with the Cross Brothers case. Bagcraft was subsequently reimbursed by its insurers for its liability costs incurred in connection with the EPA claim. With regard to the state action, Bagcraft is participating in settlement discussions with the State and thirteen other potential responsible parties to resolve all claims associated with the State. The maximum state claim is $1.1 million for all participants. Bagcraft has accrued $120,000 related to the State action in the Company's consolidated financial statements at December 28, 1995.
Bagcraft was listed as a de minimis contributor at the American Chemical Services, Inc. off-site disposal location in Griffith, Indiana and the Duane Marine off-site disposal location in Perth Amboy, New Jersey. These sites are included in the EPA's National Priorities List. Bagcraft is presently unable to determine its liability, if any, with respect to this site.
Bagcraft has been notified by the Federal Environment Protection Agency that it is a potentially responsible party for the disposal of hazardous substances at a site on Ninth Avenue in Gary, Indiana. Bagcraft has no records indicating that it deposited hazardous substances at this site and intends to vigorously defend itself in this matter.
Bagcraft is presently undertaking a soil remediation project for solvent-contaminated soil at its Chicago manufacturing facility. The environmental firm responsible for implementing the remediation has recommended that a soil vapor extraction process be used, at an estimated cost of $175,000. Although there can be no assurances that remediation costs will not exceed this estimate, in the opinion of management, no material additional costs are anticipated.
In April 1994, the EPA notified the Company that it was a potentially responsible party for the disposal of hazardous substances (principally waste oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing facility formerly operated by the Clearshield Plastics Division ("Clearshield") of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In 1985, Harvel was merged into ARTRA's subsidiary Fill-Mor Holding, Inc. ("Fill-Mor"). This site has been included on the EPA's National Priorities List. In February 1983, Harvel sold the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in 1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA for indemnification in connection with this proceeding. The cost of clean-up at the Palmer, Massachusetts site has been estimated to be approximately $7 million according to proofs of claim filed in the adversary proceeding. A committee formed by the named potentially responsible parties has estimated the liability respecting the activities of Clearshield to be $400,000. ARTRA has not made any independent investigation of the amount of its potential liability and no assurances can be given that it will not substantially exceed $400,000.
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in 1991 in the United States District Court for Maryland, Sherwin-Williams Company ("Sherwin-Williams") brought suit against ARTRA and other former owners of a paint manufacturing facility in Baltimore, Maryland for recovery of costs of investigation and clean-up of hazardous substances which were stored, disposed of or otherwise released at this manufacturing facility. This facility was owned by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from 1968 to 1980. Sherwin-William's current projection of the cost of clean-up is approximately $5 to $6 million. The Company has filed counterclaims against Sherwin-Williams and cross claims against other former owners of the property. The Company also is vigorously defending this action and has raised numerous defenses. Currently, the case is in its early stages of discovery and the Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company brought in the United States District Court for the Central District of California respecting Operating Industries, Inc. site in Monterey Park, California. This site is included on the EPA's National Priorities List. ARTRA's involvement stemmed from the alleged disposal of hazardous substances by The Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling paste, wall coatings and related products, certain of which generated hazardous substances as a by-product of the manufacturing process.
ARTRA entered into a consent decree with the EPA in which it agreed to pay $85,000 for one phase of the clean-up costs for this site; however, ARTRA defaulted on its payment obligation. ARTRA is presently unable to estimate the
total potential liability for clean-up costs at this site, which clean-up is expected to continue for a number of years. The consent decree, even if it had been honored by ARTRA, was not intended to release ARTRA from liability for costs associated with other phases of the clean-up at this site. The Company is presently unable to determine what, if any, additional liability it may incur in this matter.
In a case titled City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in the Circuit Court of Cook County, Illinois, the City of Chicago alleged that ARTRA (and NL Industries, Inc.) had improperly stored, discarded and disposed of hazardous substances at the subject site, and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At the time the suit was filed, the City of Chicago claimed to have expended $1,000,000 in clean-up costs.
ARTRA and NL Industries, Inc. have counter sued each other and have filed third party actions against the subsequent owners of the property. The City of Chicago has made an offer to settle the matter for $350,000 for all parties. The parties are currently conducting discovery. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case.
In a case titled Illinois Environmental Protection Agency v. NL Industries, Inc., ARTRA GROUP Incorporated, et al, the Illinois Environmental Protection Agency filed suit alleging all former owners contributed to the contamination of the site. The suit was dismissed, but subject to possible appeal. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case.
The EPA has identified ARTRA GROUP Incorporated as a potentially responsible party in an action involving the former manufacturing facility. The EPA is currently investigating the site to determine the extent and type of contamination, if any. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case.
PART II
Item 5.
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 March 31, 1996 and December 28, 1995, the approximate number of holders of its common stock was 2,500.
The high and low sales prices for ARTRA's common stock, as reported in the NYSE Quarterly Market Statistics reports, during the past two fiscal years were as follows:
1995 1994 --------------------------- ------------------------- High Low High Low ------------ ------------ ------------ ----------
First quarter 5 - 3/4 3 - 1/2 7 - 3/4 5 - 1/8 Second quarter 5 - 1/2 3 - 1/4 6 - 1/4 4 - 3/8 Third quarter 6 4 - 1/8 7 - 1/4 5 Fourth quarter 5 - 1/8 3 - 5/8 5 - 3/8 3 - 3/4
No dividends were paid in 1995 or 1994 nor are any anticipated in 1996. The Company was prohibited from paying dividends to its stockholders pursuant to the terms of its bank loan agreement that was discharged in February 1996. In addition, the Company's operating subsidiaries historically have been prohibited from or restricted in paying dividends or making distributions under their respective debt agreements (except for limited overhead allocations or payments in accordance with tax sharing agreements with the parent entity). Accordingly, current restrictions or limitations on the Company's Bagcraft subsidiary in upstreaming payments in 1996 and beyond would make the payment of dividends by ARTRA unlikely. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the loan agreements of the Company and its Bagcraft subsidiary.
Item 6.
Item 6. Selected Financial Data.
Following is a consolidated summary of selected financial data of the Company for each of the five fiscal years in the period ended December 28, 1995. The information for the year ended December 29, 1994 has been reclassified to reflect the operations of Arcar Graphics, Inc. as discontinued operations. The sale of Arcar (acquired effective April 9, 1994) was completed on October 26, 1995. Certain selected financial data for each of the four fiscal years in the period ended December 29, 1994 has been reclassified to reflect the discontinuance of the Company's fashion costume jewelry business effective September 30, 1995 conducted by the former majority-owned subsidiary COMFORCE Corporation, formerly The Lori Corporation. In October 1995, due to additional issuances of COMFORCE common stock, the Company's interest in COMFORCE was reduced to approximately 25% and the investment in COMFORCE was accounted for under the equity method during the fourth quarter of 1995. See notes 3 and 6 to the Company's consolidated financial statements for a further discussion of the Company's investment in COMFORCE and its results of operations.
(A) 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 the Lori's fashion costume jewelry operations effective June 29, 1995, a provision of $1,000,000 for loss on disposal of the Lori's fashion costume jewelry operations and a gain on sale of Bagcraft's Arcar subsidiary of $8,483,000. The loss from discontinued operations for the year ended December 31, 1994 includes a charge to operations of $10,800,000 representing a write-off of New Dimensions goodwill. The loss from discontinued operations for the year ended December 31, 1992 includes charges to operations of $8,664,000 representing an impairment of goodwill at December 31, 1992 and $8,500,000 representing increased reserves for markdowns allowances and inventory valuation.
(B) The 1995 and 1994 extraordinary credits represent gains from net discharge of indebtedness under terms of a debt settlement agreements with banks. The 1993 extraordinary credit represents a gain from a net discharge of indebtedness due to the reorganization of Lori's former New Dimensions subsidiary. See Note 8 to the Company's consolidated financial statements.
(C) As partial consideration for a debt settlement agreement, in December, 1994 the Lori's bank lender received all of the assets of the New Dimensions subsidiary. See Note 8 to the Company's consolidated financial statements.
(D) Effective in 1993, the Company adopted a 52/53 week fiscal year ending the last Thursday of December .
Item 7.
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:
Changes in Business
Arcar
As discussed in Note 3 to the Company's consolidated financial statements, effective April 8, 1994, Bagcraft purchased the business assets, subject to buyer's assumption of certain liabilities, of Arcar, a manufacturer and distributor of waterbase inks, for consideration of $10,264,000 consisting of cash of $2,264,000 and subordinated promissory notes totaling $8,000,000. The acquisition of Arcar was accounted for by the purchase method and, accordingly, the assets and liabilities of Arcar were included in ARTRA's financial statements at their estimated fair market value at the date of acquisition.
Effective October 26, 1995, Bagcraft sold the business assets, subject to the buyer's assumption of certain liabilities, of Arcar for cash of approximately $20,300,000, resulting in a net gain of $8,483,000. The net proceeds, after extinguishment of certain Arcar debt obligations, of approximately $10,400,000, were used to reduce Bagcraft debt obligations.
Lori/COMFORCE
In September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of the fashion costume jewelry business.
Effective October 17, 1995, Lori acquired one hundred percent of the capital stock of COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc. for consideration of approximately $6.4 million, net of cash acquired, consisting of cash of approximately $5.6 million and 500,000 shares of Lori common stock issued as consideration for various fees and guarantees associated with the transaction. The cash consideration included net cash payments to the selling shareholders of approximately $5.2 million. The 500,000 shares of Lori common stock issued as consideration for the Global transaction included 150,000 shares issued to Peter R. Harvey, then a director of Lori and currently the president/director of ARTRA and 100,000 shares issued to ARTRA for their guarantee to the selling shareholder of the payment of the Global purchase price at closing. The shares issued to Peter R. Harvey and ARTRA are subject to approval by the issuer's shareholders. Global provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. The acquisition of Global was funded principally by private placements of approximately 1,950,000 shares of Lori common stock at $3.00 per share (total proceeds of approximately $5,800,000) plus detachable warrants to purchase approximately 970,000 shares of Lori common stock at $3.375 per share that expire five years from the date of issue. In connection with the re-focus of its business, Lori changed its name to COMFORCE Corporation. Additionally, in conjunction with the Global acquisition, ARTRA has agreed to assume certain pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation.
Effective July 4, 1995, Lori and ARTRA entered into employment or consulting services agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business. As additional compensation, the agreements provided for the issuance in aggregate of a 35% common stock interest in Lori. After the issuance of the Lori common shares, plus the effects of the issuance of Lori common shares sold by private placements and other Lori common shares issued in conjunction with the Global acquisition, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 25%. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the equity method through the end of fiscal 1995. See Note 6 to the Company's consolidated financial statements for a further discussion of and the accounting treatment of the Company's investment in COMFORCE at December 28, 1995.
As discussed below in the "Liquidity and Capital Resources" section, on August 18, 1994, as amended effective December 23, 1994, ARTRA, Lori's parent, Fill-Mor, Lori and Lori's operating subsidiaries entered into and agreement with Lori's bank lender to settle obligations due the bank under terms of the bank loan agreements of Lori and its discontinued fashion costume jewelry subsidiaries and Fill-Mor. Under terms of the amended settlement agreement, Lori's bank lender received all of the assets of New Dimensions and New Dimensions terminated operations effective December 27, 1994. In March, 1995, the remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an additional extraordinary gain to Lori and Fill-Mor in 1995.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Cash and cash equivalents increased $277,000 during the year ended December 28, 1995. Cash flows used by operating activities of $5,943,000 and cash flows used by financing activities of $14,419,000 exceeded cash flows from investing activities of $20,639,000. Cash flows used by operating activities were principally attributable to the Company's loss from operations, exclusive of the effect of a charge to operations of $6,430,000 representing an impairment of goodwill at COMFORCE's (formerly Lori) discontinued fashion costume jewelry operations and a compensation charge to continuing operations of $3,000,000 representing the issuance in aggregate of a 35% common stock interest in COMFORCE as additional consideration under employment or consulting services agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business. Cash flows used by financing activities were principally attributable to a net reduction of long-term debt with proceeds from the October 26, 1995 sale of Arcar. Cash flows from investing activities represent proceeds from the October 26, 1995 sale of Arcar.
The Company's consolidated working capital deficiency decreased $34,107,000 to $26,365,000 during the year ended December 28, 1995. The decrease in working capital deficiency is principally attributable to the classification of borrowings under Bagcraft's credit agreement as long-term liabilities at December 28, 1995 due to a February 1, 1996 amendment that extended the maturity date of the agreement until September 30, 1997 (see Note 10 to the Company's consolidated financial statements.. At December 29, 1994, borrowings under Bagcraft's credit agreement were classified in the Company's consolidated balance sheet as currently payable.
Status of Debt Agreements and Operating Plan
At December 28, 1995 the Company's corporate entity was in default of provisions of certain of its credit agreements. Under certain debt agreements ARTRA is limited in the amounts it can withdraw from its Bagcraft operating subsidiary. In February, 1996, a bank lender agreed to discharge amounts due under bank notes of the corporate entity ($12,063,000 plus accrued interest) and certain obligations of the Company's president, Peter R. Harvey. Effective February 1, 1996, Bagcraft's credit agreement was extended until September 30, 1997. See Notes 9 and 10 to the Company's consolidated financial statements and discussion below.
Effective August 18, 1994, as amended effective December 23, 1994, ARTRA, Fill-Mor, Lori and Lori's operating subsidiaries entered into an agreement with Lori's bank lender to settle obligations due the bank under terms of the bank loan agreements of Lori and its operating subsidiaries and Fill-Mor. See Note 8 to the consolidated financial statements and discussion below.
ARTRA Corporate
At December 31, 1993, $17,063,000 in ARTRA notes, plus related loan fees and accrued interest were payable to a bank. The notes provided for interest at the prime rate. These bank notes were collateralized by, among other things, 100% of the common stock of ARTRA's BCA Holdings, Inc. ("BCA") subsidiary, the parent of Bagcraft, and a secondary position on the assets of BCA, payments due under a noncompetition agreement with the Company's former Welch subsidiary and by a
subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the sale of Welch. See note 9 to the Company's consolidated financial statements for a further discussion of these bank notes.
On March 31, 1994, ARTRA entered into a series of agreements with its primary bank lender and with a private corporation that had guaranteed $2,500,000 of ARTRA's bank notes. Per terms of the agreements, the private corporation purchased $2,500,000 in ARTRA notes from ARTRA's bank thereby reducing the outstanding principal on ARTRA's bank notes to $12,063,000 at March 31, 1994 and the bank released the private corporation from its $2,500,000 loan guaranty. As consideration for purchasing $2,500,000 of ARTRA bank notes, the private corporation received a $2,500,000 note payable from ARTRA bearing interest at the prime rate. See Note 9 to the Company's consolidated financial statements for further discussion of this transaction and additional consideration received by the private corporation. A major shareholder and executive officer of the private corporation is an ARTRA director.
As additional consideration, the private corporation has received an option to put back to ARTRA the 49,980 shares of ARTRA common stock received as compensation for its former $2,500,000 ARTRA loan guaranty at a price of $15.00 per share. The put option is exercisable on the later of the day that the $2,500,000 note payable to the private corporation becomes due or the date the ARTRA bank notes have been paid in full. The option price increases by $2.25 per share annually ($18.938 per share at December 28, 1995). The $2,500,000 note payable to the private corporation is reflected in the Company's consolidated financial statements as amounts due to related parties. During the first quarter of 1996, the $2,500,000 note and related accrued interest was paid in full principally with proceeds from additional short-term borrowings.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the former Welch subsidiary under terms of a noncompetition agreement and a subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the 1989 sale of Welch. Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a subordinated note in the principal amount of $640,000 payable June 30, 2001. The cash proceeds were used for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the remainder used for working capital. In conjunction with this transaction, ARTRA entered into a letter agreement with the bank whereby the bank agreed not to exercise any of its rights and remedies with respect to amounts due the bank under its ARTRA notes and certain obligations of ARTRA's president, Peter R. Harvey through at least September 28, 1995.
In February 1996, the bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest) and certain obligations of Mr. Harvey for consideration of $6,000,000, consisting of a cash payment of $5,150,000 and Mr. Harvey's $850,000 note payable to the bank. ARTRA will recognize a gain on the discharge of its bank indebtedness of approximately $10,000,000 in the first quarter of 1996 and will record a receivable for Mr. Harvey's prorata share of the debt discharge funded by the Company. As collateral for this advance and other previous advances (see note 21 to the Company's consolidated financial statements), Mr. Harvey provided ARTRA a $2,150,000 security interest in certain real estate.
In conjunction with the February 1996 discharge of indebtedness, the Company entered into a $1,900,000 short-term loan agreement with an unaffiliated company. The loan, due May 26, 1996, with interest at 12% is collateralized by, among other things, the common stock of ARTRA's BCA subsidiary. As additional compensation for the loan and for participating in the above discharge of indebtedness, the lender has received, to-date, 150,000 shares of ARTRA common stock and 37,500 shares of COMFORCE common stock held by ARTRA. Additionally, for a cash payment of $500,000 to ARTRA, the lender purchased an option to acquire up to 40% of the common stock of Bagcraft for nominal consideration. If the borrowings under the loan agreement are repaid by May 26, 1996, ARTRA can repurchase the option for a cash payment of $550,000. If the borrowings under the loan agreement are repaid subsequent to May 26, 1996, the percentage of the warrant ARTRA can repurchase declines on a sliding scale through July 25, 1996. The proceeds from this loan agreement along with proceeds received from the Bagcraft subsidiary as consideration for the issuance of BCA preferred stock were used to fund the cash payment to the bank for the above discharge of indebtedness.
Effective May 14, 1991, ARTRA, through its wholly-owned Fill-Mor subsidiary, entered into a loan agreement with a bank providing for borrowings of up to $2,500,000 with interest at the prime rate plus 2%, of which $2,200,000 was outstanding at December 29, 1994. The loan was collateralized by ARTRA's interest in Lori common stock and preferred stock, by the proceeds of a tax sharing agreement between ARTRA and its Bagcraft subsidiary and by ARTRA's interest in Fill-Mor's common stock. At December 29, 1994, borrowings on this note were reclassified as amounts due under the debt restructuring agreement discussed in Note 8. In March, 1995, borrowings due under this loan agreement were discharged.
At December 29, 1994 an ARTRA bank note with outstanding borrowings of $3,600,000 had been past due since December 31, 1990. In October, 1995 the bank agreed to discharge the $3,600,000 note plus accrued interest of $1,467,000 for a cash payment of $150,000, resulting in an extraordinary gain of $4,917,000 in the fourth quarter of 1995.
An ARTRA bank note with outstanding borrowings of $345,000 at December 29, 1994 was guaranteed by a private company. Interest on the note was at the prime rate plus 2%. In October, 1995 all amounts due on this bank note were paid in full.
In December 1995, ARTRA completed a private placement of $2,500,000 of 12% convertible subordinated promissory notes due March 21, 1996. As additional consideration the noteholders received 15,000 ARTRA common shares per each $100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the closing market value of ARTRA common stock on the date of issue, discounted for restricted marketability. In the event the notes and all accrued interest is not paid in full at maturity, the noteholders have the option to convert all or a portion of the amount due into shares of ARTRA common at a conversion price of $3.00 per share. The proceeds from the private placement, held in escrow at December 28, 19995, were used to pay down other debt obligations in January, 1996. The notes were repaid in April, 1995, substantially with proceeds from a new private placement of ARTRA notes.
As discussed in Note 21 to the Company's consolidated financial statements, ARTRA has total advances due from its president, Peter R. Harvey, of which $5,369,000 and $4,715,000, including accrued interest, remained outstanding at December 28, 1995 and December 29, 1994, respectively. The advances bear interest at the prime rate plus 2% (10.5% at December 28, 1995 and December 29, 1994). This receivable from Peter R. Harvey has been classified as a reduction of common shareholders' equity.
In May, 1991, ARTRA's wholly-owned Fill-Mor subsidiary made advances to Peter R. Harvey. The advances provided for interest at the prime rate plus 2%. At March 30, 1995 and December 29, 1994, advances of $1,540,000 and $1,510,000, respectively, including accrued interest, were outstanding. In April, 1995, these advances from ARTRA's Fill-Mor subsidiary to Peter R. Harvey were transferred to ARTRA as a dividend.
Commencing January 1, 1993 to date, interest on all advances to Peter R. Harvey has been accrued and fully reserved.
Peter R. Harvey has not received other than nominal compensation for his services as an officer or director of ARTRA or any of its subsidiaries since October of 1990. Additionally, Mr. Harvey has agreed not to accept any compensation for his services as an officer or director of ARTRA or any of its subsidiaries until his obligations to ARTRA, described above, are fully satisfied.
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania corporation) is permitted to make loans to officers and directors. Further, under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is permitted to make loans to an officer (including any officer who is also a director, as in the case of Peter R. Harvey), whenever, in the judgment of the directors, the loan can reasonably be expected to benefit Fill-Mor.
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey. The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan agreement, a condition of which was the application of a portion of the proceeds thereof to the payment of certain of Mr. Harvey's loan obligations to the bank. However, the resolutions did not acknowledge the use of such proceeds for this purpose and the formal loan documents with the bank did not set forth this condition (though in fact, the proceeds were so applied by the bank).
As partial collateral for amounts due from Peter R. Harvey, the Company has received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr. Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial Communication Company (a private company). Such interest is valued by
Mr. Harvey at $800,000 to $1,000,000. During 1995, Peter R. Harvey entered into a pledge agreement with ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067 shares of ARTRA common stock and 707,281 shares of Puretech International, Inc., a publicly traded corporation. As additional collateral for the above mentioned advances and a 1996 advance for Mr. Harvey's prorata of certain bank debt discharged, Mr. Harvey provided ARTRA a $2,150,000 security interest in certain real estate.
ARTRA has entered into various agreements under which it has sold its common shares along with options that require ARTRA to repurchase these shares at the option of the holder, principally one year after the date of each agreement. At December 28, 1995, options are outstanding that, if exercised, would require ARTRA to repurchase 283,965 shares of its common stock for an aggregate amount of approximately $4,774,000. ARTRA does not have available funds to satisfy its obligations if these options were exercised. However the holders of redeemable common stock have the option to sell their shares in the market subject to the limitations of Securities Act Rule 144. At its discretion and subject to its financial ability, ARTRA could reimburse the optionholders for any short-fall resulting from such sale.
As discussed in Note 12 to the consolidated financial statements, ARTRA, Bagcraft and Bagcraft's parent BCA have various redeemable preferred stock issues with an aggregate carrying value of $18,631,000 outstanding at December 28, 1995. These redeemable preferred stock issues have various maturity dates commencing in 1997.
Effective February 1, 1996, BCA, Bagcraft and Ozite entered into an agreement to exchange certain preferred stock between the Companies. In connection with the agreement, BCA issued to Bagcraft 8,135 shares of BCA Series B preferred stock (with a liquidation preference equal to $1,000 per share) for cash of $4,135,000. Bagcraft in turn exchanged the BCA Series B preferred stock for Bagcraft redeemable preferred stock (82.7% of 50,000 shares, or 41,350 shares) held by Ozite. Funds for the transaction were obtained by Bagcraft through an advance under its revolving credit loan (see Note 10 to the Company's consolidated financial statements). BCA then upstreamed the proceeds to ARTRA for working capital purposes.
As a result of the preferred stock exchange agreement, 17.3% of the original Bagcraft redeemable preferred stock and the prorata share of dividends remain outstanding February 1, 1996. Dividends related to the Bagcraft redeemable preferred stock exchanged have been forgiven in accordance with the agreement. The dividend forgiveness will be reflected in the Company's consolidated financial statements in the first quarter of 1996.
The Company has suffered recurring losses from operations and has a net capital deficiency. As a result of these factors, the Company has experienced difficulty in obtaining adequate financing to replace certain current credit arrangements, certain of which are in default, to fund its debt service and liquidity requirements in 1995. Due to its limited ability to receive operating funds from its operating subsidiaries, ARTRA historically has met its operating expenditures with funds generated by such alternative sources as private placements of ARTRA common stock and notes, sales of ARTRA common stock with put options, loans from officers/directors and private investors, as well as through sales of assets and/or other equity infusions. ARTRA plans to continue to seek such alternative sources of funds to meet its future operating expenditures.
ARTRA does not currently have available funds to repay amounts due under various loan arrangements, principally with private investors, some of which are currently past due. ARTRA is currently negotiating with certain investors to issue a private placement of ARTRA notes, with the proceeds to be used to pay down outstanding debt obligations. ARTRA will continue to have significant levels of indebtedness in the future. The level of indebtedness may affect the rate at which or the ability of ARTRA to effectuate the refinancing or restructuring of debt. ARTRA intends to continue to negotiate with its creditors to extend due dates to allow ARTRA to maximize value from possible sale of assets and to explore various other sources of funding to meet its future operating expenditures. If ARTRA is unable to negotiate extensions with its creditors and complete the above mentioned transactions, ARTRA could suffer severe adverse consequences, and as a result, ARTRA may be forced to liquidate its assets or file for protection under the Bankruptcy Code.
ARTRA's corporate entity has no material commitments for capital expenditures.
Bagcraft
Effective December 17, 1993, Bagcraft refinanced its bank debt by entering into a Credit Agreement that provides for a revolving credit loan and two separate term loans. The term loans were separate two-year facilities initially totaling $12,000,000 (Term Loan A) and $8,000,000 (Term Loan B), bearing interest at the lender's index rate plus 1.75% and 3%, respectively. The principal under
Term Loan A is payable at maturity, unless accelerated under terms of the Credit Agreement. The principal under Term Loan B ($4,600,000 and $5,000,000 outstanding at December 28, 1995 and December 29, 1994, respectively) was scheduled to be payable in twenty-four monthly installments of $250,000 from January 1, 1994 to December 1, 1995, with the remaining principal balance payable at maturity, unless accelerated under terms of the Credit Agreement. At December 28, 1995, interest rates on Term Loan A and Term Loan B were 10.25% and 11.5% respectively.
The amount available to Bagcraft under the revolving credit loan is subject to a borrowing base, as defined in the agreement, up to a maximum of $18,000,000. At December 28, 1995 and December 29, 1994, approximately $6,600,000 and $800,000, respectively, was available and unused by Bagcraft under the revolving credit loan. Borrowings under the revolving credit loan bear interest at the lender's index rate plus 1.5% and are payable upon maturity of the Credit Agreement, unless accelerated under terms of the Credit Agreement. At December 28, 1995 the interest rate on the revolving credit loan was 10%.
Borrowings under the Credit Agreement are collateralized by substantially all of the assets of Bagcraft. The Credit Agreement, as amended, contains various restrictive covenants, that among other restrictions, require Bagcraft to maintain minimum levels of tangible net worth and liquidity levels, and limits capital expenditures and restricts additional loans, dividend payments and payments to related parties. In addition, the Credit Agreement prohibits changes in ownership of Bagcraft.
In October, 1995 the Credit Agreement was amended whereby, among other things, the maturity date of the Credit Agreement was extended until March 31, 1996, certain loan covenant violations were resolved and the principal payments under Term Loan B were modified to include five monthly installments of $200,000 from November 15, 1995 to March 31, 1996, with the remaining balance payable at maturity (March 31, 1996) .
Effective February 1, 1996, the Credit Agreement was amended whereby, among other things, the maturity date of the Credit Agreement was extended until September 30, 1997, certain loan covenants were amended. The principal payments under Term Loan B were modified to include twenty-three monthly installments of $200,000 from November 15, 1995 to September 30, 1997, with the remaining balance payable at maturity (September 30, 1997) . Additionally, the lender consented to the use of $4,135,000 advance under the revolving credit loan to fund a preferred stock exchange agreement between BCA (the parent of Bagcraft), Bagcraft and the holder of Bagcraft's 13.5% cumulative, redeemable preferred stock (see Note 12).
As additional compensation for borrowings under the Credit Agreement, the lender received a detachable warrant, expiring in December 1998, with a put option to purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal value. Under certain conditions Bagcraft is required to repurchase the warrant from the lender. The determination of the repurchase price of the warrant is to be based on the warrant's pro rata share of the highest of book value, appraised value or market value of Bagcraft.
In connection with the February 1, 1996 amendment to the Credit Agreement, the warrant agreement was amended to permit the holder to purchase 13% of the fully diluted common equity of Bagcraft at the original nominal purchase price.
In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a $12,500,000 financing package associated with the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The financing package, funded by a combination of Federal, state and local funds, consists of the following loan agreements payable by Bagcraft directly to the City of Baxter Springs:
A $7,000,000 promissory note payable in ten installments of $700,000 due annually on July 21 of each year beginning in 1995 through maturity on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is payable semi-annually. At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $6,300,000 and $7,000,000, respectively, under this loan agreement.
A $5,000,000 subordinated promissory note payable as follows: $150,000 due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The subordinated promissory note is non-interest bearing, subject to certain repayment provisions as defined in the agreement (as amended). At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $5,000,000 and $4,810,000, respectively, under this loan agreement.
Two separate $250,000 subordinated promissory notes payable in varying installments through January 20, 2025. The subordinated promissory notes are non-interest bearing, subject to certain repayment provisions as defined in the agreement. At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $493,000 and $500,000, respectively, under this loan agreement.
Borrowings under the above loan agreements are collateralized by a first lien on the land and building at the Baxter Springs, Kansas production facility and by a second lien on certain machinery and equipment. Under certain circumstances, repayment of the borrowings under the above loan agreements is subordinated to the repayment of obligations under Bagcraft's Credit Agreement. At December 28, 1995 $552,000 of borrowings from the above loan agreements is reflected in the consolidated balance sheet in current assets as restricted cash and equivalents. These funds, invested in interest bearing cash equivalents, are restricted for expenditures associated with the Baxter Springs, Kansas project.
The new Kansas facility replaced Bagcraft's production facility in Joplin, Missouri. Additionally, with the completion of the new Kansas facility, Bagcraft converted the manufacturing facility in Forest Park, Georgia into a distribution facility. The former Carteret, New Jersey facility was sold in December, 1994 and the proceeds of approximately $1,700,000 were used to reduce borrowings under Bagcraft's Credit Agreement.
On April 8, 1994, Bagcraft completed the acquisition of Arcar for consideration consisting of cash of $2,264,000 and subordinated promissory notes totaling $8,000,000 ($5,500,000 and $8,000,000 outstanding at September 28, 1995 and December 29, 1994, respectively). The subordinated promissory notes provided for interest payable quarterly at the prime rate (as defined in the agreement). At September 28, 1995, the remaining outstanding promissory notes were scheduled to mature as follows: $2,500,000 payable March 15, 1996; $2,500,000 payable March 15, 1997; $500,000 payable March 15, 1998. The seller also received a warrant to purchase 177,778 ARTRA common shares at a price of $5.625 per share, the market value at the date of grant. Exercise of the warrant was payable only through a reduction of the subordinated promissory notes and accrued interest due the seller under terms of the purchase agreement. The subordinated promissory notes were paid in full in October, 1995 with proceeds from the sale of Arcar (see Note 3 to the Company's consolidated financial statements).
Effective April 8, 1994, Arcar entered into a Loan and Security Agreement (the "Agreement") with a bank that provided for a revolving credit loan and a term loan. The term loan, in the original principal amount of $2,750,000, provided for interest at the prime rate plus .75%. Borrowings under the Agreement were collateralized by substantially all of the assets of Arcar. The Agreement contained various restrictive covenants, that among other restrictions, require Arcar to maintain minimum levels of net worth and liquidity levels and limit additional loans, dividend payments, capital expenditures and payments to related parties. All borrowings under the Agreement were paid in full in October, 1995 with proceeds of the sale of Arcar (see Note 3 to the Company's consolidated financial statements).
Bagcraft has historically funded its capital requirements with cash flow from operations and funds available under its revolving credit loan. These sources should provide sufficient cash flow to fund Bagcraft's short-term capital requirements. As discussed above, it is anticipated that Bagcraft's recently amended Credit Agreement will provide Bagcraft with the ability to fund its long-term capital requirements.
Bagcraft anticipates that its 1996 capital expenditures, principally for manufacturing equipment, will be approximately $2,500,000 and will be funded principally from the above mentioned credit facilities and also from operations.
COMFORCE/Lori
In September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of the fashion costume jewelry business.
Effective October 17, 1995, September 11, 1995, Lori acquired one hundred percent of the capital stock of COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc. for consideration of approximately $6.4 million, net of cash acquired, consisting of cash of approximately $5.6 million and 500,000 shares of Lori common stock issued as consideration for various fees and guarantees associated with the transaction. The cash consideration included net cash payments to the selling shareholders of approximately $5.2 million. The 500,000 shares of Lori common stock issued as consideration for the Global transaction included 150,000 shares issued to Peter R. Harvey, then a director of Lori and currently the president/director of ARTRA and 100,000 shares issued to ARTRA for their guarantee to the selling shareholder of the payment of the Global purchase price at closing. The shares issued to Peter R. Harvey and ARTRA are subject to approval by the COMFORCE's shareholders. Global provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. The acquisition of Global was funded principally by private placements of approximately 1,950,000 shares of Lori common stock at $3.00 per share (total proceeds of approximately $5,800,000) plus detachable warrants to purchase approximately 970,000 shares of Lori common stock at $3.375 per share that expire five years from the date of issue. In connection with the re-focus of its business, Lori changed its name to COMFORCE Corporation.
Effective July 4, 1995, Lori and ARTRA entered into employment or consulting services agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business. As additional compensation, the agreements provided for the issuance in aggregate of a 35% common stock interest in Lori. After the issuance of the Lori common shares, plus the effects of the issuance of Lori common shares sold by private placements and other common shares issued in conjunction with the Global acquisition, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 25%. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from the ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the equity method through the end of fiscal 1995. See Note 6 to the Company's consolidated financial statements for a further discussion of and the accounting treatment of the Company's investment in COMFORCE at December 28, 1995.
In conjunction with the Global acquisition, ARTRA has agreed to assume certain pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, ARTRA has accrued $4,500,000 of Lori liabilities classified in its consolidated balance at December 28, 1995 as current liabilities of discontinued operations.
Lori Debt Restructuring
Effective August 18, 1994, as amended December 23, 1994, ARTRA, Fill-Mor, Lori and Lori's fashion costume jewelry subsidiaries, (including the New Dimensions Accessories, Ltd., ("New Dimensions") subsidiary, which terminated operations effective December 27, 1994) entered into an agreement with Lori's bank lender to settle obligations due the bank under terms of the bank loan agreements of Lori and its fashion costume jewelry subsidiaries and Fill-Mor. Borrowings due the bank (approximately $25,000,000 as of December 23, 1994), plus amounts due the bank for accrued interest and fees were reduced to $10,500,000 (of which $7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank). Upon the satisfaction of certain conditions of the debt settlement agreement in 1995, as discussed below, the balance of this indebtedness was discharged.
In conjunction with the debt settlement agreement, ARTRA entered into a $1,850,000 short-term loan agreement with a non-affiliated corporation, the proceeds of which were used to fund amounts due the bank as discussed below. The loan, due June 30, 1995, with interest payable monthly at 10%, was collateralized by 100,000 shares of Lori common stock. These 100,000 Lori common shares were originally issued to the bank under terms of the August 18, 1994 Settlement Agreement. In August, 1995 the loan was extended until September 15, 1995 and the lender received the above mentioned 100,000 Lori common shares as consideration for the loan extension. The loan was repaid by ARTRA in February, 1996.
The Company recognized an extraordinary gain of $8,965,000 ($1.57 per share) in December 1994 as a result of the reduction of amounts due the bank under the loan agreements of the Borrowers and Fill-Mor to $10,500,000 (of which
$7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank) as of December 23, 1994.
On March 31, 1995 the bank was paid $750,000 and the remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an additional extraordinary gain to the Company of $9,113,000 ($1.35 per share) in the first quarter of 1995. The $750,000 payment was funded with the proceeds of a $850,000 short-term loan from a former director of Lori. As consideration for assisting in the debt restructuring, the former director received 150,000 shares of the Lori common stock valued at $337,500 ($2.25 per share) based upon Lori's closing market value on March 30, 1995.
The common stock and virtually all the assets of the Company and its Bagcraft subsidiary have been pledged as collateral for borrowings under various loan agreements. Under certain debt agreements the Company is limited in the amounts it can withdraw from its operating subsidiaries. At December 28, 1995 substantially all cash and equivalents on the Company's consolidated balance sheet were restricted to use by and for the Company's operating subsidiaries.
Litigation
The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. See Note 20 to the Company's consolidated financial statements. At December 28, 1995 and December 29, 1994, the Company had accrued $1,800,000 and $1,500,000 respectively, for potential business-related litigation and environmental liabilities. However, as discussed above ARTRA may not have available funds to pay liabilities arising out of these business-related litigation and environmental matters or, in certain instances, to provide for its legal defense. ARTRA could suffer severe adverse consequences in the event of an unfavorable judgment in any of these matters.
Net Operating Loss Carryforwards
At December 28, 1995, ARTRA had Federal income tax loss carryforwards of approximately $33,000,000 expiring principally in 2003 - 2010. Additionally, ARTRA's discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss carryforwards of approximately $11,000,000 available to be applied against future taxable income, if any. In recent years, the Company has issued shares of its common stock to repay various debt obligations, as consideration for acquisitions, to fund working capital obligations and as consideration for various other transactions. Section 382 of the Internal Revenue Code of 1986 limits a corporation's utilization of its Federal income tax loss carryforwards when certain changes in the ownership of a corporation's common stock occurs. In the opinion of management, the Company is not currently subject to such limitations regarding the utilization of its Federal income tax loss carryforwards. Should the Company continue to issue a significant number of shares of its common stock, it could trigger a limitation that would prevent it from utilizing a substantial portion of its Federal income tax loss carryforwards.
Results of Operations
On July 31, 1995, ARTRA and Bagcraft, entered into a letter of intent to sell the business assets, subject to the buyer's assumption of certain liabilities, of Arcar. On October 26, 1995, Bagcraft completed the sale of Arcar.
In September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of the fashion costume jewelry business.
The Company's consolidated financial statements have been reclassified to report separately the results of operations of Arcar and COMFORCE's (formerly Lori) discontinued fashion costume jewelry business prior to the deconsolidation of COMFORCE and its majority-owned subsidiaries effective October 1995. The following discussion of results of operations is presented for the Company's continuing operations at December 28, 1995, which were conducted by the Company's wholly-owned Bagcraft subsidiary.
The Company's Bagcraft subsidiary sells all of its products directly to its customers. On a very limited basis certain customers may be offered extended payment terms beyond 30 days depending upon prevailing trade practices and financial strength.
1995 vs 1994
Net sales from continuing operations of $121,879,000 for the year ended December 28, 1995 were $10,042,000, or 9.0%, higher than net sales from continuing operations for the year ended December 29, 1994. The 1995 sales increase is attributable to increased 1995 selling prices due to the significant increases in paper costs in the second half of 1994 and early 1995 and to an improved sales mix in 1995.
The Company's cost of sales from continuing operations of $102,508,000 for year ended December 28, 1995 increased $7,742,000 as compared to year ended December 29, 1994. Cost of sales from continuing operations in the year ended December 28, 1995 was 84.1% of net sales compared to a cost of sales percentage of 84.7% for the year ended December 29, 1994. The increase in cost of sales is primarily attributable to the significant increases in paper costs in the second half of 1994 and early 1995. The decrease in cost of sales percentage is primarily attributable to the Company's ability to pass along the significant increases in paper costs and to improved production efficiencies in 1995.
Selling, general and administrative expenses from continuing operations were $19,131,000 in the year ended December 28, 1995 as compared to $16,760,000 in the year ended December 29, 1994. Selling, general and administrative expenses were 15.7% of net sales in the year ended December 28, 1995 as compared to 15.0% of net sales in the year ended December 29, 1994. The 1995 increase in selling, general and administrative expenses is primarily attributable to a compensation charge of $3,000,000 related to the issuance of a 35% common stock interest in COMFORCE/Lori as additional compensation for certain individuals to enter into employment or consulting services agreements to manage its entry into and development of the telecommunications and computer technical staffing services business.
In recent years, Bagcraft has experienced a decline in its domestic microwave popcorn business due to the acquisition of one of its major customers by a company with its own packaging ability. Accordingly, at December 31, 1995, Bagcraft incurred a charge to operations of $1,503,000 to write-down the carrying value of idle machinery and equipment dedicated to the production of microwave popcorn products.
Operating loss from continuing operations in the year ended December 28, 1995 was $5,593,000 as compared to operating loss of $4,026,000 in the year ended December 29, 1994. The increased operating loss is primarily attributable to a compensation charge of $3,000,000 related to the issuance of a 35% common stock interest in COMFORCE/Lori as additional compensation for certain individuals to enter into employment or consulting services agreements to manage its entry into and development of the telecommunications and computer technical staffing services business and a charge to operations of $1,503,000 to write-down the carrying value of idle machinery and equipment dedicated to the production of microwave popcorn products, partially offset by improved operating margins of the Bagcraft subsidiary.
Interest expense from continuing operations in the year ended December 28, 1995 increased $1,164,000 as compared to the year ended December 29, 1994. The 1995 increase is principally due to the cost of ARTRA common stock issued as additional compensation for the December 1995 private placement of ARTRA short-term notes.
Due to the Company's tax loss carryforwards and the uncertainty of future taxable income, no income tax benefit was recognized in connection with the Company's 1995 and 1994 pre-tax losses. The 1995 extraordinary credit represents a net gain from discharge of bank indebtedness.
1994 vs 1993
Net sales from continuing operations of $111,837,000 for the year ended December 29, 1994 were $1,747,000, or 1.5%, lower than net sales from continuing operations for the year ended December 30, 1993. The 1994 net sales decrease is primarily attributable to the sale of Bagcraft's Roll Press division, which was completed in the second quarter of 1993.
The Company's cost of sales from continuing operations of $94,766,000 for year ended December 29, 1994 increased $1,305,000 as compared to year ended December 30, 1993. Cost of sales from continuing operations in the year ended December 28, 1995 was 84.7% of net sales compared to a cost of sales percentage of 82.3% for the year ended December 30, 1993. The increase in the packaging segment cost of sales and cost of sales percentage is primarily attributable to unforeseen delays in the completion of and higher than anticipated start-up costs of the Baxter Springs, Kansas production facility and higher raw material costs in the second half of 1994, partially offset by a more favorable product mix.
Selling, general and administrative expenses from continuing operations were $16,760,000 in the year ended December 29, 1994 as compared to $15,537,000 in the year ended December 30, 1993. Selling, general and administrative expenses were 15.0% of net sales in the year ended December 29, 1994 as compared to 13.7% of net sales in the year ended December 30, 1993. The 1994 increase in selling, general and administrative expenses is primarily attributable to an increase in employee benefit costs and professional fees.
In December, 1993 the Bagcraft subsidiary recorded a charge to operations of $1,175,000 representing equipment and inventory relocation costs and employee severance and outplacement costs relating to the construction of a new manufacturing facility in Baxter Springs, Kansas.
Operating loss from continuing operations in the year ended December 29, 1994 was $4,026,000 as compared to operating loss of $974,000 in the year ended December 30, 1993. The increased operating loss is primarily attributable to unforeseen delays in the completion of and higher than anticipated start-up costs of the Baxter Springs, Kansas production facility.
Interest expense from continuing operations in the year ended December 29, 1994 increased $2,067,000 as compared to the year ended December 30, 1993. The 1994 increase is principally due to an overall increase in borrowings due to the December, 1993 refinancing of Bagcraft's bank debt, an increase in the prime rate and fees incurred for short-term borrowings at the Corporate entity.
The 1994 extraordinary credit represents a net gain from discharge of bank indebtedness under the loan agreements of Lori and its operating subsidiaries. The 1993 extraordinary credit represents a gain from a net discharge of indebtedness at Lori's New Dimensions subsidiary. No income tax expense is reflected in the Company's financial statements resulting from the extraordinary credit due to the utilization of tax loss carryforwards.
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in our economy; however, to the extent permitted by competition, the Company generally passes increased costs to its customers by increasing sales prices over time.
Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use or sale of the asset and its eventual disposition, to the carrying amount of the asset. This new accounting principle is effective for the Company's fiscal year ending December 26, 1996. The Company believes that adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on new fair value accounting rules. Although expense recognition for employee stock based compensation is not mandatory, the pronouncement requires companies that choose not to adopt the new fair value accounting, to disclose the pro-forma net income and earnings per share under the new method. This new accounting principle is effective for the Company's fiscal year ending December 26, 1996. The Company believes that adoption will not have a material impact on its financial statements as the Company will not adopt the new fair value accounting, but instead comply with the disclosure requirements.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Financial Statements and Schedules as listed on Page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Item 11.
Item 11. Executive Compensation
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by Part III will be filed as an amendment to Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements as listed on Page. 2. Financial Statement Schedules as listed on Page. 3. Exhibits as listed on Page E-1.
(b) Reports on Form 8-K.
On November 8, 1995 the Company filed Form 8-K to report:
1) The October 26, 1995 sale of the business assets, subject to the buyers assumption of certain liabilities, of Bagcraft's Arcar Graphics subsidiary.
2) The settlement of certain debt obligations due a bank lender of approximately $5,000,000 for a cash payment of $150,000.
On October 31, 1995 the Company filed Form 8-K to report:
1) The October 17, 1995 acquisition of COMFORCE Global Inc. by The Lori Corporation and the discontinuance of Lori's fashion costume jewelry business.
2) The reduction of the Company's common stock ownership interest in The Lori Corporation from 62.6% to approximately 25% due to the issuance Lori common shares principally to certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business and a private placement of Lori common shares to fund the acquisition of COMFORCE Global.
On October 11, 1995 the Company filed Form 8-K to report:
1) On September 11, 1995, the Company's 62.6% owned subsidiary The Lori Corporation agreed to participate in the acquisition of COMFORCE Global Inc.
2) On July 11, 1995 The Company and its 62.6% owned subsidiary The Lori Corporation entered into agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business.
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: JOHN HARVEY ----------------------- John Harvey Chairman and Director Dated: April 9, 1996 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.
JOHN HARVEY Chairman and Director April 9, 1996 - ----------------------- John Harvey Chief Executive Officer
PETER R. HARVEY President and Director April 9, 1996 - ----------------------- Peter R. Harvey Chief Operating Officer
JAMES D. DOERING Vice President /Treasurer April 9, 1996 - ----------------------- James D. Doering Chief Financial Officer
GERARD M. KENNY Director April 9, 1996 - ----------------------- Gerard M. Kenny
LAWRENCE D. LEVIN Controller April 9, 1996 - ----------------------- Lawrence D. Levin
Page ---- ARTRA GROUP INCORPORATED AND SUBSIDIARIES
Report of Independent Accountants
Consolidated Balance Sheets as of December 28, 1995 and December 29, 1994
Consolidated Statements of Operations for each of the three fiscal years in the period ended December 28, 1995
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for each of the three fiscal years in the period ended December 28, 1995
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended December 28, 1995
Notes to Consolidated Financial Statements
Schedules:
I. Condensed Financial Information of Registrant
II. Valuation and Qualifying Accounts
Schedules other than those listed are omitted as they are not applicable or required or equivalent information has been included in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors ARTRA GROUP Incorporated Northfield, Illinois
We have audited the consolidated financial statements and the financial statement schedules of ARTRA GROUP Incorporated and Subsidiaries as listed in the index on page of this Form 10-K. These financial statements and financial statement schedules are the responsibility of ARTRA GROUP Incorporated's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ARTRA GROUP Incorporated and Subsidiaries as of December 28, 1995 and December 29, 1994, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency. As a result of these factors, the Company has experienced difficulty in obtaining adequate financing to replace its current credit arrangements, certain of which are in default, to fund its debt service and to satisfy liquidity requirements for 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois April 9, 1996
ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
December 28, December 29, 1995 1994 -------- --------
ASSETS Current assets: Cash and equivalents $2,347 $2,070 Restricted cash and equivalents 552 1,324 Receivables, less allowance for doubtful accounts and markdowns of $250 in 1995 and $1,654 in 1994 10,897 13,707 Inventories 16,634 20,268 Available -for-sale securities 1,427 - Other 324 1,148 -------- -------- Total current assets 32,181 38,517 -------- --------
Property, plant and equipment Land 930 930 Buildings 11,679 10,584 Improvements to land and leaseholds - 187 Machinery and equipment 30,547 33,756 Construction in in progress 1,117 2,693 -------- -------- 44,273 48,150 Less accumulated depreciation and amortization 17,335 17,110 -------- -------- 26,938 31,040 -------- --------
Other assets: Available -for-sale securities 15,519 - Excess of cost over net assets acquired, net of accumulated amortization of $2,022 in1995 and $7,934 in 1994 3,258 19,076 Other 53 4,796 -------- -------- 18,830 23,872 -------- -------- $77,949 $93,429 ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
December 28, December 29, 1995 1994 -------- --------
LIABILITIES Current liabilities: Notes payable, including amounts due to related parties of $5,675 in 1995 and $5,669 in 1994 $25,300 $28,053 Current maturities of long-term debt 3,512 37,521 Accounts payable, including amounts due to a related party of $399 in 1995 10,925 16,788 Accrued expenses 14,106 16,533 Income taxes 203 94 Liabilities of discontinued operations 4,500 - -------- ------- Total current liabilities 58,546 98,989 -------- -------
Long-term debt 34,113 19,673 Debt subsequently discharged - 9,750 Other noncurrent liabilities 650 1,463 Commitments and contingencies
Redeemable common stock, issued 283,965 shares in 1995 and 279,679 shares in 1994 4,774 4,144 ARTRA redeemable preferred stock payable to a related party, $1,000 par value; Series A, 6% cumulative payment-in-kind, including accumulated dividends, net of unamortized discount of $1,575 in 1995 and $1,842 in 1994; redeemable March 1, 2000 at $1,000 per share plus accrued dividends; authorized 2,000,000 shares all series; issued 3,750 shares 3,694 3,129 Bagcraft redeemable preferred stock payable to a related party, cumulative $.01 par value, 13.5%; including accumulated dividends; redeemable in 1997 with a liquidation preference equal to $100 per share; 50,000 shares authorized and issued 10,794 10,119 BCA Holdings preferred stock payable to a related party, $1.00 par value, Series A, 6% cumulative; including accumulated dividends; liquidation preference of $1,000 per share; 10,000 shares authorized; issued 3,675 shares 4,143 3,922
SHAREHOLDERS' EQUITY (DEFICIT) Common stock, no par value; authorized 7,500,000 shares; issued 7,102,979 shares in 1995 and 6,455,602 shares in 1994 5,540 5,052 Additional paid-in capital 38,526 36,613 Unrealized appreciation of investments 21,047 - Receivable from related party, including accrued interest (4,318) (4,100) Accumulated deficit (98,755) (94,520) -------- -------- (37,960) (56,955) Less treasury stock (57,038 shares), at cost 805 805 -------- -------- (38,765) (57,760) -------- -------- $77,949 $93,429 ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements.
_______________________________________________ * As reclassified for discontinued operations.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data)
The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars)
The accompanying notes are an integral part of the consolidated financial statements.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Financial Restructuring
ARTRA Group Incorporated's ("ARTRA" or the "Company") consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities or other adjustments that might be necessary should ARTRA be unable to continue as a going concern.
The Company has suffered recurring losses from operations and has a net capital deficiency. As a result of these factors, the Company has experienced difficulty in obtaining adequate financing to replace certain current credit arrangements, certain of which are in default, and to fund its debt service and liquidity requirements in 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 9, Notes Payable, and Note 10, Long Term Debt, for further discussion of the status of credit arrangements and restrictions on the ability of operating subsidiaries to fund ARTRA corporate obligations. Due to its limited ability to receive operating funds from its operating subsidiaries, ARTRA has historically met its operating expenditures with funds generated by alternative sources, such as private placements of ARTRA common stock and notes, sales of ARTRA common stock with put options, loans from officers/directors and private investors, as well as through sales of assets and/or other equity infusions. ARTRA plans to continue to seek such alternative sources of funds to meet its future operating expenditures.
ARTRA, through its wholly-owned subsidiary, Bagcraft Corporation of America ("Bagcraft"), currently operates in one industry segment as a manufacturer of packaging products principally serving the food industry. Prior to September 28, 1995, ARTRA's then 62.9% owned subsidiary, The Lori Corporation ("Lori"), operated as a designer and distributor of popular-priced fashion costume jewelry and accessories. In recent years, Lori's fashion costume jewelry operations had experienced a pattern of significantly lower sales levels and related operating losses primarily due to a shift in the buying patterns of its major customers (i.e. certain mass merchandisers) from participation in Lori's service program to purchases of costume jewelry and accessories directly from manufacturers and due to a continued unfavorable retail environment. Accordingly, in September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business as discussed in Note 3.
As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase agreement to participate in the acquisition of one hundred percent of the capital stock of COMFORCE Global Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc. Global provides telecommunications and computer technical staffing and consulting services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. On October 17, 1995, Lori completed the acquisition of one hundred percent of the capital stock of Global. In connection with the re-focus of its business Lori changed its name to COMFORCE Corporation ("COMFORCE").
Effective July 4, 1995, Lori and ARTRA entered into employment or consulting services agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business. As additional compensation, the agreements provided for the issuance in aggregate of a 35% common stock interest in Lori. After the issuance of the Lori common shares, plus the effects of the issuance of Lori common shares sold by private placements and other Lori common shares issued in conjunction with the Global acquisition, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 25% at December 28, 1995. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the equity method through the end of fiscal 1995. See Note 6 for a further discussion of ARTRA's investment in COMFORCE.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Effective October 26, 1995, Bagcraft completed the sale of the business assets, subject to the buyer's assumption of certain liabilities, of its wholly-owned subsidiary, Arcar Graphics, Inc. ("Arcar"), for cash of approximately $20,300,000. The net proceeds, after extinguishment of certain Arcar debt obligations, of approximately $10,400,000, were used to reduce Bagcraft debt obligations.
In October, 1995 the Company recognized an extraordinary gain of $4,917,000 ($.71 per share) as a result of a settlement agreement with a bank whereby a $3,600,000 note payable due December 31, 1990 plus accrued interest of $1,467,000 were discharged for a cash payment of $150,000.
As discussed in Note 8, the Company recognized an extraordinary gain of $9,113,000 ($1.35 per share) in March 1995 as a result of the discharge of amounts due a bank under the loan agreements of Lori and its parent, Fill-Mor Holding, Inc. ("Fill-Mor").
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the former Welch Vacuum Technology ("Welch") subsidiary under terms of a noncompetition agreement and a subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the 1989 sale of Welch. Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a subordinated note in the principal amount of $640,000 payable June 30, 2001. The cash proceeds were used for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the remainder used for working capital. In conjunction with this transaction, ARTRA entered into a letter agreement with the bank whereby the bank agreed not to exercise any of its rights and remedies with respect to amounts due the bank under its ARTRA notes (see Note 9) and certain obligations of ARTRA's president, Peter R. Harvey.
In February 1996, the bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest) and certain obligations of Mr. Harvey for a cash payment of $5,150,000 and Mr. Harvey's $850,000 note payable to the bank. ARTRA will recognize a gain on the discharge of this indebtedness of approximately $10,000,000 in the first quarter of 1996. The cash payment due the bank was funded principally with proceeds received from a short-term loan agreement along with proceeds received from the Bagcraft subsidiary as consideration for the issuance of BCA Holdings, Inc. ("BCA", the parent of Bagcraft) preferred stock, see Note 12.
ARTRA intends to continue to negotiate with its creditors to extend due dates to allow ARTRA to maximize value from possible sale of assets and to explore various other sources of funding to meet its future operating expenditures. If ARTRA is unable to negotiate extensions with its creditors and complete the above mentioned transactions, ARTRA could suffer severe adverse consequences, and as a result, ARTRA may be forced to liquidate its assets or file for protection under the Bankruptcy Code.
The Company has adopted a 52/53 week fiscal year ending the last Thursday of December.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany accounts and transactions are eliminated.
B. Cash Equivalents
Short-term investments with an initial maturity of less than ninety days are considered cash equivalents.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
C. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
D. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred and expenditures for major renovations are capitalized. Depreciation is computed on the basis of estimated useful lives principally by the straight line method for financial statement purposes and principally by accelerated methods for tax purposes. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the period covered by the lease.
The costs of property retired or otherwise disposed of are applied against the related accumulated depreciation to the extent thereof, and any profit or loss on the disposition is recognized in earnings.
E. Investments in Equity Securities
In 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, at December 28, 1995, the Company's investment in COMFORCE (see Note 6) is classified as available for sale and is stated at fair value. The adoption of SFAS No. 115 resulted in an increase to shareholders' equity in the fourth quarter of 1995 of $21,047,000. In prior years and, until October 1995, COMFORCE was a majority-owned subsidiary included in the consolidated financial statements of the Company.
F. Intangible Assets
The net assets of a purchased business are recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of net assets acquired (goodwill) is reflected as intangible assets and amortized on a straight-line basis principally over 40 years.
The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through forecasted future operations.
G. Revenue Recognition
Sales to customers are recorded at the time of shipment net of estimated markdowns and merchandise credits.
H. Income Taxes
Income taxes are accounted for as prescribed in Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes. Under the asset and liability method of Statement No. 109, the Company recognizes the amount of income taxes payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to recovered or settled.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
I. Use of Estimates In Preparation of Financial Statements
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
J. Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use or sale of the asset and its eventual disposition, to the carrying amount of the asset. This new accounting principle is effective for the Company's fiscal year ending December 26, 1996. The Company believes that adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on new fair value accounting rules. Although expense recognition for employee stock based compensation is not mandatory, the pronouncement requires companies that choose not to adopt the new fair value accounting, to disclose the pro-forma net income and earnings per share under the new method. This new accounting principle is effective for the Company's fiscal year ending December 26, 1996. The Company believes that adoption will not have a material impact on its financial statements as the Company will not adopt the new fair value accounting, but instead comply with the disclosure requirements.
3. CHANGE OF BUSINESS
Arcar Graphics, Inc.
Effective April 8, 1994, Bagcraft purchased the business assets, subject to buyer's assumption of certain liabilities, of Arcar, a manufacturer and distributor of waterbase inks, for consideration of $10,264,000 consisting of cash of $2,264,000 and subordinated promissory notes totaling $8,000,000. The acquisition of Arcar was accounted for by the purchase method and, accordingly, the assets and liabilities of Arcar were included in ARTRA's financial statements at their estimated fair market value at the date of acquisition.
Effective October 26, 1995, Bagcraft sold the business assets, subject to the buyer's assumption of certain liabilities, of Arcar for cash of approximately $20,300,000, resulting in a net gain of $8,483,000. The net proceeds, after extinguishment of certain Arcar debt obligations, of approximately $10,400,000, were used to reduce Bagcraft debt obligations. At December 29, 1994, the total assets and liabilities of Arcar were approximately $13,157,000 and $11,914,000, respectively.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Lori/COMFORCE
In September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business and recorded a provision of $1,000,000 for the estimated costs to complete the disposal of the fashion costume jewelry business. At December 29, 1994, the total assets and liabilities of Lori's discontinued fashion costume jewelry business were approximately $17,460,000 and $11,914,000, respectively.
Effective October 17, 1995, Lori acquired one hundred percent of the capital stock of COMFORCE Global, Inc. ("Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc. for consideration of approximately $6.4 million, net of cash acquired, consisting of cash of approximately $5.6 million and 500,000 shares of Lori common stock issued as consideration for various fees and guarantees associated with the transaction. The cash consideration included net cash payments to the selling shareholders of approximately $5.2 million. The 500,000 shares of Lori common stock issued as consideration for the Global transaction included 150,000 shares issued to Peter R. Harvey, then a director of Lori and currently the president/director of ARTRA and 100,000 shares issued to ARTRA for their guarantee to the selling shareholder of the payment of the Global purchase price at closing. The shares issued to Peter R. Harvey and ARTRA are subject to approval by the issuer's shareholders.
Global provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. The acquisition of Global was funded principally by private placements of approximately 1,950,000 shares of Lori common stock at $3.00 per share (total proceeds of approximately $5,800,000) plus detachable warrants to purchase approximately 970,000 shares of Lori common stock at $3.375 per share that expire five years from the date of issue. In connection with the re-focus of its business, Lori changed its name to COMFORCE Corporation. Additionally, in conjunction with the Global acquisition, ARTRA has agreed to assume certain pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, ARTRA has accrued $4,500,000 of Lori liabilities classified in its consolidated balance at December 28, 1995 as current liabilities of discontinued operations.
Effective July 4, 1995, Lori and ARTRA entered into employment or consulting services agreements with certain individuals to manage Lori's entry into and development of the telecommunications and computer technical staffing services business. As additional compensation, the agreements provided for the issuance in aggregate of a 35% common stock interest in Lori. After the issuance of the Lori common shares, plus the effects of the issuance of Lori common shares sold by private placements and other Lori common shares issued in conjunction with the Global acquisition, ARTRA's common stock ownership interest in COMFORCE common stock was reduced to approximately 25%. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the equity method through the end of fiscal 1995. See Note 6 for a further discussion of and the accounting treatment of the Company's investment in COMFORCE at December 28, 1995.
Other
During 1995 the Company was dismissed as party to certain litigation relating to the former Welch subsidiary. Accordingly, the Company reversed $700,000 of excess liability accruals originally provided in 1989 to complete the disposal of Welch.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's consolidated financial statements have been reclassified to report separately the results of operations of Arcar and COMFORCE's discontinued fashion costume jewelry business prior to the deconsolidation of Lori and its majority-owned subsidiaries effective October 1995. The 1995, 1994 and 1993 operating results (in thousands) of Bagcraft's discontinued Arcar subsidiary and COMFORCE's discontinued fashion costume jewelry business and net gain on disposal of discontinued operations consist of:
1995 1994 1993 -------- -------- ---------
Net sales $ 16,932 $ 40,278 $ 46,054 ======== ======== =========
Loss from operations before income taxes $ (8,156) $(15,832) $ (183 Provision for income taxes (17) (74) (33) -------- -------- --------- Loss from operations (8,173) (15,906) (216) -------- -------- ---------
Gain on sale of Arcar subsidiary 8,483 -- --
Provision for disposal of business (300)
Provision for income taxes -- -- -- -------- -------- --------- Gain on disposal of businesses 8,183 -- -- -------- -------- --------- Earnings (loss) from discontinued operations $ 10 $(15,906) $ (216) ======== ======== =========
4. CONCENTRATION OF RISK
The accounts receivable of the Company's Bagcraft subsidiary at December 28, 1995 consist primarily of amounts due from companies in the food industry. As a result, the collectibility of these receivables is dependent, to an extent, upon the economic condition and financial stability of the food industry. Credit risk is minimized as a result of the large number and diverse nature of Bagcraft's customer base. Bagcraft's major customers include some of the largest companies in the food industry. At December 28, 1995, Bagcraft had 10 customers with accounts receivable balances that aggregated approximately 40% of the Company's total trade accounts receivable. No single customer accounted for 10% or more of Bagcraft's 1995 sales.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. INVENTORIES
Inventories consist of:
December 28, December 29, 1995 1994 -------- -------- (in thousands)
Raw materials and supplies $ 5,645 $ 7,041 Work in process 40 877 Finished goods 10,949 12,350 -------- -------- $ 16,634 $ 20,268 ======== ========
6. INVESTMENT IN COMFORCE (formerly LORI) CORPORATION
As discussed in Note 3, due to the issuances of COMFORCE common shares in conjunction with the acquisition of Global, ARTRA's common stock ownership in COMFORCE was reduced to approximately 25%. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the requirements of APB Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock" through the end of fiscal 1995.
Effective December 28, 1995, John Harvey and Peter R. Harvey, ARTRA's chairman and president, respectively, resigned as directors of COMFORCE. Due to such factors as a lack of board of directors representation and participation in policy formulation by ARTRA, as well as a lack of interchange of managerial personnel, ARTRA is not able to exercise significant influence over the operating and financial policies of COMFORCE. Additionally, assuming contemplated additional issuances of COMFORCE common shares, on a fully diluted basis ARTRA's ownership interest in COMFORCE will be reduced to less than 20%. In the opinion of the Company, effective December 28, 1995, the investment in COMFORCE ceased to conform to the requirements of APB Opinion No. 18. Accordingly, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, at December 28, 1995, the Company's investment in COMFORCE is classified as available for sale and is stated at fair value. The adoption of SFAS No. 115 resulted in an increase to shareholders' equity in the fourth quarter of 1995 of $21,047,000. In prior years and, until October 1995, COMFORCE was a majority-owned subsidiary included in the consolidated financial statements of the Company.
In February 1996, ARTRA sold the 200,000 COMFORCE common shares it received in connection with Lori's acquisition of COMFORCE to certain officers, directors and key employees of ARTRA. As additional consideration for a February 1996 short-term loan (see Note 9) the lender has received to-date 37,500 COMFORCE common shares held by ARTRA. In March 1996, ARTRA sold 93,000 COMFORCE shares in the market, with the proceeds used for working capital. The above mentioned 330,500 COMFORCE shares were classified in the Company's consolidated balance sheet at December 28, 1995 in current assets as "Available-for-sale securities." ARTRA's remaining investment in COMFORCE (1,970,536 shares) was classified in the Company's consolidated balance sheet at December 28, 1995 in noncurrent assets as "Available-for-sale securities."
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. INVESTMENT IN EMERALD ACQUISITION CORPORATION / ENVIRODYNE INDUSTRIES, INC.
In March, 1989, Envirodyne Industries, Inc. ("Envirodyne") and Emerald Acquisition Corporation ("Emerald") entered into a definitive agreement for a subsidiary of Emerald to acquire all of the issued and outstanding shares of Envirodyne common stock. Pursuant to the terms of certain letter agreements, ARTRA agreed to participate in the transaction and received Envirodyne's consent to sell its then 4,830,000 Envirodyne common shares (a 26.3% interest) to Emerald. On May 3, 1989 the transaction was consummated. ARTRA received consideration consisting of cash of $75,000,000, a 27.5% common stock interest in Emerald and Emerald junior debentures.
On January 6, 1993, a group of bondholders filed an involuntary petition for reorganization of Envirodyne under Chapter 11 of the U.S. Bankruptcy Code. On January 7, 1993, Envirodyne and certain of its subsidiaries (the "Debtor") filed petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. Subsequently, Emerald filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the same court.
Envirodyne's plan of reorganization did not provide for any distribution or value to Emerald and Emerald, therefore, is without assets to provide value to ARTRA for ARTRA's investment in Emerald common stock and Emerald Junior Debentures. See discussion below and in Note 20 Litigation for remedies being pursued by ARTRA as damages for the lost value of its investment in Emerald common stock and Emerald Junior Debentures.
On November 2, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth Judicial Circuit for the state of Illinois (the "State Court Action") against Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K. Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P. Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with DPK), James F. Massey and William Rifkind. On November 22, 1993, ARTRA filed a First Amended Complaint. The defendants removed the case to the Bankruptcy Court in which the Emerald Chapter 11 case is pending. On July 15, 1994 all but two of ARTRA's causes of action were remanded to the state court. The Bankruptcy Court retained jurisdiction of ARTRA's claims against the defendants for breaching their fiduciary duty as directors of Emerald to Emerald's creditors and interference with ARTRA's contractual relations with Emerald. On April 7, 1995, the Company's appeal of the Bankruptcy Court's order retaining jurisdiction over two claims was denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these claims. On August 4, 1995, ARTRA appealed from the Bankruptcy Court's dismissal order. That appeal is still pending.
On July 18, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court Action for breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation, breach of contract and promissory estopel. In the State Court Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of $408.6 million and approximately $33 million in fees paid to Salomon. The causes of action for breach of the fiduciary duty of due care were repleaded to reserve ARTRA's right to appeal the State Court's dismissal of the causes of action in the Third Amended Complaint. Defendant Kelly was dismissed with prejudice pursuant to a stipulation between ARTRA and the Kelly Defendants.
On or about March 1, 1996, DPK brought a motion for summary judgment as to ARTRA's claims for breach of contract and promissory estoppel. DPK's motion is currently pending.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. EXTRAORDINARY GAINS
ARTRA Debt Restructuring
In October, 1995 the Company recognized an extraordinary gain of $4,917,000 ($.71 per share) as a result of a settlement agreement with a bank whereby a $3,600,000 note payable due December 31, 1990 plus accrued interest of $1,467,000 were discharged for a cash payment of $150,000.
Lori Debt Restructuring
Per terms of a debt settlement agreement, borrowings due a bank under the loan agreements of Lori and its discontinued fashion costume jewelry subsidiaries (including the former New Dimensions ("New Dimensions") subsidiary, which ceased operations in December 1994) and Fill-Mor (approximately $25,000,000 as of December 23, 1994), plus amounts due the bank for accrued interest and fees were reduced to $10,500,000 (of which $7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank). Upon the satisfaction of certain conditions of the debt settlement agreement in 1995, as discussed below, the balance of this indebtedness was discharged.
In conjunction with the debt settlement agreement, ARTRA entered into a $1,850,000 short-term loan agreement with a non-affiliated corporation, the proceeds of which were used to fund amounts due the bank as discussed below. The loan, due June 30, 1995, with interest payable monthly at 10%, was collateralized by 100,000 shares of Lori common stock. These 100,000 Lori common shares were originally issued to the bank under terms of the debt settlement agreement. In August, 1995 the loan was extended until September 15, 1995 and the lender received the above mentioned 100,000 Lori common shares as consideration for the loan extension. The loan was repaid by ARTRA in February, 1996.
The Company recognized an extraordinary gain of $8,965,000 ($1.57 per share) in December 1994 as a result of the reduction of amounts due the bank under the loan agreements of Lori and its discontinued fashion costume jewelry subsidiaries and Fill-Mor to $10,500,000 (of which $7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank) as of December 23, 1994 calculated (in thousands) as follows:
Amounts due the bank under loan agreements of Lori and its operating subsidiaries and Fill-Mor $ 25,394 Less amounts due the bank at December 29, 1994 (10,500) --------- Bank debt discharged 14,894 Accrued interest and fees discharged 3,635 Other liabilities discharged 1,985 Less consideration to the bank per terms of the amended settlement agreement Cash (1,900) ARTRA common stock (2,500) New Dimensions assets assigned to the bank at estimated fair market value (7,149) --------- Net extraordinary gain $ 8,965 =========
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On March 31, 1995, the bank was paid $750,000 and the remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an additional extraordinary gain to the Company of $9,113,000 ($1.35 per share) in the first quarter of 1995. The $750,000 payment was funded with the proceeds of a $850,000 short-term loan from a former director of Lori. As consideration for assisting in the debt restructuring, the former director received 150,000 shares of Lori common stock valued at $337,500 ($2.25 per share) based upon Lori's closing market value on March 30, 1995. The first quarter 1995 extraordinary gain was calculated (in thousands) as follows:
Amounts due the bank under loan agreements of Lori and its operating subsidiaries and Fill-mor $ 10,500 Less amounts due the bank (750) --------- Bank debt discharged 9,750 Less fair market value of Lori common stock issued as consideration for the debt restructuring (337) Other fees and expenses (300) --------- Net extraordinary gain $ 9,113 =========
New Dimensions 1993 Restructuring
The reorganization of New Dimensions resulted in a 1993 extraordinary gain of $22,057,000 ($4.49 per share) from a net discharge of indebtedness calculated (in thousands) as follows:
Amount due on New Dimensions' 12.75% Senior Notes, including accrued interest $ 22,822 Trade liabilities and accrued expenses 3,231 --------- Total unsecured claims 26,053 Less present value of payments due to unsecured creditors (2,725) Less present value of bank restructuring loan fee (1,271) --------- Net extraordinary gain $ 22,057 =========
9. NOTES PAYABLE
Notes payable (in thousands) consist of: December 28, December 29, 1995 1994 -------- --------
ARTRA bank notes payable, at various interest rates $ 12,063 $ 18,507 Amounts due to related parties, interest from 8% to 12% 5,675 5,669 ARTRA 12% convertible subordinated promissory notes 2,500 - Other, interest from 8% to 20% 5,062 3,877 -------- -------- $ 25,300 $ 28,053 ======== ========
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Bank Notes Payable
At December 31, 1993, $17,063,000 in ARTRA notes, plus related loan fees and accrued interest were payable to a bank. The notes provided for interest at the prime rate. These bank notes were collateralized by, among other things, 100% of the common stock of ARTRA's BCA subsidiary, the parent of Bagcraft, and a secondary position on the assets of BCA, payments due under a noncompetition agreement with the Company's former Welch subsidiary and by a subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the sale of Welch. Additionally, the bank notes are collateralized by a $5,500,000 personal guaranty of a private investor and, prior to March 31, 1994 as discussed below, the bank notes were collateralized by a $2,500,000 guaranty of a private corporation. A major shareholder and executive officer of the private corporation is an ARTRA director. As additional compensation, the private investor is receiving 1,833 shares of ARTRA common stock for each month the guaranty is outstanding and the private corporation received 833 shares of ARTRA common stock for each month the guaranty was outstanding. Among other things, the bank notes prohibit the payment of cash dividends by ARTRA.
On March 31, 1994, ARTRA entered into a series of agreements with its bank lender and with the private corporation noted above that had guaranteed $2,500,000 of ARTRA's bank notes. Per terms of the agreements, the private corporation purchased $2,500,000 of ARTRA notes from ARTRA's bank thereby reducing the outstanding principal on ARTRA's bank notes to $12,063,000 and the bank released the private corporation from its $2,500,000 loan guaranty. The ARTRA bank notes and related loan fees were payable on September 30, 1994. Interest on the bank notes continues to accrue at the prime rate (8.75% and 8.5% at September 28, 1995 and December 29, 1994, respectively) and is payable quarterly. Interest on the bank notes has been paid through June 14, 1994. Effective March 31, 1994, ARTRA pledged, as additional collateral for its bank notes, any and all net proceeds arising from its lawsuit against Salomon Brothers, Inc., Salomon Brothers Holding Company Inc. (collectively, "Salomon") D.P. Kelly & Associates, L.P. ("Kelly") and all of the directors of Emerald for breaches of fiduciary duty by the directors of Emerald, induced by Salomon and Kelly, in connection with the reorganization of Envirodyne as discussed in Note 7. As consideration for purchasing $2,500,000 of ARTRA bank notes, the private corporation received a $2,500,000 note payable from ARTRA bearing interest at the prime rate.
As additional consideration, the private corporation has received an option to put back to ARTRA the 49,980 shares of ARTRA common stock received as compensation for its former $2,500,000 ARTRA loan guaranty at a price of $15.00 per share. The put option is exercisable on the later of the day that the $2,500,000 note payable to the private corporation becomes due or the date the ARTRA bank notes have been paid in full. The option price increases by $2.25 per share annually ($18.938 per share at December 28, 1995). The $2,500,000 note payable to the private corporation is reflected in the above table as amounts due to related parties. During the first quarter of 1996, the $2,500,000 note and related accrued interest was paid in full principally with proceeds from additional short-term borrowings.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by the former Welch subsidiary under terms of a noncompetition agreement and a subordinated note in the principal amount of $2,500,000 received by ARTRA as part of the proceeds from the 1989 sale of Welch. Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a subordinated note in the principal amount of $640,000 payable June 30, 2001. The cash proceeds were used for a $2,500,000 reduction of amounts due on certain ARTRA bank notes, with the remainder used for working capital. In conjunction with this transaction, ARTRA entered into a letter agreement with the bank whereby the bank agreed not to exercise any of its rights and remedies with respect to amounts due the bank under its ARTRA notes and certain obligations of ARTRA's president, Peter R. Harvey through at least September 28, 1995.
In February 1996, the bank agreed to discharge all amounts under its ARTRA notes ($12,063,000 plus accrued interest) and certain obligations of Mr. Harvey for consideration of $6,000,000, consisting of a cash payment of $5,150,000 and Mr. Harvey's $850,000 note payable to the bank. ARTRA will recognize a gain on the discharge of its bank indebtedness of approximately $10,000,000 in the first quarter of 1996 and will record a receivable for Mr. Harvey's prorata share of the debt discharge funded by the Company. As collateral for this advance and other previous advances (see note 21), Mr. Harvey provided ARTRA a $2,150,000 security interest in certain real estate.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In conjunction with the February 1996 discharge of indebtedness, the Company entered into a $1,900,000 short-term loan agreement with an unaffiliated company. The loan, due May 26, 1996, with interest at 12% is collateralized by, among other things, the common stock of ARTRA's BCA subsidiary. As additional compensation for the loan and for participating in the above discharge of indebtedness, the lender has received, to-date, 150,000 shares of ARTRA common stock and 37,500 shares of COMFORCE common stock held by ARTRA. Additionally, for a cash payment of $500,000 to ARTRA, the lender purchased an option to acquire up to 40% of the common stock of Bagcraft for nominal consideration. If the borrowings under the loan agreement are repaid by May 26, 1996, ARTRA can repurchase the option for a cash payment of $550,000. If the borrowings under the loan agreement are repaid subsequent to May 26, 1996, the percentage of the warrant ARTRA can repurchase declines on a sliding scale through July 25, 1996. The proceeds from this loan agreement along with proceeds received from the Bagcraft subsidiary as consideration for the issuance of BCA preferred stock (see Note 12) were used to fund the cash payment to the bank for the above discharge of indebtedness.
Effective May 14, 1991, ARTRA, through its wholly-owned Fill-Mor subsidiary, entered into a loan agreement with a bank providing for borrowings of up to $2,500,000 with interest at the prime rate plus 2%, of which $2,200,000 was outstanding at December 29, 1994. The loan was collateralized by ARTRA's interest in Lori common stock and preferred stock, by the proceeds of a tax sharing agreement between ARTRA and its Bagcraft subsidiary and by ARTRA's interest in Fill-Mor's common stock. At December 29, 1994, borrowings on this note were reclassified as amounts due under the debt restructuring agreement discussed in Note 8. In March, 1995, borrowings due under this loan agreement were discharged.
At December 29, 1994 an ARTRA bank note with outstanding borrowings of $3,600,000 had been past due since December 31, 1990. Effective October 30, 1995, the Company settled this bank obligation totaling approximately $5,000,000, including accrued interest, for a cash payment of $150,000. The gain on this debt extinguishment was reflected in the Company's consolidated financial statements in the fourth quarter of 1995. In October, 1995 the bank agreed to discharge the $3,600,000 note plus accrued interest of $1,467,000 for a cash payment of $150,000, resulting in an extraordinary gain of $4,917,000 ($.71 per share) in the fourth quarter of 1995.
An ARTRA bank note with outstanding borrowings of $345,000 at December 29, 1994 was guaranteed by a private company. Interest on the note was at the prime rate plus 2%. In October, 1995 all amounts due on this bank note were paid in full.
Amounts Due To Related Parties
At December 28, 1995 and December 29, 1994, the Company had outstanding borrowings from its Chairman, John Harvey, of $175,000 and $42,000, respectively. Since January, 1995, John Harvey's borrowings have been evidenced by unsecured short-term notes bearing interest at 8%. As additional compensation the loans provide for the issuance of warrants to purchase ARTRA common shares at prices equal to the market value of ARTRA's common stock at the date of issuance. The warrants expire five years from the date of issuance. Terms of the note provide for the issuance of additional warrants to purchase ARTRA common shares, as determined by the number of days the loans are outstanding. Through February 29, 1996, John Harvey has received warrants to purchase an aggregate of 58,007 shares of ARTRA common stock at prices ranging from $3.75 to $6.125 per share as additional compensation for his loans to ARTRA.
At March 30, 1995, amounts due to related parties included a $850,000 short-term loan from a then director of COMFORCE. The loan provided for interest at the prime rate plus 1%. As consideration for assisting with the debt restructuring, the former director received 150,000 Lori common shares valued at $337,500 ($2.25 per share) based upon COMFORCE closing market value on March 30, 1995. The principal amount of the loan was reduced to $750,000 at July 31, 1995. The remaining loan principal was not repaid on its scheduled to maturity date of July 31, 1995. Per terms of the loan agreement, the former director received an additional 50,000 COMFORCE common shares as compensation for the
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
non-payment of the loan at its originally scheduled maturity. The maturity date of the loan was subsequently extended to September 30, 1995. The Company then entered into discussions with the director to extend the maturity date of the loan and, as additional consideration for the non-payment of the loan, the former director received an additional 25,000 shares of COMFORCE common stock in January 1996. In March 1996, the loan was repaid in full by ARTRA.
At December 29, 1994, amounts due to related parties also included borrowings of $127,000, respectively, from the above mentioned former director of COMFORCE. As additional compensation the former director has received warrants to purchase an aggregate of 236,315 ARTRA common shares at prices ranging from $3.75 to $6.375 per share based upon the market value of ARTRA's common stock at the date of issuance. The warrants expire five years from the date of issuance. Terms of the note provide for the issuance of additional warrants to purchase ARTRA common shares as determined by the number of days the loan is outstanding. In December 1995, amounts due pursuant to this loan were repaid by the issuance of 33,000 shares of ARTRA common stock.
On December 31, 1993, a religious organization, currently holding approximately 7% of ARTRA's outstanding common stock, loaned the Company $2,000,000 evidenced by a short-term note bearing interest at 10%. The proceeds of this loan were remitted to ARTRA's bank to pay principal and interest on ARTRA's bank notes as discussed above. In January, 1994 the religious organization made an additional $1,000,000 short-term loan to the Company also with interest at 10%. As additional compensation for the above loans, the lender received warrants to purchase an aggregate of 86,250 ARTRA common shares at prices ranging from $6.00 to $7.00 per share based upon the market of ARTRA's common stock at the date of issuance. The warrants expire in 1998, five years from the date of issuance. In July, 1994 ARTRA made a $2,000,000 payment against the amounts outstanding on the above loans and the religious organization subsequently loaned ARTRA an additional $2,000,000. At December 28, 1995 and December 29, 1994 borrowings due the religious organization totaled $3,000,000. In December, the religious organization received 126,222 shares of ARTRA common in payment of past due interest through October 31, 1995.
Convertible Subordinated Promissory Notes
In December 1995, ARTRA completed a private placement of $2,500,000 of 12% convertible subordinated promissory notes due March 21, 1996. As additional consideration the noteholders received 15,000 ARTRA common shares per each $100,000 of notes issued, or an aggregate of 375,000 ARTRA common shares. The ARTRA common shares were valued at $1,266,000 ($3.375 per share) based upon the closing market value of ARTRA common stock on the date of issue, discounted for restricted marketability. In the event the notes and all accrued interest is not paid in full at maturity, the noteholders have the option to convert all or a portion of the amount due into shares of ARTRA common at a conversion price of $3.00 per share. The proceeds from the private placement, held in escrow at December 28, 1995, were used to pay down other debt obligations in January, 1996. The notes were repaid in April, 1996, substantially with proceeds from a new private placement of ARTRA notes.
Other
In conjunction with the debt settlement agreement discussed in Note 8, ARTRA entered into a $1,850,000 short-term loan agreement with a non-affiliated corporation, the proceeds of which were used to fund amounts due the bank as discussed below. The loan, due June 30, 1995, with interest payable monthly at 10%, was collateralized by 100,000 shares of Lori common stock. These 100,000 COMFORCE common shares were originally issued to the bank under terms of the August 18, 1994 Settlement Agreement. In August, 1995 the loan was extended until September 15, 1995 and the lender received the above mentioned 100,000 COMFORCE common shares as consideration for the loan extension. The loan was repaid by ARTRA in February, 1996.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. LONG-TERM DEBT
Long-term debt (in thousands) consists of: December 28, December 29, 1995 1994 -------- --------
Bagcraft Credit Agreement, Term loans, interest at the prime rate plus 1.75% to 3% $ 16,600 $ 17,000 Revolving credit loan, interest at the prime rate plus 1.5% 9,231 16,672 Unamortized discount - (315) Bagcraft, City of Baxter Springs, Kansas loan agreements, interest, at varying rates 11,794 12,310 Arcar subordinated promissory notes due to seller, interest at the prime rate - 8,000 Arcar bank term loan, interest at the prime rate plus .75% - 2,750 Amounts due a bank term under terms of a debt settlement agreement - 10,500 Other, at various interest rates, due in varying amounts through 1995 - 27 -------- --------
37,625 66,944 Current scheduled maturities (3,512) (37,521) Debt subsequently discharged - (9,750) -------- -------- $ 34,113 $ 19,673 ======== ========
Bagcraft
Effective December 17, 1993, Bagcraft refinanced its bank debt by entering into a Credit Agreement that provides for a revolving credit loan and two separate term loans. The term loans were separate two-year facilities initially totaling $12,000,000 (Term Loan A) and $8,000,000 (Term Loan B), bearing interest at the lender's index rate plus 1.75% and 3%, respectively. The principal under Term Loan A is payable at maturity, unless accelerated under terms of the Credit Agreement. The principal under Term Loan B ($4,600,000 and $5,000,000 outstanding at December 28, 1995 and December 29, 1994, respectively) was scheduled to be payable in twenty-four monthly installments of $250,000 from January 1, 1994 to December 1, 1995, with the remaining principal balance payable at maturity, unless accelerated under terms of the Credit Agreement. At December 28, 1995, interest rates on Term Loan A and Term Loan B were 10.25% and 11.5% respectively.
The amount available to Bagcraft under the revolving credit loan is subject to a borrowing base, as defined in the agreement, up to a maximum of $18,000,000. At December 28, 1995 and December 29, 1994, approximately $6,600,000 and
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
$800,000, respectively, was available and unused by Bagcraft under the revolving credit loan. Borrowings under the revolving credit loan bear interest at the lender's index rate plus 1.5% and are payable upon maturity of the Credit Agreement, unless accelerated under terms of the Credit Agreement. At December 28, 1995 the interest rate on the revolving credit loan was 10%.
Borrowings under the Credit Agreement are collateralized by substantially all of the assets of Bagcraft. The Credit Agreement, as amended, contains various restrictive covenants, that among other restrictions, require Bagcraft to maintain minimum levels of tangible net worth and liquidity levels, and limits capital expenditures and restricts additional loans, dividend payments and payments to related parties. In addition, the Credit Agreement prohibits changes in ownership of Bagcraft.
In October, 1995 the Credit Agreement was amended whereby, among other things, the maturity date of the Credit Agreement was extended until March 31, 1996, certain loan covenant violations were resolved and the principal payments under Term Loan B were modified to include five monthly installments of $200,000 from November 15, 1995 to March 31, 1996, with the remaining balance payable at maturity (March 31, 1996) .
Effective February 1, 1996, the Credit Agreement was amended whereby, among other things, the maturity date of the Credit Agreement was extended until September 30, 1997, certain loan covenants were amended. The principal payments under Term Loan B were modified to include twenty-three monthly installments of $200,000 from November 15, 1995 to September 30, 1997, with the remaining balance payable at maturity (September 30, 1997) . Additionally, the lender consented to the use of $4,135,000 advanced under the revolving credit loan to fund a preferred stock exchange agreement between BCA (the parent of Bagcraft), Bagcraft and the holder of Bagcraft's 13.5% cumulative, redeemable preferred stock (see Note 12).
As additional compensation for borrowings under the Credit Agreement, the lender received a detachable warrant, expiring in December 1998, allowing the holder to purchase up to 10% of the fully diluted common equity of Bagcraft at a nominal value. Under certain conditions Bagcraft is required to repurchase the warrant from the lender. The determination of the repurchase price of the warrant is to be based on the warrant's pro rata share of the highest of book value, appraised value or market value of Bagcraft.
In connection with the February 1, 1996 amendment to the Credit Agreement, the warrant agreement was amended to permit the holder to purchase 13% of the fully diluted common equity of Bagcraft at the original nominal purchase price and to extend the expiration date to December 17, 1999.
In March, 1994 Bagcraft and the City of Baxter Springs, Kansas completed a $12,500,000 financing package associated with the construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. The financing package, funded by a combination of Federal, state and local funds, consists of the following loan agreements payable by Bagcraft directly to the City of Baxter Springs:
A $7,000,000 promissory note payable in ten installments of $700,000 due annually on July 21 of each year beginning in 1995 through maturity on July 21, 2004. Interest, at varying rates from 4.6% to 6.6%, is payable semi-annually. At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $6,300,000 and $7,000,000, respectively, under this loan agreement.
A $5,000,000 subordinated promissory note payable as follows: $150,000 due in 1996; $2,425,000 due in 1998; and $2,425,000 due in 1999. The subordinated promissory note is non-interest bearing, subject to certain repayment provisions as defined in the agreement (as amended). At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $5,000,000 and $4,810,000, respectively, under this loan agreement.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Two separate $250,000 subordinated promissory notes payable in varying installments through January 20, 2025. The subordinated promissory notes are non-interest bearing, subject to certain repayment provisions as defined in the agreement. At December 28, 1995 and December 29, 1994, Bagcraft had outstanding borrowings of $493,000 and $500,000, respectively, under this loan agreement.
Borrowings under the above loan agreements are collateralized by a first lien on the land and building at the Baxter Springs, Kansas production facility and by a second lien on certain machinery and equipment. Under certain circumstances, repayment of the borrowings under the above loan agreements is subordinated to the repayment of obligations under Bagcraft's Credit Agreement. At December 28, 1995 and December 29, 1994, $552,000 and $774,000, respectively, of borrowings from the above loan agreements is reflected in the consolidated balance sheet in current assets as restricted cash and equivalents. These funds, invested in interest bearing cash equivalents, are restricted for expenditures associated with the Baxter Springs, Kansas project.
Arcar
On April 8, 1994, Bagcraft completed the acquisition of Arcar for consideration consisting of cash of $2,264,000 and subordinated promissory notes totaling $8,000,000 ($5,500,000 and $8,000,000 outstanding at September 28, 1995 and December 29, 1994, respectively). The subordinated promissory notes provided for interest payable quarterly at the prime rate (as defined in the agreement). At September 28, 1995, the remaining outstanding promissory notes were scheduled to mature as follows: $2,500,000 payable March 15, 1996; $2,500,000 payable March 15, 1997; $500,000 payable March 15, 1998. The seller also received a warrant to purchase 177,778 ARTRA common shares at a price of $5.625 per share, the market value at the date of grant. Exercise of the warrant was payable only through a reduction of the subordinated promissory notes and accrued interest due the seller under terms of the purchase agreement. The subordinated promissory notes were paid in full in October, 1995 with proceeds from the sale of Arcar (see Note 3).
Effective April 8, 1994, Arcar entered into a Loan and Security Agreement (the "Agreement") with a bank that provided for a revolving credit loan and a term loan. The term loan, in the original principal amount of $2,750,000, provided for interest at the prime rate plus .75%. Borrowings under the Agreement were collateralized by substantially all of the assets of Arcar. The Agreement contained various restrictive covenants, that among other restrictions, require Arcar to maintain minimum levels of net worth and liquidity levels and limit additional loans, dividend payments, capital expenditures and payments to related parties. All borrowings under the Agreement were paid in full in October, 1995 with proceeds from the sale of Arcar (see Note 3).
Lori
As discussed in Note 8, effective August 18, 1994, as amended effective December 23, 1994, ARTRA, Fill-Mor, Lori and Lori's fashion costume jewelry subsidiaries entered into an agreement with Lori's bank lender to settle obligations due the bank under terms of the bank loan agreements of Lori and its fashion costume jewelry subsidiaries and Fill-Mor. Borrowings due the bank under the loan agreements of Lori and its operating subsidiaries and Lori's parent, Fill-Mor, plus amounts due the bank for accrued interest and fees were reduced to $10,500,000 as of December 23, 1994 (of which $7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank). As partial consideration for the Amended Settlement Agreement the bank received a $750,000 Lori note payable due March 31, 1995.
In March, 1995 the $750,000 note due the bank was paid and the remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an additional extraordinary gain to Lori and Fill-Mor of $9,113,000 in 1995 (See Note 8).
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The common stock and virtually all the assets of ARTRA's subsidiaries have been pledged as collateral for ARTRA's and its subsidiaries' borrowings. Under certain debt agreements the Company is limited in the amounts it can withdraw from its operating subsidiaries. At December 28, 1995 and December 29, 1994, substantially all cash and equivalents on the Company's consolidated balance sheet are restricted to use by and for the Company's operating subsidiaries.
At December 28, 1995 the aggregate amount of yearly maturities of long-term debt, exclusive of debt discharged, is: 1996, $3,512,000; 1997, $24,143,000; 1998, $3,137,000; 1999, $3,137,000; 2000, $712,000; thereafter, $2,983,000.
11. REDEEMABLE COMMON STOCK
ARTRA has entered into various agreements under which it has sold its common shares along with options that require ARTRA to repurchase these shares at the option of the holder, principally one year after the date of each agreement. The difference between the option price and the net proceeds received is amortized over the life of the options by a charge to retained earnings. ARTRA agreed to register 100,000 ARTRA common shares issued to a bank as partial consideration for a 1994 debt settlement agreement on or before July 31, 1995, after which the bank has the right to put the 100,000 common shares back to ARTRA for an exercise price of $500,000. As of March 31, 1996 the ARTRA common shares have not been registered and the bank has not exercised the put option. At December 28, 1995 and December 29, 1994 options are outstanding that, if exercised, would require ARTRA to repurchase 283,965 and 279,679 shares of its common stock for an aggregate amount of $4,774,000 and $4,144,000, respectively.
12. REDEEMABLE PREFERRED STOCK
On September 27, 1989, ARTRA received a proposal to purchase BCA, the parent of Bagcraft, from Sage Group, Inc. ("Sage"), a privately-owned corporation that owned 100% of the outstanding common stock of BCA. Sage was merged with and into Ozite Corporation ("Ozite") on August 24, 1990. Peter R. Harvey, ARTRA's President, and John Harvey, ARTRA's Chairman of the Board of Directors, were the principal shareholders of Sage and are the principal shareholders of Ozite. Effective March 3, 1990, a wholly-owned subsidiary of ARTRA acquired 100% of BCA's issued and outstanding common shares for consideration of $5,451,000, which included 772,000 shares of ARTRA common stock and 3,750 shares of $1,000 par value junior non-convertible payment-in-kind redeemable Series A Preferred Stock with an estimated fair value of $1,012,000, net of unamortized discount of $2,738,000. The Series A Preferred Stock accrues dividends at the rate of 6% per annum and is redeemable by ARTRA on March 1, 2000 at a price of $1,000 per share plus accrued dividends. Accumulated dividends of $1,519,000 and $1,221,000 were accrued at December 28, 1995 and December 29, 1994, respectively.
In 1987, Bagcraft issued to a subsidiary of Ozite $5,000,000 of preferred stock (50,000 shares of 13.5% cumulative, redeemable preferred stock with a liquidation preference equal to $100 per share) redeemable by Bagcraft in 1997 at a price of $100 per share plus accrued dividends. Dividends, which accrue and are payable semiannually on June 1 and December 1 of each year, are reflected in the Company's consolidated statement of operations as minority interest. The holder has agreed to forego dividend payments as long as such payments are prohibited by Bagcraft's lenders. Accumulated dividends of $5,794000 and $5,119,000 were accrued at December 28, 1995 and December 29, 1994, respectively.
In 1987, Bagcraft obtained financing from a subsidiary of Ozite through the issuance of a $5,000,000 unsecured subordinated note, due June 1, 1997. During 1992, per agreement with the noteholder, the interest payments were remitted to ARTRA and the noteholder received 675 shares of BCA Series A preferred stock ($1.00 par value, 6% cumulative with a liquidation preference equal to $1,000 per share) with a liquidation value of $675,000. In December, 1993, the unsecured subordinated note and accrued interest thereon were paid in full from proceeds of Bagcraft's Credit Agreement. Per agreement with the noteholder, the accrued interest outstanding on the note of $3,000,000 was remitted to ARTRA and the noteholder received an additional 3,000 shares BCA preferred stock having a liquidation value of $3,000,000.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Effective February 1, 1996, BCA, Bagcraft and Ozite entered into an agreement to exchange certain preferred stock between the Companies. In connection with the agreement, BCA issued to Bagcraft 8,135 shares of BCA Series B preferred stock (with a liquidation preference equal to $1,000 per share) for cash of $4,135,000. Bagcraft in turn exchanged the BCA Series B preferred stock for Bagcraft redeemable preferred stock (82.7% of 50,000 shares, or 41,350 shares) held by Ozite. Funds for the transaction were obtained by Bagcraft through an advance under its revolving credit. BCA then upstreamed the proceeds to ARTRA for working capital purposes.
As a result of the preferred stock exchange agreement, 17.3% of the original Bagcraft redeemable preferred stock and the prorata share of dividends remain outstanding February 1, 1996. Dividends related to the Bagcraft redeemable preferred stock exchanged have been forgiven in accordance with the agreement. The dividend forgiveness will be reflected in the Company's consolidated financial statements in the first quarter of 1996.
13. STOCK OPTIONS AND WARRANTS
Stock Option Plan
In July, 1985, ARTRA's shareholders approved a stock option plan (the "Plan") for certain officers and key employees of the Company and its subsidiaries. The Plan, as amended, reserved 1,000,000 shares of the Company's common stock and authorized the granting of options on or before February 1, 1995. The purchase price of such options was to be not less than the market value at the date of grant for incentive stock options ("ISO") and not less than 110% of the market value on the date of grant for an ISO granted to a shareholder possessing 10% more of the voting stock of the Company. Non-qualified options may be granted at such price and amount as the Company determines at the date of grant.
During 1994, the Company issued a former officer of Bagcraft a non-qualified option to purchase 20,000 shares of ARTRA common stock at $5.75 per share as additional compensation for short-term loans to ARTRA.
Effective January 8, 1993, the Company issued certain officers and key employees of ARTRA options to purchase 148,100 shares of ARTRA common stock at $3.75 per share. The options expire ten years from the date of grant.
During 1993, the Company issued to a then officer of Bagcraft a non-qualified option to purchase 50,000 shares of ARTRA common stock at $3.75 per share as additional compensation for short-term loans to ARTRA. The options were exercised during 1993. The exercise of these options was principally paid through a reduction of the then Bagcraft officer's loans to ARTRA.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of stock option transactions for the three years in the period ended December 28, 1995 is as follows:
1995 1994 1993 -------- -------- --------
Outstanding at beginning of year:
Shares 445,460 450,760 340,360
$ 3.75 $ 3.75 $ 5.25 Prices to to to $ 20.50 $ 20.50 $ 20.50
Options granted: Shares 20,000 198,100 Prices $ 5.75 $ 3.75
Options exercised: Shares (12,100) (25,300) (74,700)
$ 3.75 Prices $ 4.00 $ 5.25 to $ 5.25 Options canceled: Shares (1,860) (13,000)
$ 5.25 Prices $ 20.50 to $ 5.75 Outstanding at end of year: Shares 431,500 445,460 450,760 ======== ======== ========
$ 3.65 $ 3.75 $ 3.75 Prices to to to $ 10.00 $ 20.50 $ 20.50
Options exercisable at end of year 431,500 445,460 450,760 ======== ======== ======== Options available for future grant at end of year - 390,814 410,814 ======== ======== ========
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Warrants
At December 28, 1995, warrants were outstanding to purchase a total of 1,148,548 common shares at prices ranging from $3.50 per share to $10.50 per share. The warrants, exercisable from the date of issue, expire at various dates through 2003.
During 1995, ARTRA issued warrants to purchase an aggregate of 140,507 shares of its common stock at prices ranging from $3.75 per share to $6.125 per share, principally to certain lenders as additional compensation for short-term loans. The warrants expire at various dates in 2000. Warrants to purchase 48,331 shares of ARTRA common stock at prices ranging from $6.75 per share to $11.375 per share expired unexercised during 1995. The warrants were issued as additional compensation for various short-terms loans.
During 1994, ARTRA issued warrants to purchase an aggregate of 154,719 shares of its common stock at prices ranging from $4.50 per share to $6.625 per share, principally to certain lenders as additional compensation for short-term loans. The warrants expire at various dates from 1996 and 1999. Warrants to purchase 9,166 shares of ARTRA common stock at prices ranging from $10.00 per share to $11.25 per share expired unexercised during 1994. The warrants were issued as additional compensation for various short-terms loans.
During 1993, ARTRA issued warrants to purchase an aggregate of 326,090 shares of its common stock at prices ranging from $3.50 per share to $7.00 per share, principally to certain lenders as additional compensation for short-term loans. The warrants expire at various dates from 1998 and 2003. Additionally, warrants to purchase 76,668 shares of ARTRA common stock at prices ranging from $18.00 per share to $27.00 per share expired unexercised during 1993. The warrants were issued as additional compensation for short-term loans in 1988.
14. RESTRUCTURING COSTS
In December, 1993 the Bagcraft subsidiary recorded a charge to operations of $1,175,000 representing equipment and inventory relocation costs and employee severance and outplacement costs relating to the construction of a new manufacturing facility in Baxter Springs, Kansas. In September, 1994, Bagcraft completed construction of a new 265,000 sq. ft. production facility in Baxter Springs, Kansas. This facility replaced Bagcraft's production facilities in Joplin, Missouri, Carteret, New Jersey and Forest Park, Georgia.
15. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease certain buildings and equipment which are used in its manufacturing and distribution operations. At December 28, 1995, future minimum lease payments under operating leases that have an initial or remaining noncancellable term of more than one year (in thousands) are:
Year ---- 1996 $ 944 1997 860 1998 737 1999 719 2000 449 After 2000 765 ------- $ 4,474 =======
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Rental expense was $861,000, $1,116,000 and $1,240,000 in fiscal years 1995, 1994 and 1993 respectively.
In conjunction with the sale of Arcar (see Note 3), Bagcraft entered into an ink products purchase agreement with the Arcar buyer for a period of five years. Under terms of the agreement, Bagcraft is required to purchase a minimum supply of ink based on market prices in effect at the time of each purchase. Minimum dollar amounts required for each of the contract years ending September 30 is $4,100,000 in 1996; $4,300,000 in 1997; $4,500,000 in 1998; $3,375,000 in 1999; and $2,250,000 in 2000. Bagcraft has issued a letter of credit of $1,000,000 in conjunction with this agreement.
The Company and its subsidiaries are the defendants in various business-related litigation and environmental matters. At December 28, 1995 and December 29, 1994, the Company had accrued $1,800,000 and $1,500,000, respectively, for potential business-related litigation and environmental liabilities. While these litigation and environmental matters involve wide ranges of potential liability, management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements. However, ARTRA may not have available funds to pay liabilities arising out of these business-related litigation and environmental matters or, in certain instances, to provide for its legal defense.
In January, 1985 the United States Environmental Protection Agency ("EPA") notified the Company's Bagcraft subsidiary that it was a potentially responsible party under the Comprehensive Environmental Responsibility Compensation and Liability Act ("CERCLA") for alleged release of hazardous substances at the Cross Brothers site near Kankakee, Illinois. Although Bagcraft has denied liability for the site, it has entered into a settlement agreement with the EPA, along with the other third party defendants, to resolve all claims associated with the site except for state claims. In May, 1994 Bagcraft paid $850,000 plus accrued interest of $29,000 to formally extinguish the EPA claim. Bagcraft filed suit in 1993 in the United States District Court for the Northern District of Illinois, against its insurers to recover its liability costs in connection with the Cross Brothers case. Bagcraft was subsequently reimbursed by its insurers for its liability costs incurred in connection with the EPA claim. With regard to the state action, Bagcraft is participating in settlement discussions with the State and thirteen other potential responsible parties to resolve all claims associated with the State. The maximum state claim is $1.1 million for all participants. Bagcraft has accrued $120,000 related to the State action in the Company's consolidated financial statements at December 28, 1995.
Bagcraft was listed as a de minimis contributor at the American Chemical Services, Inc. off-site disposal location in Griffith, Indiana and the Duane Marine off-site disposal location in Perth Amboy, New Jersey. These sites are included in the EPA's National Priorities List. Bagcraft is presently unable to determine its liability, if any, with respect to this site.
Bagcraft has been notified by the Federal Environment Protection Agency that it is a potentially responsible party for the disposal of hazardous substances at a site on Ninth Avenue in Gary, Indiana. The Company has no records indicating that it deposited hazardous substances at this site and intends to vigorously defend itself in this matter.
Bagcraft is presently undertaking a soil remediation project for solvent-contaminated soil at its Chicago manufacturing facility. The environmental firm responsible for implementing the remediation has recommended that a soil vapor extraction process be used, at an estimated cost of $175,000. Although there can be no assurances that remediation costs will not exceed this estimate, in the opinion of management, no material additional costs are anticipated.
In April 1994, the EPA notified the Company that it was a potentially responsible party for the disposal of hazardous substances (principally waste oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing facility formerly operated by the Clearshield Plastics Division ("Clearshield") of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In 1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been included on the EPA's National Priorities List. In February 1983, Harvel sold the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in 1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA for indemnification in connection with this proceeding. The cost of clean-up at the Palmer, Massachusetts site has been estimated to be approximately $7 million according to proofs of claim filed in the adversary proceeding. A committee formed by the named potentially responsible parties has estimated the
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
liability respecting the activities of Clearshield to be $400,000. ARTRA has not made any independent investigation of the amount of its potential liability and no assurances can be given that it will not substantially exceed $400,000.
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in 1991 in the United States District Court for Maryland, Sherwin-Williams Company ("Sherwin-Williams") brought suit against ARTRA and other former owners of a paint manufacturing facility in Baltimore, Maryland for recovery of costs of investigation and clean-up of hazardous substances which were stored, disposed of or otherwise released at this manufacturing facility. This facility was owned by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from 1968 to 1980. Sherwin-William's current projection of the cost of clean-up is approximately $5 to $6 million. The Company has filed counterclaims against Sherwin-Williams and cross claims against other former owners of the property. The Company also is vigorously defending this action and has raised numerous defenses. Currently, the case is in its early stages of discovery and the Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company brought in the United States District Court for the Central District of California respecting Operating Industries, Inc. site in Monterey Park, California. This site is included on the EPA's National Priorities List. ARTRA's involvement stemmed from the alleged disposal of hazardous substances by The Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling paste, wall coatings and related products, certain of which generated hazardous substances as a by-product of the manufacturing process.
ARTRA entered into a consent decree with the EPA in which it agreed to pay $85,000 for one phase of the clean-up costs for this site; however, ARTRA defaulted on its payment obligation. ARTRA is presently unable to estimate the total potential liability for clean-up costs at this site, which clean-up is expected to continue for a number of years. The consent decree, even if it had been honored by ARTRA, was not intended to release ARTRA from liability for costs associated with other phases of the clean-up at this site. The Company is presently unable determine what, if any, additional liability it may incur in this matter.
In a case titled City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in the Circuit Court of Cook County, Illinois, the City of Chicago alleged that ARTRA (and NL Industries, Inc.) had improperly stored, discarded and disposed of hazardous substances at the subject site, and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up costs. At the time the suit was filed, the City of Chicago claimed to have expended $1,000,000 in clean-up costs.
ARTRA and NL Industries, Inc. have counter sued each other and have filed third party actions against the subsequent owners of the property. The City of Chicago has made an offer to settle the matter for $350,000 for all parties. The parties are currently conducting discovery. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case.
In a case titled Illinois Environmental Protection Agency v. NL Industries, Inc., ARTRA GROUP Incorporated, et al, the Illinois Environmental Protection Agency filed suit alleging all former owners contributed to the contamination of the site. The suit was dismissed, but subject to possible appeal. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case.
The EPA has identified ARTRA GROUP Incorporated as a potentially responsible party in an action involving the former manufacturing facility. The EPA is currently investigating the site to determine the extent and type of contamination, if any. The Company is presently unable to determine ARTRA's liability, if any, in connection with this case.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. INCOME TAXES
The provision (credit) for income taxes is included in the statements of operations as follows:
1995 1994 1993 --------- --------- --------- (in thousands) Continuing operations $ 51 $ 9 $ 7 Discontinued operations 17 74 33 --------- --------- --------- $ 68 $ 83 $ 40 ========= ========= =========
A summary of the provision (credit) for income taxes is as follows:
1995 1994 1993 --------- --------- --------- (in thousands) Current: Federal $ - $ - $ - State 68 83 40 --------- --------- --------- $ 68 $ 83 $ 40 ========= ========= =========
The 1995, 1994 and 1993 extraordinary credits represent net gains from discharge of indebtedness. No income tax expense is reflected in the Company's financial statements resulting from the extraordinary credits due to the utilization of tax loss carryforwards.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. INCOME TAXES, continued
In 1995, 1994 and 1993, the effective tax rates from operations, including discontinued operations were (3.9)%, (.4)% and .3%, respectively, as compared to the statutory Federal rate, which are reconciled as follows:
1995 1994 1993 --------- --------- ---------- (in thousands)
Provision (credit) for income taxes using statutory rate $ (600) $ (6,629) $ 4,992 State and local taxes, net of Federal benefit 68 73 7 Current year tax loss not utilized - 3,151 1,938 Amortization of goodwill 155 206 212 Previously unrecognized benefit from utilizing tax loss carryforwards (2,136) - - Effect of not including all subsidiaries in the consolidated tax return 2,546 3,249 (7,113) Other 35 33 4 --------- --------- ---------- $ 68 $ 83 $ 40 ========= ========= ==========
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. INCOME TAXES, continued
The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to the deferred tax liabilities and deferred tax assets at December 28, 1995 and December 29, 1994 and their approximate tax effects (in thousands) are as follows:
The Company has recorded a valuation allowance with respect to the future tax benefits and the net operating loss reflected in deferred tax assets as a result of the uncertainty of their ultimate realization.
At December 28, 1995, the Company and its subsidiaries had Federal income tax loss carryforwards of approximately $44,000,000 available to be applied against future taxable income, if any. ARTRA's tax loss carryforwards of approximately $33,000,000 expire principally in 2003 - 2010. Additionally, ARTRA's discontinued Ultrasonix and Ratex subsidiaries had Federal income tax loss carryforwards of approximately $11,000,000 available to be applied against future taxable income, if any. In recent years, the Company has issued shares of its common stock to repay various debt obligations, as consideration for acquisitions, to fund working capital obligations and as consideration for various other transactions. Section 382 of the Internal Revenue Code of 1986 limits a corporation's utilization of its Federal income tax loss carryforwards when certain changes in the ownership of a corporation's common stock occurs. In the opinion of management, the Company is not currently subject to such
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
limitations regarding the utilization of its Federal income tax loss carryforwards. Should the Company continue to issue a significant number of shares of its common stock, it could trigger a limitation that would prevent it from utilizing a substantial portion of its Federal income tax loss carryforwards.
17. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have certain contributory and noncontributory benefit plans covering eligible employees. Both employee and employer contributions are generally determined as a percentage of the covered employee's annual compensation. The total expense charged to continuing operations from all of these plans amounted to $477,000, $333,000 and $450,000 in 1995, 1994 and 1993, respectively.
Effective June 1, 1990, the Company adopted an Employee Stock Ownership Plan ("ESOP") which covers eligible employees of ARTRA and certain of its subsidiaries. Employer contributions to the Plan are at the discretion of ARTRA's Board of Directors. Employee contributions are not permitted. Contributions are allocated in the same proportion that the percentage of a participant's compensation for the Plan year bears to the compensation of all participants for the Plan year. ARTRA contributed 8,750 common shares to the Plan with a fair market value of $42,000 ($4.75 per share) for the plan year ending December 28, 1995. ARTRA contributed 15,000 common shares to the Plan with a fair market value of $71,250 ($4.75 per share) for the plan year ending December 29, 1994. ARTRA contributed 65,000 common shares to the Plan with a fair market value of $423,000 ($6.50 per share) for the plan year ending December 30, 1993. At December 28, 1995, the ESOP held 271,775 shares of ARTRA common stock.
Effective August 1, 1995, the Company terminated the ESOP and is currently is the process of distributing the related Employee accounts to participants.
The Company typically does not offer the types of benefit programs that fall under the guidelines of Statement of Financial Accounting Standards No. 106 - Employers Accounting for Post Retirement Benefits Other Than Pensions.
18. EARNINGS PER SHARE
Earnings (loss) per share is computed by dividing net earnings (loss), less redeemable preferred stock dividends and redeemable common stock accretion, by the weighted average number of shares of common stock and common stock equivalents (redeemable common stock, stock options and warrants), unless anti-dilutive, outstanding during each period. Fully diluted earnings per share is not presented since the result is equivalent to primary earnings per share.
19. INDUSTRY SEGMENT INFORMATION
At December 28, 1995, the Company, through its Bagcraft subsidiary operates in one industry segment as a manufacturer of packaging products principally serving the food industry.
Prior to September 28, 1995 and in prior years, ARTRA's then majority owned subsidiary, Lori, operated as a designer and distributor of popular-priced fashion costume jewelry and accessories. In recent years, Lori's fashion costume jewelry operations had experienced a pattern of significantly lower sales levels and related operating losses primarily due to a shift in the buying patterns of its major customers (i.e. certain mass merchandisers) from participation in Lori's service program to purchases of costume jewelry and accessories directly from manufacturers and due to a continued unfavorable retail environment. Accordingly, in September, 1995, Lori adopted a plan to discontinue its fashion costume jewelry business as discussed in Note 3.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase agreement to participate in the acquisition of one hundred percent of the capital stock of Global. Global provides telecommunications and computer technical staffing and consulting services worldwide to Fortune 500 companies and maintains an extensive, global database of technical specialists, with an emphasis on wireless communications capability. On October 17, 1995, Lori completed the acquisition of one hundred percent of the capital stock of Global. In connection with the re-focus of its business, Lori changed its name to COMFORCE Corporation.
Due to the issuances of COMFORCE common shares in conjunction with the acquisition of Global, ARTRA's common stock ownership in COMFORCE was reduced to approximately 25%. Accordingly, in October 1995, the accounts of COMFORCE and its majority-owned subsidiaries were deconsolidated from the ARTRA's consolidated financial statements and ARTRA's investment in COMFORCE was accounted for under the equity method through the end of fiscal 1995. As discussed in note 6, effective December 28, 1995, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, at December 28, 1995, the Company's investment in COMFORCE is classified as available for sale and is stated at fair value.
No single customer accounted for more than 10% of consolidated net sales in 1995, 1994 and 1993.
20. LITIGATION
On November 2, 1993, ARTRA filed suit in the Circuit Court of the Eighteenth Judicial Circuit for the state of Illinois (the "State Court Action") against Salomon Brothers, Inc., Salomon Brothers Holding Company, Inc., Charles K. Bobrinskoy, Michael J. Zimmerman (collectively, "Salomon Defendants"), D.P. Kelly & Associates, L.P. ("DPK"), Donald P. Kelly ("Kelly Defendants" along with DPK), James F. Massey and William Rifkind. On November 22, 1993, ARTRA filed a First Amended Complaint. The defendants removed the case to the Bankruptcy Court in which the Emerald Chapter 11 case is pending. On July 15, 1994 all but two of ARTRA's causes of action were remanded to the state court. The Bankruptcy Court retained jurisdiction of ARTRA's claims against the defendants for breaching their fiduciary duty as directors of Emerald to Emerald's creditors and interference with ARTRA's contractual relations with Emerald. On April 7, 1995, the Company's appeal of the Bankruptcy Court's order retaining jurisdiction over two claims was denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these claims. On August 4, 1995, ARTRA appealed from the Bankruptcy Court's dismissal order. That appeal is still pending.
On July 18, 1995, ARTRA filed a Fourth Amended Counterclaim in the State Court Action for breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation, breach of contract and promissory estopel. In the State Court
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Action, ARTRA seeks compensatory damages of $136.2 million, punitive damages of $408.6 million and approximately $33 million in fees paid to Salomon. The causes of action for breach of the fiduciary duty of due care were repleaded to reserve ARTRA's right to appeal the State Court's dismissal of the causes of action in the Third Amended Complaint. Defendant Kelly was dismissed with prejudice pursuant to a stipulation between ARTRA and the Kelly Defendants.
On or about March 1, 1996, DPK brought a motion for summary judgment as to ARTRA's claims for breach of contract and promissory estoppel. DPK's motion is currently pending.
Effective December 31, 1989, ARTRA completed the disposal of its former scientific products segment with the sale of its Welch subsidiary, formerly Sargent-Welch Scientific Company, to a privately held corporation whose president and sole shareholder was a vice president of Welch prior to the sale. The consideration received by ARTRA consisted of $2,625,000 payable June 30, 1997, with interest at 10% beginning June 30, 1990, under terms of a noncompetition agreement and the buyer's subordinated note in the principal amount of $2,500,000. The receivable due June 30, 1997 under terms of the noncompetition agreement was reflected in ARTRA's condensed consolidated balance sheet at December 29, 1994 in other assets at $2,625,000. The subordinated security, due in 1997, was originally scheduled to be non-interest bearing for a period of three years, after which time interest will accrue at the rate of 10% per annum. The note was discounted at a rate of 10% during the non-interest bearing period and was reflected in ARTRA's consolidated balance sheet at December 29, 1994 in other assets at $1,375,000, net of a discount of $1,125,000.
In December, 1991 Welch filed a lawsuit against ARTRA alleging that certain representations, warranties and covenants made by ARTRA, which were contained in the parties' Stock Purchase Agreement, were false. Welch was seeking compensatory damages in the amount of $3,800,000. Subsequently, ARTRA had filed a counterclaim predicated upon Welch's breach of the payment terms of the parties' Non-Competition Agreement and the Subordinated Note executed by Welch. ARTRA was seeking damages in the amount of approximately $5,300,000 plus accrued interest. On November 23, 1994, the Circuit Court of Cook County Law Division in Chicago granted a judgment in favor of ARTRA affirming the validity of the amounts due under the Non-Competition Agreement and the Subordinated Note of $2,625,000 and $2,500,000, respectively.
In June 1995 ARTRA entered into an agreement to settle amounts due ARTRA by Welch under terms of the noncompetition agreement and the subordinated security. Per terms of the settlement agreement, ARTRA received cash of $3,000,000 and a subordinated note in the principal amount of $640,000 payable June 30, 2001.
In January, 1985 the United States Environmental Protection Agency ("EPA") notified the Company's Bagcraft subsidiary that it was a potentially responsible party under the Comprehensive Environmental Responsibility Compensation and Liability Act ("CERCLA") for alleged release of hazardous substances at the Cross Brothers site near Kankakee, Illinois. Although Bagcraft has denied liability for the site, it has entered into a settlement agreement with the EPA, along with the other third party defendants, to resolve all claims associated with the site except for state claims. In May, 1994 Bagcraft paid $850,000 plus accrued interest of $29,000 to formally extinguish the EPA claim. Bagcraft filed suit in 1993 in the United States District Court for the Northern District of Illinois, against its insurers to recover its liability costs in connection with the Cross Brothers case. Bagcraft was subsequently reimbursed by its insurers for its liability costs incurred in connection with the EPA claim. With regard to the state action, Bagcraft is participating in settlement discussions with the State and thirteen other potential responsible parties to resolve all claims associated with the State. The maximum state claim is $1.1 million for all participants. Bagcraft has accrued $120,000 related to the State action in the Company's consolidated financial statements at December 28, 1995.
The Company and its subsidiaries are the defendants in various other business-related litigation and environmental matters (see Note 15). Management does not believe the outcome of these matters will have a material adverse effect on the Company's financial statements.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
21. RELATED PARTY TRANSACTIONS
Advances to Peter R. Harvey, ARTRA's president, classified in the Consolidated Balance Sheet as a reduction of common shareholders' equity, consist of:
December 28, December 29, 1995 1994 --------- --------- (in thousands)
ARTRA $ 5,369 $ 3,205 Fill-Mor - 1,510 --------- --------- 5,369 4,715 Less interest for the period January 1, 1993 to date, accrued and fully reserved (1,051) (615) --------- --------- $ 4,318 $ 4,100 ========= =========
ARTRA has total advances due from its president, Peter R. Harvey, of which $5,369,000 and $3,205,000, including accrued interest, remained outstanding at December 28, 1995 and December 29, 1994 The advances bear interest at the prime rate plus 2% (10.5% at December 28, 1995 and December 29, 1994). This receivable from Peter R. Harvey has been classified as a reduction of common shareholders' equity. See note 9 for an additional 1996 advance for Mr. Harvey's prorata share of debt discharged by a bank. The debt discharge was principally funded by ARTRA.
In May, 1991, ARTRA's wholly-owned Fill-Mor subsidiary made advances to Peter R. Harvey. The advances provided for interest at the prime rate plus 2%. At March 30, 1995 and December 29, 1994, advances of $1,540,000 and $1,510,000, respectively, including accrued interest, were outstanding. In April, 1995, these advances from ARTRA's Fill-Mor subsidiary to Peter R. Harvey were transferred to ARTRA as a dividend.
Commencing January 1, 1993 to date, interest on all advances to Peter R. Harvey has been accrued and fully reserved. Interest accrued and fully reserved on the advances to Peter R. Harvey for the years ended December 28, 1995 and December 29, 1994 totaled $436,000 and $341,000, respectively.
Peter R. Harvey has not received other than nominal compensation for his services as an officer or director of ARTRA or any of its subsidiaries since October of 1990. Additionally, Mr. Harvey has agreed not to accept any compensation for his services as an officer or director of ARTRA or any of its subsidiaries until his obligations to ARTRA, described above, are fully satisfied.
Under Pennsylvania Business Corporation Law of 1988, ARTRA (a Pennsylvania corporation) is permitted to make loans to officers and directors. Further, under the Delaware General Corporation Law, Fill-Mor (a Delaware corporation) is permitted to make loans to an officer (including any officer who is also a director, as in the case of Peter R. Harvey), whenever, in the judgment of the directors, the loan can reasonably be expected to benefit Fill-Mor.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At the September 19, 1991 meeting, ARTRA's Board of Directors discussed, but did not act on a proposal to ratify the advances made by ARTRA to Peter R. Harvey. The 1992 advances made by ARTRA to Mr. Harvey were ratified by ARTRA's Board of Directors. In the case of the loan made by Fill-Mor to Mr. Harvey, the Board of Directors of Fill-Mor approved the borrowing of funds from Fill-Mor's bank loan agreement, a condition of which was the application of a portion of the proceeds thereof to the payment of certain of Mr. Harvey's loan obligations to the bank. However, the resolutions did not acknowledge the use of such proceeds for this purpose and the formal loan documents with the bank did not set forth this condition (though in fact, the proceeds were so applied by the bank).
As partial collateral for amounts due from Peter R. Harvey, the Company has received the pledge of 1,523 shares of ARTRA redeemable preferred stock (with a liquidation value of $1,523,000, plus accrued dividends) which are owned by Mr. Harvey. In addition, Mr. Harvey has pledged a 25% interest in Industrial Communication Company (a private company). Such interest is valued by Mr. Harvey at $800,000 to $1,000,000. During 1995, Peter R. Harvey entered into a pledge agreement with ARTRA whereby Mr. Harvey pledged additional collateral consisting of 42,067 shares of ARTRA common stock and 707,281 shares of Puretech International, Inc., a publicly traded corporation.
In conjunction with Lori's October 1995 acquisition of Global (see Note 3), ARTRA has agreed to assume certain pre-existing Lori liabilities and indemnify COMFORCE in the event any future liabilities arise concerning pre-existing environmental matters and business related litigation. Accordingly, ARTRA has accrued $4,500,000 of Lori liabilities classified in its consolidated balance at December 28, 1995 as current liabilities of discontinued operations.
For a discussion of certain other related party debt obligations see Note 9.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ARTRA GROUP INCORPORATED BALANCE SHEETS (Registrant Only In Thousands)
December 28, December 29, 1995 1994 --------- ---------
ASSETS Current assets: Cash $2,347 $91 Receivables 25 55 Other current assets 85 87 --------- --------- 2,457 233 --------- ---------
Property, plant and equipment 25 19 Less accumulated depreciation and amortization 14 6 --------- --------- 11 13 --------- ---------
Other assets: Investments in and advances to affiliates 2,567 (15,264) Other - 4,000 --------- --------- 2,567 (11,264) --------- --------- $5,035 ($11,018) ========= =========
LIABILITIES Current liabilities: Notes payable and current maturities of long-term debt $25,300 $28,053 Accounts payable 509 1,576 Accrued expenses 9,323 9,702 Income taxes 200 138 --------- --------- 35,332 39,469 --------- ---------
Redeemable common stock 4,774 4,144 --------- ---------
Redeemable preferred stock 3,694 3,129 --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT) Common stock 5,540 5,052 Additional paid-in capital 38,526 36,613 Unrealized appreciation of investments 21,047 - Receivable from related party, including accrued interest (4,318) (4,100) Accumulated deficit (98,755) (94,520) --------- --------- (37,960) (56,955) Less treasury stock, at cost 805 805 --------- --------- (38,765) (57,760) --------- --------- $5,035 ($11,018) ========= =========
The accompanying notes are an integral part of the condensed financial information.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ARTRA GROUP INCORPORATED STATEMENTS OF OPERATIONS (Registrant Only In Thousands)
Fiscal Year ----------------------------- 1995 1994* 1993* -------- --------- --------
Selling, general and administrative expenses $1,760 $2,158 $1,907 Depreciation and amortization 27 4 2 Interest expense 4,953 3,139 2,641 Equity in loss of affiliates 7,817 6,129 3,423 Other expense, net 424 308 85 -------- --------- -------- Loss from continuing operations before income taxes (14,981) (11,738) (8,058) Charge equivalent to income taxes (1,962) (1,791) (269) -------- --------- --------
Loss from continuing operations (16,943) (13,529) (8,327)
Equity in earnings (loss) of discontinued affiliate 10 (15,906) (216) -------- --------- -------- Loss before extraordinary credit (16,933) (29,435) (8,543)
Extraordinary credit, net discharge of indebtedness 14,030 8,965 22,057 -------- --------- --------
Net earnings (loss) ($2,903) ($20,470) $13,514 ======== ========= ========
The accompanying notes are an integral part of the condensed financial information.
______________________________________________ * As reclassified for discontinued operations.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE I . CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ARTRA GROUP INCORPORATED STATEMENTS OF CASHFLOWS (Registrant Only In Thousands)
The accompanying notes are an integral part of the condensed financial information.
ARTRA GROUP INCORPORATED AND SUB AND SUBSIDIARIES SCHEDULE I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(Cont.)
ARTRA GROUP INCORPORATED NOTES TO FINANCIAL INFORMATION (Registrant Only)
1. Presentation
The condensed financial information of the Registrant has been prepared in accordance with the instructions for Schedule I to Form 10-K. The Registrant's investments in subsidiaries and affiliates are presented on the equity method.
2. Commitments and Contingencies
See Note 15 of the consolidated financial statements.
3. Restricted Assets
The terms of several agreements place certain restrictions on the net assets of certain operating subsidiaries. See Notes 9 and 10 of the consolidated financial statements for additional information.
4. Notes Payable and Long-Term Debt
See Notes 9 and 10 of the consolidated financial statements.
5. Redeemable Common and Preferred Stock and Stock Options
See Notes 11, 12 and 13 of the consolidated financial statements.
6. Income Taxes
The Registrant files a consolidated income tax return with its 80% or more owned subsidiaries. Separate returns are filed by the Company's majority-owned, but less than 80% owned subsidiaries. For financial reporting purposes, the Registrant's charge or benefit equivalent to income tax represents the difference between the aggregate of income taxes computed on a separate return basis for each of the subsidiaries and affiliates and the income taxes computed on a consolidated basis.
7. Guarantees of Subsidiaries' Obligations
See Notes 3 and 21 of the consolidated financial statements for a discussion of guarantees of subsidiary obligations.
ARTRA GROUP INCORPORATED AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS for each of the three fiscal years in the period ended December 28, 1995 (in thousands)
(A) Principally amounts of discontinued operations. (B) Principally markdowns taken. (C) Principally uncollectible accounts written off, net of recoveries. (D) Principally inventory written off, net of recoveries.
INDEX OF EXHIBITS
(A) Exhibits included herein:
EXHIBIT 3 Articles of Incorporation and By-laws
3.1 Statement with Respect to Shares of Series A Preferred Stock of Registrant.
3.2 Statement with Respect to Shares of Rights and Preferences of Series B Preferred Stock of Registrant.
EXHIBIT 10 Material contracts
10.1 Letter Agreement dated February 26, 1996 by and among ARTRA GROUP Incorporated, ARTRA Subsidiary, Inc., BCA Holdings, Inc., Peter and Jean Harvey, and Bank of America Illinois, re. certain Purchase and Sale Agreement and Assignment between the Bank and Arabella S.A., a Luxembourg holding company.
10.2 PURCHASE AND SALE AGREEMENT AND ASSIGNMENT, dated as of February 26, 1996, by and between Bank of America Illinois (the "Seller") and Arabella S.A., a Luxembourg holding company (the "Purchaser").
10.3 Letter Agreement dated February 26, 1996 by and among ARTRA GROUP Incorporated and Arabella S.A., a Luxembourg holding company, re. purchase of certain indebtedness by Arabella (the "Purchaser") from Bank of America Illinois (the "Seller").
10.4 AMENDED AND RESTATED PROMISSORY NOTE, dated February 26, 1996 made by BCA HOLDINGS, INC. in favor of ARABELLA S.A.
10.5 OPTION TO PURCHASE SHARES OF COMMON STOCK OF BAGCRAFT CORPORATION OF AMERICA sold by BCA HOLDINGS, INC. to ARABELLA S.A.
10.6 PREFERRED STOCK AGREEMENT made by and between BCA HOLDINGS INC. AND BAGCRAFT CORPORATION OF AMERICA.
10.7 PREFERRED STOCK EXCHANGE AGREEMENT, dated as of January 31, 1996 by and between Ozite Corporation, BCA Holdings Inc. and Bagcraft Corporation of America.
10.8 LIMITED CONSENT AND SIXTH AMENDMENT TO CREDIT AGREEMENT, dated as of February 1, 1996 between BAGCRAFT CORPORATION OF AMERICA and GENERAL ELECTRIC CAPITAL CORPORATION.
EXHIBIT 11 Computation of earnings per share and equivalent share of common stock for each of the three years in the period ended December 28, 1995.
EXHIBIT 21 Subsidiaries.
EXHIBIT 24 Consent of Independent Accountants.
(B) Exhibits incorporated herein by reference:
EXHIBIT 3 Articles of Incorporation and By-laws
3.3 Amended and Restated Articles of Incorporation of the Registrant as filed in the Department of State of Pennsylvania on December 21, 1990.
3.4 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.
EXHIBIT 10 Material contracts
10.1 ASSET PURCHASE AGREEMENT made as of the 28th day of September, 1995, by and among Arcar Graphics, Inc., an Illinois corporation ("Arcar" or "Seller"), BCA Holdings, Inc., a Delaware corporation ("BCA"), Bagcraft Corporation of America, a Delaware corporation ("BCA" and, collectively with BCA, "Bagcraft"), ARTRA GROUP Incorporated, a Pennsylvania corporation ("ARTRA"), and Arcar Acquisition Corp., a Delaware corporation ("Buyer"), filed with Registrant's Form 8-K dated October 26, 1995.
10.2 LIMITED RELEASE, dated October 30, 1995, between NatWest Bank N. A. ("Releasor"), and ARTRA GROUP Incorporated and Peter R. Harvey ("Releasee"), filed with Registrant's Form 8-K dated October 26, 1995.
10.3 STOCK PURCHASE AGREEMENT, Dated September 11, 1995 by and Among Spectrum Technologies, Inc., The Lori Corporation, COMFORCE Corp.; ARTRA Group Incorporated, Peter R. Harvey, Marc L. Werner, James L. Paterek, Michael Ferrentino, and Christopher P. Franco, filed with Registrant's Form 8-K dated September 11, 1995.
10.4 Letter Agreement dated June 29, 1995, regarding employment or consulting services between The Lori Corporation, ARTRA Group Incorporated, James L. Paterek, Michael Ferrentino, and Christopher P. Franco, filed with Registrant's Form 8-K dated September 11, 1995.
10.5 ASSIGNMENT AGREEMENT, dated and effective March 31, 1995, by and among IBJ Schroder Bank & Trust Company, The Lori Corporation, Lawrence Jewelry Co., Lawrence Jewelry Corporation, New Dimensions Accessories Ltd., Rosecraft, Inc., Fill-Mor Holding, Inc., ARTRA GROUP Incorporated and Alexander Verde, filed as an exhibit to Registrant's Form 10-K, for the year ended December 29, 1994, dated April 12, 1995.
10.6 REGISTRATION AND SETTLEMENT AGREEMENT dated as of March 31, 1995 by and between ARTRA GROUP Incorporated and IBJ Schroder Bank & Trust Company filed as an exhibit to Registrant's Form 10-K, for the year ended December 29, 1994, dated April 12, 1995.
10.7 AMENDED SETTLEMENT AGREEMENT by and among THE LORI CORPORATION, LAWRENCE JEWELRY CO., LAWRENCE JEWELRY CORPORATION, NEW DIMENSIONS ACCESSORIES LTD. (formerly known as R.N. Koch, Inc.), ROSECRAFT, INC., FILL-MOR HOLDING, INC., ARTRA GROUP INCORPORATED AND IBJ SCHRODER BANK & TRUST COMPANY, dated as of December 23, 1994 filed as an exhibit to Registrant's Form 8-K, dated January 3, 1995.
10.8 Loan Agreement, dated as of December 23, 1994, by and among ARTRA GROUP Incorporated and McGOODWIN JAMES & CO filed as an exhibit to Registrant's Form 8-K, dated January 3, 1995.
10.9 Settlement Agreement dated August 18, 1994 by among The Lori Corporation, Lawrence Jewelry Co., Lawrence Jewelry Corporation, New Dimensions Accessories, Ltd., Rosecraft, Inc., Fill-Mor Holding, Inc., ARTRA GROUP Incorporated and IBJ Schroder Bank & Trust Company, dated as of August 18,1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994.
10.10 Pledge and Security Agreement between The Lori Corporation and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994.
10.10 Pledge and Security Agreement between Lawrence Jewelry Co. and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994.
10.11 Pledge and Security Agreement between Lawrence Jewelry Corporation and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994.
10.12 Pledge and Security Agreement between New Dimensions Accessories, Ltd and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994.
10.13 Pledge and Security Agreement between Rosecraft, Inc. and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994.
10.14 Pledge and Security Agreement between Fill-Mor Holding, Inc. and IBJ Schroder Bank & Trust Company dated as of August 18, 1994 filed as an exhibit to Registrant's Form 10-Q for the quarterly period ended June 30, 1994, dated August 19, 1994.
10.15 Credit Agreement dated as of December 17, 1993 by and between Bagcraft Corporation of America as Borrower and General Electric Capital Corporation as agent and lender filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994. . 10.16 Loan Agreement dated December 27, 1993 in the amount of $5,000,000 between Bagcraft Corporation of America and the City of Baxter Springs, Kansas filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994.
10.19 Construction Loan Agreement dated as of February 15, 1994 in the amount of $7,000,000 between the City of Baxter Springs, Kansas and Bagcraft Corporation of America filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994.
10.20 Loan Agreement dated January 19, 1994 in the amount of $250,000 between Bagcraft Corporation of America and the City of Baxter Springs, Kansas filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994.
10.21 Loan Agreement dated January 20, 1994 in the amount of $250,000 between Bagcraft Corporation of America and the City of Baxter Springs, Kansas filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994.
10.22 Asset Purchase Agreement dated as March 1, 1994 by and between AGI Acq. Inc., a subsidiary of Bagcraft Corporation of America, and Arcar Graphics, Inc. filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994.
10.23 Loan and Security Agreement dated as of April 8, 1994 between AGI Acq. Inc. and American National Bank and Trust Company of Chicago filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994.
10.24 Revolving Note dated as of April 8, 1994 in the amount of $1,500,000 from AGI Acq. Inc. to American National Bank and Trust Company of Chicago filed as an exhibit to Registrant's Form 10-K for the year ended December 30, 1993, dated April 11, 1994.