ARTRA GROUP INC, 10-Q, 1995-08-21

ARTRA GROUP INC
10-Q, 1995-08-21
COSTUME JEWELRY & NOVELTIES

Previous: SYSTEMED INC /DE, S-8 POS, 1995-08-21

Next: FIDELITY SUMMER STREET TRUST, N-30D/A, 1995-08-21

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 1995

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-3916

ARTRA GROUP INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Pennsylvania 25-1095978
-------------------------------- -----------------
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.

500 Central Avenue, Northfield, IL 60093
-------------------------------------- --------
Address of principal executive offices Zip Code

Registrant's telephone number, including area code: (708) 441-6650

Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at July 31, 1995
------------------------------- ----------------------------
Common stock, without par value 6,730,423

<PAGE>

ARTRA GROUP INCORPORATED

INDEX

Page
Number
------

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets
June 29, 1995 and December 29, 1994 2

Condensed Consolidated Statements of Operations
Three Months and Six Months Ended
June 29, 1995 and June 30, 1994 4

Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Six Months Ended June 29, 1995 5

Condensed Consolidated Statements of Cash Flows
Six Months Ended June 29, 1995 and June 30, 1994 6

Notes to Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25

PART II OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 39

SIGNATURES 40

ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)

June 29, December 29,
1995 1994
------- -------

ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents .................................................. $ 420 $ 2,070
Restricted cash and equivalents ....................................... 546 1,324
Receivables, less allowance for doubtful accounts
and markdowns of $1,289 in 1995 and $1,654 in 1994 ................. 12,817 13,707
Inventories ........................................................... 23,669 20,268
Other ................................................................. 1,311 1,148
------- -------
Total current assets ...................................... 38,763 38,517
------- -------

Property, plant and equipment ............................................ 49,487 48,150
Less accumulated depreciation and amortization ........................... 19,027 17,110
------- -------
30,460 31,040
------- -------

Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of $8,637 in 1995 and $7,934 in 1994 11,592 19,076
Other ................................................................. 1,477 4,796
13,069 23,872
------- -------
$82,292 $93,429
======= =======

<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share data)
<CAPTION>

June 29, December 29,
1995 1994
--------- -----------
LIABILITIES
<S> <C> <C>

Current liabilities:
Notes payable, including amounts due to related parties
of $6,586 in 1995 and $5,669 in 1994 ........................................ $ 27,763 $ 28,053
Current maturities of long-term debt ........................................... 37,839 37,521
Accounts payable ............................................................... 21,390 16,788
Accrued expenses ............................................................... 16,912 16,533
Income taxes ................................................................... 303 94
--------- ---------
Total current liabilities .......................................... 104,207 98,989
--------- ---------

Long-term debt .................................................................... 17,201 19,673
Debt subsequently discharged ...................................................... 9,750
Other noncurrent liabilities ...................................................... 1,479 1,463
Commitments and contingencies

Redeemable common stock,
issued 369,679 shares in 1995 and 279,679 shares in 1994 ....................... 4,736 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
of $1,712 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 .................... 3,407 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 ............................................ 10,456 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 ............... 4,032 3,922

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; authorized 7,500,000 shares;
issued 6,417,782 shares in 1995 and 6,455,602 shares in 1994 .................. 5,091 5,052
Additional paid-in capital ........................................................ 36,365 36,613
Receivable from related party, including accrued interest ......................... (4,340) (4,100)
Accumulated deficit ............................................................... (99,537) (94,520)
--------- ---------
(62,421) (56,955)
Less treasury stock (57,038 shares), at cost ...................................... 805 805
--------- ---------
(63,226) (57,760)
--------- ---------
$ 82,292 $ 93,429
========= =========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>

Three Months Ended Six Months Ended
-------------------- --------------------
June 29, 1995 June 30, 1994 June 29, 1995 June 30, 1994
-------- -------- -------- --------

<S> <C> <C> <C> <C>
Net sales .......................................................... $ 37,463 $ 38,773 $ 72,538 $ 74,813
-------- -------- -------- --------

Costs and expenses:
Cost of goods sold, exclusive of depreciation and amortization .. 30,489 29,272 58,028 55,935
Selling, general and administrative ............................. 7,124 8,369 14,016 16,649
Depreciation and amortization ................................... 1,465 1,634 2,774 3,088
Goodwill impairment ............................................. 6,430 6,430
-------- -------- -------- --------
45,508 39,275 81,248 75,672
-------- -------- -------- --------

Operating loss ..................................................... (8,045) (502) (8,710) (859)
-------- -------- -------- --------

Other income (expense):
Interest expense ................................................ (2,326) (2,443) (4,521) (4,942)
Other income, net ............................................... 9 (52) 13 (14)
-------- -------- -------- --------
(2,317) (2,495) (4,508) (4,956)
-------- -------- -------- --------

Loss from operations before income taxes and minority interest ..... (10,362) (2,997) (13,218) (5,815)
Provision for income taxes ......................................... (14) (43) (24) (64)
Minority interest .................................................. (224) (224) (448) (442)
-------- -------- -------- --------
Loss before extraordinary credit ................................... (10,600) (3,264) (13,690) (6,321)
Extraordinary credit, net discharge of indebtedness ................ 9,113
-------- -------- -------- --------
Net earnings (loss) ................................................ (10,600) (3,264) (4,577) (6,321)
Dividends applicable to redeemable preferred stock ................. (143) (131) (278) (254)
Reduction of retained earnings applicable to redeemable common stock (84) (77) (162) (120)
-------- -------- -------- --------
Earnings (loss) applicable to common shares ........................ ($10,827) ($ 3,472) ($5,017) ($6,695)
======== ======== ======= =======

Earnings (loss) per share:
Loss before extraordinary credit ................................ ($ 1.61) ($ 0.66) ($ 2.10) ($ 1.28)
Extraordinary credit ............................................ 1.35
-------- -------- -------- --------
Net earnings (loss) ................................. ($ 1.61) ($ 0.66) ($ 0.75) ($ 1.28)
======== ======== ======= =======

Weighted average number of shares of common stock and
common stock equivalents outstanding ............................ 6,724 5,243 6,705 5,215
======== ======== ======= =======

<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited in thousands, except share data)

Total
Common Stock Additional Receivable Treasury Stock Shareholders'
-------------------- Paid-in Related Accumulated -------------- Equity
Shares Dollars Capital Party (Deficit) Shares Dollars (Deficit)
--------- ------- -------- ------- -------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Balance at December 29, 1994 .......... 6,455,602 $ 5,052 $ 36,613 ($4,100) ($94,520) 57,038 ($805) ($57,760)
Net earnings ....................... (4,577) (4,577)
Reclassification of
redeemable common stock .......... (100,000) (500) (500)
Common stock issued to
pay liabilities .................. 43,182 33 175 208
Net (increase) decrease in
receivable from related party,
including accrued interest ....... (240) (240)
Redeemable common stock put
option exercised ................. (8) 8
Exercise of stock options .......... 12,100 9 39 48
Redeemable common stock accretion .. (162) (162)
Redeemable preferred stock dividends (278) (278)
Common stock issued as compensation 6,898 5 30 35
--------- ------- -------- ------- -------- ------ ----- --------
Balance at June 29, 1995 .............. 6,417,782 $ 5,091 $ 36,365 ($4,340) ($99,537) 57,038 ($805) ($52,353)
========= ======= ======== ======= ======== ====== ===== ========

<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>

<PAGE>

<TABLE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)

Six Months Ended
--------------------
June 29, June 30,
1995 1994
-------- --------
<S> <C> <C>

Net cash flows from (used by) operating activities, ................ ($ 722) ($ 2,458)
-------- --------

Cash flows from investing activities:
Additions to property, plant and equipment ...................... (1,480) (6,066)
Retail fixtures ................................................. (610) (199)
Acquisition of Arcar ............................................ (2,264)
Proceeds from collection of Welch notes ......................... 3,000
Payment of liabilites with restricted cash ...................... 550
(Increase) decrease in unexpended plant construction funds ...... 228 (3,818)
-------- --------
Net cash flows used by investing activities ........................ 1,688 (12,347)
-------- --------

Cash flows from financing activities:
Net increase (decrease) in short-term debt ...................... (142) (1,153)
Proceeds from long-term borrowings .............................. 66,529 49,516
Reduction of long-term debt ..................................... (68,938) (33,253)
Other ........................................................... (65) 39
-------- --------
Net cash flows from (used by) financing activities ................. (2,616) 15,149
-------- --------

Increase (decrease) in cash and cash equivalents ................... (1,650) 344
Cash and equivalents, beginning of period .......................... 2,070 1,060
-------- --------
Cash and equivalents, end of period ................................ $ 420 $ 1,404
======== ========

Supplemental cash flow information: Cash paid during the period for:
Interest ......................................................... $ 2,831 $ 2,619
Income taxes paid, net ........................................... 7 46

Supplemental schedule of noncash investing and financing activities:
Notes issued as consideration for Arcar acquisition ........... 8,000
Issue common stock and redeemable common stock
to pay down current liabilities ............................. 205 118

<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL RESTRUCTURING AND BASIS OF PRESENTATION

ARTRA Group Incorporated and its majority-owned subsidiaries (hereinafter
"ARTRA" or the "Company") principally operate 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 and
accessories. The packaging products business is conducted by the Company's
wholly-owned subsidiary, Bagcraft Corporation of America ("Bagcraft"). The
jewelry business in 1995 is conducted by the 62.6% owned subsidiary, The Lori
Corporation ("Lori"), through its two wholly-owned subsidiaries Lawrence Jewelry
Corporation ("Lawrence") and Rosecraft, Inc. ("Rosecraft").

The Company's condensed consolidated financial statements are presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. In the opinion of
the Company, the accompanying condensed consolidated financial statements
reflect all normal recurring adjustments necessary to present fairly the
financial position as of June 29, 1995, and the results of operations and
changes in cash flows for the periods ended June 29, 1995 and June 30, 1994. 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. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty. See Note
7, Notes Payable, and Note 8, Long Term Debt, for further discussion of the
status of credit arrangements and restrictions on the ability of 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 such alternative sources
as private placements of ARTRA common stock, 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.

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 Bagcraft's wholly-owned Arcar Graphics, Inc. ("Arcar") subsidiary. Arcar is a
manufacturer and distributor of waterbase inks. The purchase price shall be cash
of $21,000,000 payable at closing and the buyer's assumption of certain
liabilities. Consummation of the transaction is subject to certain conditions,
including performance of the buyer's due diligence, buyer's financing of the
acquisition and negotiation of a definitive asset purchase agreement. ARTRA
expects to use the net proceeds to pay down certain debt obligations, with the
balance to be used for working capital.

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 to not to exercise any of its rights and
remedies with respect to amounts due the bank under its ARTRA notes (see Note 7)
and certain obligations of ARTRA's president, Peter R. Harvey. In exchange for a
payment of $5,700,000, to be paid with ARTRA's share of the proceeds from the
sale of Arcar, the bank agreed to discharge all amounts due the bank by ARTRA
and to sell the obligations of Peter R. Harvey due the bank to ARTRA. Upon
consummation of this transaction, ARTRA will recognize a gain on the discharge
of this indebtedness.

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.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

As discussed in Note 6, on August 18, 1994, as amended December 23, 1994, ARTRA,
Lori, Lori's parent, Fill-Mor Holding, Inc. ("Fill-Mor"), a wholly-owned
subsidiary of the Company, and Lori's operating subsidiaries, (including New
Dimensions Accessories, Ltd., "New Dimensions", 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 operating subsidiaries and Fill-Mor resulting in a partial
discharge of indebtedness to Lori and its operating subsidiaries in December,
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
recognized in 1995.

At March 30, 1995 and at December 31, 1994, Lori had anticipated that the
restructuring of its debt (see Note 6), along with a consolidation and
restructuring of its operations in order to reduce overhead costs and improve
operational efficiencies, would permit it to obtain a sufficient level of
borrowings to fund its capital requirements in 1995. During the second quarter
of 1995, due primarily to competitive conditions in the costume jewelry
industry, Lori's operating subsidiaries experienced a reduction in business with
certain major customers. Additionally, Lori's operating subsidiaries
discontinued certain unprofitable programs with other customers resulting in
charges to operations for merchandise credits and inventory valuation allowances
totaling $450,000. Due to the continued losses from operations and the inability
of the Company to obtain conventional bank financing, the Company determined
that Lori's remaining goodwill balance could no longer be recovered over its
remaining life through forecasted future operations. Accordingly, the Company
recorded a charge against operations of $6,430,000 ($.96 per share) to write-off
all of the goodwill of Lori and its costume jewelry operations (see Note 5).

During June, 1995, Lori entered into a series of agreements with certain
unaffiliated investors that provided for $700,000 of short-term loans due
January 1, 1996. In August, 1995 Lori obtained a credit facility for the
factoring of the accounts receivable of its costume jewelry operations.
Borrowings under the credit facility are collateralized by the accounts
receivable, inventory and equipment of Lori's operating subsidiaries and
guaranteed by Lori. Lori continues to search for additional funding to meet its
capital requirements for the remainder of 1995 and beyond, either through
borrowings or equity infusions. Additionally, Lori is attempting to increase
sales through the solicitation of new customers and the addition of new programs
with existing customers such that operating results will improve. However, there
can be no assurance that such efforts will result in increased sales and
operating profits. If Lori is unable to obtain additional working capital
borrowings or equity infusions to fund its operations in for the remainder of
1995 and beyond, and improve the results of operations, it may be forced to
liquidate its assets or file for protection under the Bankruptcy Code.

Lori's business plan for the remainder of 1995 is based on the continued
dependence upon certain major customers which include Target Stores, Walgreens
and Wal-Mart. Lori does not have sales contracts with its customers.

These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's annual report on Form 10-K for the fiscal year ended December 29,
1994, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 29, 1994 was derived from
the audited consolidated financial statements in the Company's annual report on
Form 10-K.

Reported interim results of operations are based in part on estimates which may
be subject to year-end adjustments. In addition, these quarterly results of
operations are not necessarily indicative of those expected for the year.

2. ARCAR GRAPHICS, INC.

In March, 1994, Bagcraft entered into an agreement to purchase 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

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

cash of $2,264,000 and subordinated promissory notes totaling $8,000,000. In
addition to the initial consideration, the purchase price may be increased based
upon Arcar's cumulative earnings, as defined in the purchase agreement, for the
period from January 1, 1994 until December 31, 1997 ("earnout compensation").
The earnout compensation, if applicable, is payable on or before January 2, 1999
along with interest thereon at the prime rate for the period January 1, 1998
until final payment. 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 is payable only through a reduction of the
subordinated promissory notes and accrued interest due the seller under terms of
the purchase agreement. The acquisition of Arcar, completed on April 8, 1994,
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.

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. The purchase price shall be cash of $21,000,000 payable at closing and
the buyer's assumption of certain liabilities. Consummation of the transaction
is subject to certain conditions, including performance of the buyer's due
diligence, buyer's financing of the acquisition and negotiation of a definitive
asset purchase agreement. ARTRA expects to use the net proceeds to pay down
certain debt obligations, with the balance to be used for working capital.

3. INVENTORIES
<TABLE>

Inventories (in thousands) consist of:
<CAPTION>

June 29, December 29,
1995 1994
------- -------
<S> <C> <C>

Raw materials and supplies $ 6,179 $ 7,041
Work in process .......... 179 877
Finished goods ........... 17,311 12,350
------- -------
$23,669 $20,268
======= =======
</TABLE>

4. 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: (i) cash of $75,000,000; (ii) a 27.5% common stock
interest in Emerald and (iii) Emerald junior debentures ("Junior Debentures")
with a principal amount of $20,992,710. The Junior Debentures were scheduled to
mature May 1, 2001, twelve years from the date of issuance, and to accrue and
pay interest in the form of cash or additional Junior Debentures, at Emerald's
option, semi-annually, for the first six years at the rate of 15% and to pay
interest at the rate of 15% in the form of cash thereafter, semi-annually in
arrears. ARTRA's 27.5% interest in Emerald common stock and Emerald Junior
Debentures, as required by the Securities and Exchange Commission Staff
Accounting Bulletin No. 81, were carried net of a valuation allowance.

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.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

On December 17, 1993 the Bankruptcy Court confirmed the First Amended Joint Plan
of Reorganization as twice modified (the "Plan") with respect to Envirodyne and
certain of its subsidiaries. The confirmation of the Plan was affirmed by the
United States District Court for the Northern District of Illinois on December
28, 1993 and Envirodyne and certain of its subsidiaries emerged from Chapter 11
on December 31, 1993, the Effective Date. A notice of appeal to the United
States Court of Appeals for the Seventh Circuit was thereafter filed by certain
holders of Envirodyne's 13.5% Subordinated Notes Due 1996. Envirodyne has filed
a motion, which is currently pending, to dismiss the appeal. Confirmation of the
Plan was affirmed on appeal. The Emerald Chapter 11 case is still pending
although ARTRA has moved to dismiss that case.

Envirodyne's plan of reorganization did not provide any consideration 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 13 Litigation for remedies being pursued by
ARTRA as compensation 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
maintained jurisdiction of ARTRA's claims against the individual 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 retention of claims was
denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these
claims. On August 4, 1995, ARTRA filed its Notice of Appeal of the Bankruptcy
Court's order.

On November 23, 1994, the Company filed a Second Amended Complaint against the
Salomon Defendants and the Kelly Defendants. On December 21, 1994, the Salomon
Defendants and the Kelly Defendants brought motions to dismiss ARTRA's Second
Amended Complaint in the State Court Action. On February 8, 1995, ARTRA's Second
Amended Complaint was dismissed in part, with leave to replead.

On March 10, 1995, ARTRA filed a Third Amended Complaint in the State court
Action. On April 13, 1995, the Salomon Defendants and the Kelly Defendants
brought motions to dismiss the Company's Third Amended Complaint. On June 8,
1995, the Third Amended Complaint was dismissed in part, with leave to replead.

On July 19, 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 case is in its early stages and discovery is just beginning. ARTRA cannot
predict, with any certainty, the outcome of the suit.

5. GOODWILL IMPAIRMENT

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 was amortized
on a straight-line basis principally over a period of 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.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

At March 31, 1995 and at December 31, 1994, Lori's business plan had anticipated
that the restructuring of its debt (see Note 6), along with a consolidation and
restructuring of its operations would permit it to obtain a sufficient level of
borrowings to fund its capital requirements in 1995 and beyond. With the above
business plan in place, funded by an adequate level of conventional working
capital borrowings, it was anticipated that future cash flows from operations
would be sufficient to recover the carrying value of the Lori's goodwill.

During the second quarter of 1995, due primarily to competitive conditions in
the costume jewelry industry, Lori's operating subsidiaries experienced a
reduction in business with certain major customers. Additionally, Lori's
operating subsidiaries discontinued certain unprofitable programs with other
customers resulting in charges to operations for merchandise credits and
inventory valuation allowances totaling $450,000. Due to the continued losses
from operations and the inability of Lori to obtain conventional bank financing,
the Lori determined that its remaining goodwill balance could no longer be
recovered over its remaining life through forecasted future operations.
Accordingly, the Company recorded a charge against operations of $6,430,000
($.96 per share) to write-off all of the goodwill of Lori and its costume
jewelry operations at June 29, 1995.

6. DEBT RESTRUCTURING

Effective August 18, 1994, as amended December 23, 1994, Lori and Lori's
operating subsidiaries (collectively, the "Borrowers"), ARTRA and Lori's parent,
Fill-Mor, 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.

Per terms of the Amended Settlement Agreement, borrowings due the bank under the
loan agreements of the Borrowers 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 Amended Settlement Agreement in
1995, as discussed below, the balance of this indebtedness was discharged.

In exchange for the reduction of amounts due the bank, and as additional
consideration for the $1,850,000 short-term loan agreement from the
non-affiliated corporation, the Borrowers, ARTRA and Fill-Mor agreed to pay the
following consideration:

A) A cash payment to the bank of $1,900,000, which was made in
December, 1994.

B) 400,000 shares of ARTRA common stock. These 400,000 ARTRA
common shares were originally issued to the bank under terms
of the August 18, 1994 Settlement Agreement. The bank retained
100,000 shares and the non-affiliated corporation received
300,000 shares as additional consideration for its short-term
loan.

C) Assignment to the bank of all of the assets of Lori's New
Dimensions subsidiary.

D) A $750,000 note payable to the bank due March 31, 1995.

Among other things, ARTRA has agreed to register the ARTRA shares issued in
order to enable the ARTRA shares issued to be freely tradeable without
restriction on or before July 31, 1995. Additionally, the Settlement Agreement
required ARTRA to advance $400,000 to Lori which, along with $150,000 of the
ARTRA $1,850,000 short-term loan agreement

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

noted above, was deposited in trust at December 29, 1994. This deposit was used
to fund the installment payment due December 31, 1994 for unsecured claims
arising from the May 3, 1993 reorganization of New Dimensions. The installment
payment was made in January, 1995.

The August 18, 1994 settlement agreement required ARTRA to contribute cash of
$1,500,000 to Lori for working capital. ARTRA's cash contribution was funded by
private placements of ARTRA common stock. An officer/director of Lori
participated in the private placement of ARTRA common stock purchasing $150,000
of ARTRA common stock (37,500 shares), subject to the same terms and conditions
as the other outside investors.

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 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
========
</TABLE>

Lori also recorded a charge against operations in December 1994 to write-off New
Dimensions' goodwill, which had a book value of $10,800,000.

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 ($1.35 per share) in the
first quarter of 1995. Among other things, ARTRA has agreed to register the
ARTRA shares issued in order to enable the ARTRA shares issued to be freely
tradeable without restriction on or before July 31, 1995. In the event the
shares are not registered by July 31, 1995, the bank has the right to put the
100,000 ARTRA shares back to ARTRA for an exercise price of $500,000. The
$750,000 note payment was funded with the proceeds of a $850,000 short-term loan
from a director of Lori. The loan provides for interest at the prime rate plus
1%. As consideration for assisting in the debt restructuring, the director
received 150,000 Lori common shares 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:

<TABLE>
<S> <C>
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
========
</TABLE>
<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

7. NOTES PAYABLE

<TABLE>
Notes payable (in thousands) consist of:
<CAPTION>

June 29, December 29,
1995 1994
------- -------
<S> <C> <C>

ARTRA bank notes payable, at various interest rates ..... $16,008 $18,508
Amounts due to related parties, interest from 8.5% to 12% 6,586 5,669
Other, interest from 8% to 20% .......................... 5,169 3,876
------- -------
$27,763 $28,053
======= =======
</TABLE>

ARTRA

At December 30, 1993, $18,452,000 in ARTRA notes and related loan fees of
$1,107,000 were payable to a bank. The notes provided for interest at the prime
rate. These bank notes are 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. 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 December 31, 1993, a religious organization, currently holding approximately
5.8% of ARTRA's outstanding common stock, made a $2,000,000 short-term loan to
the Company with interest at 10%. See discussion of amounts due to related
parties below for further discussion of this transaction and additional
consideration received by the religious organization. The proceeds of this loan
were remitted to the bank to pay interest and other costs due through December
31, 1993 and to reduce the principal amount outstanding on the bank notes to
$17,063,000 at December 31, 1993.

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 $14,563,000 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 (8.5% at June
29, 1995 and December 29, 1994) 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 4. 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.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 ($17.81 per share at June 29, 1995). The $2,500,000 note payable
to the private corporation is reflected in the above table as amounts due to
related parties.

On October 25, 1994, ARTRA's bank lender filed suit against ARTRA in the Circuit
Court of Cook County, Illinois alleging nonpayment by ARTRA of the amounts due
under the above notes payable to the bank. The bank has requested that the court
enter judgment in its favor against ARTRA in the amount of approximately
$16,000,000, which includes the principal balance of the notes of $14,563,000,
plus interest, costs and fees.

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 the above ARTRA bank notes to
$12,063,000 at June 29, 1995, 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 to 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. In exchange for a payment of
$5,700,000, to be paid with ARTRA's share of the proceeds from the sale of
Arcar, the bank agreed to discharge all amounts due the bank by ARTRA and to
sell the obligations of Peter R. Harvey due the bank to ARTRA. Upon consummation
of this transaction, ARTRA will recognize a gain on the discharge of this
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 6. In March, 1995, borrowings due under this loan agreement
were discharged.

A $3,600,000 bank note payable due December 31, 1990, has not been paid.
However, the bank has not demanded payment. This loan is collateralized by a
$2,500,000 guarantee of Peter R. Harvey, ARTRA's president.

An ARTRA bank note with outstanding borrowings of $345,000 at June 29, 1995 and
December 29, 1994 is guaranteed by a private company. Interest on the note is at
the prime rate plus 2% (11.0% at June 29, 1995 and 10.5% at December 29, 1994).

Amounts Due To Related Parties

In January, 1995, John Harvey loaned ARTRA $100,000 evidenced by an unsecured 60
day note bearing interest at 8%. As additional compensation for the loan, John
Harvey received a warrant to purchase 6,000 ARTRA common shares at $4.75 per
share based upon the market value of ARTRA's common stock at the date of
issuance. The warrant expires 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 April,
1995, John Harvey made additional advances to ARTRA totaling $33,000 and as
consideration for all outstanding advances, received additional warrants to
purchase 11,667 shares of ARTRA common stock at $3.75 per share based upon the
market value of ARTRA's common stock at the date of issuance. At June 29, 1995
and December 29, 1994, total outstanding borrowings from John Harvey were
$175,000 and $42,000, respectively.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

At March 30, 1995, amounts due to related parties included a $850,000 short-term
loan from a director of Lori. The loan provides for interest at the prime rate
plus 1%. As consideration for assisting with the debt restructuring, the
director received 150,000 Lori common shares valued at $337,500 ($2.25 per
share) based upon Lori's closing market value on March 30, 1995. The principal
amount of the loan was reduced to $775,000 at June 29, 1995 and further reduced
to $750,000 at July 31, 1995. The remaining loan principle was not repaid on its
scheduled to maturity date of July 31, 1995. Per terms of the loan agreement,
the Lori director received an additional 50,000 Lori common shares as
compensation for the non-payment of the loan at its scheduled maturity. The due
date of the loan was subsequently extended to September 30, 1995 and the Lori
director received an additional 50,000 Lori common shares as consideration for
the loan extension.

At June 29, 1995 and December 29, 1994, amounts due to related parties also
included borrowings of $136,000 and $127,000, respectively, from the above
mentioned director of Lori. As additional compensation the Lori director has
received, through June 29, 1995, 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.

On December 31, 1993, a religious organization, currently holding approximately
5.8% 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 June 29, 1995 and December 29, 1994 borrowings due the
religious organization totaled $3,000,000.

Other

In conjunction with the debt settlement agreement discussed in Note 6, ARTRA
entered into a $1,850,000 short-term loan agreement with a non-affiliated
corporation, the proceeds of which were advanced to Lori and used to fund
amounts due the bank as discussed below. The loan, due June 30, 1995, with
interest payable monthly at 10%, is collateralized by 100,000 shares of Lori
common stock. These 100,000 Lori common shares, originally issued to the bank
under terms of the August 18, 1994 Settlement Agreement, were carried in the
Company's condensed consolidated balance sheet at June 29, 1995 and December 29,
1994 as restricted common stock. 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.

During the second quarter of 1995, Lori entered into a series of agreements with
certain unaffiliated investors that provided for $700,000 of short-term loans
due January 1, 1996 that provide for interest at 15%. As additional compensation
the lenders received an aggregate of 41,176 Lori common shares.

In August, 1995 Lori obtained a credit facility for the factoring of the
accounts receivable of its costume jewelry operations. The credit facility
provides for advances of 80% of receivables assigned, after allowances for
markdowns and other merchandise credits. The factoring charge, a minimum of
1.75% of the receivables assigned, increases on a sliding scale if the
receivables assigned are not collected within 45 days. Borrowings under the
credit facility are collateralized by the accounts receivable, inventory and
equipment of Lori's operating subsidiaries and guaranteed by Lori.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

8. LONG-TERM DEBT
<TABLE>

Long-term debt (in thousands) consists of:
<CAPTION>

June 29, December 29,
1995 1994
--------- ---------
<S> <C> <C>
Bagcraft Credit Agreement,
Term loans,
interest at the prime rate plus 1.75% to 3% ..... $ 17,000 $ 17,000
Revolving credit loan,
interest at the prime rate plus 1.5% ............ 16,843 16,672
Unamortized discount ................................ (60) (315)
Bagcraft, City of Baxter Springs, Kansas loan agreements,
interest, at varying rates .......................... 12,500 12,310
Arcar subordinated promissory notes due to seller,
interest, at the prime rate ......................... 5,500 8,000
Arcar bank term loan,
interest at the prime rate plus .75% ................ 2,687 2,750
Arcar revolving credit loan,
interest at the prime rate plus .5% ................. 556
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 ................. 14 27
--------- ---------
55,040 66,944
Current scheduled maturities ............................ (37,839) (37,521)
Debt subsequently discharged ............................ (9,750)
--------- ---------
$ 17,201 $ 19,673
========= =========
</TABLE>

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 (December 17, 1995), unless accelerated under
terms of the Credit Agreement. The principal under Term Loan B ($5,000,000
outstanding at June 29, 1995 and December 29, 1994) is payable in varying
monthly installments from January 1, 1994 to December 1, 1995, with the
remaining principal balance payable at maturity (December 17, 1995), unless
accelerated under terms of the Credit Agreement. At June 29, 1995, interest
rates on Term Loan A and Term Loan B were 10.75% and 12.0%, 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
June 29, 1995 and December 29, 1994, approximately $1,150,000 and $450,000,

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

respectively, was available and unused by Bagcraft under the revolving credit
loan. The revolving credit loan bears interest at the lender's index rate plus
1.5%. The revolving credit loan is scheduled to become due and payable upon
maturity of the Credit Agreement (December 17, 1995), unless accelerated under
terms of the Credit Agreement. At June 29, 1995 the interest rate on the
revolving credit loan was 10.5%.

Borrowings under the Credit Agreement are collateralized by substantially all of
the assets of Bagcraft. The Credit Agreement contains various restrictive
covenants, that among other restrictions, require Bagcraft to maintain minimum
levels of net worth and liquidity levels and limit additional loans, dividend
payments, capital expenditures and payments to related parties. In addition, the
Credit Agreement prohibits changes in ownership of Bagcraft. At June 29, 1995
Bagcraft was not in compliance with certain provisions of its Credit Agreement.
Bagcraft is currently negotiating with its lender to amend or restructure the
Credit Agreement.

As additional compensation for borrowings under the Credit Agreement, the lender
received a detachable warrant with a put option to purchase up to 10% of the
fully diluted common equity of Bagcraft. The warrant allows Bagcraft to
reacquire up to 2-1/2% of Bagcraft's fully diluted common equity from the lender
contingent upon Bagcraft's repayment of Term Loan B as defined in the Credit
Agreement. 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 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 June 29, 1995 and December 29, 1994, Bagcraft
had borrowed the maximum available under this loan agreement.

A $5,000,000 subordinated promissory note payable as follows:
$2,000,000 installments due June 30,1998 and June 30, 1999; $1,000,000
due on January 2, 2000. The subordinated promissory note is interest
free provided that loan payments are made on a timely basis and no
events of default occur under terms of the agreement. At June 29, 1995
and December 29, 1994, Bagcraft had outstanding borrowings of
$5,000,000 and $4,810,000, respectively, under this loan agreement.

A $250,000 subordinated promissory note payable in 240 monthly
installments commencing August 1, 1995 through maturity on July 18,
2015. The subordinated promissory note is interest free provided that
loan payments are made on a timely basis and no events of default occur
under terms of the agreement. At June 29, 1995 and December 29, 1994,
Bagcraft had borrowed the maximum amount available under this loan
agreement.

A $250,000 subordinated promissory note payable January 20, 2005. The
subordinated promissory note is interest free provided that loan
payments are made on a timely basis and no events of default occur
under terms of the agreement. At June 29, 1995 and December 29, 1994,
Bagcraft had borrowed the maximum amount available 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. At June 29, 1995 and December
29, 1994, $546,000 and $774,000, respectively, of borrowings from the above loan
agreements is reflected in the condensed 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.
<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Arcar

As discussed in Note 2, 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
June 29, 1995 and December 29, 1994, respectively). The subordinated promissory
notes provide for interest payable quarterly at the prime rate (as defined in
the agreement). At June 29, 1995, the remaining outstanding promissory notes
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 is payable only through a
reduction of the subordinated promissory notes and accrued interest due the
seller under terms of the purchase agreement.

Effective April 8, 1994, Arcar entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for a revolving credit loan and a term
loan. The term loan, in the original principal amount of $2,750,000, bears
interest at the prime rate plus .75%. The principal under the term loan is
payable in forty-eight varying monthly installments from April 30, 1995 to March
31, 1999, unless accelerated under terms of the Agreement. At June 29, 1995 the
interest rate on the term loan was 9.75%.

The amount available to Arcar under the revolving credit loan is subject to a
borrowing base, as defined in the agreement, up to a maximum of $1,500,000. The
revolving credit loan bears interest at the prime rate plus .5% (9.5% at June
29, 1995) and is due and payable March 31, 1996, unless accelerated under terms
of the Agreement. The revolving credit loan, renewable solely at the discretion
of the lender for additional one year periods until maturity of the Agreement
(March 31, 1999. At June 29, 1995 approximately $950,000 was available and
unused by Arcar under the revolving credit loan.

Borrowings under the Agreement are collateralized by substantially all of the
assets of Arcar. The Agreement contains 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.

Lori

As discussed in Note 6, 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. Per terms of the Amended Settlement Agreement, 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.

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 June 29, 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.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

9. REDEEMABLE COMMON STOCK

ARTRA has entered into various agreements under which it has sold its common
shares along with options that require ARTRA to repurchase these shares at the
option of the holder, principally one year after the date of each agreement. The
difference between the option price and the net proceeds received is amortized
over the life of the options by a charge to retained earnings. Additionally, as
discussed in Note 6, ARTRA has agreed to register the 100,000 ARTRA common
shares issued to a bank in as partial consideration for a debt settlement
agreement on or before July 31, 1995. In the event the shares are not registered
by July 31, 1995, the bank has the right to put the 100,000 ARTRA common shares
back to ARTRA for an exercise price of $500,000. In July 1995 the bank sold
these ARTRA shares in a private transaction and the put option was cancelled. At
June 29, 1995 and December 29, 1994 options are outstanding that, if exercised,
would require ARTRA to repurchase 369,679 and 279,679 shares of its common stock
for an aggregate amount of $4,736,000 and $4,144,000, respectively.

10. 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 $1,369,000 and $1,221,000 were
accrued at June 29, 1995 and December 29, 1994, respectively.

In 1987, Bagcraft issued to an affiliate, currently a subsidiary of Ozite,
$5,000,000 of preferred stock (50,000 shares of 13.5% cumulative, redeemable
preferred stock with a liquidation preference equal to $100 per share)
redeemable by Bagcraft in 1997 at a price of $100 per share plus accrued
dividends. Dividends, which accrue and are payable semiannually on June 1 and
December 1 of each year, are reflected in the Company's condensed consolidated
statement of operations as minority interest. The affiliate has agreed to forego
dividend payments as long as such payments are prohibited by bank lenders.
Accumulated dividends of $5,456,000 and $5,119,000 were accrued at June 29, 1995
and December 29, 1994, respectively.

In 1987, Bagcraft obtained financing from an affiliate, currently 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
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.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

11. INCOME TAXES

No income tax benefit was recognized in connection with the Company's 1995 and
1994 pre-tax losses due to the Company's tax loss carryforwards. The 1995
extraordinary credit represents a net gain from discharge of bank indebtedness.

At June 29, 1995, the Company and its subsidiaries had Federal income tax loss
carryforwards of approximately $95,000,000 available to be applied against
future taxable income, if any. ARTRA's tax loss carryforwards of approximately
$42,000,000 expire principally in 2003 - 2009. 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. Lori has Federal income tax loss carryforwards of approximately
$53,000,000 available to be applied against future Lori taxable income, if any,
expiring principally in 1995 - 2009. In recent years, the Company has issued
shares of its common stock to repay various debt obligations, as consideration
for acquisitions, to fund working capital obligations and as consideration for
various other transactions. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its Federal income tax loss carryforwards
when certain changes in the ownership of a corporation's common stock occurs. In
the opinion of management, the Company is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should the Company continue to issue a significant number of
shares of its common stock, it could trigger a limitation that would prevent it
from utilizing a substantial portion of its Federal income tax loss
carryforwards.

12. EMPLOYEE BENEFIT PLANS

Effective June 1, 1990, the Company adopted an Employee Stock Ownership Plan
("ESOP") which covers substantially all employees of ARTRA and its Bagcraft
subsidiary. Employer contributions to the Plan are at the discretion of ARTRA's
Board of Directors. Employee contributions are not permitted. ARTRA's
contribution for the plan year ended December 31, 1994, 15,000 ARTRA common
shares, has been accrued in the Company's condensed consolidated balance sheet
in current liabilities at their fair market value of $77,000 ($5.125 per share)
as of December 29, 1994.

13. EARNINGS PER SHARE

Earnings (loss) per share is computed by dividing net earnings (loss), less
dividends applicable to redeemable preferred stock and redeemable common stock
accretion by the weighted average number of shares of common stock and common
stock equivalents (redeemable common stock, stock options and warrants), unless
anti-dilutive, outstanding during each period. Fully diluted earnings per share
are not presented since the result is equivalent to primary earnings per share.

14. LITIGATION

The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At June 29, 1995 and December 29, 1994,
the Company had accrued $1,500,000 for potential business-related litigation and
environmental liabilities. While these litigation and environmental matters
involve wide ranges of potential liability, management does not believe the
outcome of these matters will have a material adverse effect on the Company's
financial statements. However, ARTRA may not have available funds to pay
liabilities arising out of these business-related litigation and environmental
matters or, in certain instances, to provide for its legal defense. ARTRA could
suffer severe adverse consequences in the event of an unfavorable judgment in
any of these matters.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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
maintained jurisdiction of ARTRA's claims against the individual 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 retention of claims was
denied. On July 26, 1995, the Bankruptcy Court entered an order dismissing these
claims. On August 4, 1995, ARTRA filed its Notice of Appeal of the Bankruptcy
Court's order.

The case is in its early stages and discovery is just beginning. ARTRA cannot
predict, with any certainty, the outcome of the suit.

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 condensed 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

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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 theUnited States District Court for the Northern District of Illinois,
against its insurers to recover a portion of its liability costs in connection
with the Cross Brothers case. Bagcraft recovered $725,000 from its insurers in
1994 and an additional $250,000 in 1995. With regard to the state action,
Bagcraft is participating in settlement discussions with the State and thirteen
other potential parties to resolve all claims associated with the State. The
maximum state claim is $1.1 million. Bagcraft has accrued $120,000 related to
the State action in the Company's consolidated financial statements at June 29,
1995 and December 29, 1994.

Bagcraft was listed as a de minimis contributor at the American Chemical
Services, Inc. off-site disposal location in Griffith, Indiana. This site is
included in the EPA's National Priorities List. Bagcraft is presently unable to
determine its liability, if any, with respect to this site.

Bagcraft is presently undertaking a soil remediation project for
solvent-contaminated soil at its Chicago manufacturing facility. The
environmental firm responsible for implementing the remediation has recommended
that a soil vapor extraction process be used, at an estimated cost of $175,000.
Although there can be no assurances that remediation costs will not exceed this
estimate, in the opinion of management, no material additional costs are
anticipated.

In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.

In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of 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.

In connection with this suit, in a case filed in 1992 in the Circuit Court for
Baltimore City, Maryland, American Motorists Insurance Company ("AMICO") is
seeking a declaratory judgment that it is not required to defend, indemnify or
provide insurance coverage to ARTRA in connection with the Sherwin-Williams
case. The Circuit Court ruled in favor of AMICO, but in June 1994, the Court of
Special Appeals of Maryland reversed the final Circuit Court, ruling that AMICO
was obligated to defend and indemnify ARTRA.

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

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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
$400,000 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.

Lori has been notified by the Federal Environment Protection Agency that it is a
potentially responsible party for the disposal of hazardous substances by its
predecessor company at a site on Ninth Avenue in Gary, Indiana.. Lori has no
records indicating that it deposited hazardous substances at this site and
intends to vigorously defend itself in this matter.

15. RELATED PARTY TRANSACTIONS

Advances to Peter R. Harvey, ARTRA's president, classified in the condensed
consolidated balance sheet as a reduction of common shareholders' equity, (in
thousands) consist of:
<TABLE>
<CAPTION>

June 29, December 29,
1995 1994
------- -------
<S> <C> <C>
ARTRA ....................................... $ 5,177 $ 3,205
Fill-Mor .................................... 1,510
------- -------
5,177 4,715
Less interest for the period January 1, 1993
to date, accrued and fully reserved ....... (837) (615)
------- -------
$ 4,340 $ 4,100
======= =======
</TABLE>

ARTRA has total advances due from its president, Peter R. Harvey, of which
$5,177,000 and $3,205,000, including accrued interest, remained outstanding at
June 29, 1995 and December 29, 1994. The advances bear interest at the prime
rate plus 2% (11.0% at June 29, 1995). This receivable from Peter R. Harvey has
been classified as a reduction of common shareholders' equity.

<PAGE>

ARTRA GROUP INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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 six months ended June 29, 1995 and June 30,
1994 totaled $222,000 and $157,000, 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.

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.

For a discussion of certain other related party debt obligations see Note 7.

16. OTHER INFORMATION

In the fourth quarter of 1993 the Company adopted a 52/53 week fiscal year
ending the last Thursday of December. Accordingly, the Company's quarterly
periods now end on the last Thursday of March, June and September.

<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion supplements the information found in the financial
statements and related notes:

Changes in Business

Arcar

As discussed in Note 2 to the condensed consolidated financial statements, in
March 1994, Bagcraft entered into an agreement to purchase the business assets,
subject to buyer's assumption of certain liabilities, of Arcar Graphics, Inc.
("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. In addition to the initial consideration, the
purchase price may be increased based upon Arcar's cumulative earnings, as
defined in the purchase agreement, for the period from January 1, 1994 until
December 31, 1997 ("earnout compensation"). The earnout compensation, if
applicable, is payable on or before January 2, 1999 along with interest thereon
at the prime rate for the period January 1, 1998 until final payment. 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
is payable only through a reduction of the subordinated promissory notes and
accrued interest due the seller under terms of the purchase agreement. The
acquisition of Arcar, completed on April 8, 1994, was accounted for by the
purchase method and, accordingly, the assets and liabilities of Arcar have been
included in ARTRA's financial statements at their estimated fair market value at
the date of acquisition.

Envirodyne

As discussed in Note 4 to the condensed 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: (i) cash of $75,000,000; (ii) a 27.5% common stock interest in Emerald and
(iii) Emerald junior debentures ("Junior Debentures") with a principal amount of
$20,992,710. The Junior Debentures were scheduled to mature May 1, 2001, twelve
years from the date of issuance, and to accrue and pay interest in the form of
cash or additional Junior Debentures, at Emerald's option, semi-annually, for
the first six years at the rate of 15% and to pay interest at the rate of 15% in
the form of cash thereafter, semi-annually in arrears. ARTRA's 27.5% interest in
Emerald common stock and Emerald Junior Debentures, as required by the
Securities and Exchange Commission Staff Accounting Bulletin No. 81, were
carried net of a valuation allowance.

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 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.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Due 1996. Envirodyne has filed a motion, which is currently pending, to dismiss
the appeal. Confirmation of the Plan was affirmed on appeal. The Emerald Chapter
11 case is still pending although ARTRA has moved to dismiss that case.

The case is in its early stages and discovery is just beginning. ARTRA cannot
predict, with any certainty, the outcome of the suit.

As discussed below in the "Liquidity and Capital Resources" section, on February
5, 1993 the Lori's New Dimensions subsidiary filed a petition for reorganization
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York (Case No. 93 B 40653). On April 9, 1993,
New Dimensions' reorganization plan was confirmed by an order of the Bankruptcy
Court. On May 3, 1993, the consummation date of the reorganization, New
Dimensions emerged from Chapter 11 bankruptcy court protection. On August 18,
1994, as amended effective December 23, 1994, ARTRA, Lori's parent, Fill-Mor
Holding, Inc. ("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 operating 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.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Liquidity and Capital Resources

Cash and Cash Equivalents and Working Capital

Cash and cash equivalents decreased $1,650,000 during the six months ended June
29, 1995. Cash flows used by financing activities of $2,616,000 and cash flows
used by operating activities of $722,000 exceeded cash flows from investing

activities of $1,688,000. Cash flows used by financing activities were
attributable to a net reduction of long-term debt principally due to the March
15, 1995 maturity of a $2,500,000 note payable to the Arcar sellers. Cash flows
used by operating activities were principally attributable to the Company's loss
from operations, partially offset by the effect of depreciation and amortization
and other noncash expenses. Cash flows from investing activities represent
proceeds from a settlement of notes receivable arising from the 1989 sale of the
former Welch Vacuum Technology subsidiary and the use of funds held in escrow at
December 29, 1994 for the payment of certain liabilities, net of expenditures
for plant and equipment and retail fixtures.

The Company's consolidated working capital deficiency increased $4,972,000 to
approximately $65,444,000 during the six months ended June 29, 1995. The
increase in working capital deficiency is principally attributable to an
increase in trade credit resulting from the Company's loss from operations,
exclusive of the effect of certain noncash expenses.

Status of Debt Agreements and Operating Plans

At June 29, 1995 the Company's corporate entity was in default of provisions of
certain of its credit agreements. Under certain subsidiary debt agreements ARTRA
is limited in the amounts it can withdraw from its operating subsidiaries. See
Notes 7 and 8 to the Company's condensed 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 6
to the condensed consolidated financial statements and discussion below.

ARTRA Corporate

At December 30, 1993, $18,452,000 in ARTRA notes and related loan fees of
$1,107,000 were payable to a bank. On December 31, 1993, a religious
organization, currently holding approximately 5.8% of ARTRA's outstanding common
stock, made a $2,000,000 short-term loan to the Company with interest at 10%.
See Note 7 to the condensed consolidated financial statements for further
discussion of this transaction and additional consideration received by the
religious organization. The proceeds of this loan were remitted to the bank to
pay interest and other costs due through December 31, 1993 and to reduce the
principal amount outstanding on the bank notes to $17,063,000.

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 $14,563,000 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 6 to the condensed 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.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

The $14,563,000 of ARTRA bank notes were payable on September 30, 1994. On
October 25, 1994, ARTRA's bank lender filed suit against ARTRA in the Circuit
Court of Cook County, Illinois alleging nonpayment by ARTRA of the amounts due
under the above notes payable to the bank. The bank has requested that the court
enter judgment in its favor against ARTRA in the amount of approximately
$16,000,000, which includes the principal balance of the notes of $14,563,000,
plus interest, costs and fees.

As discussed in Note 15 to the condensed consolidated financial statements,
ARTRA has total advances due from its president, Peter R. Harvey, of which
$5,177,000 and $3,205,000, including accrued interest, remained outstanding at
June 29, 1995 and December 29, 1994. The advances bear interest at the prime
rate plus 2% (11.0% at June 29, 1995). 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.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

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
June 29, 1995, options are outstanding that, if exercised, would require ARTRA
to repurchase 369,679 shares of its common stock for an aggregate amount of
approximately $4,736,000. ARTRA does not have available funds to satisfy its
obligations if these options were exercised. However the holders of redeemable
common stock have the option to sell their shares in the market subject to the
limitations of Securities Act Rule 144. At its discretion and subject to its
financial ability, ARTRA could reimburse the optionholders for any short-fall
resulting from such sale.

As discussed in Note 10 to the condensed consolidated financial statements,
ARTRA, Bagcraft and Bagcraft's parent BCA Holdings, Inc. ("BCA") have various
redeemable preferred stock issues with an aggregate carrying value of
approximately $17,895,000 outstanding at June 29, 1995. These redeemable
preferred stock issues have various maturity dates commencing in 1997.

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, 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 the principal amount of
its bank notes as of June 29, 1995. On October 25, 1994, ARTRA's bank lender
filed suit against ARTRA in the Circuit Court of Cook County, Illinois alleging
nonpayment by ARTRA of the amounts due under the above notes payable to the
bank. The bank has requested that the court enter judgment in its favor against
ARTRA in the amount of approximately $16,000,000, which includes the principal
balance of the notes of $14,563,000, plus interest, costs and fees.

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 the above ARTRA bank notes to
$12,063,000 at June 29, 1995, 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 to 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. In exchange for a payment of
$5,700,000, to be paid with ARTRA's share of the proceeds from the sale of
Arcar, the bank agreed to discharge all amounts due the bank by ARTRA and to
sell the obligations of Peter R. Harvey to ARTRA. Upon consummation of this
transaction, ARTRA will recognize a gain on the discharge of this indebtedness.

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.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

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 (December 17, 1995), unless accelerated under
terms of the Credit Agreement. The principal under Term Loan B ($5,000,000
outstanding at June 29, 1995) is payable in varying monthly installments from
January 1, 1994 to December 1, 1995, with the remaining principal balance
payable at maturity (December 17, 1995), unless accelerated under terms of the
Credit Agreement. At June 29, 1995, interest rates on Term Loan A and Term Loan
B were 10.75% and 12.0%, 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
June 29, 1995 approximately $1,150,000 was available and unused by Bagcraft
under the revolving credit loan. The revolving credit loan bears interest at the
lender's index rate plus 1.5%. The revolving credit loan is scheduled to become
due and payable upon maturity of the Credit Agreement (December 17, 1995),
unless accelerated under terms of the Credit Agreement. At June 29, 1995 the
interest rate on the revolving credit loan was 10.5%.

Borrowings under the Credit Agreement are collateralized by substantially all of
the assets of Bagcraft. The Credit Agreement contains various restrictive
covenants, that among other restrictions, require Bagcraft to maintain minimum
levels of tangible net worth and liquidity levels and limit additional loans,
dividend payments, capital expenditures and payments to related parties. In
addition, the Credit Agreement prohibits changes in ownership of Bagcraft. At
June 29, 1995 Bagcraft was not in compliance with certain provisions of its
Credit Agreement. Bagcraft is currently negotiating with its lender to amend or
restructure the Credit Agreement.

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 June 29, 1995 Bagcraft had borrowed the
maximum available under this loan agreement.

A $5,000,000 subordinated promissory note payable as follows:
$2,000,000 installments due June 30,1998 and June 30, 1999; $1,000,000
due on January 2, 2000. The subordinated promissory note is interest
free provided that loan payments are made on a timely basis and no
events of default occur under terms of the agreement. At June 29, 1995
Bagcraft had had borrowed the maximum of $5,000,000 available under
this loan agreement.

A $250,000 subordinated promissory note payable in 240 monthly
installments commencing August 1, 1995 through maturity on July 18,
2015. The subordinated promissory note is interest free provided that
loan payments are made on a timely basis and no events of default occur
under terms of the agreement. June 29, 1995 Bagcraft had borrowed the
maximum amount available under this loan agreement.

A $250,000 subordinated promissory note payable January 20, 2005. The
subordinated promissory note is interest free provided that loan
payments are made on a timely basis and no events of default occur
under terms of the agreement. At June 29, 1995 Bagcraft had borrowed
the maximum amount available under this loan agreement.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

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. At June 29, 1995, $546,000 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.

As discussed in Note 2 to the condensed consolidated financial statements, 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. The promissory notes provide for interest payable quarterly at the
prime rate (as defined in the agreement). The promissory notes mature as
follows: $2,500,000 payable March 15, 1995; $2,500,000 payable March 15, 1996;
$2,500,000 payable March 15, 1997; $500,000 payable March 15, 1998. The
$2,500,000 note due March 15, 1995 was funded by a combination of funds from
operations and borrowings on Arcar's revolving credit loan. The seller also
received a warrant to purchase 177,778 ARTRA common shares at a price of $5.625
per share. Exercise of the warrant is payable only through a reduction of the
subordinated promissory notes and accrued interest due the seller under terms of
the purchase agreement.

Effective April 8, 1994, Arcar entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for a revolving credit loan and a term
loan. The term loan, in the principal amount of $2,750,000, bears interest at
the prime rate plus .75%. The principal under the term loan is payable in
forty-eight varying monthly installments from April 30, 1995 to March 31, 1999,
unless accelerated under terms of the Agreement.

The amount available to Arcar under the revolving credit loan is subject to a
borrowing base, as defined in the agreement, up to a maximum of $1,500,000. The
revolving credit loan bears interest at the prime rate plus .5% and originally
became due and payable March 31, 1995, unless accelerated under terms of the
Agreement. The revolving credit loan, renewable solely at the discretion of the
lender for additional one year periods until maturity of the Agreement (March
31, 1999), has been renewed until March 31, 1996. At June 29, 1995 approximately
$950,000 was available and unused by Arcar under the revolving credit loan.

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. Consummation of the transaction is subject to certain conditions,
including performance of the buyer's due diligence, buyer's financing of the
acquisition and negotiation of a definitive asset purchase agreement. ARTRA
expects to use the net proceeds to pay down certain debt obligations, with the
balance to be used for working capital.

Bagcraft has historically generated cash flow from operations and has available
funds under its revolving credit loan. These sources should provide sufficient
cash flow to fund Bagcraft's short-term capital requirements. As discussed
above, Bagcraft is currently negotiating to amend or restructure the borrowings
under the Credit Agreement. It is anticipated that the successful completion of
these negotiations, of which there can be no assurance, will provide Bagcraft
with the ability to fund its long-term capital requirements.

Bagcraft anticipates that its 1995 capital expenditures, principally for the
Kansas facility and manufacturing equipment, will be approximately $2,500,000
and will be funded principally from the above mentioned credit facilities and
also from operations.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Lori

In recent years, Lori has 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 the Lori's service program to purchases of costume jewelry and
accessories directly from manufacturers. As a result of the significant
operating loss incurred in 1992, on February 5, 1993, the Company's former New
Dimensions subsidiary filed a petition for reorganization under Chapter 11 of
the Bankruptcy Code. On April 9, 1993, New Dimensions' reorganization plan was
confirmed by an order of the Bankruptcy Court and on May 3, 1993, the
consummation date of the reorganization, New Dimensions emerged from Chapter 11
bankruptcy court protection. Lori assumed and guaranteed certain New Dimensions'
pre-bankruptcy loans payable to its bank and the bank also provided New
Dimensions with certain credit facilities. Additionally, Lori's bank lender
provided Lawrence and Rosecraft with new credit facilities in the first quarter
of 1993.

At December 31, 1993 and during 1994, Lori and its operating subsidiaries were
not in compliance with certain provisions of their respective bank loan
agreements.

Effective August 18, 1994, as amended December 23, 1994, Lori and Lori's
operating subsidiaries (collectively, the "Borrowers"), ARTRA and Fill-Mor
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.

Per terms of the Amended Settlement Agreement, borrowings due the bank under the
loan agreements of the Borrowers 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 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). Upon the satisfaction of certain conditions of the Amended
Settlement Agreement in March 1995, as discussed below, the balance of this
indebtedness was discharged.

In conjunction with the Amended Settlement Agreement, ARTRA entered into a
$1,850,000 short-term loan agreement with a non-affiliated corporation, the
proceeds of which were advanced to Lori and used to fund amounts due the bank as
discussed below. The loan, due June 30, 1995, with interest payable monthly at
10%, is collateralized by 100,000 shares of Lori common stock. These 100,000
Lori common shares, originally issued to the bank under terms of the August 18,
1994 Settlement Agreement, were carried in the Company's condensed consolidated
balance sheet at June 30, 1995 and December 31, 1994 as restricted common stock.
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.

A) A cash payment to the bank of $1,900,000, which was made
prior to consummation of the Amended Settlement Agreement.

B) 400,000 shares of ARTRA common stock.. These 400,000 ARTRA
common shares were originally issued to the bank under terms
of the August 18, 1994 Settlement Agreement. The bank retained
100,000 shares and the non-affiliated corporation received
300,000 shares as additional consideration for its short-term
loan.

C) Assignment to the bank of all of the assets of Lori's New
Dimensions subsidiary.

D) A $750,000 note payable to the bank due March 31, 1995.

Additionally, ARTRA advanced $400,000 to Lori to be used to fund the installment
payment due December 31, 1994 for unsecured claims arising from the May 3, 1993
reorganization of New Dimensions.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Lori 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. Lori also
recorded a charge against operations of $10,800,000 in December 1994 to
write-off New Dimensions' remaining goodwill.

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 $6,657,000 ($2.04 per share) in the
first quarter of 1995. The $750,000 note payment was funded with the proceeds of
a $850,000 short-term loan from a director of Lori. The loan provides for
interest at the prime rate plus 1%. As consideration for assisting in the debt
restructuring, the director received 150,000 Lori common shares valued at
$337,500 ($2.25 per share) based upon Lori's closing market value on March 30,
1995.

In recent years, New Dimensions 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 the New Dimension's service program to purchases of costume
jewelry and accessories directly from manufacturers. In the fourth quarter of
1994, New Dimensions' largest customer, Wal-Mart, ended its participation in New
Dimension's service program. Accordingly, the assignment to the Company's bank
lender of all of the assets of the New Dimensions subsidiary in accordance with
terms of the Amended Settlement Agreement, resulted in New Dimensions ceasing
its operations effective December 27, 1994. Due to the pattern of operating
losses, New Dimensions cessation of operations is not expected to have a
material adverse effect on the financial condition, liquidity or results of
operations of the Company in the immediate future.

At March 31, 1995 and at December 31, 1994, Lori had anticipated that the
restructuring of its debt (see Note 6 to the Company's condensed consolidated
financial statements), along with a consolidation and restructuring of its
operations in order to reduce overhead costs and improve operational
efficiencies, would permit it to obtain a sufficient level of borrowings to fund
its capital requirements in 1995. During the second quarter of 1995, due
primarily to competitive conditions in the costume jewelry industry, Lori's
operating subsidiaries experienced a reduction in business with certain major
customers. Additionally, Lori's operating subsidiaries discontinued certain
unprofitable programs with other customers resulting in charges to operations
for merchandise credits and inventory valuation allowances totaling $450,000.
Due to the continued losses from operations and the inability of Lori to obtain
conventional bank financing, Lori determined that its remaining goodwill balance
could no longer be recovered over its remaining life through forecasted future
operations. Accordingly, the Company recorded a charge against operations of
$6,430,000 ($.96 per share) to write-off all of the goodwill of Lori (see Note 5
to the Company's condensed consolidated financial statements).

Lori's business plan for the remainder of 1995 is based on the continued
dependence upon certain major customers which include Target Stores, Walgreens
and Wal-Mart. The Company does not have sales contracts with its customers.

At March 31, 1995, subsequent to the discharge of Lori's former bank
indebtedness, Lori did not have a credit facility in place to fund its 1995
capital requirements. Lori entered into negotiations with various financial
institutions and other lenders to obtain a working capital financing. These
negotiations did not result in the placement of a credit facility. During June,
1995, Lori entered into a series of agreements with certain unaffiliated
investors that provided for $700,000 of short-term loans due January 1, 1996. In
August, 1995 Lori obtained a credit facility for the factoring of the accounts
receivable of its costume jewelry operations. The credit facility provides for
advances of 80% of receivables assigned, after allowances for markdowns and
other merchandise credits. The factoring charge, a minimum of 1.75% of the
receivables

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

assigned, increases on a sliding scale if the receivables assigned are not
collected within 45 days. Borrowings under the credit facility are
collateralized by the accounts receivable, inventory and equipment of Lori's
operating subsidiaries and guaranteed by Lori.

The above borrowings are not sufficient to adequately fund Lori's capital
requirements for the remainder of 1995. Lori continues to search for additional
funding to meet its capital requirements for the remainder of 1995 and beyond,
either through borrowings or equity infusions. Additionally, Lori is attempting
to increase sales through the solicitation of new customers and the addition of
new programs with existing customers such that operating results will improve.
However, there can be no assurance that such efforts will result in increased
sales and operating profits. If Lori is unable to obtain additional working
capital borrowings or equity infusions to fund its operations in for the
remainder of 1995 and beyond, and improve the results of operations, it may be
forced to liquidate its assets or file for protection under the Bankruptcy Code.

Rosecraft, Lawrence and Lori's corporate entity have no material commitments for
capital expenditures.

During the six months ended June 29, 1995, ARTRA made net advances of $220,000
to Lori. During 1994, ARTRA made net advances to Lori of $2,531,000. The
advances consisted of a $1,850,000 short-term note with interest at 10%, the
proceeds of which were used to fund the $1,900,000 cash payment to the bank in
conjunction with the Amended Settlement Agreement with Lori's bank lender, and
certain non-interest bearing advances used to fund Lori working capital
requirements..

Effective December 29, 1994 ARTRA exchanged $2,242,000 of its notes and advances
for additional Lori Series C preferred stock. Additionally, the August 18, 1994
Settlement Agreement required ARTRA to contribute cash of $1,500,000 and ARTRA
common stock with a fair market value of $2,500,000 to Lori's capital account.

The common stock and virtually all the assets of the Company and its operating
subsidiaries have been pledged as collateral for the Company's and its operating
subsidiaries' bank borrowings. Under certain debt agreements the Company is
limited in the amounts it can withdraw from its operating subsidiaries. At June
29, 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. Due to the limited ability of the Company to receive funds from
its operating subsidiaries, effective July 1, 1989, ARTRA placed a moratorium on
the declaration and accrual of dividends on its Lori preferred stock. The
moratorium has been extended indefinitely.

The Company's operating subsidiaries sell all of their products directly to
their 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.

Litigation

The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. See Note 14 to the condensed consolidated
financial statements. At June 29, 1995 and December 29, 1994, the Company had
accrued $1,500,000 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.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Net Operating Loss Carryforwards

Results of Operations

The assignment to a bank lender of all of the assets of Lori's New Dimensions
subsidiary in accordance with terms of the debt settlement agreement, resulted
in New Dimensions terminating its operations effective December 27, 1994. The
results of operations for the three and six months ended June 30, 1994 included
New Dimensions net sales of $4,345,000 and $7,896,000 and operating losses of
$403,000 and $888,000, respectively. New Dimensions terminated operations
effective December 27, 1994. In recent years, New Dimensions 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 the New Dimension's service
program to purchases of costume jewelry and accessories directly from
manufacturers. Due to the pattern of operating losses, New Dimensions cessation
of operations is not expected to have a material adverse effect on the results
of operations of the Company in the immediate future.

Three Months Ended June 29, 1995 vs. Three Months Ended June 30, 1994

Net sales of $37,463,000 for the three months ended June 29, 1995 were
$1,310,000, or 3.4%, lower than net sales for the three months ended June 30,
1994. Jewelry segment sales decreased $6,348,000, or 70.2%, while packaging
segment sales increased $5,038,000 or 16.9%. The 1995 jewelry segment sales
decrease is principally attributable to the termination of New Dimensions
operations effective December 27, 1994 and to a soft retail environment in 1995.
During the second quarter of 1995, due primarily to competitive conditions in
the costume jewelry industry, the jewelry segment experienced a reduction in
business with certain major customers. Additionally, the jewelry segment
discontinued certain unprofitable programs with other customers. The 1995
packaging segment sales increase is primarily attributable to increased volume
and increased 1995 selling prices due to the significant increase in paper costs
in the second half of 1994.

The Company's cost of sales of $30,489,000 for the three months ended June 29,
1995 increased $ 1,217,000 as compared to the three months ended June 30, 1994.
Cost of sales in the three months ended June 29, 1995 was 81.4% of net sales
compared to a cost of sales percentage of 75.5% for the three months ended June
30, 1994. Jewelry segment cost of sales of $2,233,000 for the three months ended
June 29, 1995 decreased $2,973,000 as compared to the three months ended June
30, 1994. Jewelry segment cost of sales in the three months ended June 29, 1995
was 82.9% of net sales compared to a cost of sales percentage of 57.6% for the
three months ended June 30, 1994. The 1995 cost of sales decrease is principally
attributable to the decrease in sales volume due to the termination of New
Dimensions operations effective December 27, 1994. The 1995 jewelry segment cost
of sales percentage increase of 25.3% is primarily attributable to a soft retail
environment that resulted in depressed operating margins. Additionally, the
jewelry segment discontinued certain unprofitable programs with other customers
resulting in charges to operations for inventory valuation allowances. Packaging
segment cost of sales increased $4,190,000 in the three months ended June 29,
1995, as compared to the three months ended

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

June 30, 1994. Packaging segment cost of sales was 81.3% of net sales in the
three months ended June 29, 1995, as compared to 81.0% of net sales in the three
months ended June 29, 1995. The increase in the packaging segment cost of sales
and cost of sales percentage is primarily attributable to the effect of a
significant increase in paper costs in the second half of 1994, partially offset
by a more favorable product mix in 1995.

Selling, general and administrative expenses were $7,124,000 in the three months
ended June 29, 1995 as compared to $8,369,000 in the three months ended June 30,
1994. Selling, general and administrative expenses were 19.0% of net sales in
the three months ended June 29, 1995 as compared to 21.6% of net sales in the
three months ended June 30, 1994. The 1995 decrease in selling, general and
administrative expenses is attributable to the termination of New Dimensions
operations effective December 27, 1994.

Depreciation and amortization expense decreased approximately $170,000 in the
three months ended June 29, 1995 as compared to the three months ended June 30,
1994. The decrease is primarily attributable to the termination of New
Dimensions operations effective December 27, 1994.

As discussed in Note 5 to the Company's condensed consolidated financial
statements, during the second quarter of 1995 the Company determined that the
remaining goodwill balance of the jewelry segment could no longer be recovered
over its remaining life through forecasted future operations. Accordingly, the
Company recorded a charge against operations of $6,430,000 ($.96 per share) to
write-off all of the goodwill of its costume jewelry operations at June 29,
1995.

Operating loss in the three months ended June 29, 1995 was $8,045,000 as
compared to operating loss of $502,000 in the three months ended June 30, 1994.
The jewelry segment incurred an operating loss of $8,324,000 as compared to
operating loss of $944,000 in the three months ended June 30, 1994. The
increased 1995 operating loss is principally attributable to a charge against
operations of $6,430,000 to write-off all of the goodwill of Lori and its
costume jewelry operations at June 29, 1995, as discussed in Note 5 to the
Company's condensed consolidated financial statements. The packaging segment had
operating earnings of $1,162,000 in the three months ended June 29, 1995, as
compared to operating earnings of $901,000 in the three months ended June 30,
1994. The 1995 packaging segment operating earnings increase is principally
attributable to increased volume and increased 1995 selling prices partially
offset by the significant increase in paper costs in the second half of 1994.

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.

Six Months Ended June 29, 1995 vs. Six Months Ended June 30, 1994

Net sales of $ 72,538,000 for the six months ended June 29, 1995 were
$2,275,000, or 3.0%, lower than net sales for the six months ended June 30,
1994. Jewelry segment sales decreased $10,673,000, or 58.3%, while packaging
segment sales increased approximately $8,398,000 or 14.9%. The 1995 jewelry
segment sales decrease is principally attributable to the termination of New
Dimensions operations effective December 27, 1994 and a soft retail environment
in 1995. During the second quarter of 1995, due primarily to competitive
conditions in the costume jewelry industry, the Company experienced a reduction
in business with certain major customers. Additionally, the jewelry segment
discontinued certain unprofitable programs with other customers. The 1995
packaging segment sales increase is attributable to 1995 sales of Arcar
(acquired in April, 1994), increased volume and increased 1995 selling prices
due to the significant increase in paper costs in the second half of 1994.

The Company's cost of sales of $58,028,000 for the six months ended June 29,
1995 increased $2,093,000 as compared to the six months ended June 30, 1994.
Cost of sales in the three months ended June 29, 1995 was 80.0% of net sales
compared to a cost of sales percentage of 74.8% for the six months ended June
30, 1994. Jewelry segment cost of sales decreased $5,207,000 in the six months
ended June 29, 1995, as compared to six months ended June 30, 1994. Jewelry
segment cost of sales was 66.7% of net sales in the three months ended June 29,
1995, as compared to 56.3% of net sales in

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

the six months ended June 30, 1994. The 1995 jewelry segment cost of sales
decrease is principally attributable to the decrease in sales volume due to the
termination of New Dimensions operations effective December 27, 1994. The 1995
jewelry segment cost of sales percentage increase of 10.4% is primarily
attributable to a soft retail environment that resulted in depressed operating
margins. Additionally, the jewelry segment discontinued certain unprofitable
programs with other customers resulting in charges to operations for inventory
valuation allowances. Packaging segment cost of sales increased $7,300,000 in
the six months ended June 29, 1995, as compared to the six months ended June 30,
1994. Packaging segment cost of sales was 81.6% of net sales in the three months
ended June 29, 1995, as compared to 80.8% of net sales in the three months ended
June 29, 1995. The increase in the packaging segment cost of sales is primarily
attributable to increased volume and increased 1995 selling prices due to the
significant increase in paper costs in the second half of 1994 and the April,
1994 acquisition of Arcar. The increase in the packaging segment cost of sales
percentage is primarily attributable to the effect of the increase in paper
costs in the second half of 1994, partially offset by a more favorable product
mix in 1995.

Selling, general and administrative expenses were $14,016,000 in the six months
ended June 29, 1995 as compared to $16,649,000 in the six months ended June 30,
1994. Selling, general and administrative expenses were 19.3% of net sales in
the three months ended June 29, 1995 as compared to 22.3% of net sales in the
six months ended June 30, 1994. The decrease in selling, general and
administrative expenses is principally attributable to the termination of New
Dimensions operations effective December 27, 1994 partially offset by the April,
1994 acquisition of Arcar.

Depreciation and amortization expense decreased approximately $314,000 in the
three months ended June 29, 1995 as compared to the three months ended June 30,
1994. The decrease is primarily attributable to the termination of New
Dimensions operations effective December 27, 1994.

Operating loss in the six months ended June 29, 1995 was $8,710,000 as compared
to operating loss of $859,000 in the six months ended June 30, 1994. The jewelry
segment incurred an operating loss of $8,510,000 as compared to operating loss
of $1,717,000 in the six months ended June 30, 1994. The increased 1995
operating loss is principally attributable to a charge against operations of
$6,430,000 to write-off all of the goodwill of Lori and its costume jewelry
operations at June 29, 1995, as discussed in Note 5 to the Company's condensed
consolidated financial statements. The packaging segment had operating earnings
of $1,147,000 in the six months ended June 29, 1995, as compared to operating
earnings of $1,702,000 in the six months ended June 30, 1994. The 1995 packaging
segment operating earnings decrease is principally attributable to a significant
increase in paper costs in the second half of 1994 and, partially offset by a
more favorable product mix in 1995.

Interest expense in the six months ended June 29, 1995 decreased $421,000 as
compared to the six months June 30, 1994. The 1995 decrease is principally due
to the debt settlement agreement with Lori's bank lender, partially by an
overall increase in borrowings at the Corporate entity and at Bagcraft and
increased interest rates in 1995.

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.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Seasonality

Retail sales of the Company's jewelry segment products are higher during the
Spring (February through April) and Christmas seasons (September through
December). As a result of these seasonal factors, the Company's inventories of
finished goods reach peak levels just prior to these periods and are generally
lower during the balance of the year.

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.

<PAGE>

PART II - OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

EXHIBIT 11

Computation of earnings per share and equivalent share of
common stock for the six months ended June 29, 1995 and June
30, 1994.

(b) Reports on Form 8-K:

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.

ARTRA GROUP INCORPORATED
------------------------
Registrant

Dated: August 21, 1995 JAMES D. DOERING
--------------- -----------------------
Vice President and
Chief Financial Officer

<TABLE>
EXHIBIT 11
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
AND EQUIVALENT SHARE OF COMMON STOCK
(In thousands except per share amounts)

Six Months Ended
------------------
June 29, June 30,
Line 1995 1994
---- -------- --------
<S> <C> <C>

AVERAGE SHARES OUTSTANDING

1 Weighted average number of shares of common stock
2 outstanding during the period ........................ 6,705 5,215
3 Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury shares
-------- --------
Weighted average number of shares and equivalent shares
of common stock outstanding during the period ......... 6,705 5,215
======== ========

EARNINGS (LOSS)

4 Earnings (loss) before extraordinary credit ............. ($13,690) ($ 6,321)
5 Less dividends applicable to redeemable preferred stock . (278) (254)
6 Less redeemable common stock accretion .................. (162) (120)
-------- --------
7 Amount for per share computation ........................ ($14,130) (6,695)
======== ========

8 Net earnings (loss) ..................................... ($ 4,577) ($ 6,321)
9 Less dividends applicable to redeemable preferred stock . (278) (254)
10 Less redeemable common stock accretion .................. (162) (120)
-------- --------
11 Amount for per share computation ........................ ($ 5,017) (6,695)
======== ========

PER SHARE AMOUNTS

Earnings (loss) before extraordinary credit
(line 7 / line 3) ..................................... ($ 2.10) ($ 1.28)
======== ========
Net earnings (loss)
(line 11 / line 3) .................................... ($ 0.75) ($ 1.28)
======== ========

<FN>
Earnings (loss) per share is computed by dividing net earnings (loss), less
redeemable preferred stock dividends and redeemable common stock accretion, by
the weighted average number of shares of common stock and common stock
equivalents (redeemable common stock, stock options and warrants), unless
anti-dilutive, outstanding during the period. Fully diluted earnings (loss) per
share are not presented since the result is equivalent to primary earnings
(loss) per share.
</FN>
</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE
QUARTERLY PERIOD ENDED JUNE 29, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000200243
<NAME> ARTRA GROUP INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> dollars

<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-28-1995
<PERIOD-START> DEC-30-1994
<PERIOD-END> JUN-29-1995
<EXCHANGE-RATE> 1.000
<CASH> 966
<SECURITIES> 0
<RECEIVABLES> 14,106
<ALLOWANCES> 1,289
<INVENTORY> 23,669
<CURRENT-ASSETS> 38,763
<PP&E> 49,487
<DEPRECIATION> 19,027
<TOTAL-ASSETS> 82,292
<CURRENT-LIABILITIES> 104,207
<BONDS> 0
<COMMON> 5,091
17,895
0
<OTHER-SE> (68,317)
<TOTAL-LIABILITY-AND-EQUITY> 82,292
<SALES> 72,538
<TOTAL-REVENUES> 72,538
<CGS> 58,028
<TOTAL-COSTS> 58,028
<OTHER-EXPENSES> 23,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,521
<INCOME-PRETAX> (13,666)
<INCOME-TAX> 24
<INCOME-CONTINUING> (13,690)
<DISCONTINUED> 0
<EXTRAORDINARY> 9,113
<CHANGES> 0
<NET-INCOME> (4,577)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> 0

</TABLE>