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parsed_sections/prospectus_summary/1997/APT_alpha-pro_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements contained elsewhere in this Prospectus. Investors should carefully consider information set forth under the heading "Risk Factors". THE COMPANY The Company develops, manufactures and markets disposable protective apparel, food industry, infection control, wound care and consumer products for the cleanroom, food services, industrial, medical, dental and consumer markets. The Company operates through four divisions: apparel; food industry; mask and shield; and wound care. The Company's products are primarily sold under the "Alpha Pro Tech" brand names but are also sold for use under private label. The Company's products are classified into five groups: disposable protective apparel consisting of a complete line of shoecovers, headcovers, gowns, coveralls and labcoats; food industry apparel consisting of a line of automated shoecovers, sleeve protectors, aprons, coveralls and bus boy jackets; infection control products consisting of a line of facial masks and facial shields; wound care products consisting of a line of mattress overlays, wheelchair covers, geriatric chair surfaces, operating room table surfaces and pediatric surfaces; consumer products consisting of a line of pet bedding and pet toys. The Company's strategy is to grow its cleanroom division through its exclusive Agreement with VWR Scientific Products ("VWR") (formerly Baxter Scientific), by increasing its manufacturing capabilities to meet VWR's needs. The Company entered into an exclusive distribution agreement with a major supplier to the food industry to launch a line of innovative new products to help solve a major problem in the food industry: accidents that occur because of employees slipping and falling on wet slippery surfaces found in restaurants and food processing plants and to help decrease the number of burns caused by frying and grilling. The Company intends to also maintain its core business in the medical, dental, industrial and health related markets by using its existing distributors. The Company's products are used primarily in hospitals, clean rooms, laboratories and dental offices and are distributed principally in the United States through a network presently consisting of four purchasing groups, ten major distributors, approximately 200 additional distributors, approximately 30 independent sales representatives and a Company sales force of 7 people. <TABLE> <CAPTION> <S> <C> The Offering Securities Offered Common Stock 3,626,935 shares of Common Stock. See "Description of Securities". Of the 3,626,935 shares of Common Stock $.01 Par Value per Share being offered hereby, 119,048 shares are to be issued from time to time upon the exercise of certain Warrants described herein and 810,000 shares of Common Stock are to be issued from time to upon the exercise of stock options. Of the 2,697,887 remaining shares being offered hereby, 759,221 shares were issued in connection with private placements, and 1,610,333 shares were issued in connection with the settlement of certain debt obligations of the Company and 195,000 shares were issued in connection with the exercise of consultants options, all pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Shares underlying the Warrants and Options will be sold following exsercise. See "Selling Stockholders". Common Stock Outstanding and to be 24,047,449 shares of Common Outstanding Stock at June 30, 1997 and 25,109,830 shares as adjusted for this Offering (1) (2). Warrants and Options 119,048 Warrants and 3,475,000 Options at June 30, 1997 Outstanding and -0- Warrants and 2,665,000 Options to be outstanding as adjusted for this Offering. Use of Proceeds This Offering is made by Selling Stockholders and the Company will not receive any of the proceeds of such sales. See "Use of Proceeds" and "Selling Stockholders". Risk Factors This Offering involves certain risks. See "Risk Factors". NASD Symbol Common Stock........ APTD </TABLE> (1) Does not include as outstanding 119,048 shares reserved for issuance upon the exercise of Warrants and 3,475,000 shares reserved for issuance upon the exercise of certain Options and treats as to be outstanding the 119,048 shares and 810,000 shares being registered hereby to be issued upon the exercise of Warrants and Options respectively. (2) Does not include 100,000 additional shares reserved for issuance under the Company's stock option plan for directors as of June 30, 1997. - ------------------------ See "The Company",--"Recent Developments"--"Private Placements", "Management--Stock Option Plans", "Description of Securities" and Note 10 of Notes to Consolidated Financial Statements.

parsed_sections/prospectus_summary/1997/CERS_cerus-corp_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as set forth in the financial statements or as otherwise indicated herein, information in this Prospectus gives effect to (i) the anticipated reincorporation of the Company from California to Delaware to be effected prior to the effective date of this offering, (ii) the 1.47-for-one split of the outstanding Common Stock effected in January 1997, (iii) the conversion of each outstanding share of Preferred Stock into 1.47 shares of Common Stock, which will occur automatically upon the closing of this offering, and assumes the exercise of outstanding warrants, including the net exercise of certain of such warrants, to purchase 47,950 shares of capital stock (on an as-converted basis) (the "Warrant Exercise"), which warrants expire upon the closing of this offering, and assumes that the Underwriters' over-allotment option is not exercised. See "Description of Capital Stock" and "Underwriters." This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Cerus Corporation ("Cerus" or the "Company") is developing systems designed to improve the safety of blood transfusions by inactivating infectious pathogens in blood components used for transfusion (platelets, fresh frozen plasma ("FFP") and red blood cells) and inhibiting the leukocyte (white blood cell) activity that is responsible for certain adverse immune and other transfusion-related reactions. Preclinical studies conducted by the Company have indicated the ability of these systems to inactivate a broad array of viral and bacterial pathogens that may be transmitted in blood component transfusions and to inhibit leukocyte activity. The Company believes that, as a result of the mechanism of action of its proprietary technology, its systems also have the potential to inactivate many new pathogens before they are identified and before tests have been developed to detect their presence in the blood supply. Because the Company's systems are being designed to inactivate rather than merely test for pathogens, the Company's systems also have the potential to reduce the risk of transmission of pathogens that would remain undetected by testing. Despite recent improvements in testing and processing of blood, patients receiving transfusions of blood components face a number of significant risks from blood contaminants, as well as adverse immune and other transfusion-related reactions induced by leukocytes. Viruses such as hepatitis B (HBV), hepatitis C (HCV), human immunodeficiency virus (HIV), cytomegalovirus (CMV) and human T-cell lymphotropic virus (HTLV) can present life-threatening risks. In addition, bacteria, the most common agents of transfusion-transmitted disease, can cause complications such as sepsis, which can result in serious illness or death. Although donor screening and diagnostic testing of donated blood have been successful in reducing the incidence of transmission of many pathogens, diagnostic testing has a number of limitations, such as the inability to detect pathogens prior to the generation of antibodies, ineffectiveness in detecting genetic variants of viruses, and the risk of human error. In addition, emerging or unidentified pathogens for which no tests exist also represent a threat to the blood supply. The continuing risk of transmission of serious diseases through transfusion of contaminated blood components from both known and unknown pathogens, together with the limitations of current approaches to providing a safe blood supply, have created the need for a new approach to blood-borne pathogen inactivation that is safe, easy to implement and cost-effective. The Company is designing its pathogen inactivation systems to provide therapeutically functional platelets, FFP and red cells following the inactivation treatment process. Pathogen inactivation systems being developed by the Company employ proprietary small molecule compounds that act by preventing the replication of nucleic acid (DNA or RNA); platelets, FFP and red blood cells do not contain nuclear DNA or RNA. When the inactivation compounds are introduced into the blood components for treatment, they cross bacterial cell walls or viral membranes, then move into the interior of the nucleic acid structure. When subsequently activated by an energy source, such as light, these compounds bind to the nucleic acid of the viral or bacterial pathogen, preventing its replication. A virus, bacteria or other pathogenic cell must replicate in order to cause infection. The Company's compounds react in a similar manner with the nucleic acid in leukocytes, thereby inhibiting the leukocyte activity that is responsible for certain adverse immune and other transfusion-related reactions. The Company is initially focusing its product development efforts on its platelet pathogen inactivation system. Platelet transfusions are used to prevent or control bleeding in platelet-deficient patients, such as those undergoing cancer chemotherapy or bone marrow transplant. The Company estimates the production of platelets in 1995 to have been 1.8 million transfusion units in North America, 1.4 million transfusion units in Western Europe and 800,000 transfusion units in Japan. The Company's platelet pathogen inactivation system applies a technology to prevent replication of nucleic acid that combines light and the Company's proprietary inactivation compound, S-59, which is a synthetic small molecule from a class of compounds known as psoralens. In September 1996, the Company completed a Phase 1b clinical trial to assess in healthy subjects the safety and tolerability of platelets treated with the Company's platelet pathogen inactivation system. In November 1996, the Company completed a Phase 2a clinical trial to assess post-transfusion recovery and lifespan of platelets treated with the system, including a device designed to reduce the amount of residual S-59 and S-59 breakdown products. The Company plans to conduct a Phase 2b clinical trial to assess the combined effect of treatment with the platelet pathogen inactivation system and gamma irradiation on post-transfusion platelet recovery and lifespan. The Company has recently submitted to the FDA a preliminary protocol for a Phase 3 clinical trial to assess the therapeutic efficacy of treated platelets in patients requiring platelet transfusion. The Company intends to submit in the first quarter of 1997 a preliminary protocol for a Phase 3 clinical trial to ethical committees of institutions that would be conducting such trial in Europe. The Company currently anticipates that such trials will commence by mid-1997. For more information on the clinical development status of this planned product, see "Business -- Products Under Development -- Platelet Program -- Development Status." The Company is also developing pathogen inactivation systems for use with FFP, which is used to control bleeding, and red blood cells, which are frequently administered to patients with anemia, trauma, surgical bleeding or genetic disorders. The Company estimates the production of FFP and red blood cells in 1995 to have been 3.3 million and 13.7 million transfusion units, respectively, in North America, 4.1 million and 14.3 million transfusion units, respectively, in Western Europe and 2.0 million and 3.0 million transfusion units, respectively, in Japan. The Company's FFP pathogen inactivation system is being designed to employ the S-59 compound and other technology similar to that used in the platelet pathogen inactivation system. The Company intends to submit an investigational new drug application to the U.S. Food and Drug Administration to commence Phase 1 clinical trials for its FFP pathogen inactivation system in early 1997. The red cell pathogen inactivation system being designed by the Company is based on the Company's proprietary S-303 compound, which can bind to nucleic acid in a manner similar to that of S-59, but without the need for the introduction of light. The Company has entered into two development and commercialization agreements with Baxter to develop, manufacture and market pathogen inactivation systems for platelets, FFP and red blood cells. The agreements provide for Baxter and the Company to share development expenses. Through December 31, 1996, Baxter has invested $7.0 million in the capital stock of the Company and has paid the Company up-front license fees and milestone and development payments totaling $13.7 million under these agreements. These agreements provide for Baxter's exclusive right and responsibility to market the systems worldwide and for the Company to receive a share of the gross profits from the sale of the systems. THE OFFERING <TABLE> <S> <C> Common Stock offered........................... 2,000,000 shares Common Stock to be outstanding after the offering..................................... 8,885,878 shares(1) Use of proceeds................................ For research and development activities, including continuing clinical trials, general and administrative support, capital expenditures, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.................. CERS </TABLE> - --------------- (1) Based upon the number of shares outstanding as of December 31, 1996. (Includes 496,878 shares to be issued in the Baxter Private Placement, assuming an initial public offering price of $15.00 per share.) Excludes, as of December 31, 1996, (i) 407,383 shares of Common Stock subject to outstanding options under the Company's 1996 Equity Incentive Plan and 547,067 shares reserved for future issuance thereunder, (ii) 220,500 shares of Common Stock reserved for future issuance under the Company's Employee Stock Purchase Plan and (iii) 35,478 shares of Preferred Stock subject to outstanding warrants, which will convert into warrants to purchase 52,152 shares of Common Stock upon the closing of this offering. See "Management -- Equity Incentive Plans" and Note 4 of Notes to Financial Statements. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 ------- --------- --------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue........................................................ $ 4,796 $ 6,799 $ 3,609 Operating expenses Research and development..................................... 5,680 8,125 12,080 General and administrative................................... 1,194 1,517 2,200 ------- ---------- ---------- Loss from operations........................................... (2,078) (2,843) (10,671) Other income (expense), net.................................... 278 483 464 ------- ---------- ---------- Net loss....................................................... $(1,800) $ (2,360) $ (10,207) ======= ========== ========== Pro forma net loss per share(1)................................ $(1.55) Shares used in computing pro forma net loss per share(1)....... 6,587,855 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1996 ------------------------------------------ ACTUAL PRO FORMA(2) AS ADJUSTED(3) -------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 6,002 $ 6,197 $ 40,028 Working capital......................................... 2,653 2,848 36,679 Total assets............................................ 8,486 8,681 42,512 Accumulated deficit..................................... (20,206) (20,206) (20,206) Stockholders' equity.................................... 4,839 5,034 38,865 </TABLE> - --------------- (1) See Note 1 of Notes to Financial Statements for a description of the method used in computing the pro forma net loss per share. (2) Gives effect to (i) the Warrant Exercise and (ii) the conversion of each outstanding share of Preferred Stock into 1.47 shares of Common Stock upon the closing of this offering. (3) As adjusted to reflect (i) the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share and receipt of the estimated net proceeds therefrom and (ii) the Baxter Private Placement. See "Use of Proceeds."

parsed_sections/prospectus_summary/1997/CHH_choice_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summarizes certain information contained elsewhere in this Prospectus, including the appendices hereto (the "Prospectus"). Reference is made to, and this summary is qualified in its entirety by, the more detailed information set forth in this Prospectus, which should be read in its entirety. Unless the context otherwise requires, all references herein to Choice and to Franchising shall include their respective subsidiaries and all references herein to Franchising prior to the Distribution Date (as defined herein) shall refer to the Franchising Business (as defined herein) as operated by Choice. Unless otherwise indicated, all statistical information and data relating to the hotel industry in this Prospectus are derived from information provided by Smith Travel Research. Smith Travel Research has not consented to the use of the hotel industry data presented herein or provided any form of consultation, advice, or counsel regarding any aspects of, and is in no way whatsoever associated with, the proposed transaction. BACKGROUND Franchising is currently a wholly owned subsidiary of Choice. On or about October 15, 1997 (the "Distribution Date"), Choice intends to make a special dividend, consisting of the distribution (the "Distribution") to holders of outstanding shares of Choice Common Stock at the close of business on October 7, 1997 (the "Distribution Record Date"), on a share for share basis, of all outstanding shares of Franchising Common Stock. This Distribution will separate Choice's hotel franchising business from its hotel ownership and management business. Upon the Distribution, Choice will change its corporate name to Sunburst Hospitality Corporation (as renamed after the Distribution, "Sunburst") and will continue to own and operate hotel properties in the United States (the "Hotel Business"). Upon the Distribution, Franchising will change its name to Choice Hotels International, Inc. and will engage in the business of franchising hotels under the Clarion, Quality, Comfort, Sleep Inn, Rodeway, Econo Lodge and Mainstay brands and will own and operate 14 hotel properties in France, Germany and the United Kingdom (together, the "Franchising Business"). The Distribution is described in more detail herein. As of the date hereof, the thirty-three Manor Care Employees held options (the "Choice Options") to purchase up to 1,193,571 shares of Choice Common Stock issued in November 1996 as part of the Manor Care Spin-off (as defined herein) pursuant to the Choice Hotels International, Inc. 1996 Long-Term Incentive Plan (the "Choice Plan"). Under the Choice Plan, each outstanding Choice Option will be adjusted as a result of the Distribution in a manner described herein in order to preserve the financial value of such Choice Options prior to the Distribution. On or prior to the Distribution Date, each Manor Care Employee holding nonqualifed Choice Options may make a one-time election to choose a conversion award consisting of any percentage combination of an option to acquire Franchising Common Stock and an adjusted Choice Option, with the number of shares and the exercise price of each option adjusted so as to preserve the financial value of the outstanding Choice Options. The Franchising Options issuable to Manor Care Employees as part of the aforementioned adjustment to Choice Options and the shares of Franchising Common Stock issuable upon exercise of such Franchising Options will be issued pursuant to the Registration Statement of which this Prospectus is a part. <TABLE> <CAPTION> PAGE ---- <S> <C> INDEX TO FINANCIAL STATEMENTS............................................ F-1 ANNEX A: FORM OF RESTATED CERTIFICATE OF INCORPORATION OF CHOICE HOTELS FRANCHISING, INC............................................... A-1 ANNEX B: FORM OF AMENDED AND RESTATED BYLAWS OF CHOICE HOTELS INTERNATIONAL, INC............................................. B-1 ANNEX C: CHOICE HOTELS FRANCHISING, INC. 1997 LONG-TERM INCENTIVE PLAN... C-1 </TABLE> THE COMPANY Franchising is a Delaware corporation and a wholly owned subsidiary of Choice, formed in 1981. Franchising currently conducts a significant portion of the Franchising Business. Immediately prior to the Distribution, Franchising will succeed to that portion of the Franchising Business currently conducted by Choice or Choice's other subsidiaries. Franchising is one of the world's largest franchisors of hotels with 3,344 properties open and operating in 33 countries at May 31, 1997. These properties operate under one of Franchising's brand names: Comfort, Quality, Clarion, Sleep, Rodeway, Econo Lodge and Mainstay Suites. At May 31, 1997, another 820 franchise properties with a total of 72,093 rooms were under development. The principal executive offices of Franchising are located at 10750 Columbia Pike, Silver Spring, Maryland 20901. Its telephone number is (301) 797-5000. For additional information with respect to Franchising and the Franchising Business expected to be conducted by Franchising after the Distribution, see "Certain Information Concerning Franchising." THE OFFERING Securities Offered............ (i) options (the "Franchising Options") to purchase up to 1,193,571 shares of Franchising Common Stock, and (ii) up to 1,193,571 shares of Franchising Common Stock issuable upon exercise of the Franchising Options. Franchising Common Stock Outstanding................... Franchising is currently a wholly owned subsidiary of Choice. Based on the number of shares of Choice Common Stock outstanding on August 5, 1997, it is expected that approximately 60,200,784 shares of Franchising Common Stock will be issued in the Distribution. Use of Proceeds............... The Franchising Options will be issued as part of the adjustments of outstanding Choice Options and Franchising will receive no proceeds from such issuance. The proceeds to Franchising to be received from exercise of the Franchising Options will be used for working capital and other general corporate purposes. Proposed NYSE Symbol.......... CCH. The following portion of the Prospectus Summary presents a summary of the Distribution, Franchising (as its expected to be constituted after the Distribution), and Sunburst. THE DISTRIBUTION Distributed Company........... Choice Hotels Franchising, Inc. ("Franchising"), a Delaware corporation and a wholly owned subsidiary of Choice Hotels International, Inc., a Delaware corporation (the "Choice"), will, on the Distribution Date, own all of the business and assets of, and be responsible for all of the liabilities associated with, the business of franchising hotels under the Clarion(R), Quality(R), Comfort(R), Sleep Inn(R), Rodeway(R), Econo Lodge(R) and MainStay SuitesSM brands currently conducted by Franchising and certain of its subsidiaries as well as all European real estate assets currently held by Choice (the "Franchising Business"). Upon the Distribution, Franchising will change its corporate name to Choice Hotels International, Inc. Distributing Company.......... Choice Hotels International, Inc., a Delaware corporation ("Choice"). Upon the Distribution, Choice will continue to own and operate hotel properties in the U.S. (the "Hotel Business") and will change its corporate name upon the Distribution to Sunburst Hospitality Corporation (as renamed after the Distribution, "Sunburst"). Securities to Be Distributed.................. Approximately 60,200,784 shares of Franchising Common Stock based on 60,200,784 shares of Company Common outstanding as of August 5, 1997 (the "Annual Meeting Record Date"). Conditions to the Distribution................. Choice's stockholders approved the Distribution at Choice's Annual Meeting of Stockholders on September 16, 1997; however, the Choice Board of Directors has conditioned the effectiveness of the Distribution on satisfaction of certain conditions prior to the Distribution Record Date. The Board of Directors will not waive any of the conditions to the Distribution or make any changes in the terms of the Distribution unless the Board of Directors determines that such changes would not be materially adverse to Choice's stockholders. In determining whether any such changes would be materially adverse to Choice's stockholders, the Board of Directors will consider, as appropriate, advice from its outside advisors as well as the recommendation of management as to the potential impact of such changes on the Company and the Company's Stockholders. See "The Distribution-- Conditions; Termination." Distribution Ratio............ One share of Franchising Common Stock for each share of Choice Common Stock. Tax Consequences.............. Choice has conditioned the Distribution on receipt of a ruling from the Internal Revenue Service to the effect that, among other things, for federal income tax purposes, receipt of shares of Franchising Common Stock by Choice stockholders will be tax free. On September 12, 1997, Choice received such a ruling from the Internal Revenue Service. For a discussion of the effects on Choice and Franchising if the Distribution were not to qualify as tax free for federal income tax purposes, see "Risk Factors--Certain Tax Considerations." Risk Factors.................. Manor Care Employees should carefully consider all of the information contained in this Proxy Statement, including the matters described under "Risk Factors." Relationship between Choice and Franchising after the Distribution................. For purposes of governing the ongoing relationships between Choice and Franchising after the Distribution Date and in order to provide for an orderly transfer of the Franchising Business to Franchising and facilitate the transition to two separate publicly traded companies, Choice and Franchising will enter into a Distribution Agreement, a Strategic Alliance Agreement, Franchising Agreements and various other agreements with respect to, among other things, intercompany debt, tax matters, employee benefits, risk management and corporate and administrative services. See "Relationship Between Choice and Franchising After the Distribution." Choice and Franchising may be subject to certain potential conflicts of interest. See "Risk Factors--Potential Conflicts." Accounting Treatment.......... The historical combined financial statements of Franchising present its financial position, results of operations and cash flows as if it were a separate entity for all periods presented. Choice's historical basis in the assets and liabilities of Franchising has been carried over. See "Accounting Treatment," and the combined financial statements of Choice Hotels Franchising, Inc., contained elsewhere herein. Listing and Trading Market.... There is currently no public market for Franchising Common Stock. Choice has been approved to submit an application for listing the Franchising Common Stock on the New York Stock Exchange, subject to satisfaction of certain conditions; however, there can be no assurance that the Franchising Common Stock will ultimately be accepted for listing on the New York Stock Exchange or any other national stock exchange or market. Choice expects that no "when issued" trading market will exist prior to the time that Franchising's Registration Statement on Form 10 is declared effective by the Commission. See "Risk Factors--No Current Market for Franchising Common Stock; and --The Distribution--Listing and Trading of Franchising Common Stock." Record Date................... The Choice Board of Directors set the record date for the Distribution referred to herein as October 7, 1997 (the "Distribution Record Date") provided, however, that the Distribution remains subject to satisfaction of certain conditions prior to the Distribution Record Date. Distribution Date............. The Choice Board of Directors set the Distribution Date, as October 15, 1997. On the Distribution Date, Choice will deliver all outstanding shares of Franchising Common Stock to the Distribution Agent. As soon as practicable thereafter, the Distribution Agent will mail account statements reflecting ownership of the appropriate number of shares of Franchising Common Stock to Choice's stockholders entitled thereto. See "The Distribution--Manner of Effecting the Distribution." Distribution Agent............ ChaseMellon Shareholder Services, L.L.C., the transfer agent for the Company. Reverse Stock Split........... In connection with the Distribution, Choice shall effect a one-for-three reverse stock split of Choice Common Stock whereby every three shares of Choice Common Stock will be aggregated into one share of Choice Common Stock. See "Amendments to the Restated Certification of Incorporation of Choice-- Reverse Stock Split." CHOICE HOTELS FRANCHISING, INC. Business...................... Franchising is presently a wholly owned subsidiary of Choice. Following the Distribution, Franchising will conduct the Franchising Business as now conducted by Franchising, Choice and certain other subsidiaries of Choice. Franchising will be one of the world's largest franchisors of hotels with 3,344 properties open and operating in 33 countries at May 31, 1997. As a franchisor, Franchising will license hotel operators to use Franchising's brand names: Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and MainStay SuitesSM (collectively, the "Choice Brands"), and will provide to these hotel operators products and services designed to increase their revenues and profitability. Following the Distribution, Franchising will also conduct Choice's European hotel operations, including Choice's indirect investment in Friendly Hotels, PLC. Board of Directors............ Effective as of the Distribution Date, the Board of Directors of Franchising is expected to consist of nine persons: Stewart Bainum, Jr., Stewart Bainum, Barbara Bainum, William R. Floyd, James H. Rempe, Robert C. Hazard, Jr., Gerald W. Petitt, Jerry E. Robertson, Ph.D and Frederic V. Malek. Post-Distribution Dividend Policy....................... The dividend policy of Franchising will be determined by Franchising's Board of Directors following the Distribution. It is expected that the Franchising Credit Facility (as defined below) will restrict Franchising's ability to pay dividends. See "Financing." Certain Restated Certificate of Incorporation and Bylaw Provisions................... The Restated Certificate of Incorporation (the "Franchising Certificate") and the Bylaws (the "Franchising Bylaws") of Franchising are substantially identical to, and contain no material differences from, the Choice Restated Certificate of Incorporation and Bylaws. Certain provisions of the Franchising Certificate and the Franchising Bylaws have the effect of delaying or making more difficult an acquisition of control of Franchising in a transaction not approved by its Board of Directors. These provisions have been designed to enable Franchising, especially in its initial years, to develop its businesses and foster its long-term growth without disruptions caused by the threat of a takeover not deemed by its Board of Directors to be in the best interests of Franchising. Such provisions could, however, deter an offer for Franchising Common Stock at a substantial premium to the then current market price or hinder a potential transaction that may be attractive to stockholders. See "Certain Information Concerning Franchising--Purposes and Effects of Certain Provisions of the Franchising Certificate and Bylaws." The Franchising Certificate would eliminate certain liabilities of directors in connection with the performance of their duties. See "Certain Information Concerning Franchising--Liability and Indemnification of Officers and Directors-- Elimination of Liability in Certain Circumstances." Principal Office.............. 10750 Columbia Pike, Silver Spring, Maryland 20901. Its telephone number is (301) 979-5000. SUNBURST HOSPITALITY CORPORATION Business...................... Following the Distribution, Sunburst will retain Choice's Hotel Business and will own and manage 71 hotels in 25 states, primarily under Franchising's brands, and will be Franchising's largest franchisee. Board of Directors............ Effective as of the Distribution Date, the Board of Directors of Sunburst is expected to consist of seven persons; Stewart Bainum, Jr., Stewart Bainum, Donald J. Landry, Frederic V. Malek, Paul R. Gould, Carole Y. Prest and one additional director to be selected by the Company's Board of Directors prior to the Distribution. The remaining vacancy will be filled by a person who is not a Sunburst employee or employee or director of Franchising. Post-Distribution Dividend Policy....................... The dividend policy of Sunburst will be determined by its Board of Directors following the Distribution. Choice currently is prohibited from paying dividends pursuant to the terms of its loan agreement with MNR Finance Corp. It is expected that the Sunburst Credit Facility will restrict Sunburst's ability to pay dividends. See "Financing." Listing and Trading Market.... The Sunburst Common Stock (formerly Choice Common Stock) is expected to continue to be listed on the New York Stock Exchange following the Distribution. Following the Distribution, Sunburst's financial results will no longer be consolidated with those of Choice's Franchising Business, and Sunburst's revenues, income and other results of operations will be substantially below those of Choice prior to the Distribution. Accordingly, as a result of the Distribution, the trading price range of Sunburst Common Stock immediately after the Distribution (prior to the effect of the Reverse Stock Split) is expected to be significantly lower than the trading range of Choice Common Stock. See "--The Distribution-- Listing and Trading of Sunburst Common Stock; and --Risk Factors--Changes in Trading Prices of Sunburst Common Stock."

parsed_sections/prospectus_summary/1997/CHRW_c-h_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and the consolidated financial statements of the Company and notes thereto included elsewhere in this Prospectus. Unless the context otherwise indicates, "Company" or "Robinson" refers to C.H. Robinson Worldwide, Inc. (including its predecessors in interest) and its wholly owned subsidiaries. Unless otherwise indicated herein, all information in this Prospectus (i) has been adjusted to give effect to the Company's reincorporation in Delaware upon consummation of this offering, providing for, among other things, an increase in the authorized shares of capital stock of the Company and the conversion of Class A Common Stock and Class B Common Stock into Common Stock, and (ii) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Founded in 1905, the Company is the largest third-party logistics company in North America with 1996 gross revenues of $1.6 billion. The Company is a global provider of multimodal transportation services and logistics solutions through a network of 116 offices in 38 states and Canada, Mexico, Belgium, the United Kingdom, France, Spain, Italy, Singapore and South Africa. Through contracts with over 14,000 motor carriers, the Company maintains the single largest network of motor carrier capacity in North America and is one of the largest third-party providers of intermodal services in the United States. In addition, the Company regularly provides air, ocean and customs services. As an integral part of the Company's transportation services, the Company provides a wide range of value-added logistics services, such as raw materials sourcing, freight consolidation, cross-docking and contract warehousing. During 1996, the Company handled over 935,000 shipments for more than 8,600 customers, ranging from Fortune 100 companies to small businesses in a wide variety of industries. During the past five years, the Company has increased net revenues at a compound annual growth rate of 18.6 percent. The Company has developed global multimodal transportation and distribution networks to provide seamless logistics services worldwide. As a result, the Company has the capability of managing all aspects of the supply chain on behalf of its customers. As a non-asset based transportation provider, the Company can focus on optimizing the transportation solution for its customer rather than its own asset utilization, using established relationships with motor carriers, railroads (primarily intermodal service providers), air freight carriers and ocean carriers. Through its motor carrier contracts, the Company maintains access to more than 370,000 dry vans, 128,000 temperature-controlled vans and containers and 96,000 flatbed trailers. The Company also has intermodal marketing contracts with 11 railroads, including all of the major North American railroads, which give the Company access to more than 150,000 additional trailers and containers. Throughout its 90-year history, the Company has been in the business of sourcing fresh produce. Much of the Company's logistics expertise can be traced to its significant experience in handling perishable commodities. Due to the time-sensitive nature and quality requirements of the shipments, fresh produce represents a unique logistics challenge, and the distribution and transportation costs are significant compared with, and may exceed, the cost of the produce being shipped. The Company has developed a network of produce sources and maintains access to specialized equipment and transportation modes designed to ensure timely delivery of uniform quality produce. In response to demand from large grocery retailers and food service distributors, the Company has developed its own brand of produce, The Fresh 1(R), which is sourced through various relationships and packed to order through contract packing agreements. The Company has also leveraged its food sourcing and logistics expertise into the sourcing of food ingredients on behalf of food manufacturers. The Company's unique business philosophy has accounted for its strong historical results and has positioned the Company for continued growth. The Company's principal competitive advantage is its large decentralized branch network, staffed by nearly 1,300 salespersons who are employees rather than agents. These branch employees are in close proximity to both customers and carriers which facilitates quick responses to customers' changing needs. Branch employees act as a team in both marketing the Company's services and providing these services to individual customers. The Company compensates its branch employees principally on the basis of their branch's profitability, which in the Company's opinion produces a more service-oriented, focused and creative sales force. The Company is substantially owned by more than 700 of its employees, and, following this offering, these employees will continue to own more than 75% of the Company's Common Stock. The Company's recently adopted Stock Incentive Plan and Stock Purchase Plan will allow for even broader equity participation by employees following this offering. Growth within the logistics industry is being driven by the continuing trend of companies outsourcing their logistics needs in order to focus on their core businesses, better manage just-in-time inventory systems and reduce costs. According to a leading industry consultant, the available domestic market for third-party logistics providers was $421 billion in 1996, only 5.9%, or $25 billion, of which was actually generated by third-party logistics providers. This same consultant predicts the market for third-party logistics to double to $50 billion by the year 2000, representing approximately 10% of the estimated $474 billion domestic market. The Company believes the international logistics market is approximately three to four times the domestic market, and both the domestic and international markets are highly fragmented. The Company's strategy for future growth is to expand the following: . Core transportation business. The Company believes there are significant opportunities to gain more transportation business from both existing and new customers through its existing branch network. The Company also believes it can selectively add domestic branches in response to cus- tomer demand and opportunities to serve new customers in new geographic areas. . International markets. The Company intends to open additional interna- tional branches to serve the local needs of its existing multinational customer base and gain new customers throughout the world. For example, after many years of providing logistics services to an international snack food company in North America, the Company was recently designated as this customer's international logistics partner. The Company has im- plemented a comprehensive logistics solution for this customer in Europe and is currently developing a similar solution in South Africa and South America. . Enhanced logistics services. In recent years, the Company has been pro- viding an expanded range of enhanced logistics services. The Company be- lieves there are significant opportunities to increase the level of lo- gistics services it provides to its customers. The Company intends to offer increasingly sophisticated logistics services to customers in or- der to provide greater efficiencies and reduce costs throughout the cus- tomers' supply chains. The Company was reincorporated in Delaware in 1997 as the successor to a business existing, in various legal forms, since 1905. The Company's corporate office is located at 8100 Mitchell Road, Eden Prairie, Minnesota 55344-2248, and its telephone number is (612) 937-8500. Its web site address is www.chrobinson.com. The Company has recently put up for sale its consumer finance business and its results of operations and net assets are now reflected as discontinued operations in its consolidated financial statements and consolidated financial data included elsewhere herein. Accordingly, this Prospectus does not include information on the historical operations of that business. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling 10,578,396 shares Stockholders....................... Common Stock outstanding after the 41,264,621 shares(1) offering........................... Use of proceeds..................... The Company will not receive any of the proceeds from the sale of the Common Stock by the Selling Stockholders. Proposed Nasdaq National Market sym- CHRW bol ............................... </TABLE> - -------- (1) Excludes (i) 470,417 shares of Common Stock issuable upon exercise of options granted immediately prior to this offering at an exercise price per share equal to the public offering price shown on the cover page of this Prospectus, none of which is currently exercisable, and (ii) an additional 3,529,583 shares of Common Stock reserved for future issuance under the Company's 1997 Omnibus Stock Plan (the "Stock Incentive Plan") and the 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan"). See "Management-- New Incentive Plans." DIVIDENDS, STOCK REPURCHASE PROGRAM AND NON-CASH CHARGE The Company's ability to generate substantial amounts of cash flow from operations has enabled it to make annual repurchases of its Common Stock and, for more than 50 years, to pay annual dividends to its stockholders. The Company anticipates that it will pay regular quarterly dividends beginning in December 1997, initially at the rate of $0.06 per share per quarter. The declaration of dividends by the Company is subject to the discretion of the Board of Directors. The Company's Board of Directors has authorized a stock repurchase program under which up to 1,000,000 shares of Common Stock may be repurchased. Shares repurchased will be used to reduce shares outstanding and may be reissued to employees pursuant to the recently adopted Stock Incentive Plan. Such purchases may be made from time to time at prevailing prices in the open market, by block purchase and in private transactions in compliance with the rules of the Securities and Exchange Commission (the "Commission"), including Regulation M. The Company intends to fund repurchases with internally generated funds. See "Dividends, Stock Repurchase Program and Non-Cash Charge." Pursuant to Commission rules related to stock issued or sold to employees at prices below the initial public offering price during the 12 months preceding the effective date of an initial public offering, the Company will record an $18.6 million non-recurring, non-cash compensation charge at the effective date of this offering. This charge relates to 1,237,000 shares sold to employees by retired employees under the Company's book value stock purchase program and 282,000 shares issued under the Company's existing incentive plans, and represents the aggregate difference between book value (the amount expensed by the Company for restricted shares upon issuance or the amount paid by employees upon purchase of stock) and an assumed estimated public offering price of $16.00 per share. See "Management--Existing Incentive Plans." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997(1) -------- ---------- ---------- ---------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Gross revenues......... $968,893 $1,095,815 $1,257,946 $1,445,975 $1,605,905 $775,024 $855,152 Net revenues(2)........ 90,408 108,713 135,599 160,094 179,069 86,920 99,156 Selling, general and administrative expenses.............. 68,030 81,030 95,088 115,114 129,040 62,571 72,465 Income from operations. 22,378 27,683 40,511 44,980 50,029 24,349 26,691 Net income from continuing operations. 14,449 17,844 24,141 29,455 32,442 15,685 17,233 Net income from discontinued operations(3)......... 1,846 2,411 2,964 2,086 2,158 1,083 900 Net income............. 16,295 20,255 27,105 31,541 34,600 16,768 18,133 Net income from continuing operations per share............. $ 0.28 $ 0.36 $ 0.52 $ 0.67 $ 0.78 $ 0.37 $ 0.42 Weighted average number of shares outstanding (in thousands)........ 52,125 48,980 46,296 43,934 41,799 42,182 41,306 Dividends per share.... $ 0.073 $ 0.087 $ 0.108 $ 0.130 $ 0.185 $ 0.010 $ 0.020 OPERATING DATA (AT END OF PERIOD): Branches............... 75 81 89 99 108 104 113 Employees ............. 1,050 1,183 1,403 1,436 1,665 1,563 1,801 Average net revenues per branch............ $ 1,247 $ 1,392 $ 1,597 $ 1,683 $ 1,717 $ 856 $ 901 </TABLE> <TABLE> <CAPTION> JUNE 30, 1997 --------------------- ACTUAL PRO FORMA(4) -------- ------------ <S> <C> <C> BALANCE SHEET DATA: Working capital......................................... $131,264 $ 80,281 Total assets............................................ 361,160 307,944 Total long-term debt.................................... -- -- Stockholder's investment................................ 171,366 120,383 </TABLE> - -------- (1) Pursuant to Commission rules related to stock issued or sold to employees at prices below the initial public offering price during the 12 months preceding the effective date of an initial public offering, the Company will record an $18.6 million non-recurring, non-cash compensation charge at the effective date of this offering. This charge relates to 1,237,000 shares sold to employees by retired employees under the Company's book value stock purchase program and 282,000 shares issued under the Company's existing incentive plans, and represents the aggregate difference between book value (the amount expensed by the Company for restricted shares upon issuance or the amount paid by employees upon purchase of stock) and an assumed estimated public offering price of $16.00 per share. See "Management--Existing Incentive Plans." If the $18.6 million non-recurring, non-cash compensation expense had been recorded in the six month period ended June 30, 1997, net loss from continuing operations would have been $425,000, or a $0.01 loss per share. (2) Net revenues are determined by deducting cost of transportation and products from gross revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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+SUMMARY THIS SUMMARY OF CERTAIN PROVISIONS OF THIS PROSPECTUS IS INTENDED ONLY FOR QUICK REFERENCE AND IS NOT A COMPLETE PRESENTATION OF ALL RELEVANT FACTS. IT IS QUALIFIED IN ITS ENTIRETY BY THE OTHER INFORMATION PROVIDED IN THIS PROSPECTUS. AMERICAN CRYSTAL SUGAR COMPANY American Crystal Sugar Company ("American Crystal" or the "Company") is a Minnesota agricultural cooperative corporation owned by approximately 2,586 sugarbeet growers in the Minnesota and North Dakota portions of the Red River Valley. (The Red River Valley, the largest sugarbeet growing area in the United States, forms a band approximately 35 miles wide on either side of the North Dakota and Minnesota border and extends approximately 200 miles south from the border of the United States and Canada.) The Company currently processes sugarbeets from a base level of approximately 440,000 acres, subject to tolerances for overplanting and underplanting established by the Board of Directors each year. By owning and operating five sugarbeet processing facilities in the Red River Valley, the Company provides its shareholders with the ability to process their sugarbeets into sugar and by-products, such as molasses and beet pulp. The sugar is pooled and then marketed through the services of a marketing agent under contract with the Company. The sugar marketing agent, United Sugars Corporation, is a cooperative owned by its members, American Crystal, Southern Minnesota Beet Sugar Cooperative and Minn-Dak Farmers Cooperative. The Company's molasses, beet pulp and Concentrated Separated By-product (a by-product of the molasses desugarization process) are also marketed through a marketing agent, Midwest Agri-Commodities Company. Midwest Agri-Commodities Company is a cooperative whose members are the Company, Minn-Dak Farmers Cooperative and Southern Minnesota Beet Sugar Cooperative. The Company is also one of three members of ProGold Limited Liability Company, a joint venture which owns a corn wet-milling plant in Wahpeton, North Dakota. American Crystal was organized in 1973 by sugarbeet growers to acquire the business and assets of American Crystal Sugar Company, then a publicly held New Jersey corporation in operation since 1899. American Crystal's corporate headquarters are located at 101 North Third Street, Moorhead, Minnesota 56560 (telephone number (218) 236-4400). Its fiscal year ends August 31. See "Description of Business." SECURITIES OFFERED The Company is offering a total of 500 shares of its Common Stock, $10 par value, and 61,500 shares of its Preferred Stock, $76.77 par value, for sale to sugarbeet farm operators in the territory in which the Company is engaged in business. To become a member of the Company, each sugarbeet farm operator must acquire (or already own) a share of the Company's Common Stock. During the first portion of the offering, designated as "Pool 1," members of the Company as of July 25, 1997 will be granted the first right to purchase their pro rata portion of 60,000 of the shares of the Preferred Stock offered hereby, with such pro rata portion rounded to the next whole share of Preferred Stock. The application of the rounding procedure increases the number of shares offered from 60,000 to 61,500 shares of Preferred Stock. (Such rights will grant each of the current members the right to purchase an additional number of shares of Preferred Stock, equal to approximately 13.5% of the number of shares of Preferred Stock owned by such member on July 25, 1997 before rounding to the nearest whole share.) If the Company's members as of July 25, 1997 do not purchase all of the Preferred Stock offered to them on a pro rata basis in Pool 1, then current members who have indicated an interest in acquiring additional shares of Preferred Stock and have purchased his or her entire pro rata portion of the shares of Preferred Stock in Pool 1, will be able to purchase shares of Preferred Stock in addition to those which they have purchased under their pro rata purchase rights. In this second portion of the offering, designated as "Pool 2," each member may purchase additional shares in an amount up to two (2) times the number of shares of Preferred Stock which such member is entitled to purchase pursuant to their pro rata purchase rights in Pool 1. If the Company has received indications of interest in purchasing additional shares in Pool 2 which do not exceed the number of shares available for sale in Pool 2, each member will be entitled to purchase all requested shares. If the Company has received indications of interest in purchasing additional shares in Pool 2 which exceed the number of shares available for purchase in Pool 2, the available shares will be allocated proportionally among those members in the manner described in "Plan of Distribution," except that the Company will not issue any fractional shares of its Preferred Stock. Any Preferred Stock available for purchase after completion of the Pool 2 procedures described above will be designated as "Pool 3 Shares". All Pool 3 Shares will be available for purchase by (i) parties who were not members of the Company as of July 25, 1997 and seek to become members of the Company through the purchase of a share of Common Stock and some number of shares of Preferred Stock and (ii) members of the Company as of July 25, 1997 who purchase their pro rata portion of Pool 1 and all shares of Preferred Stock available to them in Pool 2. The Pool 3 Shares will be allocated to such prospective purchasers in a random drawing to be held in December 1997, until no additional shares of Preferred Stock remain for sale or until the Company elects to terminate the Offerings described herein. All of the shares of Common Stock and Preferred Stock purchased in this offering will be issued upon completion of the offering. At the time of execution of a Subscription Agreement for the purchase of shares in Pool 1, each purchaser who was a member of the Company as of July 25, 1997 will be required to provide (i) subject to the conditions and requirements described in the "Plan of Distribution", payment in full for the first forty-two percent (42%) of the shares of Preferred Stock (rounded to the next whole share) available to such member in Pool 1 and (ii) an initial payment of One Hundred Dollars ($100) for each other share of Preferred Stock for which the member has subscribed in Pool 1. Within twenty (20) days after receipt of a notice from the Company that the subscriber is entitled to purchase shares of Preferred Stock in Pool 2, each purchaser who was a member of the Company as of July 25, 1997 will be required to provide (i) subject to the conditions and requirements described in this section, payment in full for forty-two percent (42%) of the shares of Preferred Stock (rounded to the next whole share) available to such member in Pool 2 and (ii) an initial payment of One Hundred Dollars ($100) for each other share of Preferred Stock for which the member has subscribed in Pool 2. Within twenty (20) days after receipt of a notice from the Company that the subscriber is entitled to purchase shares of Preferred Stock in Pool 3, each purchaser will be required to provide, subject to the conditions and requirements described in the "Plan of Distribution", payment in full for the shares of Preferred Stock (rounded to the next whole share) available to such member in Pool 3. Payment for shares of Preferred Stock on the installment basis described above is available to members of the Company as of July 25, 1997 only with respect to that number of shares acquired IN EXCESS of forty two percent (42%) of the shares of Preferred Stock which the member is entitled to purchase in Pool 1 and the number of shares IN EXCESS of forty two percent (42%) of the shares of Preferred Stock which become available to such member due to obtaining the right to purchase such shares in Pool 2. That is, a member who wishes to purchase less than forty two percent (42%) of all shares of Preferred Stock available under that member's pro rata purchase rights will be required to pay for such shares in full upon execution of that member's Subscription Agreement and a member who purchases less than all shares available under that member's pro rata purchase right will be required to pay for forty two percent (42%) of the shares of Preferred Stock available under the member's pro rata purchase rights. A party who was not a member of the Company as of July 25, 1997 will be required, within twenty (20) days after receipt of a notice from the Company that the subscriber is entitled to purchase shares of Preferred Stock in Pool 3, to provide (i) payment for the share of Common Stock required as a condition of membership in the Company, and (ii) subject to the conditions and requirements described in the "Plan of Distribution", payment in full for the shares of Preferred Stock (rounded to the next whole share) to be purchased by such subscriber. The remaining portion of the purchase price for shares of Preferred Stock acquired in Pool 1 and Pool 2 and not paid for in full at the time of subscription will be due and payable in six (6) annual installments, due on each anniversary of the date on which executed Subscription Agreements are required to be returned to the Company, being November 21, 1997. With respect to each share to be paid for by installment payments, the annual installment will be $233.33, exclusive of rounding, the Company will provide the subscriber with an invoice for such amounts 30 days prior to the due date of each such installment. As security for payment of the remaining installments, the Company will retain a security interest in those shares of Preferred Stock for which payment has not yet been made in full. Upon payment of each installment, the Company will release its lien on an additional number of shares of Preferred Stock (rounded down to the nearest whole share), in proportion to the amount of the installment payment. Shares may not be transferred until the Company has received payment in full; in addition, any prepayment of amounts due with respect to shares of Preferred Stock will be applied to the last installment payment then remaining payable. Each member is entitled to one vote, based upon ownership of a share of Common Stock. Ownership of Preferred Stock entitles a member to grow sugarbeets for sale to the Company. Each share of Preferred Stock will entitle the holder to grow one acre of sugarbeets for the Company. (Under the Company's Bylaws, the Board of Directors has the authority to adjust the ratio of Preferred Stock owned by a member to the number of acres of sugarbeets which may be planted by virtue of ownership of those shares. However, it is management's current intention and recommendation to the Board of Directors that the relationship between the shares of Preferred Stock and acres of sugarbeet production be maintained at a ratio of 1 to 1 for the foreseeable future, subject to tolerances for overplanting and underplanting established by the Board each year. Those tolerances can and will vary from year to year; for the 1997 sugarbeet crop, the Board of Directors established a tolerance of plus 8% or minus 2% of the number of acres represented by issued and outstanding shares of Preferred Stock.) In connection with the purchase of Preferred Stock, each purchaser will be required to enter into a Growers' Contract, obligating the member to sell the sugarbeets grown on one acre of farm land to the Company for each share of Preferred Stock owned by such member. However, only those shares of Preferred Stock to be issued in this offering for which the Company has received full payment prior to April 1, 1998 will represent the right and obligation to deliver the sugarbeets grown on an acre of farm land in the 1998 crop season. Shares which have been purchased but for which the Company has not received full payment will represent the right and obligation to deliver the sugarbeets grown on one half ( 1/2) of an acre of farmland during the 1998 crop season. Subject to adjustment by the Board of Directors in accordance with the Company's governing documents and the Growers' Contract, such shares shall represent the right and obligation to deliver the sugarbeets grown on a full acre of farm land in the 1999 crop season and years thereafter. The transfer of both the Common Stock and Preferred Stock is subject to approval by the Board of Directors and may only be transferred to another sugarbeet farm operator. Neither the Common Stock nor the Preferred Stock bear dividends. See "Plan of Distribution" and "Description of Common Stock and Preferred Stock." RISK FACTORS A decision to purchase Preferred Stock subjects the purchaser to certain risks and immediate dilution. Accordingly, a decision to purchase Preferred Stock may not be appropriate for persons who cannot afford to be subjected to such risks. See "Risk Factors." PAYMENTS TO MEMBERS FOR CROPS Sugarbeets delivered to American Crystal by its members are processed and the resulting sugar is marketed on a cooperative basis. A particular member's share of the net proceeds from the sale of sugar is determined by the amount of sugar recoverable from the sugarbeets the member delivers to the Company. All members of American Crystal are credited with the same unit price per hundredweight (100 pounds) of recoverable sugar delivered, a price which is determined when the sugarbeets of all of the members have been processed and most of the sugar has been sold. The price paid for sugarbeets is determined by reducing the adjusted value of recovered sugar from the beets a member delivers by the member's share of the Company's member business operating expenses and any unit retains. Each member also receives a pro rata share of net revenues from by-product sales, based on the tonnage of sugarbeets delivered by the member. See "Description of Business--Growers' Contracts."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus concerning the Company's operations is presented on an unaudited pro forma basis as if the following transactions (the "Recent Transactions") had been completed as of January 1, 1994: (i) the transactions (including the acquisition financing transactions) described under "Acquisition History" in this Prospectus Summary including those that have occurred since September 30, 1996 and the proposed RHO Company Incorporated acquisition and acquisition financing, (ii) the amendment of the Company's Certificate of Incorporation in October 1996 to increase the number of authorized shares of Common Stock and Preferred Stock as described under "Description of the Company's Securities," and (iii) the automatic conversion in October 1996 of the Company's Series E Preferred Stock into 887,100 shares of Common Stock as described under "Description of the Company's Securities." References in this Prospectus to the "Company" mean COMFORCE Corporation, its predecessors and its and their subsidiaries, unless the context otherwise requires. THE COMPANY COMFORCE Corporation is a provider of technical staffing, consulting and outsourcing solutions focused on the high technology needs of businesses. The Company provides services to over 725 customers through its highly-skilled labor force that includes computer programmers, engineers, technicians, scientists and researchers. The Company's customers include telecommunication equipment manufacturers, telecommunication service providers (wireline and wireless), computer software and hardware manufacturers, aerospace and avionics firms, utilities and national research laboratories such as Los Alamos National Laboratory, Sandia National Laboratory and Lawrence Livermore National Laboratory. The Company maintains its headquarters in Lake Success, NY and has 31 branch offices in 15 states across the United States to enable it to meet the needs of national as well as local customers. The Company employs approximately 3,700 persons with a ratio of billable to non-billable employees of 18.9 to 1 (as compared to a reported overall industry-wide ratio of 14.2 to 1 for comparably-sized staffing companies), and maintains a proprietary database of over 110,000 prospective employees with expertise in the technical disciplines served by the Company. The Company serves customers in three principal sectors -- telecommunications, information technology ("IT") and technical services -- which represent 14%, 24% and 62%, respectively, of pro forma sales for the nine months ended September 30, 1996. In the telecommunications sector, the Company provides staffing for wireline and wireless communications systems development, satellite and earth station deployment, network management and plant modernization. In the information technology sector, the Company provides staffing for specific projects requiring highly specialized skills such as applications programming and development, client/server development, systems software architecture and design, systems engineering and systems integration. In the technical services sector, the Company provides staffing for national laboratory research in such areas as environmental safety, alternative energy source development and laser technology, and provides highly-skilled labor meeting diverse commercial needs in the avionics and aerospace, architectural, automotive, energy and power, pharmaceutical, marine and petrochemical fields. The Company's objective is to be the leading provider of technical staffing, consulting and outsourcing solutions for the high technology needs of businesses. The Company will seek to achieve its objective by pursuing the following strategy: Focus on High Technology Markets. In the telecommunications, IT and technical service sectors which the Company serves, dynamic technology needs of businesses can effectively be met through the use of staffing, consulting and outsourcing services. The Company is focused on servicing the high technology markets because management believes that providing staffing in the high technology sectors offers greater growth opportunities over providing staffing in the lower-skilled labor sectors, including a higher growth in demand for services, lower turnover rates, generally higher profit margins and more stable customer and employee relationships Pursue Acquisitions as Key Element of Growth. A key element of the Company's expansion strategy is to continue acquiring staffing companies with profitable track records and recognized local or regional presence. Management believes that such acquisitions will enable the Company to more rapidly achieve significant economies of scale and maintain greater financial resources which will allow it to secure larger contracts and enhance its leverage for negotiating contracts. Expand Geographic Presence. The Company will seek to increase revenues and enhance earnings stability by continuing to expand geographically in the United States and internationally. Management believes that further increasing the Company's geographic diversity will better enable it to increase its customer base, weather regional economic and business cycles and provide an advantage when pursuing contracts with national accounts, particularly for customers with a national or international presence and a wide variety of staffing needs. Develop Innovative Staffing Solutions. Management continually seeks to develop new staffing solutions that provide its customers with maximum value and flexibility. By offering innovative and flexible service packages to customers, management believes that it will be better able to attract new customers as well as increase sales to existing customers. Capitalize on Operational Efficiencies. The Company considers its management information systems responsible for administrative, accounting and other "back office" operations to be capable of supporting additional levels of business in the future at low incremental costs. The Company currently intends to integrate the administrative functions of its recent and future acquisitions into the systems of previously acquired companies to improve operating efficiencies. The Company was incorporated in Illinois in 1954 and became a Delaware corporation through its merger with a Delaware subsidiary in 1969. It maintains its headquarters at 2001 Marcus Avenue, Lake Success, New York 11042. The Company's telephone number is (516) 328-7300 and its address on the World Wide Web is www.comforce.com. ACQUISITION HISTORY In October 1995, the Company acquired all of the capital stock of Spectrum Global Services, Inc. (formerly d/b/a YIELD Global and subsequently renamed COMFORCE Telecom, Inc.) ("COMFORCE Telecom"), which was engaged in the telecommunications technical staffing business. COMFORCE Telecom had been formed in 1987 by Michael Ferrentino, currently the President of the Company, and James L. Paterek, currently a principal consultant to the Company. In September 1995, the Company discontinued its then existing jewelry business. As shown in the table below, the Company acquired five additional technical staffing businesses in 1996 and has entered into a definitive agreement to acquire RHO Company Incorporated ("RHO"). Since September 30, 1996, the recent acquisitions have been funded principally from proceeds received by the Company from its sale of 3,250 shares of Series F Preferred Stock and 460,000 shares of Common Stock and related payment rights and its issuance of 111,111 shares of Common Stock upon the exercise of a warrant. See "Description of the Company's Securities." The agreement to acquire RHO requires that the transaction be closed by February 28, 1997. The Company will seek to raise net proceeds of $15.0 million through debt financing to provide the balance of the funds needed to consummate the RHO acquisition. The Company is seeking to raise between $11.4 million to $17.0 million through the private placement of debt instruments bearing interest at 8% per annum. Such private placement of debt will require additional redemption premiums ranging from 2.5% to 15% based upon, among other factors, the timing of the redemptions, which premimums are not reflected in the unaudited pro forma data presented. See "Risk Factors -- Future Capital Needs; Uncertainty of Financing; Potential Dilution" and "Business--Acquisitions" and "Discontinued Operations." <TABLE> <CAPTION> FISCAL 1995 YEAR ACQUISITION REVENUE CURRENT ACQUIRED COMPANY FOUNDED DATE (MILLIONS) OFFICES HEADQUARTERS MARKET SERVED - ---------------- ------- ---- ---------- ------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> COMFORCE Telecom 1987 October 1995 $11.4 5 Lake Success, Telecommunications NY Williams 1991 March 1996 $ 4.2 1 Englewood, Telecommunications Communications FL Services, Inc. ("Williams") RRA, Inc., Project 1964 May 1996 $52.0 8 Tempe, AZ Technical Services Staffing Support Team, Inc. and DataTech Technical Services, Inc. (collectively, "RRA") Force Five, Inc. 1993 August 1996 $ 7.1 4 Dallas, TX Information Technology ("Force Five") AZATAR Computer 1980 November $ 7.1 2 Rochester, Information Technology Systems, Inc. 1996 NY ("AZATAR") Continental Field 1965 November $ 9.9 2 Elmsford, NY Telecommunications Service Corporation and 1996 Progressive Telecom, Inc. (collectively, "Continental") RHO 1971 Proposed to be $83.6 9 Redmond, Technical Services and February 1997 WA Information Technology </TABLE> THE OFFERING The Company is required under certain agreements it has entered into with stockholders and warrantholders to register the shares of Common Stock held by such persons or issuable upon the exercise of warrants or conversion of convertible Preferred Stock held by them. Existing securityholders of the Company are offering 11,096,157 shares of Common Stock held by them or issuable to them. The Selling Stockholders may be deemed to be underwriters within the meaning of Section 2(11) of the Securities Act of 1933 and, as a result, such Selling Stockholders may be subject to the liability provisions of Section 11 thereunder in connection with any sales of shares of Common Stock pursuant to the registration statement of which this prospectus is a part. Common Stock Offered by the Selling Stockholders....... 11,096,157 shares Common Stock Outstanding............................... 12,761,934 shares Common Stock Issuable Under Warrants................... 1,445,608 shares Common Stock Issuable Under Options.................... 2,005,850 shares Common Stock Issuable Upon Conversion of Convertible Preferred Stock........................... 879,695 shares (1) Total Common Stock..................................... 17,093,087 shares (2) American Stock Exchange Symbol..................................... CFS _________________________________ (1) Includes (i) 583,500 shares of Common Stock issuable upon conversion of the outstanding shares of the Company's Series D Preferred Stock based on a conversion price of $12.00 per share and (ii) 296,195 shares of Common Stock issuable upon conversion of the outstanding shares of the Company's Series F Preferred Stock based on a conversion price of 83% of the closing price of the Common Stock on December 31, 1996, $14.25 per share. The number of shares of Common Stock issuable upon conversion of the Series F Preferred Stock is based on a specified percentage of the average closing bid price of the Common Stock for the five trading days preceding conversion. The closing price on December 31, 1996 approximates this average closing bid price. The number of shares of Common Stock issuable upon conversion of shares of Series F Preferred Stock will increase if the closing bid price of the Common Stock decreases and, conversely, will decrease if the closing bid price of the Common Stock increases. See "Description of the Company's Securities -- Preferred Stock." (2) Excludes shares of Common Stock which may become issuable (i) as contingent consideration in connection with the AZATAR and RHO acquisitions, or (ii) at the Company's option (in lieu of making a cash payment) under payment rights on the Common Stock described under "Description of the Company's Securities -- Warrants and Payment Rights." See "Business -- Acquisitions." In addition, dividends on the Company's Series D and F Preferred Stock are payable in cash or Common Stock at the Company's option and any accrued and unpaid amounts are added to the respective conversion values of those shares. See "Description of the Company's Securities -- Preferred Stock."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the related notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes (i) no exercise of the U.S. Underwriters' over-allotment option, and (ii) an offering price of $12.00 per share, which is the last sale price of the class A common shares of beneficial interest, $1.00 par value, in the Company (the "Class A Common Shares"), reported on the NYSE on November 11, 1997 (the "Offering Price"). See "Underwriters." Potential investors should note, however, that the number of Class A Common Shares offered hereby significantly exceeds the number of Class A Common Shares which are outstanding and held by persons who are not affiliates of the Company and that, consequently, the actual Offering Price will depend on a number of factors in addition to the NYSE trading price on the date such Offering Price is determined, and may be materially lower than such price. Unless the context otherwise requires, all references in this Prospectus to the Company include the Company, its subsidiaries and their respective predecessors. References to the "Offering" shall refer to the offering of the Class A Common Shares in the United States and Canada by the U.S. Underwriters and outside the United States and Canada by the International Underwriters. THE COMPANY Capital Trust (the "Company") is a recently recapitalized specialty finance company designed to take advantage of high-yielding lending and investment opportunities in commercial real estate and related assets. The Company makes investments in various types of income-producing commercial real estate and its current investment program emphasizes senior and junior commercial mortgage loans, preferred equity investments, direct equity investments and subordinated interests in commercial mortgage-backed securities ("CMBS"). The Company believes that a majority of the investments to be held in its portfolio for the long term will be structured so that the Company's investment is subordinate to third-party financing but senior to the owner/operator's equity position. The Company also provides real estate investment banking, advisory and asset management services through its recently acquired subsidiary, Victor Capital Group, L.P. ("Victor Capital"). The Company anticipates that it will invest in a diverse array of real estate and finance-related assets and enterprises, including operating companies, that satisfy its investment criteria. In executing its business plan, the Company believes that it will be able to utilize the extensive real estate industry contacts and relationships of Equity Group Investments, Inc. ("EGI"). EGI is a privately held real estate and corporate investment firm controlled by Samuel Zell, who serves as chairman of the board of trustees of the Company. EGI's affiliates include Equity Office Properties Trust and Equity Residential Properties Trust, the largest U.S. real estate investment trusts operating in the office and multifamily residential sectors, respectively. The Company also expects to draw upon the extensive client roster of Victor Capital for potential investment opportunities. The Company believes that the significant recovery in commercial real estate property values, coupled with fundamental structural changes in the real estate capital markets (primarily related to the growth in CMBS issuance), has created significant market-driven opportunities for finance companies specializing in commercial real estate lending and investing. Such opportunities are expected to result from the following developments: . SCALE AND ROLLOVER. The U.S. commercial mortgage market--a market that is comparable in size to the corporate and municipal bond markets--has approximately $1 trillion in total mortgage debt outstanding, which debt is primarily held privately. In addition, a significant amount of commercial mortgage loans held by U.S. financial institutions is scheduled to mature in the near future. . RAPID GROWTH OF SECURITIZATION. With annual issuance volume of approximately $30 billion, the total amount of CMBS currently outstanding has grown to over $100 billion from approximately $6 billion in 1990. To date, the CMBS market expansion has been fueled in large part by "conduits" which originate whole loans primarily for resale to financial intermediaries, which in turn package the loans as securities for distribution to public and private investors. The Company believes that as securitized lenders replace traditional lenders such as banks and life insurance companies as the primary source for commercial real estate finance, borrowers are often constrained by relatively inflexible underwriting standards, including lower loan-to- value ratios, thereby creating significant demand for mezzanine financing (typically between 65% and 90% of total capitalization). In addition, since many high quality loans may not immediately qualify for securitization, due primarily to rating agency guidelines, significant opportunities are created for shorter-maturity bridge and transition mortgage financings. . CONSOLIDATION. As the real estate market continues to evolve, the Company expects that consolidation will occur and efficiency will increase. Over time, the Company believes that the market leaders in the real estate finance sector will be fully integrated finance companies capable of originating, underwriting, structuring, managing and retaining real estate risk. The Company believes that it is well-positioned to capitalize on the resultant opportunities, which, if carefully underwritten, structured and monitored, represent attractive investments that pose potentially less risk than direct equity ownership of real property. Further, the Company believes that the rapid growth of the CMBS market has given rise to opportunities for the Company to acquire selectively non-investment grade tranches of such securities, which the Company believes are priced inefficiently in terms of their risk/reward profile. The Company currently pursues investment and lending opportunities designed to capitalize on inefficiencies in the real estate capital, mortgage and finance markets. The Company's investment program emphasizes, but is not limited to, the following general categories of real estate and finance-related assets: . MORTGAGE LOANS. The Company pursues opportunities to originate and fund senior and junior mortgage loans ("Mortgage Loans") to commercial real estate owners and property developers who require interim financing until permanent financing can be obtained. The Company's Mortgage Loans are generally not intended to be permanent in nature, but rather are intended to be of a relatively short-term duration, with extension options as deemed appropriate, and typically require a balloon payment of principal at maturity. The Company may also originate and fund permanent Mortgage Loans in which the Company intends to sell the senior tranche, thereby creating a Mezzanine Loan (as defined below). . MEZZANINE LOANS. The Company originates high-yielding loans that are subordinate to first lien mortgage loans on commercial real estate and are secured either by a second lien mortgage or a pledge of the ownership interests in the borrowing property owner. Alternatively, the Company's mezzanine loans can take the form of a preferred equity investment in the borrower with substantially similar terms (collectively, "Mezzanine Loans"). Generally, the Company's Mezzanine Loans have a longer anticipated duration than its Mortgage Loans and are not intended to serve as transitional mortgage financing. . SUBORDINATED INTERESTS. The Company pursues rated and unrated investments in public and private subordinated interests ("Subordinated Interests") in commercial collateralized mortgage obligations ("CMOs" or "CMO Bonds") and other CMBS. . OTHER INVESTMENTS. The Company intends to assemble an investment portfolio of commercial real estate and finance-related assets meeting the Company's target risk/return profile. The Company is not limited in the kinds of commercial real estate and finance-related assets in which it can invest and believes that it is positioned to expand opportunistically its financing business. The Company may pursue investments in, among other assets, construction loans, distressed mortgages, foreign real estate and finance-related assets, operating companies, including loan origination and loan servicing companies, and fee interests in real property (collectively, "Other Investments"). The Company also provides real estate investment banking, advisory and asset management services through its Victor Capital subsidiary. Victor Capital provides services to real estate investors, owners, developers and financial institutions in connection with mortgage financings, securitizations, joint ventures, debt and equity investments, mergers and acquisitions, portfolio evaluations, restructurings and disposition programs. The Company may also acquire operating businesses that the Company believes would complement Victor Capital's existing business. RECAPITALIZATION AND INITIAL INVESTMENTS Prior to July 1997, the Company operated as a real estate investment trust ("REIT"), originating, acquiring, operating or holding income-producing real property and mortgage-related investments. On July 15, 1997, as a result of transactions culminating at the Company's 1997 annual meeting of shareholders (the "1997 Annual Meeting"), the Company experienced, in addition to a change in control, a number of other significant changes, including: . The investment of $33.0 million in the form of preferred equity capital (the "Investment"); . The acquisition of Victor Capital's real estate investment banking and advisory operations (the "Acquisition"); . The appointment of a new management team consisting primarily of officers of Victor Capital; . The implementation of the Company's new business plan emphasizing high- yielding lending and investment opportunities; and . The election of the Company to terminate its REIT status for federal income tax purposes primarily in order to retain earnings and to maximize its investment flexibility. In addition, the Company has entered into a credit agreement, dated as of September 30, 1997, with a commercial lender, that provides for a three-year $150.0 million line of credit ("Credit Facility"); in connection with the Credit Facility, the Company received an advance of approximately $11.7 million from the commercial lender prior to execution of the Credit Facility. Such borrowings, along with cash provided by the Investment and existing cash resources, were used to fund the Company's initial loans and investments. The Company believes that the Credit Facility and the proceeds of the Offering will provide the Company with the capital necessary to expand and diversify its portfolio of investments and will also enable the Company to compete for and consummate larger transactions meeting the Company's target risk/return profile. To date, the Company has identified, negotiated and funded the loan and investment transactions set forth below, all of which the Company believes will provide investment yields within the Company's target range of 400 to 600 basis points above the London Interbank Offered Rate ("LIBOR"). The Company intends to employ leverage on its investments in order to increase its overall return on equity. In the future, the Company may make investments with yields that fall outside of the investment range set forth above, but that correspond with the level of risk perceived by the Company to be inherent in such investments. Recent investments include: . The origination, funding and sale of a participation interest in a $50.3 million subordinated Mortgage Loan. This LIBOR-based loan is secured by a second mortgage on the office tower located at 1325 Avenue of the Americas in New York City which contains approximately 750,000 square feet. A 50% pari passu participation interest was sold to Equity Office Properties Trust, an affiliate of the Company, at closing. . The origination, funding and sale of a participation interest in a $35.0 million subordinated Mortgage Loan. This LIBOR-based loan is secured by a second mortgage on the approximately 1.1 million square foot Chicago Apparel Center located in Chicago, Illinois and two mortgage notes (with an aggregate principal amount of $9.6 million) on nearby development sites. . The origination and funding of a $9.8 million Mortgage Loan. This LIBOR- based loan was primarily secured by an $11.8 million mortgage note on an approximately 281,000 square foot office/warehouse facility located in Philadelphia, Pennsylvania and a pledge of other mortgage collateral in the New York metropolitan area aggregating $6.7 million. In November 1997, the loan was repaid to the Company in full. . The purchase of a portion of an $80.0 million Mezzanine Loan for approximately $15.6 million. This loan is secured by a pledge of the ownership interests in the entities that own the approximately 1.75 million square foot office building located at 277 Park Avenue in New York City. . The origination and funding of a $10.0 million Mezzanine Loan secured by a subordinated mortgage on, and a pledge of the ownership interests in the entity that owns a majority interest in, the approximately 931,000 square foot office building located at 555 West 57th Street in New York City commonly known as the "BMW Building." . The purchase of a Subordinated Interest in the amount of approximately $49.5 million. The investment is secured by 20 short-term commercial mortgage loans with original maturities ranging from two to three years, which loans are secured by properties located throughout the United States. The Company is the named special servicer for the entire $413.0 million loan portfolio of which this Subordinated Interest is a part. THE OFFERING Class A Common Shares offered by the Company: U.S. Offering(1)................ 6,400,000 shares International Offering(1)....... 1,600,000 shares Total(1)..................... 8,000,000 shares Class A Common Shares to be outstanding after the Offering(1)(2)..................... 17,138,325 shares Use of Proceeds..................... The net proceeds to the Company from the issuance and sale of the 8,000,000 Class A Common Shares offered hereby (after deduction of the underwriting discounts and commissions and estimated offering expenses) are estimated to be approximately $ million. The Company intends to use the net proceeds to fund investments and loans made by the Company and for working capital for ongoing operations and potential business acquisitions. Until applied to fund investment or acquisition opportunities, the net proceeds will be used to reduce temporarily the outstanding borrowings under the Credit Facility. Pending such uses, the net proceeds will be invested in short-term investment-grade securities, certificates of deposit or direct or guaranteed obligations of the United States government. See "Use of Proceeds." NYSE symbol......................... "CT" - -------- (1) Assumes the over-allotment option is not exercised. See "Underwriters." (2) Based on the number of Class A Common Shares outstanding as of December 3, 1997. Excludes (i) 12,267,658 Class A Common Shares into which the outstanding Class A Preferred Shares are convertible and (ii) an aggregate of 2,000,000 Class A Common Shares reserved for issuance under the 1997 Long-Term Incentive Share Plan (the "Incentive Share Plan") and the 1997 Non-Employee Trustee Share Plan (the "Trustee Share Plan"), including 657,000 shares as to which share options were then outstanding, none of which were exercisable on such date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Capital Shares." BACKGROUND Prior to July 1997, the Company operated as a REIT under the name "California Real Estate Investment Trust," originating, acquiring, operating or holding income-producing real property and mortgage-related investments. On January 3, 1997, CalREIT Investors Limited Partnership ("CRIL"), a partnership controlled by Samuel Zell, the Company's current chairman of the board of trustees (the "Board of Trustees" or the "Board"), purchased the 6,959,593 Class A Common Shares (representing approximately 76% of the then-outstanding Class A Common Shares) then owned by the Company's former parent for an aggregate purchase price of approximately $20.2 million. Prior to the purchase, EGI, a privately held investment firm that is controlled by Mr. Zell and engaged in, among other things, the ownership and management of real estate, and Victor Capital, which was then privately held by John R. Klopp and Craig M. Hatkoff, current trustees of the Company, presented to the Company's then-incumbent Board of Trustees a proposed new business plan in which the Company would cease to be a REIT and instead become a specialty finance company designed primarily to take advantage of high-yielding mezzanine investment opportunities in commercial real estate. EGI and Victor Capital also proposed that they provide the Company with a new management team to implement the business plan and that they invest through an affiliate a minimum of $30.0 million in a new class of preferred shares to be issued by the Company. In connection with the foregoing, the Company subsequently agreed that, concurrently with the consummation of the proposed preferred equity investment, it would acquire for $5.0 million Victor Capital's real estate investment banking, advisory and asset management businesses, including the services of its experienced management and professional team. On July 15, 1997, upon the approval of the Company's shareholders at the 1997 Annual Meeting, the Company closed on the Investment, which consisted of the sale, for $33.0 million, of 12,267,658 class A 9.5% cumulative convertible preferred shares of beneficial interest, $1.00 par value, in the Company ("Class A Preferred Shares") to Veqtor Finance Company, LLC ("Veqtor"), a limited liability company controlled by Samuel Zell, John R. Klopp and Craig M. Hatkoff. Concurrently with the Investment, Veqtor purchased the 6,959,593 Class A Common Shares held by CRIL for an aggregate purchase price of approximately $21.3 million. Veqtor funded the approximately $54.3 million aggregate purchase price for the Class A Common Shares and the Class A Preferred Shares with $5.0 million of capital contributions from its members and $50.0 million of borrowings under 12% convertible redeemable notes (the "Veqtor Notes") issued to BankAmerica Investment Corporation, BancBoston Investments, Inc., First Chicago Capital Corporation and Wells Fargo & Company (collectively, the "Institutional Investors"). The Institutional Investors may in the future convert these notes into preferred interests in Veqtor that, in turn, may be redeemed for an aggregate of approximately 34% of the outstanding shares of the Company after completion of the Offering (assuming, among other things, the sale of 8,000,000 Class A Common Shares in the Offering). As a result of the above transactions, a change in control of the Company occurred, with Veqtor beneficially owning 19,227,251 (or approximately 90%) of the outstanding voting shares of the Company. Also, the Company's shareholders approved the adoption of an amended and restated declaration of trust (the "Restated Declaration") that, among other things, reclassified the Company's outstanding common shares as Class A Common Shares and changed the Company's name to "Capital Trust." The Company immediately commenced full implementation of its new business plan and thereby elected to terminate its status as a REIT for federal income tax purposes. By not operating as a REIT, the Company is positioned to respond more quickly to investment opportunities without the structural limitations inherent in REITs and to expand its portfolio of invested assets on a more highly leveraged basis than most REITs. The Company is also able to retain its cash flows generated from operations for reinvestment, thereby facilitating the Company's growth strategy. In certain cases, the term Class A Common Shares used herein refers to the common shares of beneficial interest, $1.00 par value, in the Company outstanding prior to the reclassification discussed above. The Company is also authorized to issue class B common shares of beneficial interest, $1.00 par value ("Class B Common Shares"), and class B 9.5% cumulative convertible non- voting preferred shares of beneficial interest, $1.00 par value ("Class B Preferred Shares" and together with the Class A Preferred Shares, the "Preferred Shares"), in the Company. The Class B Common Shares and the Class B Preferred Shares, none of which are outstanding on the date hereof, are identical to the Class A Common Shares and the Class A Preferred Shares, respectively, except that neither the Class B Common Shares nor the Class B Preferred Shares entitle the holder thereof to voting rights, except as provided by law. OWNERSHIP STRUCTURE OF THE COMPANY The following diagram depicts the ownership structure of the Company after the Offering: [LOGO DEPICTING OWNERSHIP STRUCTURE OF THE COMPANY] - -------- (1) Capital Trust Investors Limited Partnership (f/k/a CalREIT Investors Limited Partnership ("CTILP")), which is indirectly controlled by Samuel Zell, and V2 Holdings LLC ("V2"), a holding company controlled by John R. Klopp and Craig M. Hatkoff, are each managing members of, and each owns 50% of the common interests in, Veqtor. Messrs. Zell, Klopp and Hatkoff as well as Sheli Z. Rosenberg and Gary R. Garrabrant, who also hold indirect economic ownership interests in Veqtor, are members of the Board of Trustees of the Company. (2) Upon completion of the Offering, Veqtor will own Class A Common Shares and Class A Preferred Shares representing approximately 65% of the outstanding voting shares of the Company (assuming the sale of 8,000,000 Class A Common Shares in the Offering). The Institutional Investors hold the Veqtor Notes and may in the future convert these notes into preferred interests in Veqtor that, in turn, may be redeemed for approximately 50% of Veqtor's holdings of Class A Common Shares and Class A Preferred Shares. (3) Upon completion of the Offering, the public shareholders will own Class A Common Shares representing approximately 35% of the outstanding voting shares of the Company (assuming the sale of 8,000,000 Class A Common Shares in the Offering). Veqtor funded the approximately $54.3 million aggregate purchase price for the 6,959,593 Class A Common Shares and the 12,267,658 Class A Preferred Shares (collectively, "Veqtor's Company Shares") that it purchased on July 15, 1997 with $5.0 million of capital contributions from its members and $50.0 million of borrowings under the Veqtor Notes issued to the Institutional Investors. The Veqtor Notes earn interest at a rate of 12% per annum, except that interest at a rate of 6% per annum is accrued and not payable until maturity or redemption or conversion of the Veqtor Notes as discussed herein. The Veqtor Notes are convertible by the holders thereof into preferred units in Veqtor ("Veqtor Preferred Units") at the rate of $55.59 per unit from and after the earlier of July 15, 2000, the dissolution, liquidation or winding up of the affairs of Veqtor or the sale of any or all of Veqtor's Company Shares. Upon conversion of the Veqtor Notes into Veqtor Preferred Units, at any time after six months from the date of such conversion, the Veqtor Preferred Units are redeemable by the holders thereof in exchange for a portion of Veqtor's Company Shares. The Veqtor Preferred Units are also redeemable by the Company in exchange for a portion of Veqtor's Company Shares at any time after 24 months from their date of issuance provided all such units are redeemed. Upon such redemption, each holder of such Veqtor Preferred Units is entitled to receive a specified portion of Veqtor's Company Shares equal to the ratio of the total number of Veqtor Preferred Units held by such holder to the sum of (i) the total number of Veqtor Preferred Units that would be outstanding if all holders of the Veqtor Notes then outstanding converted their Veqtor Preferred Units at a conversion price of $55.59 per unit and (ii) the total number of Veqtor Common Units then outstanding. Upon redemption of the Veqtor Preferred Units, with respect to holders thereof who are bank holding companies or affiliates thereof within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHCA"), Veqtor is required to convert those of Veqtor's Company Shares allocable to such holders into Class B Common Shares and Class B Preferred Shares, as the case may be. The Class B Common Shares and the Class B Preferred Shares are non-voting shares and are convertible, respectively, into Class A Common Shares and Class A Preferred Shares on a share-for-share basis upon certification by the holder thereof that such shareholder either (a) will not, together with any other person (other than the Company) who previously held voting shares of the Company held by such shareholder, upon the issuance of such shares, own more than 4.9% of any class of voting shares of the Company or (b) is not limited by the BHCA to holding no more than 4.9% of any class or series of voting shares of the Company. Veqtor can redeem the Veqtor Notes for cash at par (plus accrued and unpaid interest) at any time after July 15, 2000, subject to the right of the holders to convert the Veqtor Notes into Veqtor Preferred Units as discussed above. In connection with the Offering, CTILP, V2 and Veqtor have agreed with the Company that upon either the redemption for cash of the Veqtor Notes or the conversion of the Veqtor Notes into Veqtor Preferred Units, and, in the latter case, the subsequent redemption of all such units in exchange for the specified portion of Veqtor's Company Shares, Veqtor shall convert the remaining Class A Preferred Shares owned by it into Class A Common Shares. CTILP, V2 and Veqtor have also agreed that Veqtor shall redeem the Veqtor Preferred Units on the earliest date upon which Veqtor has the right to effect such redemption. Assuming for purposes of demonstration that all of the Veqtor Notes (including accrued and unpaid interest thereon) were converted on the third anniversary of their issuance into Veqtor Preferred Units, and such units were then redeemed for their corresponding specified portion of Veqtor's Company Shares, and assuming further that at that time all 2,000,000 shares reserved for issuance pursuant to the Company's share plans were issued and outstanding, the holders of the Veqtor Notes (the Institutional Investors) would be entitled to receive an aggregate of 3,583,349 Class A Common Shares and 6,316,361 Class A Preferred Shares, which shares would represent in the aggregate approximately 32% of the shares outstanding after consummation of the Offering, and CTILP and V2 would be entitled to receive an aggregate of 3,376,244 Class A Common Shares and 5,951,297 Class A Preferred Shares, which shares would represent in the aggregate approximately 30% of the shares outstanding after consummation of the Offering (assuming in each case the sale of 8,000,000 Class A Common Shares in the Offering and no other issuances of Class A Common Shares prior to the time of such redemption). SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following tables present summary historical and pro forma financial data for the business of the Company as of and for the nine months ended September 30, 1997, and for the year ended December 31, 1996. The pro forma statement of operations has been presented to reflect the results of the Company's business operations as if the Acquisition had occurred on January 1, 1996. The as adjusted balance sheet data as of September 30, 1997 is adjusted to reflect the sale of 8,000,000 Class A Common Shares in the Offering at an assumed price of $12.00 per share and the application of the net proceeds therefrom. The information in these tables is qualified by and should be read in conjunction with the "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed Combined Financial Information" and the financial statements of the Company and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> PRO FORMA NINE MONTHS PRO FORMA YEAR ENDED ENDED DECEMBER SEPTEMBER 30, 31, 1996 1997 -------------- ------------- (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA OPERATING DATA: AND SHARE AMOUNTS) <S> <C> <C> Income from investment and lending transactions: Interest and related income..................... $100 $1,863 Interest and related expenses(2)................ 86 759 ---------- ---------- Net income from investment and lending transac- tions.......................................... 14 1,104 ---------- ---------- Other revenues: Advisory and asset management fees.............. 6,940 3,251 Rental income(1)................................ 2,019 313 Interest and investment income.................. 1,369 1,045 ---------- ---------- Total other revenues............................ 10,328 4,609 ---------- ---------- Other expenses: General and administrative...................... 6,324 6,506 Other interest expense.......................... 821 291 Rental property expenses(1)..................... 685 123 Depreciation and amortization................... 131 83 ---------- ---------- Total other expenses............................ 7,961 7,003 ---------- ---------- (Loss) income before gain (loss) on sale or fore- closure of rental properties, provision for pos- sible credit losses and income taxes............ 2,381 (1,290) Gain (loss) on sale or foreclosure of rental properties...................................... 1,069 (432) Provision for possible credit losses(1).......... (1,743) (155) ---------- ---------- (Loss) income before income taxes................ 1,707 (1,877) Provision for income taxes....................... (96) -- ---------- ---------- Net (loss) income................................ 1,611 (1,877) Less: Preferred Share dividend requirement(2).... -- (679) ---------- ---------- Net (loss) income allocable to Class A Common Shares.......................................... $1,611 $(2,556) ========== ========== Per share information: Net (loss) income per Class A Common Share Primary and fully diluted(2).................... $0.09 $(0.15) ========== ========== Weighted average Class A Common Shares outstand- ing Primary and fully diluted(2) ................... 17,138,325 17,138,325 ========== ========== </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1997 ------------------------- HISTORICAL AS ADJUSTED(2) ---------- -------------- (AUDITED) (UNAUDITED) (IN MILLIONS) <S> <C> <C> BALANCE SHEET DATA: Total assets.......................................... $112 $189 Total liabilities..................................... 57 45 Shareholders' equity.................................. 55 144 </TABLE> - ------- (1) Prior to the 1997 Annual Meeting and the implementation of the Company's new business plan, the Company operated as a REIT holding income-producing property. As of March 31, 1997, the Company had sold its two then-remaining commercial rental properties, and since that time, the Company has derived no revenue from rental operations. The provision for possible credit loss for the year ended December 31, 1996 relates entirely to these two commercial properties. (2) Information for the Company for the nine months ended September 30, 1997 includes (i) the preferred share dividend requirement for the Class A Preferred Shares since their issuance on July 15, 1997 ($679,000) and the Investment and (ii) the income derived from the re-investment of the net proceeds therefrom. Had the Class A Preferred Shares been outstanding for that entire nine-month period, the Preferred Share dividend requirement would have been $2,351,000 (equivalent to $3,135,000 per annum). In addition, an adjustment has been made to reflect the sale of 8,000,000 Class A Common Shares in the Offering and the use of net proceeds therefrom, including the elimination of the $11.7 million borrowed under the Credit Facility. As a result, interest expense thereon for the nine months ended September 30, 1997 was reduced by $31,000. The Class A Preferred Shares were not considered Class A Common Share equivalents for purposes of calculating fully diluted earnings per share as they were antidilutive for the nine months ended September 30, 1997 and were not outstanding during the year ended December 31, 1996.

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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by reference to, and should be read in conjunction with, the detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus relating to share and per share data gives retroactive effect to a one-for-ten reverse stock split of the Company's Common Stock effected on October 17, 1994. THE COMPANY Comprehensive Care Corporation(R) ("CompCare" or the "Company")*, is a Delaware corporation organized in 1969. Prior to its fiscal year 1993, the Company principally engaged in the ownership, operation and management of freestanding psychiatric and substance abuse facilities, and the management of in-hospital psychiatric and substance abuse programs located in unaffiliated hospitals. Commencing in fiscal 1993, the Company transitioned itself and redirected its business focus, and through its 86.5% owned subsidiary, Comprehensive Behavioral Care(SM), Inc. ("Comprehensive Behavioral"), provides the delivery of a continuum of psychiatric and substance abuse services on behalf of health maintenance and preferred provider organizations, and other healthcare providers. Unless the context otherwise requires, all references to the "Company" include CompCare, Comprehensive Behavioral and subsidiary corporations. The services provided by Comprehensive Behavioral are effected through management services agreements, administrative service agreements, fee-for-service agreements or capitation contracts through which the primary provider of healthcare services pays a fixed per member per month fee for covered psychiatric and substance abuse services made available to covered members regardless of actual member utilization. Current services include risk based contract capitation of behavioral health expenses for specific populations, and a broad spectrum of inpatient and outpatient mental health and substance abuse therapy and counseling. Programs are provided at freestanding facilities operated by the Company, and at independent general hospitals under contracts with the Company. A wholly-owned subsidiary, Comprehensive Care Integration(SM), Inc. ("CCI"), formerly known as CareUnit(R), Inc., develops, markets and manages the Company's contract programs. For the fiscal year ended May 31, 1996 and for the six months ended November 30, 1996, psychiatric and chemical dependency treatment programs (freestanding operations and CCI contracts) accounted for approximately 43% and 33%, respectively, of the Company's operating revenues. Comprehensive Behavioral (formerly known as AccessCare, Inc.) accounted for approximately 56% and 67%, respectively, of the Company's operating revenues for the fiscal year ended May 31, 1996 and for the six months ended November 30, 1996. The remaining revenues for the respective periods were derived from other activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". Freestanding facilities are designated either as psychiatric or chemical dependency based on the license of the facility and the predominant treatment provided. The Company believes that the increasing role of health maintenance organizations ("HMO's"), reduced benefits from employers and indemnity companies, and a shifting to outpatient programs continue to cause a decline in utilization of freestanding facilities. As a result of the foregoing the Company has implemented cost reduction measures, including the closure of selected Company facilities. During the second quarter of fiscal 1996, the Company sold the operations of one facility, representing 83 beds and closed one facility representing 70 beds. During fiscal 1997, the Company closed one facility representing 128 beds. The Company owns and continues to operate one freestanding facility representing 38 available beds. See "Business - Freestanding Operations". The Company's principal executive offices are located at 1111 Bayside Drive, Corona del Mar, California 92625 and its telephone number is (714) 222-2273. - ------------------- *COMPREHENSIVE CARE CORPORATION IS A REGISTERED SERVICE MARK OF THE COMPANY. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1997 370,207 SHARES COMPREHENSIVE CARE CORPORATION COMMON STOCK This Prospectus relates to 370,207 shares of Common Stock, $.01 par value (the "Shares") of Comprehensive Care Corporation (the "Company") being sold by certain shareholders (the "Selling Shareholders"). The Company will not receive any proceeds from the sale of the Shares by the Selling Shareholders. See "Selling Shareholders". The Common Stock of the Company is listed on the New York Stock Exchange ("NYSE") under the trading symbol CMP. The reported closing price of the Common Stock of the Company on the NYSE on February 10, 1997, was $16 1/8 per share. See "Price Range of Common Stock and Certain Market Information". The Selling Shareholders' Shares may be offered from time to time by the Selling Shareholders or by their transferees, through ordinary brokerage transactions on the NYSE, third market transactions, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices. No underwriting arrangements have been entered into by the Selling Shareholders. Usual and customary, or specifically negotiated brokerage fees or commissions may be paid by the Selling Shareholders in connection with sales of the Selling Shareholders' Shares. See "Plan of Distribution". The Selling Shareholders may be deemed to be "underwriters" as that term is defined in the Securities Act of 1933, with respect to their Shares. All costs, expenses and fees in connection with the registration of the Shares offered by Selling Shareholders will be borne by the Company. Brokerage commission, if any, attributable to the sale of the Selling Shareholders' Shares will be borne by the Selling Shareholders. The Company will not receive any of the proceeds from the sale of the Shares. All of the Selling Shareholders will be required to represent that they have knowledge of Rules 10b-2 and Regulation M promulgated under the Securities Exchange Act of 1934 as amended which proscribe certain manipulative and deceptive practices in connection with a distribution of securities. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. PLEASE SEE "RISK FACTORS" AT PAGE 13 FOR CERTAIN INVESTMENT CONSIDERATIONS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS FEBRUARY ____, 1997. RECENT DEVELOPMENTS RECENTLY COMPLETED EXCHANGE OFFER WITH HOLDERS OF 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE APRIL 15, 2010, AND RESCISSION BY DEBENTUREHOLDERS OF COMPANY DEFAULT In October 1994, the Company suspended the payment of semi-annual interest on its outstanding 7 1/2% Convertible Subordinated Debentures due April 15, 2010 (the "Debentures"). As a result of such suspended interest payments, the Company became in default with respect to $9,538,000 principal amount of then outstanding Debentures. On November 14, 1996, the Company commenced a consent solicitation pursuant to a proxy statement addressed to its Debentureholders (the "Consent Solicitation"). The Company simultaneously initiated an exchange offer (the "Debenture Exchange Offer") to exchange cash and common stock of the Company for its Debentures, as discussed below. The Consent Solicitation sought a consent of Debentureholders to the rescission of the acceleration of all principal and interest due under the Debentures and the waiver of all defaults thereunder. As of December 30, 1996, (the "Expiration Date" of Exchange Offer) holders of $7,901,000 principal amount of Debentures representing in excess of 82% of issued and outstanding amount of Debentures gave their affirmative written consent to the rescission of the acceleration and to the waiver of the defaults of the Company. The Debenture Exchange Offer, conditioned upon acceleration of payment of the Debentures being rescinded, and the waiver of default being consented to, offered to the holders of Debentures to exchange $500 in cash plus sixteen (16) shares of Common Stock, par value $.01 per share ("Common Shares"), designated aggregately as a payment of principal, plus $80 in cash plus eight (8) shares of Common Stock, designated aggregately as a payment of interest (the combined total of principal and interest herein called "Exchange Consideration") for each $1,000 of the outstanding principal amount of its Debentures and the waiver by the Debentureholder of all interest accrued and unpaid on such principal amount as of the date of the Exchange except for such designated interest payment included in the Exchange Consideration. On December 30, 1996, the Company completed the Debenture Exchange Offer with its Debentureholders. An aggregate of $6,846,000 principal amount of Debentures, representing 72% of the issued and outstanding Debentures, were tendered for exchange to the Company pursuant to the terms of the Debenture Exchange Offer. All such Debentures were accepted for exchange by the Company, and the Company paid an aggregate of $3,970,680 in cash to the tendering Debentureholders and issued an aggregate of 164,304 shares of the Company's Common Stock to such tendering Debentureholders. With respect to an aggregate of $2,692,000 principal amount of Debentures which were not tendered for exchange, the Company paid an aggregate of $552,701 of interest and default interest to such non-tendering Debentureholders. As a result of the Consent Solicitation and the payment by the Company of interest and default interest with respect to all Debentures which have not been tendered for exchange, the Company is no longer in default with respect to such Debentures. The next scheduled semi-annual interest payment to be made on April 15, 1997, by the Company with respect to its currently outstanding Debentures is approximately $101,000. All remaining untendered Debentures remain convertible into shares of the Company's Common Stock at the rate of one share of Common Stock for each $250 principal amount of Debentures, subject to adjustment. As a result of the completion of the Debenture Exchange Offer, the Company's debt obligations have been reduced by $6,846,000, and $2,692,000 of the Company's debt obligations represented by untendered Debentures has been reclassified to long term debt during the third quarter of fiscal 1997. The completion of the Debenture Exchange Offer had the further effect of reducing the amount of stockholders' deficit by approximately $2.2 million. THE FOLLOWING APPEARS ON THE INSIDE FRONT COVER PAGE: AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy and information statements and other information filed by the Company with the Commission pursuant to the informational requirements of the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of the Commission: New York Regional Office, Seven World Trade Center, Room 1400, New York, New York 10048; and Chicago Regional Office, Everett McKinley Dirkson Building, 210 South Dearborn Street, Room 1204, Chicago, Illinois 60604. Copies of such material may be obtained from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site that contains reports, proxy information statements and other information regarding the Registrant that is filed electronically with the Commission and the address is http://www.sec.gov. The Company distributes to its stockholders annual reports containing financial statements audited by its independent auditors and independent public accountants. FORWARD LOOKING STATEMENTS This Prospectus contains certain forward-looking statements or statements which may be deemed or construed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, management's discussion and analysis of financial condition and results of operations, business of the Company, and risk factors. The words "estimate," "project," "intend," "expect," and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve and are subject to known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating), achievements expressed or implied by such forward-looking statement. For a discussion of certain risks and uncertainties, see "Risk Factors" at page 13. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. EXCHANGE OF SECURED CONVERTIBLE NOTE FOR PREFERRED STOCK The Board of Directors has authority to issue its authorized Preferred Stock in one or more series, each series to have such designation and number of shares as the Board of Directors may fix prior to the issuance of any shares of such series. Each series may have such preferences and relative participating, optional or special rights with such qualifications, limitations or restrictions as stated in the resolution or resolutions providing for the issuance of such series as may be adopted from time to time by the Board of Directors prior to the issuance of any such series. The Board of Directors has designated 41,260 shares of Preferred Stock as Series A Non-Voting 4% Cumulative Convertible Preferred Stock, $50 par value (the "Preferred Stock") on January 17, 1997. The Preferred Stock was issued by the Company in exchange for the Secured Convertible Note of the Company due January 9, 1997 in the principal amount of $2.0 million and bearing interest at the rate of 12% per annum and $63,000 of interest accrued thereon. The Preferred Stock pays a cumulative quarterly dividend of 4% per annum, when and as declared by the Board of Directors; is preferred to the extent of $50 per share plus accrued dividends; is convertible into shares of Common Stock of the Company at $6 per share, which was the same price at which the principal of the note was exchangeable; and is not entitled to vote. The shares of Common Stock issuable upon conversion of the Preferred Stock are not registered under the Registration Statement under which the prospectus is a part. As a result of the exchange of the Secured Convertible Note into Preferred Stock, the Company's debt obligations have been reduced by $2.0 million. The completion of the exchange had the further effect of reducing the amount of stockholders' deficit by $2.1 million. THE OFFERING Number of Shares of Common Stock Offered by Selling Stockholders............. 370,207 Shares of Common Stock Outstanding(1)........ 3,265,385 Use of Proceeds.............................. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders New York Stock Exchange Symbol(2)............ CMP - -------------------- (1) Excludes (i) 1,139,255 shares of Common Stock issuable upon exercise of outstanding warrants granted under (a) the Company's 1988 Incentive and Nonstatutory Stock Option Plans, (b) the Company's 1995 Stock Option Plan and (c) the Company's Non-Employee Director Plan; (ii) 35,000 shares of Common Stock issuable pursuant to miscellaneous options granted; (iii) 343,820 shares of Common Stock (subject to adjustment) issuable upon conversion of Series A Non-Voting 4% Cumulative Convertible Preferred Stock; (iv) 100,000 shares of Common Stock issuable to the holder of the 13.5% interest in Comprehensive Behavioral in exchange for such interest; (v) shares of Common Stock that may be issued to stockholders of the Company pursuant to the Rights Agreement between the Company and Continental Stock Transfer & Trust Company dated April 19, 1988 and amended October 21, 1994. (2) The current listing of the Company's shares of Common Stock on the New York Stock Exchange does not assure continued future listing. See "Risk Factors - Continued Listing on NYSE". SUMMARY CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary consolidated financial data of the Company has been derived from the financial statements of Comprehensive Care Corporation which have been prepared in accordance with generally accepted accounting principles ("GAAP"). The summary consolidated financial data for the Company as of May 31, 1995 and 1996, and for the years then ended, are derived from the consolidated financial statements of Comprehensive Care Corporation which have been audited by Ernst & Young LLP, independent auditors. Ernst & Young LLP's report on the consolidated financial statements for the years ended May 31, 1995 and 1996, which appears elsewhere herein, includes a description of an uncertainty with respect to the Company's ability to continue as a going concern described in Note 2 to the financial statements. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein. The financial statements as of May 31, 1992, 1993 and 1994 and for the years then ended have been derived from financial statements audited by other accountants. The summary consolidated financial data set forth below for the years ended May 31, 1992, 1993, and 1994 are derived from audited financial statements not included or incorporated by reference herein. The financial data for the six months ended November 30, 1995 and 1996 are derived from unaudited financial statements. The unaudited financial statements include all adjustments consisting of normal recurring accruals, which Comprehensive Care Corporation considers necessary for a fair presentation of the financial position and the results of operations for those periods. Operating results for the six months ended November 30, 1996 are not necessarily indicative of the results that may be expected for the full fiscal year. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein. Financial data presented below does not include statement of operations or balance sheet data for the Debenture Exchange and does not include the exchange of the Secured Convertible Note. See "Pro Forma Financial Information."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements and Notes thereto, appearing elsewhere or incorporated by reference in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such forward-looking statements. THE COMPANY Computer Horizons is a diversified information technology services company that provides IT staffing and solutions services, including Year 2000 services, to major corporations. Founded in 1969 as a provider of IT staffing resources, the Company has expanded through internal growth and acquisitions to become a leading national provider of IT staffing services. The Company also offers its clients various IT solutions services, including application development, conversions/migrations, legacy maintenance outsourcing, enterprise network management and knowledge transfer and training. The Company's Year 2000 solution addresses all phases of Year 2000 projects from assessment through full compliance and is based on its proprietary Signature 2000 Toolset. The Company's Year 2000 services business, which represented approximately 2% of the Company's revenues in the first six months of 1996, accounted for approximately 19% of its revenues in the first six months of 1997. Increasingly, organizations are addressing issues such as the need to improve quality, shorten time to market and reduce costs by utilizing IT solutions that facilitate rapid and flexible collection, analysis and dissemination of information. As a result, an organization's ability to effectively utilize new IT solutions in a cost-effective manner has become critical in today's increasingly competitive business environment. During this time of increasing reliance on IT, rapid technological change and other challenges, such as the need for Year 2000 conversions, have strained the capabilities of the internal IT departments within these organizations. As a result of these factors and the need to focus their resources on core competencies, large corporations are increasingly outsourcing these functions to third party vendors of IT services. International Data Corporation ("IDC") estimates that worldwide outsourcing spending was approximately $86 billion in 1996, and projects that such spending will grow to $140 billion in 2001. Furthermore, the Gartner Group estimates the worldwide cost of fixing the Year 2000 problem to be between $300 and $600 billion. The Company markets its services primarily to Fortune 500 companies with significant information technology budgets and recurring staffing or software development needs. In 1996, the Company provided services to over 450 clients, including AT&T, Chase Manhattan Corporation, Citicorp, Dow Chemical Company, Florida Power & Light Company, Ford Motor Company, International Business Machines Corporation, MCI Communications Corporation, NYNEX Corporation and Prudential Insurance Company of America. The Company has been successful in generating repeat business from existing clients, with more than 90% of revenues in each of 1994, 1995 and 1996 having been generated from clients that were also clients during the prior year. The Company believes that its ability to offer a broad range of staffing and solutions services and its established relationships with many Fortune 500 companies provide it with significant advantages in the IT services market. As of June 27, 1997, the Company had approximately 2,700 billable consultants (including independent contractors). The Company provides staffing and solutions services through a network of 45 branch offices located in 21 states, the District of Columbia, Canada, England and India (including the offices of the Company's India-based joint venture). The Company maintains an internal staff of over 100 recruiters and believes that its ability to attract, motivate and retain highly skilled IT professionals on a large scale is a core competency. The Company's objective is to be the leading provider of comprehensive IT staffing and solutions services to major corporations. To achieve this objective, the Company is seeking to: (i) maintain the Company's leadership position in its core staffing business; (ii) increase its higher margin Year 2000 services business; (iii) develop new strategic solutions offerings; (iv) expand its base of staffing and solutions clients; and (v) expand its geographic presence through opening new offices, acquisitions and strategic partnerships or alliances. The Company's principal executive offices are located at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey 07046-1495, (973) 402-7400. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 2,500,000 shares Common Stock offered by the Selling Shareholders............................... 500,000 shares Common Stock to be outstanding after the Offering................................... 27,057,374 shares(1) Use of Proceeds.............................. Working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol................ CHRZ </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 27, ---------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................... $102,206 $121,550 $152,192 $200,050 $233,858 $113,063 $145,463 Income from operations..... 4,470 7,494 11,011 17,575 18,440 9,110 15,277 Income before income taxes.................... 3,892 6,910 10,373 17,571 19,162 9,429 15,525 Net income................. 2,026 3,704 5,686 9,907 11,232 5,440 8,925 Net income per share(2).... $ 0.10 $ 0.16 $ 0.27 $ 0.42 $ 0.44 $ 0.21 $ 0.35 Weighted average number of shares of Common Stock outstanding(2)........... 20,436 22,491 21,387 23,364 25,461 25,453 25,770 </TABLE> <TABLE> <CAPTION> JUNE 27, 1997 ------------------------ ACTUAL AS ADJUSTED(3) ------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital............................................................ $59,810 $148,066 Total assets............................................................... 96,386 184,642 Long-term debt, including current portion.................................. 1,432 1,432 Shareholders' equity....................................................... 79,919 168,175 </TABLE> - --------------- (1) Includes shares outstanding as of June 27, 1997 and 7,500 shares of Common Stock to be sold in the Offering by a Selling Shareholder upon the exercise of an outstanding warrant. Excludes (i) an aggregate of 2,009,362 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1985 Incentive Stock Option and Appreciation Plan, as amended, 1994 Incentive Stock Option and Appreciation Plan and the 1991 Directors Stock Option Plan, as amended (collectively, the "Plans"), and (ii) 6,005,056 shares of Common Stock reserved for future issuance under the Plans. Also excludes 36,000 shares of Common Stock issuable upon the exercise of outstanding warrants. (2) See Note 1 of Notes to Consolidated Financial Statements incorporated by reference herein. (3) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company at an assumed public offering price of $37.375 per share, after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, included elsewhere in this Prospectus. As used in this Prospectus, unless otherwise indicated or unless the context otherwise requires, references herein to (i) the "Transactions" refer collectively to the Acquisition (as defined) and the Financings (as defined), (ii) "Holdings" refer to Hedstrom Holdings, Inc. and, where appropriate, its subsidiaries, (iii) "Hedstrom" refer to Hedstrom Corporation and, where appropriate, its subsidiaries, (iv) "ERO" refer to ERO, Inc. and, where appropriate, its subsidiaries, and (v) the "Company" refer to Hedstrom and its subsidiaries and ERO and its subsidiaries on a combined basis after completion of the Transactions, including the businesses conducted by Hedstrom and ERO prior to the Transactions. Unless otherwise specified, all financial, statistical and other data regarding the Company contained herein is presented on a pro forma basis after giving effect to the Transactions. Market and market share data used throughout this Prospectus are estimates provided by the management of the Company. Such estimates are based on management's internal research and experience in the Company's markets. Such estimates, while believed by management to be accurate, have not been verified by any independent source. THE COMPANY The Company (consisting of the businesses of Hedstrom and ERO) is a leading North American manufacturer and marketer of well-established children's leisure and activity products. The Company's diversified product lines are in such "evergreen" product categories as outdoor gym sets, wood gym kits and slides, spring horses, playballs, arts and crafts kits, game tables, and licensed indoor sleeping bags, play tents and wall decorations. The Company considers such product categories to be "evergreen" in nature because each is characterized by proven longevity, demonstrated market demand and consistent sales over time. For example, the Company believes products such as outdoor gym sets and playballs have been marketed and sold in the United States for over 30 years. The Company believes that in the U.S. markets for nine of its ten principal product categories, it enjoys the competitive advantage of being the market share leader, the low-cost producer or both. For the twelve-month period ended December 31, 1996, approximately half of the Company's pro forma net sales were derived from product categories for which the Company believes it has a market share of approximately 75% or greater. As a result of the Company's leading market shares, the Company enjoys favorable relationships with its customers and suppliers and with licensors of popular characters that decorate certain of the Company's products. The Company believes its focus on evergreen product categories in which it has competitive advantages provides consistent sales and cash flows. The Company's products are sold primarily through national retailers, mass merchants, home improvement centers, sporting goods stores, drug store chains and supermarkets. COMPETITIVE STRENGTHS The Company believes that the following characteristics contribute to the Company's position as a leading manufacturer and marketer of children's leisure and activity products: - Leading Share in Selected Niche Markets. The Company believes its outdoor gym sets, spring horses, playballs, ball pits and licensed sleeping bags and play tents each command market shares of approximately 75% or greater. Sales from these product categories accounted for approximately half of the Company's pro forma net sales for the twelve-month period ended December 31, 1996. In addition, the Company believes it is one of the leading suppliers in the U.S. markets for wood gym kits and slides, children's arts and crafts kits, game tables and wall decorations. The Company believes its position as a market share leader in selected niche markets (i) provides the Company with certain advantages over existing competitors and prospective entrants in such markets, (ii) creates the strong relationships with retailers that are critical to securing and maintaining valuable retail shelf space for existing and new products and (iii) provides a platform for introducing new products. - Stable and Established Product Categories. Substantially all of the Company's products are in evergreen categories within the children's leisure and activity products industry. For example, the Company believes products such as outdoor gym sets and playballs have been marketed and sold in the United States for over 30 years. The Company believes its diverse portfolio of evergreen products will contribute to stable revenues and cash flows, providing resources for the Company to implement its business strategies. See "-- Business Strategy." - Low-Cost Manufacturing Capabilities. The Company believes that it is the low-cost manufacturer in the markets for each major product category which the Company manufactures internally. The Company believes its leading market share in such niche markets as outdoor gym sets, spring horses, playballs and ball pits provides it with a significant cost advantage relative to smaller competitors in such markets due to the Company's greater sales volume and resultant operating leverage and efficiencies. With respect to the Company's children's arts and crafts kits and game tables, the Company is able to realize cost advantages from the low labor rates, low overhead and extensive vertical integration of its Canadian manufacturing facility. The Company believes its position as a low-cost manufacturer will enable it to (i) maintain operating profit margins, (ii) respond to competitive pressures through flexibility in pricing strategies, (iii) realize sales growth by offering superior quality products at competitive prices and (iv) expand its existing product lines and enter new product categories. BUSINESS STRATEGY The Company's strategy is to enhance its operating margins and strengthen its position as a leading manufacturer and marketer of children's leisure and activity products. The Company plans to improve its profitability by rationalizing its cost structure and utilizing the Company's excess capacity at certain of its facilities through, among other things, pursuing counter-seasonal sales opportunities. Furthermore, the Company has identified several opportunities for revenue growth, including enhancing existing products, introducing complementary products, focusing its licensed products on traditional characters and pursuing international sales opportunities. - Achieve Cost Savings. Management believes it will realize annual cost savings in excess of $6 million as a result of cost saving initiatives implemented or being implemented as a result of the Acquisition, such as rationalizing sales, marketing and general administrative functions, consolidating purchases of raw materials and eliminating less profitable product lines. Independent of the Acquisition, the Company expects to realize in excess of $9 million of permanent cost savings in 1997 and thereafter as a result of cost reduction programs implemented at Hedstrom in the second half of 1996. See "-- Hedstrom 1996 Cost Reduction Plan," "Unaudited Pro Forma Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Hedstrom and Holdings." - Utilize Excess Capacity. The Company produces its outdoor gym sets, wood gym kits and slides at its facility in Bedford, Pennsylvania, primarily in the period from December through April. During the balance of the year, the Bedford facility remains relatively inactive. The Company believes it can enhance sales and profitability by identifying products that it can manufacture during the May through November period, either for itself or for original equipment manufacturers ("OEMs"). The Company has already identified several products that it will begin producing in the second half of 1997. In addition, management is pursuing opportunities to increase the utilization of its low-cost plastic molding operations at its Ashland, Ohio facility, which already supplies a variety of components to OEMs of industrial and consumer products. - Enhance Existing Products and Develop Complementary Products. The Company has maintained sales growth and its leading market shares by continuously enhancing its principal products and designing and developing complementary products and accessories. Management believes that by pursuing this strategy it can continue growth within its core product lines with minimal economic risk. In addition, the Company will evaluate opportunities to expand its product lines, increase its market shares and acquire complementary products through strategic acquisitions. - Focus Licensed Products on Traditional Characters. The Company believes that it can differentiate certain of its products and stimulate sales more effectively and inexpensively through the licensing of recognized traditional characters rather than the development and promotion of its own brand names. For the Company's products lines that feature licensed characters, such as sleeping bags, play tents and wall decorations, the Company intends to emphasize traditionally popular characters such as the classic Disney and Looney Tunes(TM) characters, although the Company will also complement such characters by obtaining licenses for event-driven characters. The Company estimates that products featuring licensed traditional characters (including products featuring the 101 Dalmatians characters, which experienced increased sales in 1996 as a result of the release of a new version of the 101 Dalmatians movie) accounted for approximately 14% of the Company's pro forma net sales for the twelve-month period ended December 31, 1996, while products based on licensed event-driven characters also accounted for approximately 14% of the Company's pro forma net sales for such period. - Pursue International Sales Opportunities. To date, the Company has not focused a significant amount of resources toward the development of an international customer base. For the twelve-month period ended December 31, 1996, the Company's pro forma net sales outside the United States and Canada totaled less than 4% of the Company's total pro forma net sales. The Company believes there are significant sales opportunities for the Company's products in Europe and Latin America, particularly its children's arts and crafts kits, outdoor gym sets, playballs and ball pits. ACQUISITION RATIONALE Hedstrom and ERO are leading manufacturers and marketers of children's leisure and activity products. Hedstrom's principal products include outdoor gym sets, wood gym kits and slides, spring horses, playballs and ball pits. ERO's principal products include children's arts and crafts kits, game tables and licensed indoor sleeping bags, play tents and wall decorations. The acquisition of ERO by Hedstrom created one of the largest North American manufacturers and marketers of children's evergreen leisure and activity products and provides Hedstrom with (i) a more diverse portfolio of products, (ii) significant growth potential through ERO's Amav division ("Amav"), (iii) decreased seasonality as a result of more balanced sales throughout the year, (iv) significant cost savings and operating efficiencies and (v) additional advantages resulting from increased scale. - Product Diversity in Well-Established Markets. The combination of Hedstrom and ERO significantly reduces the Company's dependence on any particular product line while expanding the Company's overall presence in children's evergreen leisure and activity product categories. With the combination of Hedstrom and ERO, the Company has ten principal product categories, with its largest product line (outdoor gym sets) accounting for approximately 20% of the Company's pro forma net sales for the twelve-month period ending December 31, 1996. - Growth Potential at Amav. In October 1995, ERO established its Amav division through the acquisition of Amav Industries, Ltd., a Canadian-based manufacturer of children's arts and crafts kits and game tables. Amav has grown rapidly over the four-year period ended December 31, 1996, with sales increasing at a compound annual rate in excess of 40% over such period. Management attributes Amav's success to its strategy of targeting large, established product lines in which it can apply its design, engineering and manufacturing expertise to produce a high-quality product at a lower cost than its competitors. Management believes Amav's low-cost manufacturing, design and engineering capabilities will enable the Company to continue to increase sales of its existing products lines as well as to add complementary product lines. - Reduced Seasonality. The combination of Hedstrom and ERO significantly reduces the effect of seasonality on the Company's business. The peak selling season for Hedstrom's products is the first half of the calendar year whereas the peak selling season for ERO's products is the second half of the calendar year. As a result of the Acquisition, the Company's sales throughout the year will be relatively balanced. Pro forma net sales for the Company for each calendar quarter during the twelve months ended December 31, 1996 were 24.6%, 26.5%, 22.8% and 26.1%, respectively, of total pro forma net sales for such twelve-month period. Balanced sales throughout the year will reduce seasonal fluctuations in working capital and will enable the Company to generate more consistent cash flow. - Cost Savings. As discussed under "-- Business Strategy," management believes that the cost saving initiatives which have been or which are being implemented as a result of the combination of Hedstrom and ERO will allow the Company to realize cost savings in excess of $6 million per year. - Additional Advantages Resulting from Increased Scale. With over $280 million in pro forma net sales for the twelve-month period ending December 31, 1996, management believes the Company will have significantly more clout with retailers, suppliers and licensors than either Hedstrom or ERO individually. In addition, management anticipates that the Company's size also will enable it to pursue international sales opportunities more effectively. HEDSTROM 1996 COST REDUCTION PLAN From fiscal 1992 through fiscal 1995, Hedstrom's operating income increased at a compound annual rate of approximately 33.5%. In fiscal 1996, Hedstrom's operating income declined 52% relative to fiscal 1995. In addition, from fiscal 1992 through fiscal 1995, Hedstrom's EBITDA increased at a compound annual rate of approximately 25%. In fiscal 1996, Hedstrom's EBITDA declined modestly. In order to improve Hedstrom's profitability in 1997 and thereafter, management implemented a plan in the second half of 1996 (the "1996 Cost Reduction Plan") to reduce costs by over $9 million in 1997 and thereafter as compared with fiscal 1996 levels. Important elements of the plan include: - Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom restructured certain of its manufacturing operations to increase its daily production capacity of outdoor gym sets. This restructuring has enabled Hedstrom to manufacture outdoor gym sets to specific customer orders rather than producing outdoor gym sets in anticipation of customer orders, which Hedstrom had done in the past because of capacity constraints. In fiscal 1996, prior to implementing this restructuring, Hedstrom experienced a significant and unexpected change in its sales mix of outdoor gym sets, requiring Hedstrom to use third party warehouses to store many of the outdoor gym sets it had produced in anticipation of customer demand. As a result, Hedstrom incurred approximately $2.1 million of higher warehouse and material handling costs. Through the first six months of 1997, Hedstrom has successfully manufactured outdoor gym sets on a just-in-time basis, resulting in significantly lower warehouse and material handling expense as compared to the same period in 1996. The implementation of just-in-time manufacturing of outdoor gym sets has enabled Hedstrom to carry a lower level of outdoor gym set inventory and, as a result, to eliminate the need for utilizing third party warehouses for outdoor gym sets. Management believes the Company will save approximately $2.1 million of warehouse and material handling expense in 1997 and thereafter as a result of implementing just-in-time manufacturing of outdoor gym sets. - Improved Manufacturing Procedures. In an effort to streamline outdoor gym set production and improve manufacturing efficiencies, in 1996 Hedstrom (i) reduced its number of outdoor gym set product offerings, (ii) redesigned certain outdoor gym set components to reduce the cost of such components and (iii) further standardized many of the components among its various outdoor gym set product offerings. Management believes these actions will improve profitability by approximately $2.0 million in 1997 and thereafter over fiscal 1996 levels. - In-sourcing Certain Plastic Components. Hedstrom periodically evaluates the economics of producing internally certain plastic components used in the production and assembly of its outdoor gym sets versus purchasing such components externally. In 1996, Hedstrom invested approximately $3.0 million in new plastic blow-molding equipment to manufacture many of the plastic slides that it had previously purchased from third-party vendors. Management estimates that producing these slides internally is currently providing annual cost savings of approximately $1.5 million as compared to fiscal 1996 levels. - Discontinuation of Trial Advertising Campaign. Hedstrom historically has advertised its products in cooperation with its retail customers, principally through print media such as newspaper circulars and free-standing inserts sponsored by its customers. In fiscal 1996, Hedstrom initiated, on a trial basis, its own multi-media advertising program designed to increase consumer awareness of the Hedstrom brand over time. The total cost for this advertising program was approximately $1.5 million. After careful review, management determined that this trial advertising campaign would not provide an acceptable return on investment and elected to discontinue it. Therefore, such costs will not be incurred in 1997 and thereafter. - Restructure Promotional Programs. Consistent with industry practice, Hedstrom provides retailers with certain promotional allowances, a portion of which typically is fixed in nature and a portion of which is based on the volume of customer purchases of Hedstrom products. In late 1996, Hedstrom reduced the fixed component of certain of its promotional allowances and restructured its promotional programs with several customers by raising the required volumes necessary to achieve certain promotional discounts. Management believes these initiatives will improve profitability in 1997 and thereafter by approximately $1.4 million over fiscal 1996 levels. - Personnel Reductions. Hedstrom reduced its number of full-time employees by approximately 30 people in a variety of departments in the second half of 1996. Management believes that such personnel reductions will result in savings of approximately $0.7 million in 1997 and thereafter over fiscal 1996 levels. The implementation of the 1996 Cost Reduction Plan has resulted in marked improvement in Hedstrom's profitability in 1997 and management expects that such initiatives will continue to contribute to enhanced profitability during the remainder of 1997. For the six months ended June 30, 1997, which includes the results of ERO for the month of June 1997, Hedstrom recorded net sales and operating income of $104.1 million and $14.2 million, respectively, as compared with net sales and operating income for the comparable period in 1996 of $96.1 million and $8.1 million, respectively. Operating income as a percentage of net sales increased to 14% for the six-month period ended June 30, 1997 from 8% for the comparable period in 1996. The enhanced profitability of Hedstrom has resulted in EBITDA of $17.0 million for the six months ended June 30, 1997, as compared with EBITDA for the comparable period in 1996 of $10.4 million. EBITDA as a percentage of net sales increased to 16% for the six months ended June 30, 1997 from 11% for the comparable period in 1996. Management believes the results of operations of ERO for the period from June 1, 1997 through June 11, 1997, prior to the Merger (as defined), are not significant to Holdings results of operations for the six-months ended June 30, 1997. After giving pro forma effect to the Transactions, the Company's pro forma net sales and operating income for the twelve-month period ended December 31, 1996 would have been $283.3 million and $24.2 million, respectively. Also, after giving pro forma effect to the Transactions, pro forma EBITDA for the twelve-month period ended December 31, 1996 would have been $38.7 million. Assuming the Transactions occurred and assuming implementation of the 1996 Cost Reduction Plan at the beginning of the twelve-month period ended December 31, 1996, pro forma net sales and operating income would have been $283.3 million and $30.0 million, respectively. Also, assuming the Transactions occurred and assuming implementation of the 1996 Cost Reduction Plan at the beginning of the twelve-month period ended December 31, 1996, pro forma EBITDA, would have been $44.5 million. THE TRANSACTIONS On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned subsidiary of Hedstrom ("Acquisition Co."), entered into an Agreement and Plan of Merger with ERO (the "Merger Agreement") to acquire ERO for a total enterprise value of approximately $200 million. Pursuant to the Merger Agreement, Acquisition Co. commenced a tender offer for all of the outstanding shares of the common stock of ERO at a purchase price of $11.25 per share (the "Tender Offer"). The Tender Offer was consummated on June 12, 1997. On that date, subsequent to the consummation of the Tender Offer, (i) Acquisition Co. was merged with and into ERO (the "Merger") with ERO surviving the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of ERO's outstanding indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and (iii) Hedstrom refinanced (the "Hedstrom Refinancing") its then existing revolving credit facility (the "Old Revolving Credit Facility") and term loan facility (the "Old Term Loan Facility"). The Tender Offer, the Merger, the ERO Refinancing and the Hedstrom Refinancing are collectively referred to herein as the "Acquisition". Holdings and Hedstrom required approximately $301.1 million in cash to consummate the Acquisition, including approximately (i) $122.6 million paid in connection with the Tender Offer and the Merger, (ii) $82.6 million paid in connection with the ERO Refinancing, (iii) $74.9 million paid in connection with the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of fees and expenses. The funds required to consummate the Acquisition were provided by (i) $75.0 million of term loans (the "Tranche A Term Loans") under a new six-year senior secured term loan facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of term loans (the "Tranche B Term Loans" and, together with the Tranche A Term Loans, the "Term Loans") under a new eight-year senior secured term loan facility (the "Tranche B Term Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term Loan Facilities"), (iii) $16.1 million of borrowings under a new $70.0 million senior secured revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facilities, the "Senior Credit Facilities"), (iv) $110.0 million of gross proceeds from the offering (the "Original Senior Subordinated Notes Offering") by Hedstrom of the Old Senior Subordinated Notes, (v) $25.0 million of gross proceeds from the offering (the "Units Offering" and, together with the Original Senior Subordinated Notes Offering, the "Original Offerings") by Holdings of 44,612 units (the "Units") consisting of the Old Discount Notes and 2,705,896 shares (the "Shares") of Common Stock, $.01 par value per share, of Holdings ("Holdings Common Stock") and (vi) $40.0 million of gross proceeds from the private placement (the "Equity Private Placement" and, together with the Original Offerings and the borrowings under the Senior Credit Facilities, the "Financings") of 31,520,000 shares of Non-Voting Common Stock, $.01 par value per share, of Holdings ("Holdings Non-Voting Common Stock") and 480,000 shares of Holdings Common Stock. The following table sets forth the sources and uses of funds in connection with the Transactions. <TABLE> <CAPTION> SOURCES OF FUNDS AMOUNT ---------------- ------ (IN MILLIONS) <S> <C> Revolving Credit Facility........ $ 16.1 Tranche A Term Loans............. 75.0 Tranche B Term Loans............. 35.0 Original Senior Subordinated Notes Offering................. 110.0 Units Offering................... 25.0 Equity Private Placement......... 40.0 ------ Total Sources............... $301.1 ====== </TABLE> <TABLE> <CAPTION> SOURCES OF FUNDS AMOUNT ---------------- ------ (IN MILLIONS) <S> <C> Tender Offer/Merger.............. $122.6 ERO Refinancing(a)............... 82.6 Hedstrom Refinancing(a).......... 74.9 Fees and expenses(b)............. 21.0 ------ Total Uses.................. $301.1 ====== </TABLE> - --------------- (a) Includes accrued interest expense. (b) Fees and expenses include Initial Purchasers' discount, bank fees, financial advisory fees, legal and accounting fees, printing costs and other expenses related to the Transactions. ORGANIZATIONAL CHART The following chart depicts (i) the summary organizational structure of Holdings and the Company and its material subsidiaries after consummation of the Transactions and (ii) the sources of financing for the Transactions. [Flow-Chart] DESCRIPTION OF ORGANIZATIONAL CHART (FOR EDGAR PURPOSES ONLY) The chart provided in the prospectus is a vertical flow-chart. The first (i.e., the top box of the flow chart) represents Holdings. It indicates that Holdings received $25 million pursuant to the Units Offering and $40 million pursuant to the Equity Private Placement. The second box in the flow chart represents Hedstrom, and show that Hedstrom is a direct, wholly owned subsidiary of Holdings. It also indicates that Hedstrom received (i) $16.1 million pursuant to borrowings under the Revolving Credit Facility(1), (ii) $75.0 million pursuant to the Tranche A Term Loans, (iii) $35.0 million pursuant to the Tranche B Term Loans and (iv) $110.0 million pursuant to the Original Senior Subordinated Notes Offering. The third box of the flow chart represents ERO and shows that ERO is a direct, wholly owned subsidiary of Hedstrom. The fourth and final box of the flow chart represents all of the operating subsidiaries of ERO and shows that such operating subsidiaries are direct or indirect wholly owned subsidiaries of ERO. - --------------- (1) The Revolving Credit Facility provides for borrowings of up to $70 million (subject to certain borrowing base requirements). See "Description of the Senior Credit Facilities." MANAGEMENT AND OWNERSHIP The principal shareholders of Holdings are Hicks, Muse, Tate & Furst Equity Fund II, L.P. ("HM Fund II"), an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), and certain members of Hedstrom's senior management. Hicks Muse is a private investment firm based in Dallas, New York, St. Louis and Mexico City that specializes in acquisitions, recapitalizations and other principal investing activities. Since Hicks Muse's inception in 1989, the firm has completed or has pending over 70 transactions having a combined transaction value of approximately $19 billion. Hedstrom's senior management team, led by Arnold E. Ditri, its President and Chief Executive Officer, has extensive and diverse experience in managing consumer and industrial products companies, especially within the confines of a leveraged capital structure. In October 1995, HM Fund II, together with certain other investors (the "HM Group"), acquired an 82% common equity interest in Holdings in a transaction that was accounted for as a recapitalization (the "1995 Recapitalization"). The total enterprise value of Hedstrom at the time of the 1995 Recapitalization, including the assumption and refinancing of certain indebtedness, was approximately $75 million. The HM Group paid approximately $27 million for its common equity interest, which, together with Hedstrom senior management's 18% retained common equity ownership, implied a total equity value of Holdings at that time of approximately $33 million. Pursuant to the Equity Private Placement, HM Fund II and certain affiliates thereof purchased an additional $40 million of Holdings' common equity. RECENT DEVELOPMENTS On October 29, 1997, Hedstrom entered into an Asset Purchase Agreement with RDM Sports Group, Inc. and Sports Group, Inc. (neither of which is affiliated with Hedstrom), pursuant to which Hedstrom has agreed to purchase certain inventory, equipment and intellectual property of Sports Group, Inc. for $10,000,000 in cash on the terms and subject to the conditions set forth in such agreement. RDM Sports Group, Inc., Sports Group, Inc. and certain of their affiliates are debtors and debtors-in-possession in cases pending in the United States Bankruptcy Court for the Northern District of Georgia under Chapter 11 of Title 11 of the United States Code Sections 101 et seq., Case Nos. 97-12788 through 97-12796. Subject to required bankruptcy court approval, Hedstrom anticipates that the purchase will be consummated early in December 1997. Hedstrom also is presently in discussions with another unaffiliated party with respect to the proposed purchase by Hedstrom of certain portions of that party's inventory, equipment and intellectual property for approximately $14,250,000 in cash subject to the terms and conditions of a definitive asset purchase agreement. There can be no assurance, however, that an agreement will be reached. In connection with these proposed asset acquisitions (the "Proposed Asset Acquisitions"), Hedstrom contemplates that the Credit Agreement (as defined) will be amended to permit the acquisitions and to provide for an additional $10,000,000 of Tranche B Term Loans, in which case the amortization payments with respect to the existing Tranche B Term Loans will be increased pro rata. It is contemplated that the balance of the funds required to consummate the Proposed Asset Acquisitions will be obtained through a draw under the Revolving Credit Facility. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $110.0 million aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $110.0 million aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Hedstrom, Holdings and the Subsidiary Guarantors, Hedstrom, Holdings and the Subsidiary Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Hedstrom, Holdings or any Subsidiary Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement.................. The Old Senior Subordinated Notes were sold by Hedstrom on June 12, 1997, in a private placement. In connection with the sale, Hedstrom and Holdings entered into a Registration Rights Agreement with the initial purchasers (the "Initial Purchasers") of the Old Notes (the "Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on December 4, 1997, or such later date and time to which it is extended. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such New Senior Subordinated Note is exchanged. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by Hedstrom. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to Hedstrom that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iii) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Hedstrom, Holdings or any Subsidiary Guarantor, or if it is an affiliate, such holder or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such holder or other person is not a broker-dealer, neither the holder nor any such other person is engaged in or intends to engage in the distribution of such New Senior Subordinated Notes, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement................ Pursuant to the Registration Rights Agreement, Hedstrom and Holdings are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes (and use their reasonable best efforts to cause such shelf registration statement to be declared effective by the Commission and keep it continuously effective, supplemented and amended for prescribed periods) if (i) Hedstrom is not permitted to effect the Senior Subordinated Notes Exchange Offer because of any change in law or in applicable interpretations thereof by the staff of the Commission, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 180 days of the date of issuance of the Old Senior Subordinated Notes, (iii) any Initial Purchaser so requests with respect to Old Senior Subordinated Notes not eligible to be exchanged for New Senior Subordinated Notes in the Senior Subordinated Notes Exchange Offer and held by it following consummation of the Senior Subordinated Notes Exchange Offer, or (iv) any holder of Old Senior Subordinated Notes (other than a broker-dealer electing to exchange Old Notes, acquired for its own account as a result of market-making activities or other trading activities, for New Notes (an "Exchanging Dealer")) is not eligible to participate in the Senior Subordinated Notes Exchange Offer or, in the case of any holder of Old Senior Subordinated Notes (other than an Exchanging Dealer) that participates in the Senior Subordinated Notes Exchange Offer, such holder does not receive freely tradeable New Senior Subordinated Notes upon consummation of the Senior Subordinated Notes Exchange Offer. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... Hedstrom will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered in the Senior Subordinated Notes Exchange Offer prior to the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... IBJ Schroder Bank & Trust Company is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Considerations of the Exchange Offers." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE DISCOUNT NOTES EXCHANGE OFFER: The Discount Notes Exchange Offer applies to $44,612,000 aggregate principal amount at maturity of the Old Discount Notes. The form and terms of the New Discount Notes will be the same as the form and terms of the Old Discount Notes except that (i) the Accreted Value (as defined) of the New Discount Notes will be calculated from the date of issuance of the Old Discount Notes, and (ii) the New Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Discount Notes will evidence the same debt as the Old Discount Notes and will be entitled to the benefits of the Discount Notes Indenture (as defined) pursuant to which the Old Discount Notes were issued. The Old Discount Notes and the New Discount Notes are sometimes referred to collectively herein as the "Discount Notes." See "Description of New Discount Notes." The Discount Notes Exchange Offer.................... $1,000 principal amount at maturity of New Discount Notes in exchange for each $1,000 principal amount at maturity of Old Discount Notes. As of the date hereof, Old Discount Notes representing $44,612,000 aggregate principal amount at maturity are outstanding. The terms of the New Discount Notes and the Old Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Discount Notes issued pursuant to the Discount Notes Exchange Offer in exchange for Old Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Discount Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Discount Notes for its own account in exchange for Old Discount Notes, where those Old Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Discount Notes. See "Plan of Distribution." Registration Rights Agreement.................. The Old Discount Notes were sold by Holdings on June 12, 1997, in a private placement. In connection with the sale, Hedstrom and Holdings entered into the Registration Rights Agreement providing for, among other things, the Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on December 4, 1997, or such later date and time to which it is extended. Withdrawal................. The tender of Old Discount Notes pursuant to the Discount Notes Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Discount Notes Exchange Offer. Accreted Value of the New Discount Notes and Old Discount Notes........... The Accreted Value of each New Discount Note will be calculated from the date of issuance of the Old Discount Note for which such New Discount Note is exchanged. Conditions to the Discount Notes Exchange Offer....... The Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by Hedstrom. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Discount Notes......... Each holder of Old Discount Notes wishing to accept the Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Discount Notes Exchange Offer (the "Discount Notes Letter of Transmittal"; the Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Discount Notes Letter of Transmittal, or the copy, together with the Old Discount Notes and any other required documentation, to the Discount Notes Exchange Agent (as defined) at the address set forth in the Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the Depository Trust Company ("DTC") and wishing to accept the Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Discount Notes acquired pursuant to the Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Discount Notes, whether or not such person is the holder of the Old Discount Notes, (ii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Discount Notes within the meaning of the Securities Act, (iii) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, or if it is an affiliate, such holder or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such holder or other person is not a broker-dealer, neither the holder nor any such other person is engaged in or intends to engage in the distribution of such New Discount Notes, and (v) if such holder or other person is a broker-dealer, that it will receive New Discount Notes for its own account in exchange for Old Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such new Discount Notes. Shelf Registration Requirement................ Pursuant to the Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Discount Notes (and use its best efforts to cause such shelf registration statement to be declared effective by the Commission and keep it continuously effective, supplemented and amended for prescribed periods) if (i) Holdings is not permitted to effect the Discount Notes Exchange Offer because of any change in law or in applicable interpretations thereof by the staff of the Commission, (ii) the Discount Notes Exchange Offer is not consummated within 180 days of the date of issuance of the Old Discount Notes, (iii) any Initial Purchaser so requests with respect to Old Discount Notes not eligible to be exchanged for new Discount Notes in the Discount Notes Exchange Offer and held by it following consummation of the Discount Notes Exchange Offer, or (iv) any holder of Old Discount Notes (other than an Exchanging Dealer) is not eligible to participate in the Discount Notes Exchange Offer or, in the case of any holder of Old Discount Notes (other than an Exchanging Dealer) that participates in the Discount Notes Exchange Offer, such holder does not receive freely tradeable New Discount Notes upon consummation of the Discount Notes Exchange Offer. Acceptance of Old Discount Notes and Delivery of New Discount Notes........... Holdings will accept for exchange any and all Old Discount Notes which are properly tendered in the Discount Notes Exchange Offer prior to the Expiration Date. The New Discount Notes issued pursuant to the Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Discount Notes Exchange Agent...................... United States Trust Company of New York is serving as Exchange Agent (the "Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Considerations of the Exchange Offers." Effect of Not Tendering.... Old Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES: Issuer..................... Hedstrom Corporation. Securities Offered......... $110.0 million aggregate principal amount of 10% Senior Subordinated Notes Due 2007. Maturity................... June 1, 2007. Interest Payment Dates..... June 1 and December 1 of each year, commencing December 1, 1997. Optional Redemption........ The New Senior Subordinated Notes will not be redeemable at the option of Hedstrom prior to June 1, 2002, except (i) that until June 1, 2000, Hedstrom may redeem, at its option, in the aggregate up to $44,000,000 principal amount of the Senior Subordinated Notes at the redemption price set forth herein with the net proceeds of one or more Equity Offerings (as defined) if at least $66,000,000 principal amount of the Senior Subordinated Notes remains outstanding after any such redemption and (ii) upon a Change of Control (as defined), as described below. On or after June 1, 2002, the New Senior Subordinated Notes may be redeemed at the option of Hedstrom, in whole or in part, at any time at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Hedstrom will have the option, at any time on or prior to June 1, 2002, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium (as defined) and accrued and unpaid interest, if any, to the date of redemption, and (ii) if Hedstrom does not redeem the New Senior Subordinated Notes pursuant to clause (i) above or if such Change of Control occurs after June 1, 2002, each holder of New Senior Subordinated Notes may require Hedstrom to repurchase all or any portion of such holder's New Senior Subordinated Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that Hedstrom will be able to raise sufficient funds to meet this repurchase obligation should it arise. See "Description of the New Senior Subordinated Notes -- Optional Redemption" and "-- Change of Control." Ranking and Guaranties..... The New Senior Subordinated Notes will be unsecured senior subordinated obligations of Hedstrom and will be unconditionally guaranteed (jointly and severally) on a senior basis by Holdings (the "Holdings Guaranty") and on a senior subordinated basis (the "Subsidiary Guaranties" and, together with the Holdings Guaranty, the "Guaranties") by each domestic subsidiary of Hedstrom (the "Subsidiary Guarantors"). The New Senior Subordinated Notes will be subordinated in right of payment to all Senior Indebtedness (as defined) of Hedstrom and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of Hedstrom. The Holdings Guaranty will be an unsecured senior obligation of Holdings and will rank pari passu in right of payment with all Holdings Senior Indebtedness (as defined). Each Subsidiary Guaranty will be subordinated in right of payment to all Subsidiary Guarantor Senior Indebtedness (as defined) of the relevant Subsidiary Guarantor and will rank pari passu in right of payment with all Subsidiary Guarantor Senior Subordinated Indebtedness (as defined) of the relevant Subsidiary Guarantor. As of June 30, 1997, Senior Indebtedness of Hedstrom, Holdings Senior Indebtedness and Subsidiary Guarantor Senior Indebtedness were approximately $117.7 million, $244.3 million and $112.7 million, respectively, and Senior Subordinated Indebtedness of Hedstrom and Subsidiary Guarantor Senior Subordinated Indebtedness were approximately $110.0 million and $110.0 million, respectively. See "Description of New Senior Subordinated Notes -- Guaranties" and "-- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture contains certain covenants that, among other things, limit (i) the incurrence of additional Indebtedness by Hedstrom and its Restricted Subsidiaries (as defined), (ii) the payment of dividends and other restricted payments by Hedstrom and its Restricted Subsidiaries, (iii) restrictions on distributions from Restricted Subsidiaries, (iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of Restricted Subsidiary capital stock and (vii) mergers and consolidations. All of these limitations and prohibitions, however, are subject to a number of important qualifications and exceptions. See "Description of New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to Hedstrom from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with proceeds from the other Financings, to effect the Acquisition. NEW DISCOUNT NOTES: Issuer..................... Hedstrom Holdings, Inc. Securities Offered......... $44,612,000 aggregate principal amount at maturity of 12% Senior Discount Notes Due 2009. Maturity................... June 1, 2009. Yield and Interest......... The Old Discount Notes were issued at a substantial discount from the principal amount at maturity of such notes. Principal on each New Discount Note will accrete from the date of issuance of the Old Discount Notes to a principal amount of $1,000 on June 1, 2002, representing a yield to maturity of 12% (based on the issue price of a Unit and computed on a semi-annual bond equivalent basis). Except as described herein, no cash interest will accrue on the New Discount Notes prior to June 1, 2002. Thereafter, cash interest will accrue at a rate of 12% per annum, and cash interest will be payable on June 1 and December 1 of each year, commencing December 1, 2002. There can be no assurance that Holdings will have adequate cash available at the time of any scheduled cash interest payments. Original Issue Discount.... For U.S. federal income tax purposes, the New Discount Notes will bear original issue discount ("OID") and each holder of a New Discount Note will be required to include such OID in gross income for U.S. federal income tax purposes, on a constant yield to maturity basis, in advance of the receipt of the cash payments to which such income is attributable. See "Certain United States Federal Income Tax Considerations with Respect to the New Notes." Optional Redemption........ The New Discount Notes will not be redeemable at the option of Holdings prior to June 1, 2002, except (i) that until June 1, 2000, Holdings may redeem, at its option, in the aggregate up to 40% of the Accreted Value of the Discount Notes at the redemption price set forth herein with the net proceeds of one or more Equity Offerings if at least $26,767,200 principal amount at maturity of the Discount Notes remains outstanding after any such redemption and (ii) upon a Change of Control, as described below. On or after June 1, 2002, the New Discount Notes may be redeemed at the option of Holdings, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. See "Description of the New Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to June 1, 2002, to redeem the New Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and accrued and unpaid interest, if any, to the date of redemption, and (ii) if Holdings does not redeem the New Discount Notes pursuant to clause (i) above or if such Change of Control occurs after June 1, 2002, each holder of New Discount Notes may require Holdings to repurchase all or any portion of such holder's New Discount Notes at a purchase price equal to 101% of the Accreted Value thereof plus accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that Holdings will be able to raise sufficient funds to meet this repurchase obligation should it arise. See "Description of the New Discount Notes -- Optional Redemption" and "-- Change of Control." Ranking.................... The New Discount Notes will be unsecured senior obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including the Holdings Guaranty and Holdings' guarantee of the Senior Credit Facilities. Except for the 1995 Recapitalization Notes (as defined) in an aggregate principal amount of $2.5 million, Holdings has not issued, and does not have any arrangement to issue, any indebtedness that would be subordinated to the New Discount Notes. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of Hedstrom, all of which is pledged to secure Holdings' guarantee of the Senior Credit Facilities. As a result of the holding company structure, the holders of the New Discount Notes will effectively rank junior in right of payment to all creditors of Hedstrom and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of June 30, 1997, the New Discount Notes were effectively subordinated to approximately $282.4 million of aggregate liabilities (including trade payables) of Hedstrom and its subsidiaries. Restrictive Covenants...... The Discount Notes Indenture (as defined) contains certain covenants that, among other things, limit (i) the incurrence of additional Indebtedness by Holdings and its Restricted Subsidiaries, (ii) the payment of dividends and other restricted payments by Holdings and its Restricted Subsidiaries, (iii) restrictions on distributions from Restricted Subsidiaries, (iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of Restricted Subsidiary capital stock and (vii) mergers and consolidations. All of these limitations and prohibitions, however, are subject to a number of important qualifications and exceptions. See "Description of the New Discount Notes -- Certain Covenants."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information presented in this Prospectus assumes that the Underwriters' over-allotment options will not be exercised. All references in this Prospectus to the "Company" shall be deemed to refer to AmeriSteel Corporation and all references to fiscal years are to the Company's fiscal years ended on March 31. THE COMPANY The Company operates four non-union minimills located in the southeastern U.S. that produce steel concrete reinforcing bars ("rebar"), light structural shapes such as rounds, squares, flats, angles and channels ("merchant bars") and, to a lesser extent, wire rod ("rods") and billets (which are semi-finished steel products). The Company also operates 13 rebar fabricating plants strategically located in close proximity to its mills. The Company estimates that it currently has annual steel melting capacity of 2.0 million tons per year and finished product rolling capacity of 1.7 million tons per year. The Company believes that it is the second largest producer and the largest fabricator of rebar in the U.S. The Company's minimills use electric arc furnaces to melt recycled scrap steel. The molten steel is then cast into long strands called billets in a continuous casting process. Billets are then reheated and rolled into rebar, merchant bars and rods. The Company's fabricating plants further process approximately 40% of the Company's mill rebar production to meet specific contractor specifications. Rebar is used primarily for strengthening concrete in highway and building construction and other construction applications. Merchant bars are used in a wide variety of applications including floor and roof joists, transmission towers, and farm equipment. Rods are used in a variety of applications, including the manufacture of welded wire fabric and nails. In late 1992, the Company was purchased by Kyoei Steel Ltd. ("Kyoei"), a private Japanese minimill company engaged in the manufacture of commodity grade steel products, primarily rebar and merchant bar products. Kyoei, founded in 1947, operates five minimills in Japan and a rolling mill in Vietnam with a total annual rebar and merchant bar rolling capacity of 2.5 million tons. The Company has benefitted from access to Kyoei's operating, engineering and technical expertise. THE INDUSTRY According to industry sources, United States market demand for rebar was approximately 6.3 million tons in calendar 1996. The Company believes that it is the second largest producer of rebar in the U.S. and estimates it has approximately a 13% share of the U.S. rebar market and approximately a 20% share in the eastern two-thirds of the U.S. According to industry sources, the U.S. market for merchant and other light structural shape bars was estimated to be approximately 8.6 million tons in calendar 1996. The Company estimates that it has approximately a 6% share of this market. For the six months ended September 30, 1997, approximately 24% of the Company's net sales were derived from fabricated rebar, 28% from stock rebar (rebar produced by the mills and sold to third parties), 31% from merchant bars, 5% from rods and 12% from semi-finished billets. The minimill industry is composed of two types of competitors: multi-mill operators and stand-alone minimills. The Company believes that recent growth in the industry (through acquisitions as well as capital expenditures) has been driven by multi-mill operations because stand-alone minimills have not generally been able to achieve the economies of scale or had access to the financial resources to make the investments that larger operators have. The Company believes that further industry consolidation will continue given the significant advantages available to multi-mill operators. Accordingly, the Company is actively investigating potential acquisition opportunities. COMPETITIVE STRENGTHS The primary focus of the Company's business strategy is to continue to be a low cost producer of rebar and merchant bar products in the U.S. and to further grow its business including through acquisitions of steel producing and related assets. The Company believes that the following competitive strengths are key elements of this strategy: DEMONSTRATED COST CONTROL. Since 1994, the Company has reduced its costs of converting scrap steel to finished steel products ("conversion costs") from $146 per ton to $128 per ton for the six months ended September 30, 1997. The Company has achieved these cost reductions through its mill modernization program, high mill utilization, access to competitively priced electric power at its Tennessee and North Carolina mills, and labor incentive programs designed to maximize productivity. In addition, since 1994, the Company has closed unprofitable operations and divested non-core activities. The Company currently has initiatives in place that it believes will further reduce its conversion costs. MODERNIZED PRODUCTION EQUIPMENT IN ATTRACTIVE LOCATIONS. Since 1992, the Company has invested approximately $115 million in mill modernization, including major projects at its Jackson, Tennessee, Jacksonville, Florida and Charlotte, North Carolina mills. The Company believes its recent mill modernization program will lower conversion costs and increase capacity utilization, enhance merchant bar quality and broaden its merchant bar product range. The southeastern U.S. (where all the Company's mills are located) accounts generally for more than one-fourth of U.S. rebar consumption and, due to mild wintertime weather conditions, demonstrates less seasonal demand fluctuations than more northern regions of the U.S. Because of the high cost of freight relative to the value of the Company's products, competition from non-regional producers is limited. MOTIVATED, NON-UNION LABOR FORCE. The Company employs a non-union workforce of approximately 1,860 employees. The Company's compensation programs are designed to allow employees to earn significant incentive bonuses (approximately one-fifth of their total compensation) based on production volumes, sales volumes, cost targets or return on capital employed. These programs have been successfully implemented by the current management team and have resulted in lower costs, higher productivity and increased profitability. Further incentive is provided through equity ownership plans. Approximately 57% of current employees have purchased stock in the Company, including Phillip E. Casey, Chairman and Chief Executive Officer, who beneficially owns approximately 10% of the outstanding shares of the Company's capital stock (approximately 6% after the Offerings). STRONG MARKET POSITIONS. The Company believes that it is the second largest producer of rebar in the U.S. and estimates it has approximately a 13% share in the U.S. rebar market and approximately a 20% share in the eastern two-thirds of the U.S. In addition, the Company believes that it is the largest fabricator of rebar products in the U.S., with fiscal 1997 revenues of $161.2 million, or approximately 26% of the Company's sales. The Company believes its strong market position in both stock rebar shipments and fabricated rebar shipments provides it with competitive market intelligence and other advantages from vertical integration relative to its smaller competitors. The Company estimates it has approximately a 6% share of the U.S. market for merchant and other light structural shape bars. The Company believes it has opportunities to increase its market share in this market, which is generally less cyclical and more profitable than the rebar market. A recent independent survey has ranked the Company first in customer service and on-time delivery in the Company's principal product markets. As evidence of a high degree of customer satisfaction, the Company has had, on average, a relationship of at least 10 years with its top 25 customers. The Company's headquarters are located at 5100 W. Lemon Street, Suite 312, Tampa, Florida 33609, and its telephone number is (813) 286-8383. THE OFFERINGS(1) <TABLE> <S> <C> <C> Class A Common Stock offered by the Company: United States Offering................ 3,160,000 shares International Offering................ 790,000 shares Total......................... 3,950,000 shares Common Stock outstanding after the Offerings: Class A Common Stock.................. 3,950,000 shares Class B Common Stock.................. 10,114,385 shares(2) Total......................... 14,064,385 shares Use of Proceeds......................... To repay approximately $66.3 million in long term debt, to fund working capital and for general corporate purposes. See "Use of Proceeds". Proposed New York Stock Exchange symbol................................ AST </TABLE> - ------------------------ (1) The offerings of Class A Common Stock by the U.S. Underwriters and the International Underwriters are referred to herein as the "Offerings". (2) Excludes 329,762 shares of Class B Common Stock issuable at an average exercise price of $12.71 on the exercise of stock options granted under the Company's option plans and outstanding as of September 30, 1997. See "Management -- Incentive and Benefit Plans" and "Description of Capital Stock". CONCURRENT NOTES OFFERING Concurrent with the Offerings, the Company is planning to offer $100 million aggregate principal amount of its senior unsecured Notes due 2007 (the "Notes", and the offering of such Notes, the "Notes Offering") by a separate offering memorandum. Because the Notes Offering is subject to a variety of market, economic and other factors, there can be no assurance that the Notes Offering will be consummated. The closing of the Notes Offering is conditioned upon the closing of the Offerings, but not vice versa. It is expected that the Notes Offering would be closed shortly after the closing of the Offerings. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". SUMMARY FINANCIAL AND OPERATING DATA The summary statement of operations and balance sheet data for the years ended March 31, 1994, 1995, 1996 and 1997 are derived from the audited financial statements of the Company. The same data for the year ended March 31, 1993 have been compiled from the Company's financial statements, combining the periods for the nine months ended December 31, 1992 which was unaudited, and the three months ended March 31, 1993 which was audited. The data for the six month periods ended September 30, 1996 and 1997 have been derived from the unaudited financial statements for those periods. The results of the six months ended September 30, 1997 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 1998. The unaudited financial data include, in the opinion of management, all adjustments consisting only of normal recurring accruals necessary to present fairly the data for such periods. Certain reclassifications have been made to the March 31, 1994 financial data to conform with the financial data of the other periods presented. The following financial data for the years ended March 31, 1995, 1996 and 1997, and for the six month period ended September 30, 1996 and 1997 are qualified in their entirety by reference to the more detailed Financial Statements and Notes thereto, included elsewhere in this Prospectus, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations". <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, -------------------------------------------------------------- ----------------------------- 1993 1994 1995 1996 1997 1996 1997 ---------- ---------- ---------- ---------- ---------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AND AVERAGE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS: Net sales........................ $ 479,971 $ 547,118 $ 639,908 $ 628,404 $ 617,289 $327,908 $343,805 Operating expenses: Cost of sales.................. 431,288 498,692 545,725 533,965 531,190 285,173 277,251 Selling and administrative..... 25,285 27,293 29,959 29,605 29,068 14,261 12,834 Depreciation................... 15,496 15,369 14,046 14,619 16,654 8,091 9,643 Amortization of goodwill....... 3,017 4,061 4,130 4,130 4,130 2,065 2,065 Other operating expenses(1).... 9,000 10,920 -- 16,013 -- -- -- ---------- ---------- ---------- ---------- ---------- -------- -------- $ 484,086 $ 556,335 $ 593,860 $ 598,332 $ 581,042 $309,590 $301,793 Income (loss) from operations.... (4,115) (9,217) 46,048 30,072 36,247 18,318 42,012 Other expense: Interest....................... 37,534 21,027 23,330 22,000 19,473 9,898 10,115 Amortization of deferred financing costs.............. 1,548 2,552 2,863 1,956 934 467 353 ---------- ---------- ---------- ---------- ---------- -------- -------- $ 39,082 $ 23,579 $ 26,193 $ 23,956 $ 20,407 $ 10,365 $ 10,468 Income (loss) before income taxes (benefit) & extraordinary item........................... (43,197) (32,796) 19,855 6,116 15,840 7,953 31,544 Income taxes (benefit)........... (13,711) (10,833) 9,354 3,996 7,788 3,907 13,108 ---------- ---------- ---------- ---------- ---------- -------- -------- Income (loss) before extraordinary item............. $ (29,486) $ (21,963) $ 10,501 $ 2,120 $ 8,052 $ 4,046 $ 18,436 Extraordinary item, net of income tax benefit(2)................. (4,185) (748) -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- -------- -------- Net income (loss)................ $ (33,671) $ (22,711) $ 10,501 $ 2,120 $ 8,052 $ 4,046 $ 18,436 ========== ========== ========== ========== ========== ======== ======== Earnings (loss) per share(3)..... $ (2.27) $ 1.05 $ 0.21 $ 0.80 $ 0.40 $ 1.83 ========== ========== ========== ========== ======== ======== BALANCE SHEET DATA (end of period): Working capital.................. $ 88,805 $ 111,666 $ 121,364 $ 114,521 $ 108,727 $ 99,816 $111,852 Total assets..................... 495,884 523,706 561,748 554,896 535,685 534,961 543,400 Current liabilities.............. 59,530 76,006 102,080 85,588 73,792 75,208 80,841 Long-term debt (less current portion)....................... 212,002 247,128 243,030 252,525 237,474 239,245 216,835 Stockholders' equity............. 147,711 124,999 137,750 141,747 150,564 146,192 169,410 SELECTED OPERATING DATA: Shipped Tons Stock rebar.................... 434 466 536 508 472 242 291 Merchant bar................... 427 468 549 544 512 253 283 Rod............................ 144 121 129 133 105 62 48 ---------- ---------- ---------- ---------- ---------- -------- -------- Subtotal mill finished goods... 1,005 1,055 1,214 1,185 1,089 557 622 Fabricated rebar............... 317 330 347 315 326 170 174 Billets........................ 232 263 141 175 281 188 106 ---------- ---------- ---------- ---------- ---------- -------- -------- Total shipped tons............. 1,554 1,648 1,702 1,675 1,696 915 902 ========== ========== ========== ========== ========== ======== ======== Average mill finished goods prices (per ton)............... $ 284 $ 310 $ 342 $ 337 $ 333 $ 332 $ 349 Average scrap cost (per ton)..... 94 119 130 131 130 133 131 Average metal spread (per ton)(4)........................ 190 191 212 206 203 199 218 Average mill conversion costs (per ton)...................... 140 146 135 135 138 140 128 </TABLE> - --------------- (1) In September 1992, the Company recorded a $9.0 million charge for a settlement related to a Florida Department of Transportation epoxy coated rebar claim. In the fiscal year ended March 31, 1994, the Company recorded a $10.3 million charge related to the closing of the Tampa melt shop and a $0.6 million charge related to closing the Fort Myers, Florida and Woodbridge, Virginia fabrication shop facilities. In the fiscal year ended March 31, 1996, the Company recorded a $15.0 million charge related to the closing of the Tampa rolling mill and a $1.0 million charge for the closure of other facilities. (2) In December 1992, the Company repaid $239.6 million of existing debt which had a carrying value of $233.0 million resulting in a loss of $4.2 million net of income tax benefit. In the fiscal year ended March 31, 1994, the Company incurred a charge of $748,000, net of income tax benefits, as a result of redeeming $20 million of the 14.5% subordinated debentures at a premium of 6% or $1.2 million. (3) Earnings (loss) per share for the year ended March 31, 1993 is not presented because ownership of the Company changed in late calendar 1992. For comparative purposes, loss per share for the entire period would have been $(3.37) assuming 10,000,000 shares of stock outstanding throughout the entire year. (4) Average metal spread equals Average mill finished goods prices minus Average scrap costs.

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, (I) REFERENCES TO "FRIENDLY'S" OR THE "COMPANY" REFER TO FRIENDLY ICE CREAM CORPORATION, ITS PREDECESSORS AND ITS CONSOLIDATED SUBSIDIARIES, (II) AS USED HEREIN, "NORTHEAST" REFERS TO THE COMPANY'S CORE MARKETS WHICH INCLUDE CONNECTICUT, MAINE, MASSACHUSETTS, NEW HAMPSHIRE, NEW JERSEY, NEW YORK, PENNSYLVANIA, RHODE ISLAND AND VERMONT, (III) THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE COMMON STOCK OFFERING AND (IV) THIS PROSPECTUS GIVES EFFECT TO THE 924-FOR-1 STOCK SPLIT WHICH WILL OCCUR PRIOR TO THE COMMON STOCK OFFERING. THE COMPANY'S FISCAL YEARS ENDED DECEMBER 27, 1992, JANUARY 2, 1994, JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996 ARE REFERRED TO HEREIN AS 1992, 1993, 1994, 1995 AND 1996, RESPECTIVELY. THE COMPANY Friendly's is the leading full-service restaurant operator and has a leading position in premium frozen dessert sales in the Northeast. The Company owns and operates 662 and franchises 34 full-service restaurants and manufactures a complete line of packaged frozen desserts distributed through more than 5,000 supermarkets and other retail locations in 15 states. Friendly's offers its customers a unique dining experience by serving a variety of high-quality, reasonably-priced breakfast, lunch and dinner items, as well as its signature frozen desserts, in a fun and casual neighborhood setting. For the twelve-month period ended September 28, 1997, Friendly's generated $667.0 million in total revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0 million of interest expense. During the same period, management estimates that over $230 million of total revenues were from the sale of approximately 21 million gallons of frozen desserts. Friendly's restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company's menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all day-parts. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner items include a new line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. Friendly's is also recognized for its extensive line of ice cream shoppe treats, including proprietary products such as the Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and the Wattamelon Roll-Registered Trademark-. The Company believes that one of its key strengths is the strong consumer awareness of the Friendly's brand name, particularly as it relates to the Company's signature frozen desserts. This strength and the Company's vertically-integrated operations provide several competitive advantages, including the ability to (i) utilize its broad, high-quality menu to attract customer traffic across multiple day-parts, particularly the afternoon and evening snack periods, (ii) generate incremental revenues through strong restaurant and retail market penetration, (iii) promote menu enhancements and extensions in combination with its unique frozen desserts and (iv) control quality and maintain operational flexibility through all stages of the production process. Friendly's, founded in 1935, was publicly held from 1968 until January 1979, at which time it was acquired by Hershey Foods Corporation ("Hershey"). While owned by Hershey, the Company increased the total number of restaurants from 601 to 849 yet devoted insufficient resources to product development and capital improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by Donald Smith, the Company's current Chairman, Chief Executive Officer and President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high leverage associated with the TRC Acquisition and the Old Credit Facility (as defined herein) severely impacted the liquidity and profitability of the Company and, therefore, limited the scope and implementation of certain of the Company's business and growth strategies. The Company has reported net losses and had earnings that were insufficient to cover fixed charges for each fiscal year since the TRC Acquisition except for the nine months ended September 28, 1997. As a result of subsequent restructurings, and upon completion of the Recapitalization and the Related Transactions (as defined herein) approximately 16.8% and 9.8% of the Common Stock will be owned by the Company's employees and lenders under the Old Credit Facility, respectively. See "Risk Factors," "Selected Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Despite the Company's capital constraints, management implemented a number of initiatives to restore and improve operational and financial efficiencies. From the date of the TRC Acquisition through 1994, the Company (i) implemented a major revitalization of its restaurants, (ii) repositioned the Friendly's concept from a sandwich and ice cream shoppe to a full-service, family-oriented restaurant with broader menu and day-part appeal, (iii) elevated customer service levels by recruiting more qualified managers and expanding the Company's training program, (iv) disposed of 123 under-performing restaurants and (v) capitalized upon the Company's strong brand name recognition by initiating the sale of Friendly's unique line of packaged frozen desserts through retail locations. Beginning in 1994, the Company began implementing several growth initiatives including (i) testing and implementing a program to expand the Company's domestic distribution network by selling frozen desserts and other menu items through non-traditional locations, (ii) distributing frozen desserts internationally by introducing dipping stores in South Korea and the United Kingdom and (iii) implementing a franchising strategy to extend profitably the Friendly's brand without the substantial capital required to build new restaurants. As part of this strategy, on July 14, 1997 the Company entered into the DavCo Agreement. See "--Recent Developments." Implementation of these initiatives since the TRC Acquisition has resulted in substantial improvements in revenues and EBITDA. Despite the closing of 152 restaurants (net of restaurants opened) since the beginning of 1989 and periods of economic softness in the Northeast, the Company's restaurant revenues have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve months ended September 28, 1997, while average revenue per restaurant has increased 29.8% from $665,000 to $863,000 during the same period. Retail, institutional and other revenues and franchise revenues have also increased from $1.4 million in 1989 to $67.7 million in the twelve months ended September 28, 1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to $74.9 million in the twelve-month period ended September 28, 1997, while operating income has increased from $4.1 million to $42.0 million over the same period. Friendly's intends to utilize the increased liquidity and operating and financial flexibility resulting from consummation of the Recapitalization in order to continue to grow the Company's revenues and earnings by implementing the following key business strategies: (i) continuously upgrade the menu and introduce new products, (ii) revitalize and re-image existing Friendly's restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining experience, (v) expand the restaurant base through high-quality franchisees, (vi) increase market share through additional retail accounts and restaurant locations, (vii) introduce modified formats of the Friendly's concept into non-traditional locations and (viii) extend the Friendly's brand into international markets. COMPETITIVE STRENGTHS THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE FOLLOWING COMPETITIVE STRENGTHS: STRONG BRAND NAME RECOGNITION. During the past 60 years, management believes the Friendly's brand name has become synonymous with high-quality food and innovative frozen desserts. The Company believes that the brand name awareness created by its premium frozen dessert heritage drives customer traffic, particularly during the afternoon and evening snack periods, promotes menu enhancement and extension and generates incremental revenues from the Company's retail and non-traditional distribution channels. The Company's independent surveys indicate that, in the Northeast, over 90% of all households recognize the Friendly's brand and that over 30% of these households visit a Friendly's restaurant every three months. SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of high-quality freshly-scooped and packaged frozen desserts, which have been cited by customers as a key reason for choosing Friendly's. Accordingly, approximately 50% of all visits to a Friendly's restaurant include a frozen dessert purchase. Freshly-scooped specialties served in Friendly's restaurants include the Jim Dandy and Oreo-Registered Trademark- Brownie sundaes, and the Fribble-Registered Trademark-, the Company's signature thick shake. Packaged goods available for purchase in both restaurant and retail locations include traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In addition, the Company licenses from Hershey the rights to feature in its signature desserts certain candy brands such as Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups and York-Registered Trademark- Peppermint Patties. BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on Friendly's reputation for high-quality, wholesome foods including the well-known $2.22 Breakfast, Big Beef-Registered Trademark- Hamburger, Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark- Platter by extending these offerings into a broader product line including freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased menu variety, food products now account for over 70% of restaurant revenues, and guest check averages have increased significantly over the last five years. Friendly's also has an extensive Kid's Menu which encourages family dining due to the significant appeal to children of the Friendly's concept. MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts, the Company generates approximately 35% of its restaurant revenues during the afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to closing), providing Friendly's with the highest share of snack day-part sales in the Northeast. Accordingly, the Company endeavors to maximize revenue across multiple day-parts by linking sales of its high-margin frozen desserts with its lunch and dinner entrees. The Company generates approximately 12%, 24% and 29% of restaurant revenues from breakfast, lunch and dinner, respectively. STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the highest market share among full-service restaurants and a leading position in premium frozen dessert sales in the Northeast. The Company's strong restaurant and retail market penetration provides incremental revenues and cash flow, as multiple levels of visibility and availability provide cross promotion opportunities and enhance consumer awareness and trial of the Company's unique products while effectively targeting consumers for both planned and impulse purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with a new 79 CENTS Caramel Fudge Blast-TM- Sundae during the spring of 1997. In addition to promoting sales of this new entree, this strategy increased consumer awareness and trial of the new sundae combination, which in turn supported the introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants and retail locations. VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated operations are designed to deliver the highest quality food and frozen desserts to its customers and to allow the Company to adapt to evolving customer tastes and preferences. The Company formulates new products and upgrades existing food and frozen desserts through its research and development group and controls all stages in the production of its frozen desserts through its two manufacturing facilities. In addition, the Company controls cost and product quality and efficiently manages inventory levels from point of purchase through restaurant delivery utilizing its three distribution facilities and fleet of 56 tractors and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when sourcing materials and services for its restaurant and retail operations through its integrated purchasing department. MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented senior management team with extensive restaurant industry experience and an average tenure with the Company of 17 years. In addition, the Company minimizes turnover of both managers and line personnel through extensive employee training and retention programs. In 1996, the Company's turnover among its restaurant salaried management was approximately 24%, which was significantly lower than the industry average. BUSINESS STRATEGIES FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS STRATEGIES: UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is to increase consumer awareness and restaurant patronage by continuously upgrading its menu and introducing new products. As part of this strategy, Friendly's dedicated research and development group regularly formulates proprietary new menu items and frozen desserts to capitalize on the evolving tastes and preferences of its customers. In the fall of 1996, the Company introduced a new dinner line which includes a high-quality steak entree, home-style chicken dinners, pot pies and stir-frys, as well as several premium frozen desserts including the new Oreo-Registered Trademark- Brownie Sundae. Largely as a result of new premium items, guest check averages have increased 7.4% during the first nine months of 1997 as compared to the same period of 1996. REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow restaurant revenues and cash flow through the ongoing revitalization and re-imaging of existing restaurants and to increase total restaurant revenues through the addition of new restaurants. The Company has revitalized approximately 633 restaurants since the beginning of 1989, increasing average restaurant revenues from $665,000 in 1989 to $863,000 in the twelve months ended September 28, 1997. Further, the Company has initiated its FOCUS 2000 program which includes an advanced re-imaging of restaurants and the installation of custom designed restaurant automation systems in a majority of its restaurants. In addition, as part of its ongoing capital spending program, the Company plans to refurbish substantially all of its restaurants every five to six years to further enhance customer appeal. The Company also expects to increase market share through the opening of four new Company-owned restaurants in 1997 (two of which have opened to date) and 10 new restaurants in 1998. ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve food presentation and customer service. The Company believes that implementation of this program will create a consistent, enhanced Friendly's restaurant brand image. This strategy recognizes that food quality, dining atmosphere and attentive service all contribute to customer satisfaction. The Company maintains a consistently high standard of food preparation and customer service through stringent operational controls and intensive employee training. To help guarantee that employees perform in this manner, Friendly's maintains a dedicated training and development center where managers are thoroughly trained in customer service. EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY FRANCHISEES. Friendly's is implementing a franchising strategy to further develop the Friendly's brand and grow both revenue and cash flow without the substantial capital required to build new restaurants. This strategy seeks to (i) expand its restaurant presence in under-penetrated markets, (ii) accelerate restaurant growth in new markets, (iii) increase marketing and distribution efficiencies and (iv) preempt the Company's competition from acquiring certain prime real estate sites. Friendly's will receive a royalty based on total franchisee revenues and revenues and earnings from the sale of its frozen desserts and other products to franchisees. INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its position as a recognized leader in premium frozen desserts, Friendly's seeks to increase its market share. The Company expects to build market share by expanding distribution beyond its 696 Company-owned and franchised restaurants and its more than 5,000 retail locations by (i) adding new locations, (ii) increasing shelf space in current locations through new product introductions and more prominent freezer displays and (iii) increasing consumer and trade merchandising. INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to capitalize on both planned and impulse purchases, the Company is leveraging the Friendly's brand name and enhancing consumer awareness by introducing modified formats of the Friendly's concept into non-traditional locations. These modified formats include (i) Friendly's Cafe, a quick service concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering freshly-scooped and packaged frozen desserts and (iii) Friendly's branded display cases and novelty carts with packaged single-serve frozen desserts. The first Friendly's Cafe opened in October 1997. The Company supplies frozen desserts to non-traditional locations such as colleges and universities, sports facilities, amusement parks, secondary school systems and business cafeterias directly or through selected vendors pursuant to multi-year license agreements. EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term international growth strategy is to utilize local partners and establish master franchise or licensee agreements to extend the brand internationally and to achieve profitable growth while minimizing capital investment. Currently, the Company's Friendly's International, Inc. subsidiary ("FII") participates in a licensing agreement with a South Korean enterprise to develop Friendly's "Great American" ice cream shoppes in that country. As of September 28, 1997, the licensee and its sublicensees were operating 18 ice cream shoppes, and the Company expects such parties to operate 28 ice cream shoppes by the end of 1997. FII also sells the Company's frozen desserts in several chain restaurants, theaters and food courts in the United Kingdom. The Company selects its international markets based on the high quality of the Company's frozen desserts relative to locally-produced frozen desserts and the propensity of consumers in these regions to purchase American-branded products. The principal executive offices of the Company are located at 1855 Boston Road, Wilbraham, Massachusetts 01095, and the telephone number is (413) 543-2400. RECENT DEVELOPMENTS On July 14, 1997, the Company entered into a long-term agreement granting DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's restaurants, exclusive rights to operate, manage and develop Friendly's full-service restaurants in the franchising region of Maryland, Delaware, the District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to the DavCo Agreement, DavCo has purchased certain assets and rights in 34 existing Friendly's restaurants in this franchising region, has committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, has further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. DavCo will also manage under contract 14 other Friendly's locations in this franchising region with an option to acquire these restaurants in the future. Friendly's received approximately $8.2 million in cash for the sale of certain non-real property assets and in payment of franchise and development fees, and receives (i) a royalty based on franchised restaurant revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's frozen desserts and other products. DavCo is required to purchase from Friendly's all of the frozen desserts to be sold in these restaurants. See "Business--Restaurant Operations--Franchising Program." THE RECAPITALIZATION The Offerings are part of a series of related transactions to refinance all of the indebtedness under the Company's existing credit facilities (the "Old Credit Facility") and thereby lengthen the average maturity of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. Concurrent with, and contingent upon, the consummation of the Offerings, the Company expects to enter into a new senior secured credit facility consisting of (i) a $105 million term loan facility (the "Term Loan Facility"), (ii) a $55 million revolving credit facility (the "Revolving Credit Facility") and (iii) a $15 million letter of credit facility (the "Letter of Credit Facility" and, together with the Term Loan Facility and the Revolving Credit Facility, the "New Credit Facility"). The Offerings, the New Credit Facility and the application of the estimated net proceeds therefrom are hereinafter referred to as the "Recapitalization." In addition, subsequent to September 28, 1997, the Company (i) has paid $9.6 million of interest on the Old Credit Facility, (ii) will record $1.9 million of net income related to deferred interest no longer payable under the Old Credit Facility, (iii) will record $5.8 million of non-cash stock compensation expense, net of taxes, arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management, (iv) will write-off $319,000 of deferred financing and debt restructuring costs, net of taxes, related to the Old Credit Facility and (v) will apply $10.0 million of previously restricted cash to be received from Restaurant Insurance Corporation, its insurance subsidiary ("RIC"), in exchange for a letter of credit, toward amounts outstanding under the Old Credit Facility (collectively, the "Related Transactions"). Upon completion of the Recapitalization, Friendly's total available borrowings under the New Credit Facility are expected to be $55.0 million, excluding $2.1 million of letter of credit availability (compared to $27.0 million as of September 28, 1997 under the Old Credit Facility, excluding $2.1 million of letter of credit availability), which borrowings may be used, with certain limitations, for capital spending and general corporate purposes. After giving effect to the Recapitalization and the Related Transactions, the aggregate pro forma net decrease in interest expense would have been $15.3 million for 1996 and $11.4 million for the nine-month period ended September 28, 1997. See "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of New Credit Facility." The following table sets forth the estimated sources and uses of funds in connection with the Recapitalization after giving effect to the Related Transactions: <TABLE> <CAPTION> AT CLOSING --------------------- <S> <C> (DOLLARS IN THOUSANDS) SOURCES OF FUNDS: Term Loan Facility (a)................................................. $ 105,000 Senior Note Offering (b)............................................... 175,000 Common Stock Offering (c).............................................. 100,000 -------- Total Sources...................................................... $ 380,000 -------- -------- USES OF FUNDS: Working capital........................................................ $ 4,732 Retirement of Old Credit Facility (d).................................. 348,042 Retirement of capital leases........................................... 7,976 Estimated fees and expenses (e)........................................ 19,250 -------- Total Uses......................................................... $ 380,000 -------- -------- </TABLE> - ---------------------------------- (a) Represents borrowing in full under the Term Loan Facility. As part of the Recapitalization, the Company will have a $55,000 Revolving Credit Facility which is expected to be undrawn at closing and $2,093 available under the Letter of Credit Facility. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. (b) Represents gross proceeds from the Senior Note Offering. (c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock at an assumed initial public offering price of $20.00 per share. (d) Represents the balance of all amounts expected to be outstanding under the Old Credit Facility ($358,042 as of September 28, 1997) after giving effect to the application of $10,000 of previously restricted cash and investments of RIC which is expected to be released to the Company in exchange for a $12,907 letter of credit, with the $2,907 of additional released cash and investments increasing the Company's cash balance. (e) Includes estimated underwriting discounts and commissions and other fees and expenses relating to the Offerings and the New Credit Facility of which $8,427 relates to the Common Stock Offering and $10,823 relates to the Senior Note Offering and the New Credit Facility. See "Underwriting." THE SENIOR NOTE OFFERING <TABLE> <S> <C> Issuer....................... Friendly Ice Cream Corporation. Securities Offered........... $175,000,000 aggregate principal amount of % Senior Notes due 2007 (the "Senior Notes"). Maturity Date................ , 2007. Interest Payment Dates....... and of each year, commencing , 1998. Optional Redemption.......... The Senior Notes will be redeemable, in whole or in part, at the option of the Company, at any time on or after , 2002, at the redemption prices set forth herein, plus accrued and unpaid interest thereon, if any, to the date of redemption. In addition, on or prior to , 2000, the Company may redeem, at any time and from time to time, up to $60 million of the aggregate principal amount of the Senior Notes at a redemption price of % of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption, with the net cash proceeds from one or more Qualified Equity Offerings (as defined herein); PROVIDED, HOWEVER, that at least $115 million of the aggregate principal amount of the Senior Notes remains outstanding following each such redemption. Subsidiary Guarantees........ The Senior Notes will be fully and unconditionally guaranteed (the "Subsidiary Guarantees"), on an unsecured, senior basis, by Friendly's Restaurants Franchise, Inc., the Company's franchise subsidiary, and will also be guaranteed by each new subsidiary (other than Unrestricted Subsidiaries and Foreign Subsidiaries (as defined herein)) created or acquired after the issue date of the Senior Notes (collectively, the "Subsidiary Guarantors"). See "Description of Senior Notes--Guarantees." Ranking...................... The Senior Notes will be unsecured, senior obligations of the Company, will rank PARI PASSU in right of payment with all existing and future senior indebtedness of the Company and will rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The Senior Notes will be effectively subordinated to all existing and certain future secured indebtedness of the Company, including indebtedness under the New Credit Facility, to the extent of the value of the assets securing such secured indebtedness. The Senior Notes will be structurally subordinated to all existing and future indebtedness of any subsidiary of the Company that is not a Subsidiary Guarantor. As of September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, the Company would have had a total of $293.0 million of long-term debt and capital lease obligations outstanding, $115.1 million of which would have been secured and none of which would have been subordinated. The Subsidiary Guarantees will be unsecured, senior obligations of the Subsidiary Guarantors. As of September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, non-guarantor subsidiaries of the Company would have had no long-term debt or capital lease obligations outstanding. See "Description of Senior Notes--Ranking." </TABLE> <TABLE> <S> <C> Change of Control............ Upon the occurrence of a Change of Control (as defined herein), each holder of Senior Notes may require the Company to repurchase any or all outstanding Senior Notes owned by such holder at a repurchase price of 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. See "Description of Senior Notes--Change of Control." Restrictive Covenants........ The Indenture under which the Senior Notes will be issued will contain certain covenants pertaining to the Company and its Restricted Subsidiaries (as defined herein), including but not limited to covenants with respect to the following matters: (i) limitations on indebtedness and preferred stock, (ii) limitations on restricted payments such as dividends, repurchases of the Company's or subsidiaries' stock, repurchases of subordinated obligations, and investments, (iii) limitations on restrictions on distributions from Restricted Subsidiaries, (iv) limitations on sales of assets and of subsidiary stock, (v) limitations on transactions with affiliates, (vi) limitations on liens, (vii) limitations on sales of subsidiary capital stock and (viii) limitations on mergers, consolidations and transfers of all or substantially all assets. However, all of these covenants are subject to a number of important qualifications and exceptions. Each of Friendly's International, Inc. and its United Kingdom subsidiaries will be an Unrestricted Subsidiary on the Issue Date (as defined herein). See "Description of Senior Notes--Certain Covenants." Concurrent Common Stock Offering................... Concurrent with the Senior Note Offering, the Company is offering to the public 5,000,000 shares of Common Stock at an estimated initial public offering price of between $19.00 and $21.00 per share. Consummation of each of the Senior Note Offering and the Common Stock Offering is contingent upon consummation of the other. Use of Proceeds.............. The Company intends to use up to approximately $356.0 million of the net proceeds from the Offerings and borrowings under the New Credit Facility to refinance indebtedness and thereby lengthen the average maturity of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. See "Use of Proceeds." Risk Factors................. Prospective purchasers of the Senior Notes offered hereby should carefully consider the information set forth under the caption "Risk Factors" and all other information set forth in this Prospectus before making any investment in the Senior Notes. As set forth more fully in "Risk Factors," the risk factors associated with such an investment include, among others, those relating to the Company's (i) substantial leverage and stockholders' deficit, (ii) history of losses, resulting in its inability to cover fixed charges since the TRC Acquisition, (iii) implementation of new business concepts and strategies, (iv) development of a franchising program beyond the DavCo Agreement, (v) expansion of its international operations in existing and new markets, (vi) geographic concentration in the Northeast, and (vii) highly competitive business environment, as well as factors relating to restrictions imposed under the New Credit Facility, factors affecting the food service industry generally and circumstances potentially impacting the trading markets for, or value of, the Senior Notes offered hereby. </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR (A) ---------------------------- ------------------------------------------------ SEPTEMBER 29, SEPTEMBER 28, 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Restaurant................................. $542,859 $580,161 $589,383 $593,570 $596,675 $ 452,373 $ 455,026 Retail, institutional and other............ 20,346 30,472 41,631 55,579 54,132 39,446 49,173 Franchise.................................. -- -- -- -- -- -- 3,834 -------- -------- -------- -------- -------- ------------- ------------- Total revenues............................... 563,205 610,633 631,014 649,149 650,807 491,819 508,033 -------- -------- -------- -------- -------- ------------- ------------- Non-cash write-downs (b)..................... -- 25,552 -- 7,352 227 -- 607 Depreciation and amortization................ 35,734 35,535 32,069 33,343 32,979 25,127 24,226 Operating income............................. 25,509 8,116 36,870 16,670 30,501 22,848 34,299 Interest expense, net (c).................... 37,630 38,786 45,467 41,904 44,141 33,084 32,972 Cumulative effect of changes in accounting principles, net of income taxes (d)........ -- (42,248) -- -- -- -- 2,236 Net income (loss)............................ $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (5,794 ) $ 2,363 -------- -------- -------- -------- -------- ------------- ------------- -------- -------- -------- -------- -------- ------------- ------------- OTHER DATA: EBITDA (e)................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 47,975 $ 59,132 Net cash provided by operating activities.... 34,047 42,877 38,381 27,790 26,163 23,637 29,224 Capital expenditures: Cash....................................... 33,577 37,361 29,507 19,092 24,217 18,547 14,656 Non-cash (f)............................... 3,121 7,129 7,767 3,305 5,951 3,570 2,227 -------- -------- -------- -------- -------- ------------- ------------- Total capital expenditures................. $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117 $ 16,883 Ratio of earnings to fixed charges (g)....... -- -- -- -- -- -- 1.0 x PRO FORMA DATA: EBITDA (e)(h)................................ $ 64,653 $ 48,685 $ 59,132 Interest expense, net (c)(i)................. 28,804 21,580 21,617 Net income (j)............................... 1,835 1,412 9,062 Net income per share......................... $ 0.26 $ 0.20 $ 1.27 Weighted average shares outstanding (k)...... 7,125 7,125 7,125 Ratio of EBITDA to interest expense, net..... 2.2x 2.3 x 2.7 x Ratio of earnings to fixed charges (g)....... 1.1x 1.1 x 1.4 x Ratio of total long-term debt to EBITDA (e) (l).................................... -- -- 3.8 x RESTAURANT OPERATING DATA: Number of restaurants (end of period) (m).... 764 757 750 735 707 710 662 Average revenue per restaurant (n)........... $ 708 $ 750 $ 783 $ 797 $ 828 -- $ 863 Increase in comparable restaurant revenues (o)........................................ 6.0% 5.4% 3.4% 0.9% 1.8% 0.3% 3.1% </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 28, 1997 --------------------------- <S> <C> <C> ACTUAL AS ADJUSTED -------------- ----------- <CAPTION> (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)....................................................................... $ (17,895) $ (10,949)(p) Total assets.................................................................................... 362,914 358,348(q) Total long-term debt and capital lease obligations, excluding current maturities................ 371,296 288,585(r) Total stockholders' equity (deficit)............................................................ $ (170,684) $ (73,471)(s) </TABLE> (a) All fiscal years presented include 52 weeks of operations except 1993 which includes 53 weeks of operations. (b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a trademark license agreement as a result of new product development and the replacement of certain trademarked menu items and $3,346 in 1995 related to a postponed debt restructuring. All other non-cash write-downs relate to property and equipment disposed of in the normal course of the Company's operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. (c) Interest expense, net is net of capitalized interest of $128, $156, $176, $62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318, $273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (d) Includes non-cash items, net of related income taxes, as a result of adoption of accounting pronouncements related to income taxes of $30,968, post-retirement benefits other than pensions of $4,140 and post-employment benefits of $7,140 in 1993 and pensions of $2,236 in 1997. (e) EBITDA represents consolidated Net income (loss) before (i) Cumulative effect of changes in accounting principles, net of income taxes, (ii) (Provision for) benefit from income taxes, (iii) Equity in net loss of joint venture, (iv) Interest expense, net, (v) Depreciation and amortization and (vi) Non-cash write-downs and all other non-cash items, plus cash distributions from unconsolidated subsidiaries, each determined in accordance with generally accepted accounting principles ("GAAP"). The Company has included information concerning EBITDA in this Prospectus because it believes that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings from operations or other traditional indications of an issuer's operating performance. (f) Non-cash capital expenditures represent the cost of assets acquired through the incurrence of capital lease obligations. (g) The Ratio of earnings to fixed charges is computed by dividing (i) income before interest expense, income taxes and other fixed charges by (ii) fixed charges, including interest expense, amortization of debt issuance costs and the portion of rent expense which represents interest (assumed to be one-third). For 1992, 1993, 1994, 1995, 1996 and the nine months ended September 29, 1996 earnings were insufficient to cover fixed charges by $12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively. (h) Represents historical EBITDA adjusted to give effect to the benefit from the change in accounting for pensions related to determining the return-on-asset component of annual pension expense of $946 in 1996 and $710 for the nine months ended September 29, 1996. See Note 10 of Notes to Consolidated Financial Statements. (i) Represents historical interest expense adjusted to give effect to the Recapitalization. Borrowings under the New Credit Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for drawings under the Revolving Credit Facility and the Letter of Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 2.25% per annum for amounts issued but undrawn under the Letter of Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility. The following table represents changes to Interest expense, net on a pro forma basis, resulting from the Recapitalization and the Related Transactions: <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR ---------------------------------------- 1996 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997 ------------------- ------------------- ------------------- (IN THOUSANDS) <S> <C> <C> <C> Elimination of interest on Old Credit Facility......... $ (41,827) $ (31,337) $ (31,434) Reduction of interest on capital lease obligations..... (774) (580) (580) Interest on Revolving Credit Facility.................. 779 624 732 Interest on Letter of Credit Facility.................. 268 134 134 Interest on Term Loan Facility......................... 8,279 6,202 6,340 Interest on Senior Notes............................... 17,938 13,453 13,453 -------- -------- -------- Decrease in Interest expense, net.................... $ (15,337) $ (11,504) $ (11,355) -------- -------- -------- -------- -------- -------- </TABLE> In calculating pro forma Interest expense, net, the assumed rates on the Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively, 7.66%, 2.25%, 7.87% and 10.25% for the nine months ended September 29, 1996, respectively and 7.84%, 2.25%, 8.09% and 10.25% for the nine months ended September 28, 1997, respectively. (j) Represents historical net income adjusted to give effect to (i) the reduction in interest expense, net of income taxes, of $9,049, $6,788 and $6,699 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively, as a result of the Recapitalization and the Related Transactions, and (ii) the benefit, net of income taxes, related to the change in accounting for pensions described in (h) above of $558, $418 and $0 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (k) Represents historical weighted average shares outstanding adjusted to give effect to the issuance of 27 shares upon consummation of the Recapitalization under the Management Stock Plan (as defined herein) and the return of 375 net shares to the Company in connection with the Recapitalization. Actual weighted average shares outstanding were 2,414, 2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. See "Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial Statements. (l) For purposes of this ratio, EBITDA represents historical EBITDA for the twelve months ended September 28, 1997 adjusted by $236 to give effect to the benefit related to the change in accounting for pensions described in (h) above. (m) The number at September 28, 1997 reflects the acquisition by DavCo of 34 restaurants pursuant to the DavCo Agreement. See "Recent Developments."

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+PROSPECTUS SUMMARY The discussion in this Prospectus contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements contained in this Prospectus. The following summary information is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. The Company General Automation, Inc. (the "Company" or "GA") integrates computer systems, software and services for application solutions. GA has positioned itself as a strong service and support company offering open systems and complementary software products to a worldwide network of value-added resellers. GA's product lines include a broad range of hardware platforms including Intel and Motorola PowerPC based systems, coupled with efficient and cost effective application environments, providing a full range of systems, complementary operating environments and high quality customer services. The Company's products are sold in the United States through over 200 value-added resellers. In addition, it sells its products in Europe, Canada, Mexico, Central and South America, Guam, Taiwan, Australia, New Zealand, Singapore, Hong Kong, Africa and the People's Republic of China through distributors and value-added resellers. The Company provides service and support throughout North America to over 3,000 customers. Recently, the Company has completed transactions which have significantly expanded the Company's business and opportunities. In October 1996, the Company purchased from Sequoia Systems, Inc. ("SSI") substantially all of the assets and business of SSI's Sequoia Enterprise Systems business division ("SES"). SES manufactures, services, integrates and distributes fault-tolerant Motorola-based computer systems operating under SSI's version of UNIX and Intel-based computer systems running SSI's and Alpha Micro's versions of the Pick application environment and database software products, and engages in various related distribution arrangements. In May 1995, the Company and SunRiver Data Systems ("SunRiver") formed a limited liability company ("GAL"), with the Company owning 51% and SunRiver 49%, for the purpose of combining the Company's Pick-based business and SunRiver's Pick-based business. The Offering All of the shares offered by this Prospectus are being offered for the account of one or more shareholders. The Company will receive no part of the proceeds of the sale of such shares. P R O S P E C T U S 831,100 Shares GENERAL AUTOMATION, INC. Common Stock This Prospectus relates to 831,100 shares of common stock (the "Shares") of General Automation, Inc. ("GA" or the "Company"). The Shares may be offered and sold from time to time by and for the account of one or more of the shareholders (the "Selling Shareholders") of the Company identified under the caption "Selling Shareholders." The Company will receive no part of the proceeds of such sales. The Company will bear all of the expenses incurred in connection with the offer and sale of the Shares, other than any commissions, discounts or fees of underwriters, dealers or agents. The sale of the Shares by the Selling Shareholders may be effected from time to time in one or more transactions (which may involve block transactions, purchases by a broker or dealer as principal and resale by such broker or dealer for its own account pursuant to this Prospectus, ordinary brokerage transactions and transactions in which brokers solicit purchases) on the American Stock Exchange, in special offerings, exchange distributions or secondary distributions pursuant to and in accordance with the rules of such exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. In effecting sales, brokers or dealers engaged by the Selling Shareholders may arrange for other brokers or dealers to participate. Brokers or dealers selected by the Selling Shareholders may receive commissions or discounts from the Selling Shareholders in amounts to be negotiated immediately prior to sale (and which, as to a particular broker, may be in excess of customary commissions). The Selling Shareholders and such brokers or dealers, or any other participating brokers or dealers, may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended, in connection with such sales. The Company's common stock is traded on the American Stock Exchange. On , 1997, the closing price of the Company's common stock on the American Stock Exchange was $ per share. ---------- AN INVESTMENT IN THE COMPANY'S COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BELOW. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------- The date of this Prospectus is___________ , 1997 Summary Financial Data (In thousands, except per share data) The following table sets forth certain selected historical consolidated financial data for the Company for each of the years ended September 30, 1996, 1995, 1994, 1993 and 1992 which has been derived from audited financial statements. The following table also sets forth selected historical financial data at and for the nine months ended June 30, 1997 and 1996 which has been derived from the Company's unaudited financial statements included elsewhere herein. The financial data at and for the nine months ended June 30, 1997 and 1996 is not necessarily indicative of results which might be expected for the full fiscal year. The following table should be read in conjunction with (a) the audited consolidated financial statements of the Company and notes thereto as of and for the three years ended September 30, 1996; (b) the unaudited financial statements at and for the nine months ended June 30, 1997 and 1996; (c) "Management's Discussion and Analysis of Financial Condition and Results of Operations"; (d) the audited consolidated financial statements of SES (the Sequoia Enterprise System division of Sequoia Systems, Inc.), which was acquired by the Company in October 1996; and (e) the pro forma financial statements for the year ended September 30, 1996 and the nine months ended June 30, 1997, included elsewhere herein. <TABLE> <CAPTION> Nine Months Ended June 30 Year Ended ------------------- September 30(3) (Unaudited) ----------------------------------------------------- 1997(7) 1996 1996 1995(6) 1994(5) 1993(4) 1992(1)(2) ------- ---- ---- ------- ------- ------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Operating Data: Sales, net $ 29,180 $ 19,129 $ 25,460 $ 14,269 $ 34,614 $ 42,878 $ 45,205 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations 679 1,653 2,247 (1,666) 1,300 (351) 42 -------- -------- -------- -------- -------- -------- -------- Net income (loss) before extraordinary items 484 1,342 1,418 (2,065) 427 (1,477) (964) Extraordinary items 0 0 0 0 0 900 1,108 -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 484 $ 1,342 $ 1,418 $ (2,065) $ 427 $ (577) $ 144 ======== ======== ======== ======== ======== ======== ======== Earnings per share: Income (loss) before extraordinary items $ .05 $ .18 $ .18 $ (.26) $ .04 $ (.13) $ (.08) Extraordinary items 0 0 0 0 0 .08 .09 -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ .05 $ .18 $ .18 $ (.26) $ .04 $ (.05) $ .01 ======== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> June 30 At September 30 --------------- ------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (Unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Balance Sheet Data: Working capital (deficit) $ 289 $ 1,255 $ 1,210 $ (638) $ 2,725 $ 1,457 $ 3,450 Total assets 21,739 9,873 10,271 10,484 18,041 22,456 23,618 Total long term debt and capital lease obligations 1,157 1,087 1,072 1,305 1,453 2,215 1,406 Shareholders' equity(5) 5,328 2,652 2,778 771 3,246 2,264 3,442 </TABLE> - ---------- (1) The Company closed its German subsidiary in the fourth quarter of fiscal 1992. (See Note 8 to the Company's Financial Statements included in this Prospectus.) (2) The Company sold 55% of its share of General Automation, Ltd. (U.K.) to Sanderson Electronics, PLC, ("Sanderson") on June 30, 1990 and sold its remaining 45% interest in General Automation, Ltd. to Sanderson on January 20, 1992. During the period from July 1, 1990 through January 20, 1992, while the Company owned 45% of General Automation, Ltd., the Company accounted for its minority interest in General Automation, Ltd. on an equity basis. (See Note 8 to the Company's Financial Statements included in this Prospectus.) (3) No dividends have been paid on the Company's common stock during any of the periods presented. (See "Dividend Policy.") (4) On October 29, 1993, with retroactive effect to September 30, 1993, the Company divested its European operations. (See Note 8 to the Company's Financial Statements included in this Prospectus.) (5) On November 10, 1994, with retroactive effect to October 1, 1994, the Company divested its Pacific Basin operations. (See Notes 7 and 8 to the Company's Financial Statements included in this Prospectus.) (6) Effective May 22, 1995, the Company and SunRiver Data Systems ("SunRiver") formed a limited liability company ("GAL") for the purpose of combining GA's Pick based business and SunRiver's Pick based business, with the Company owning 51% and SunRiver owning 49% of GAL. (7) Effective October 11, 1996, the Company acquired substantially all of the assets and liabilities of Sequoia Enterprise Systems ("SES"), a division of Sequoia Systems, Inc. The acquisition of SES has been accounted for under the purchase method of accounting. Accordingly, the financial information for the nine months ended June 30, 1997 includes the results of operations for SES from the date of the acquisition.

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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Prospectus. As used herein, unless the context otherwise requires, "Company" means Proffitt's, Inc. and its subsidiaries, and the terms "Proffitt's," "McRae's," "Younkers," "Parisian" and "Herberger's" refer to the Company's five department store chains, and the existing and predecessor entities that conduct or conducted business under such names. Reference in this Prospectus to the Company's fiscal year means the fiscal year ended on the Saturday nearest January 31 of the following calendar year (e.g., "fiscal 1995" means the fiscal year ended February 3, 1996). Unless the context otherwise requires, references in this Prospectus to "pro forma" financial information reflect the acquisition by the Company of Parisian as if the acquisition had occurred on February 4, 1996. Historical financial information presented in this Prospectus includes the results of Parisian from and after October 11, 1996, the date of its acquisition by the Company. THE EXCHANGE OFFER The Exchange Offer......... The Exchange Offer consists of this Prospectus and the related Letter of Transmittal, and is being made solely to eligible holders of Series A Notes. Upon the terms and subject to the conditions of the Exchange Offer, the Company is offering eligible holders of Series A Notes the opportunity to exchange its Series A Notes that have not been registered under the Securities Act for the Exchange Notes that have been registered under the Securities Act. Exchange Offer Expiration Date..................... The Exchange Offer expires at 5:00 P.M., Eastern Time on August 7, 1997 unless extended by the Company in its sole discretion. Exchange Notes Offered..... The Exchange Notes consist of $125,000,000 aggregate principal amount of 8 1/8% Senior Notes due 2004, Series B. Procedures for Tendering Series A Notes........... Brokers, dealers, commercial banks, trust companies and other nominees who hold Series A Notes through DTC (as defined herein) may effect tenders by book-entry transfer in accordance with DTC's Automated Tender Offer Program ("ATOP"). Holders of such Series A Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee are urged to contact such person promptly if they wish to tender Series A Notes. In order for Series A Notes to be tendered by a means other than by book-entry transfer, a Letter of Transmittal must be completed and signed in accordance with the instructions contained herein. The Letter of Transmittal and any other documents required by the Letter of Transmittal must be delivered to the Exchange Agent by mail, facsimile, hand delivery or overnight carrier, and either such Series A Notes must be delivered to the Exchange Agent or specified procedures for guaranteed delivery must be complied with. See "The Exchange Offer -- Procedures for Tendering." Letters of Transmittal and certificates representing Series A Notes should not be sent to the Company. Such documents should only be sent to the Exchange Agent. See "The Exchange Offer -- Exchange Agent." THE NOTES Maturity Date of the Notes...................... May 15, 2004. Interest Payment Dates..... May 15 and November 15 of each year, commencing November 15, 1997. Limited Nature of Guarantees................. The Notes are fully and unconditionally guaranteed on a senior basis by the Subsidiary Guarantors. Under certain circumstances, future subsidiaries (other than Accounts Receivables Subsidiaries and Foreign Subsidiaries) of the Company may be requested to guarantee the Notes. In addition, the Guarantees are subject to release under certain circumstances. See "Description of the Notes -- Exchange Note Guarantees" and "Description of the Exchange Notes -- Limitations on Guarantees by Restricted Subsidiaries." Ranking.................... The Notes rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Guarantees rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of the Subsidiary Guarantors. The Notes and the Guarantees will be effectively subordinated to all secured indebtedness of the Company and the Subsidiary Guarantors to the extent of the value of the assets securing such indebtedness. As of May 3, 1997, on a pro forma basis after giving effect to the issuance of the Notes and the application of the net proceeds therefrom, the Company and the Subsidiary Guarantors would have had an aggregate of approximately $521.2 million of indebtedness outstanding, of which approximately $295.3 million would have been senior indebtedness and approximately $60.3 million would have been secured indebtedness. See "Description of the Exchange Notes." Change of Control.......... Following the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to make an offer to purchase all outstanding Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. See "Description of the Notes -- Change of Control." Certain Covenants.......... The Indenture under which the Notes are issued contains certain covenants that, among other things, limit (i) the incurrence of additional indebtedness, (ii) certain restricted payments, (iii) certain asset sales, (iv) transactions with affiliates, (v) consolidations, mergers and dispositions of assets on a consolidated basis, and (vi) the Company's restricted subsidiaries from guaranteeing certain other indebtedness of the Company unless such restricted subsidiaries also guarantee the Notes. The Indenture also prohibits certain restrictions on distributions from restricted subsidiaries of the Company. These covenants are subject to important exceptions and qualifications. The Indenture provides that after the Notes achieve an investment grade rating from both Standard & Poor's Ratings Services, a Division of the McGraw-Hill Companies, Inc., and Moody's Investors Service, Inc., the Company's obligation to comply with certain of the restrictive covenants described herein will be terminated. See "Description of the Notes -- Certain Covenants." Use of Proceeds............ The Company will not receive any proceeds from the issuance of the Exchange Notes pursuant to the Exchange Offer. The net proceeds to the Company from the sale of the Series A Notes are being used to repay certain outstanding mortgage and other indebtedness of the Company, to reduce certain borrowings under the Credit Facility and for general corporate purposes. See "Use of Proceeds." Shelf Registration Statement................ If (i) the Exchange Offer is not permitted by applicable law or (ii) any holder of Transfer Restricted Notes (as defined herein) notifies the Company within 20 business days of the commencement of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and holds Series A Notes acquired directly from the Company or an affiliate of the Company, the Company will be required to provide the Shelf Registration Statement to cover resales of the Notes by such holders thereof. If the Company fails to satisfy these registration obligations, it will be required to pay Additional Interest (as defined herein) to the holders of Notes under certain circumstances. See "The Exchange Offer." Absence of an Established Trading Market for the Notes.................... The Series A Notes are new securities that were issued on May 21, 1997 (the "Issue Date" or "Closing Date"). There is currently no established trading market for the Notes or the Exchange Notes. Although Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Smith Barney Inc. (the "Initial Purchasers") have informed the Company that they currently intend to make a market in the Series A Notes and, upon issuance, the Exchange Notes, they are not obligated to do so and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes. To the extent Series A Notes are exchanged in this Exchange Offer, the liquidity of the market for the remaining Series A Notes may be reduced. The Series A Notes have been designated eligible for trading in the Private Offerings, Resale and Trading through Automatic Linkages (PORTAL) market. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through Nasdaq. See "Risk Factors -- Absence of a Public Market." THE COMPANY The Company is a leading regional department store chain operating 175 stores in 24 states, primarily in the Southeast and Midwest. The Company operates its stores under five chain names: Proffitt's (19 stores), McRae's (29 stores), Younkers (48 stores), Parisian (40 stores) and Herberger's (39 stores). Each chain operates primarily as a leading branded traditional department store in its communities, with Parisian serving as a better branded specialty department store. Most of the stores are located in premier regional malls in the respective trade areas served. The Company's stores offer a wide selection of fashion apparel, accessories, cosmetics and decorative home furnishings, featuring assortments of premier brands, private brands and specialty merchandise. Each of the Company's chains operates with its own merchandising, marketing and store operations team in order to tailor regional assortments to the local customer. At the same time, the Company coordinates merchandising among the chains and consolidates administrative and support functions to realize scale economies, to promote a competitive cost structure and to increase margins. Under the leadership of R. Brad Martin and an experienced senior management team, the Company has executed a disciplined acquisition strategy and strategic approach to new store openings, growing from 11 stores and net sales of $94.8 million in fiscal 1989 to 175 stores and pro forma net sales of $2.3 billion in fiscal 1996. In addition, the Company has increased EBITDA from $8.9 million in fiscal 1989 to $167.2 million in fiscal 1996, on a pro forma basis. Members of the Company's senior management have substantial investments in the Company. As of April 25, 1997, Mr. Martin beneficially owned approximately 4.7% of the Company's Common Stock and all directors and executive officers of the Company as a group beneficially owned approximately 13.2% of the Company's Common Stock. The Company was incorporated under the laws of the State of Tennessee in 1919. The principal executive offices of the Company are located at 3455 Highway 80 West, Jackson, Mississippi 39209, and its telephone number is (601) 968-4400. BUSINESS STRENGTHS The Company believes that it is well-positioned to build upon its historical success by capitalizing on its competitive strengths, including the following: Strong Regional Focus. The Company places a high priority on being a market leader in each of the markets in which it operates. In smaller communities, the Company's stores are frequently the only branded name department store catering to middle and upper income customers and offering an array of brands that frequently are not otherwise available to shoppers in such markets. In most larger metropolitan markets, the Company seeks to maximize its market share by operating multiple stores in prime locations. While the Company has grown through the acquisition of regional chains, its philosophy has been to (i) maintain existing trade names and retain merchandising and store personnel and (ii) utilize previously developed regional expertise and knowledge of the local customer base by allowing each chain to tailor merchandise assortments to the local customer. The Company believes that the increased sales and gross margins resulting from a coordinated but decentralized merchandising effort outweigh any incremental operating cost savings associated with a completely centralized strategy. Scale Economies. With pro forma sales of approximately $2.3 billion in fiscal 1996, the Company realizes scale economies in purchasing and distribution, administrative areas such as accounting, proprietary credit card administration, management information systems, and other infrastructure-related areas. Although the Company's chains control regional merchandising, the Proffitt's Merchandising Group coordinates merchandising, planning and execution, visual presentation, marketing and advertising activities among the chains. The Proffitt's Merchandising Group manages strategic relationships with the Company's top vendors to ensure that each chain is afforded the purchasing leverage of the Company as a whole. In addition to seeking economies of scale in purchasing, the Proffitt's Merchandising Group will continue to capitalize on corporate level marketing synergies, such as the coordination of media buying and direct mail programs, the establishment of preferred advertising rates, and the production of store catalogs. Proven Track Record of Integrating Acquisitions. In recent years, the Company has grown primarily through the acquisition of strong, regional department store chains at valuations believed to be attractive by management. The following table sets forth certain information concerning the Company's significant acquisitions: <TABLE> <CAPTION> TRANSACTION VALUE(A) EQUITY AS A % AS A MULTIPLE OF: DATE OF NUMBER TRANSACTION OF TRANSACTION ---------------------------- COMPANY ACQUIRED ACQUISITION OF STORES VALUE(A) VALUE(A) LTM SALES(B) LTM EBITDA(B) - ---------------- ----------- --------- ----------- -------------- ------------ ------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> McRae's, Inc.................... March 31, 1994 28 $264.8 5% 0.6x 5.3x Younkers, Inc................... February 3, 1996 51 321.6 79 0.5 6.5 Parisian, Inc................... October 11, 1996 38 375.0 28 0.5 8.7 G.R. Herberger's, Inc........... February 1, 1997 39 176.9 88 0.5 7.4 </TABLE> - --------------- (a) Transaction value is the total consideration paid in the form of: (i) cash; (ii) notes; (iii) equity (valued as of the announcement date for pooling-of-interest transactions and in accordance with generally accepted accounting principles for purchase accounting transactions); and (iv) assumed long-term debt, net of cash, as of the end of the last full fiscal quarter prior to the acquisition date. (b) LTM Sales and LTM EBITDA of the acquired company represent data for the twelve months ending on the last day of the last full fiscal quarter prior to the acquisition date. Additionally, EBITDA for Herberger's is adjusted for ESOP expense of $4.3 million. See "-- Summary Historical and Pro Forma Financial and Operating Data" for the definition of EBITDA. The Company employs a "best practices" approach to integrating acquired companies. Best practices is a process whereby each acquired chain's operating procedures and policies are reviewed to determine those practices which the Company believes will increase synergies while minimizing business interruptions. The Company believes the implementation of best practices throughout the Company's chains has resulted in improved comparable store sales and increased operating margins through better and more consistent inventory control and pricing, and other operating efficiencies. Strong Financial Position. The Company has been able to realize significant growth while maintaining moderate leverage. Since February 1996, the acquisitions of Younkers, Herberger's and Parisian have resulted in an increase in net sales of approximately $1.6 billion, while senior debt as a percentage of total capitalization decreased slightly. In addition to conservative balance sheet management, the Company's strong cash flow generation has allowed it to fund all capital expenditures, incremental working capital requirements and fixed charges with internally generated cash flow. On a pro forma basis, the Company's ratio of EBITDA to interest expense in fiscal 1996 would have been 3.7x. The Company's strong financial performance has provided it with significant financial flexibility, including the ability to use its publicly-traded common stock as consideration for selected acquisitions. Geographic and Demographic Diversity. The Company operates 175 stores in 24 states. Stores are operated in metropolitan markets such as Atlanta, Georgia and Indianapolis, Indiana, as well as in smaller markets such as Ames, Iowa and Kalispell, Montana. The Company believes that its geographic diversity and the demographic breadth of its target customer groups may to some extent serve to insulate the Company from sales and earnings volatility typically associated with poor weather conditions, or changes in local or regional economic conditions. Attractive Real Estate. The Company believes that its stores are primarily located in premier malls in the markets in which the Company operates. As is consistent with national trends, the Company further believes that construction of new malls in many of its markets is likely to be limited. The Company anticipates that the attractiveness of its existing locations, combined with limited new mall development, may contribute to improved comparable store sales. BUSINESS STRATEGY The Company's business objective is to maximize profitability and shareholder value by (i) expanding its core business through comparable store sales growth, new store openings and margin expansion, and (ii) monitoring acquisition opportunities while maintaining a strong capital structure. Comparable Store Sales Growth. The Company expects that comparable store sales will benefit from a number of merchandising initiatives including (i) implementing best practices, (ii) expanding sales of key brands, and (iii) increasing sales of the Company's private brands. As part of best practices, the Company benchmarks sales of product categories and brand assortments for each store and identifies and targets opportunities to strengthen such sales by altering the merchandise mix. The Company has successfully used this strategy by applying the long history of strength in the cosmetics business of McRae's and Proffitt's stores to increase the penetration and profitability of Younkers stores' cosmetics business. The Company believes that it will be able to further utilize this strategy to increase sales in the Younkers shoe business, increase McRae's women's apparel sales and introduce home goods into select Parisian stores. The Company believes that comparable store sales will also benefit from expanded sales of key brands, such as Tommy Hilfiger, Liz Claiborne, Jones New York, Polo/Ralph Lauren, Calvin Klein, Guess, and Nine West, among others. The Company's large scale and proven track record with these vendors has enabled the Company to introduce certain of these brands into acquired stores which, prior to combining with the Company, did not have access to these vendors. For instance, Tommy Hilfiger, Nautica and Lancome will now be carried in select Herberger's stores. Additionally, the Company plans to increase sales of its private brand offerings within the apparel and housewares categories from 6% of total net sales to 12% to 15% over the next two to three years. For example, the Company has recently developed its own line of men's dress shirts and accessories, under the brand name RBM. The RBM collection is designed to fill a niche for quality men's furnishings at moderate prices. New Store Openings. The Company plans to open 15 to 20 new stores across all chains over the next three years and to make selective real estate acquisitions in existing or new markets. The Company targets premier mall locations principally based on favorable demographic profiles and trends, as well as the compatibility and traffic draws of other tenants. High quality real estate is a primary criterion for all new stores. In addition, the Company plans to selectively remodel or expand certain existing stores. Margin Expansion. The Company has implemented the following strategies to increase margins: (i) leveraging key vendor relationships; (ii) capitalizing on purchasing economies of scale; (iii) extending key brands into certain acquired stores; (iv) shifting the merchandise mix toward higher margin products; (v) increasing private brand penetration; (vi) consolidating administrative and support areas and eliminating redundant expenses; and (vii) realizing efficiencies related to the re-engineering of certain operating activities. The Company intends to further increase gross margins by increasing sales of its private brand products, which typically generate higher margins and enhance customer loyalty. Operating margins are also expected to benefit from sales productivity enhancements across the Company's chains and from the integration cost savings programs developed by management in conjunction with the Younkers, Parisian, and Herberger's acquisitions. These programs reduced operating expenses by a total of $6 million in fiscal 1996 (consistent with the Company's announced target) and are expected to produce annualized expense savings of $20 million in fiscal 1997 and $29 million in fiscal 1998 (compared to the 1995 cost structure of the chains on an independent basis). Monitor Acquisition Opportunities. The Company has an established record of successfully acquiring and integrating regional department store chains. The Company believes that its philosophy of retaining the local identity and merchandising organization of acquired companies makes the Company an attractive acquirer for regional department store companies. The Company's criteria in evaluating strategic opportunities include (i) strong market presence; (ii) prime real estate locations; (iii) similar merchandising strategies targeted toward middle to upper income consumers; (iv) geographic proximity to the Company's core markets; (v) compatible corporate culture; and (vi) favorable demographics in the regions served. Although the Company currently has no agreements, arrangements or understandings with respect to future acquisitions, the Company expects the department store industry will continue to consolidate, and the Company will regularly evaluate possible acquisition opportunities as they arise. Maintain Strong Capital Structure. The Company intends to maintain a strong balance sheet to support its growth objectives. The fulfillment of this objective has been facilitated by strong cash flows and the Company's issuance of its Common Stock as all or part of the consideration used in its recent acquisitions. The Company believes that, absent any additional acquisitions, future cash flows from operations (with seasonal needs supplemented by borrowings under its Credit Facility) will be sufficient to service debt and lease payments, and to fund capital expenditures and working capital requirements. RECENT DEVELOPMENTS Strengthening and Retaining Management. In recent months, the Company has acted to strengthen and retain its senior management in light of its recent growth and strategic objectives. In April 1997, the Board of Directors of the Company authorized a new five-year employment agreement with R. Brad Martin, its Chairman and Chief Executive Officer since 1989. Among other recent appointments, the Company also named Douglas E. Coltharp as Executive Vice President and Chief Financial Officer, William D. Cappiello as President and Chief Executive Officer of Parisian, Frank E. Kulp as President and Chief Executive Officer of Herberger's, Mark Shulman as President and Chief Executive Officer of Younkers, Toni E. Browning as President and Chief Executive Officer of the Proffitt's Division, Dawn H. Robertson as President and Chief Executive Officer of McRae's, and Donald E. Wright as Senior Vice President of Finance and Accounting. Implementation of Capital Structure Improvements. The Company is in the process of implementing a number of capital structure improvements to position it for future growth. The issuance of the Notes is part of a plan to improve the Company's capital structure by (i) reducing the amount of the Company's secured indebtedness; (ii) reducing the amount of the Company's indebtedness that bears interest at a floating rate; and (iii) extending the average life of the Company's indebtedness. On June 26, 1997, the Company amended and restated its existing credit facility (as amended and restated, the "Credit Facility") to, among other things, (a) increase the revolving Credit Facility from $275 million to $400 million, (b) extend the maturity from October 11, 1999 to June 26, 2002, (c) make provision for, upon any senior indebtedness of Proffitt's being rated investment grade, the elimination of the inventory borrowing base limitation on borrowings under the Credit Facility, (d) reduce the financial performance benchmarks at which more favorable pricing options are made available to the Company, and (e) lessen in varying degrees the scope of the affirmative and negative covenants applicable to the Company and its subsidiaries. The Company may use the proceeds of borrowings under the Credit Facility to refinance certain existing indebtedness, to finance capital expenditures, for general corporate purposes and to finance certain acquisitions. Furthermore, the Company is pursuing a restructuring of one of its existing accounts receivable financing arrangements covering receivables generated by all the stores, except Younkers, in an effort to extend the term of a portion of such arrangements from one year to three to five years through the sale of investment grade term asset-backed securities. The Company anticipates that such transaction may be completed during or shortly after the Exchange Offer. There is no assurance, however, that such transaction will be completed as presently contemplated. See "Receivables Securitization Facilities."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus, including "Risk Factors," and the consolidated financial statements of the Company, including the notes thereto (the "Consolidated Financial Statements"). Unless otherwise indicated, all references in this Prospectus to "Snelling" or the "Company" shall mean Snelling and Snelling, Inc., and its subsidiaries on a consolidated basis. In addition, unless otherwise indicated, the information in this Prospectus (i) gives effect to the reclassification of Snelling's outstanding common stock into Class B Common Stock, the equivalent of a 5.415067-for-1 split of the outstanding shares of Class B Common Stock and the creation of a new Class A Common Stock, all of which will be effected by amendment and restatement of the Company's Articles of Incorporation upon the effectiveness of the registration statement of which this Prospectus forms a part, (ii) assumes that 5,126,904 shares of Class B Common Stock will be outstanding immediately before this offering and (iii) assumes the Underwriters' over-allotment option will not be exercised. THE COMPANY Snelling is a leading national provider of staffing solutions primarily targeted to small and mid-sized businesses. As of September 30, 1997, the Company operated as Snelling(R) Personnel Services through a network of 289 franchise locations and 29 Company-owned branch locations in 42 states, the District of Columbia and Puerto Rico, as well as three foreign countries, and had executed an agreement for the opening of one additional franchise location. The majority of the Company's franchise and branch locations offer the Company's clients integrated, full-service staffing solutions by providing traditional flexible staffing, single-source management, temp-to-hire, career placement and other staffing services from each location. Founded in 1951, the Company currently provides flexible staffing personnel for office, clerical and light industrial services. The Company also offers career placement services in a number of fields, including accounting and finance, engineering, health care, law, manufacturing, management information systems and office, sales, marketing and technical services. Flexible staffing services (which include traditional flexible staffing, single-source management and temp-to-hire) accounted for approximately 90%, and career placement services accounted for approximately 10%, of the Company's total system-wide sales for both the year ended December 31, 1996, and the nine months ended September 30, 1997. The staffing industry has experienced rapid growth over the past decade as a result of economic trends and changing approaches to staffing and employment. According to Staffing Industry Report(R), the U.S. staffing industry has grown from an estimated $31.4 billion in revenues in 1991 to an estimated $74.4 billion in 1996, representing a compound annual growth rate of approximately 19%. Based on this information, 1996 sales generated by flexible staffing accounted for 66% of the overall staffing market, professional employer organizations ("PEOs") accounted for 23% and career placement accounted for 11%. Traditional flexible staffing for office, clerical and industrial services grew from approximately $12.1 billion in 1991 to approximately $26.4 billion in 1996, representing a compound annual growth rate of approximately 17%. Estimated sales from career placement (in approximate numbers) grew from $3.9 billion in 1991 to $7.2 billion in 1996, representing a compound annual growth rate of 13%. Snelling's goal is to enhance its leading position in the staffing industry through the following business strategy: (i) continue to focus on small and mid-sized businesses; (ii) offer an integrated, full-service approach to staffing solutions from each location; (iii) maintain a strong operating infrastructure; (iv) recruit and retain qualified management and personnel, including flexible staffing personnel; and (v) control costs through a continued emphasis on technology and risk management, especially workers' compensation insurance. Snelling intends to continue to achieve revenue and earnings growth and increase market share through the following focused growth strategy: (i) expand market penetration of its existing franchise and branch locations through intensive training of sales personnel, investments in technology and the aggressive pursuit of cross-selling opportunities; (ii) pursue acquisitions of independent staffing companies and select franchise locations; (iii) establish alternative distribution channels, such as "co-branding" with other services providers or retailers; (iv) develop new services, such as PEO services, internally or through strategic acquisitions of related staffing businesses that are complementary to Snelling's business; and (v) continue to franchise in certain select markets. ACQUISITIONS Consistent with its growth strategy, Snelling began an expansion program in 1994 to acquire independent staffing companies and selected franchise locations. The Company acquired six franchise locations in 1994 with aggregate annual revenues of approximately $5.9 million; four franchise locations in 1995, with aggregate annual revenues of approximately $8.0 million; seven independent staffing locations and nine franchise locations in 1996, with aggregate annual revenues of approximately $43.6 million; one franchise location in the first nine months of 1997, with annual revenues of approximately $3.5 million; one independent staffing location in October 1997, with annual revenues of approximately $14.4 million; and one franchise location in November 1997, with annual revenues of approximately $2.6 million. The aggregate consideration paid with respect to these acquisitions was approximately $29.1 million and was financed using a combination of cash, seller financing and bank loans. After giving effect to the consolidation of certain locations of the acquired companies, the Company's acquisitions have resulted in a net addition of 26 Company-owned branch locations in 13 states. The Company has one pending acquisition of an independent staff location with annual revenues of approximately $2.3 million, which is currently scheduled to be completed in December 1997. On an ongoing basis, the Company evaluates opportunities to acquire companies that are complementary to its business, including independent staffing companies and selected franchises. The Company currently has no plans, arrangements or understandings, and is not participating in negotiations, with respect to any material acquisitions. THE OFFERING <TABLE> <S> <C> Common Stock being offered by: The Company............................. 2,933,333 shares The Selling Shareholder................. 416,667 shares Common Shares to be outstanding after the offering................................ 8,060,237 shares(1) Voting rights............................. The Common Stock is entitled to one vote per share, and the Class B Common Stock is entitled to ten votes per share. See "Risk Factors -- Control of the Company by the Snelling Family" and "Description of Capital Stock." Use of proceeds........................... To repay certain indebtedness, including capital lease commitments, and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.... SNEL </TABLE> - --------------- (1) Includes 4,710,237 shares of Class B Common Stock currently issued and outstanding, which are convertible into shares of Common Stock under certain circumstances. See "Description of Capital Stock -- Common Shares" regarding the conversion rights and restrictions on transfer of the Class B Common Stock. Excludes (i) 2,599,238 shares of Class B Common Stock issuable pursuant to outstanding options under the Company's 1996 Stock Option Plan at a weighted average exercise price of $3.85 per share and (ii) 357,974 shares of Class B Common Stock issuable pursuant to options to be granted under the 1996 Stock Option Plan at the initial public offering price upon completion of this offering. See "Management -- Stock Option Plans." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) <TABLE> <CAPTION> SEVEN FISCAL NINE MONTHS FISCAL YEAR MONTHS YEAR ENDED ENDED ENDED MAY 31, ENDED DEC. 31, SEPTEMBER 30, ------------------------------ DEC. 31, ------------------- ------------------- 1992 1993 1994 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF EARNINGS DATA: Revenues.............................. $ 19,023 $ 30,360 $ 70,202 $ 59,309 $122,701 $168,602 $116,864 $165,686 Cost of services...................... 8,260 16,330 47,456 40,221 87,943 122,945 83,957 123,964 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit.................. 10,763 14,030 22,746 19,088 34,758 45,657 32,907 41,722 Selling, general and administrative expenses............................ 11,878 11,832 14,116 8,859 15,384 19,600 13,624 20,421 Franchises' share of gross profit(1)........................... -- 2,023 8,648 8,659 14,682 19,587 14,835 15,772 -------- -------- -------- -------- -------- -------- -------- -------- Operating profit (loss)....... (1,115) 175 (18) 1,570 4,692 6,470 4,448 5,529 Interest expense...................... 46 34 66 71 379 1,100 602 1,885 Other income.......................... 523 432 348 63 97 105 54 698 -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) before income taxes............................... (638) 573 264 1,562 4,410 5,475 3,900 4,342 Income tax expense (benefit).......... (137) 263 152 704 1,720 2,161 1,564 1,727 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings (loss)................... $ (501) $ 310 $ 112 $ 858 $ 2,690 $ 3,314 $ 2,336 $ 2,615 ======== ======== ======== ======== ======== ======== ======== ======== Net earnings (loss) per Common Share............................... $ (0.07) $ 0.04 $ 0.02 $ 0.12 $ 0.38 $ 0.48 $ 0.33 $ 0.38 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average Common Shares outstanding......................... 7,121 7,118 7,068 7,012 7,007 6,966 6,982 6,909 ======== ======== ======== ======== ======== ======== ======== ======== SELECTED OPERATING DATA: System-wide sales (in thousands)(2)... $117,693 $175,747 $225,270 $166,340 $318,858 $372,999 $273,282 $324,932 Hours billed (in thousands)(3)........ -- 1,181 5,016 5,058 9,526 13,141 9,300 13,345 Average bill rate(3).................. -- $ 10.20 $ 10.60 $ 10.54 $ 11.29 $ 11.44 $ 11.57 $ 11.90 Gross margin per flexible employee(3)......................... -- 23.4% 24.6% 23.9% 23.8% 23.2% 23.6% 22.3% Number of branch locations(4)(5)...... 1 1 2 7 9 29 19 29 Number of franchise locations(4)...... 271 253 248 248 274 277 276 289 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1997 ---------------------- AS ACTUAL ADJUSTED(6) ------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $13,943 $20,119 Total assets................................................ 55,302 60,385 Total debt.................................................. 27,407 1,004 Shareholders' equity........................................ 14,885 46,371 </TABLE> - --------------- (1) The Company has two types of franchises for purposes of flexible staffing services revenue recognition. With the first type, the Company records franchise royalties, based on a contractual percentage of flexible staffing services billings, in the period in which the franchise collects for the services provided. The second type of franchises participate in the Company's pay/bill processing program. With the second type, the Company has a direct contractual relationship with the clients for the services, holds title to the related receivables and is the legal employer of the flexible staffing employees. Revenues generated by these franchises and the related direct costs of services are included as part of the Company's revenues and costs of services in the period in which the services are provided. The net distribution paid to franchises participating in the pay/bill processing program is an operating expense recorded by the Company as franchises' share of gross profit and is based on either a percentage of the flexible staffing services billings or a percentage of the gross profit generated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Organization -- Franchises" and "Business -- Operations -- Pay/Bill Processing Services." (2) System-wide sales are equal to the aggregate revenues of all franchise locations and Company-owned branch locations during the period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Includes franchise locations participating in the Company's pay/bill processing program and Company-owned branch locations. See "Business -- Operations -- Pay/Bill Processing Services."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and the notes thereto included elsewhere in this Prospectus. UNIFAB International, Inc. (the "Company") was recently formed to serve, upon completion of the Offering, as the parent corporation of Universal Fabricators Incorporated ("Universal Fabricators"), 51% of the outstanding common stock of which is currently owned by Universal Partners, Inc. ("Universal Partners") and 49% of such stock is owned by McDermott Incorporated ("McDermott"). Immediately prior to the completion of the Offering, Universal Partners will exchange its shares of common stock of Universal Fabricators for shares of the Company's Common Stock (the "Partners Share Exchange"), which will be distributed to the shareholders of Universal Partners upon the dissolution of Universal Partners which is expected to occur promptly after the completion of the Offering. McDermott will also exchange its shares of common stock of Universal Fabricators for shares of the Company's Common Stock (the "McDermott Share Exchange"), all of which will be sold in the Offering. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised and that the Partners Share Exchange and the McDermott Share Exchange each have been completed. As used herein, unless the context requires otherwise, references to the "Company" include Universal Fabricators and its predecessor. Certain technical terms are defined in the "Glossary of Certain Technical Terms" appearing immediately before the Index to Financial Statements.

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+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated, the information in this Prospectus assumes that all outstanding options and the Underwriters' over-allotment option will not be exercised. References to financial or statistical data for a particular year refer to the Company's corresponding fiscal year, which is currently a 52 or 53-week period ending on the Saturday closest to January 1. (For example, "1995" means the fiscal year ended December 30, 1995 and "1996" means the fiscal year ended January 4, 1997.) THE COMPANY Quaker is a leading designer, manufacturer and worldwide marketer of woven upholstery fabrics for residential furniture and one of the largest producers of Jacquard upholstery fabrics in the world. The Company is also a leading developer and manufacturer of specialty yarns and management believes it is the world's largest producer of chenille yarns, which Quaker both sells and uses in the production of its fabrics. The Company's vertically integrated operations provide Quaker with important design, cost and delivery advantages. The Company's product line is one of the most comprehensive in the industry and Quaker is well known for its broad range of Jacquard fabrics, including its soft, velvet-like Jacquard chenilles. The Company's revenues have grown from $123.4 million in 1992 to $198.9 million in 1996, a compound annual growth rate ("CAGR") of 12.7%. Quaker has been producing upholstery fabric for over fifty years and is a full service supplier of Jacquard and plain woven upholstery fabric to the furniture market. Quaker's current product line consists of over 3,000 traditional, contemporary, transitional and country fabric patterns intended to meet the styling and design, color, texture, quality and pricing requirements of promotional through middle to higher-end furniture manufacturers, and the Company introduces approximately 700 new products to the market annually. Management believes that Jacquard fabrics, with their detailed designs, provide furniture manufacturers with more product differentiation opportunities than any other fabric construction on the market. In addition, technological advances in the speed and flexibility of the Jacquard loom have reduced the cost of producing Jacquard fabrics, enabling them to compete more effectively with prints, velvets, flocks, tufts and other plain woven products. The Company sells its upholstery fabrics to over 600 domestic furniture manufacturers, including virtually every significant domestic manufacturer of upholstered furniture, such as Furniture Brands International (Action by Lane, Broyhill and Thomasville), Klaussner, La-Z-Boy, Lifestyle Furnishings International (Berkline, Benchcraft and others), Rowe and Simmons. Quaker also distributes its fabrics internationally. In 1996, fabric sales outside the United States of $35.7 million represented approximately 20.2% of gross fabric sales. Quaker's October 1996 introduction of its Whitaker Collection, a branded line of a select group of the Company's better-end products, has resulted in incremental sales to a number of well known higher-end furniture manufacturers, including Baker, Bernhardt, Henredon and Sherrill. Management estimates that approximately 85% of the Company's fabric sales in recent years have been manufactured to customer order. THE INDUSTRY Total domestic upholstery fabric sales, exclusive of automotive applications, are estimated to be approximately $2.0 billion annually. Management estimates the size of the international fabric market to be at least twice that of the domestic market. Due to the capital intensive nature of the fabric manufacturing process and the importance of economies of scale in the industry, the domestic industry is concentrated, with the top 15 upholstery fabric manufacturers, including Quaker, accounting for over 80% of the total market. Most of the largest U.S. fabric producers have expanded their export sales, capitalizing on their size, distribution capabilities, technology advantages and broad product lines. Management believes that over the last several years furniture manufacturers have moved toward more highly styled Jacquard fabrics, at the expense of less distinctive fabrics, such as flocks, plaids, plains, prints, stripes, tufts and velvets. Within the Jacquard segment, price is a more important competitive factor in the promotional-end of the market than it is in the middle to better-end of the market, where fabric styling and design considerations typically play a more important role. GROWTH STRATEGY Quaker's strategy to further its growth and financial performance objectives includes: Increasing Sales to the Middle to Better-End Segment. To capitalize on the consolidation trend in the furniture industry, the Company has positioned itself as a full service supplier of Jacquard and plain woven fabrics by increasing the breadth and depth of its product line. Sales of the Company's middle to better-end fabrics, which the Company first began emphasizing in the early 1990s, have increased from $66.3 million, or 56.3% of total fabric sales in 1992, to $121.7 million, or 69.0% of total fabric sales in 1996, a CAGR of 16.4%. Expanding International Sales. The Company has made worldwide distribution of its upholstery fabrics a key component of its growth strategy. Quaker has built an international sales and distribution network, dedicated significant corporate resources to the development of fabrics to meet the specific styling and design needs of its international customers, and put programs in place to simplify the purchase of product from Quaker. As a result, the Company's international sales have increased from $18.3 million in 1992 to $35.7 million in 1996, a CAGR of 18.2%. Capitalizing on the Growth of the Casual Furniture Segment. Based upon its leading position in the Jacquard market and its own internally produced chenille yarns, management believes Quaker is well positioned to benefit from the growth of the casual furniture segment, where soft, durable, distinctive fabrics, such as Quaker's Jacquard and other chenilles, are in increasing demand. Penetrating Related Fabric Markets. Management believes the superior styling and performance characteristics of the Company's fabrics provide opportunities to penetrate markets related to Quaker's core residential fabric business. The Company has specifically targeted the contract (office and institutional) and recreational vehicle markets, where management believes Quaker's Jacquard chenille fabrics will provide the Company with a clear product advantage. The Company has also targeted additional sales to the decorative jobber (distributors to the interior design trade) market, where management believes the Company's recently introduced Whitaker Collection will have broad appeal. Growing Specialty Yarn Sales. Quaker is a leading producer of specialty yarns and management believes it is the world's largest producer of chenille yarns. Sales of the Company's specialty yarns have increased from $7.8 million in 1992 to $26.8 million in 1996, a CAGR of 36.2%. In addition to the popularity of the Company's current line of specialty yarns, including its proprietary, abrasion-resistant Ankyra chenille yarns, Quaker regularly creates innovative new specialty yarns for use in the Company's fabrics and sale to the Company's growing list of yarn customers. Quaker intends to increase sales by targeting new markets and applications for its specialty yarns. COMPETITIVE STRENGTHS Management believes that the following competitive strengths distinguish Quaker from its competitors and that these strengths serve as a solid foundation for the Company's growth strategy: Product Design and Development Capabilities. Management believes that Quaker's reputation for design excellence and product leadership is, and will continue to be, the Company's most important competitive strength. Focus on Jacquard Fabrics. Management believes the detailed, copyrighted designs of the Company's Jacquard fabrics have enabled it to compete primarily based on superior styling and design, contributing to Quaker's strong gross margin performance. Broad Product Offering. The breadth and depth of Quaker's product line enables the Company to be a full service supplier of Jacquard and plain woven fabrics to virtually every significant domestic manufacturer of upholstered furniture. Vertical Integration. Using Quaker's own specialty yarns in the production of its fabrics provides the Company with significant design, cost and delivery advantages. State-of-the-Art Manufacturing Equipment. Management believes the Company has one of the most modern, efficient and technologically advanced manufacturing bases in the industry. During the past five years, Quaker has invested more than $51 million in new manufacturing equipment to expand its yarn and fabric production capacity, increase productivity, improve product quality and produce the more complex fabrics associated with the Company's successful penetration of the middle to better-end segment of the upholstery fabric market. During 1997, Quaker plans to spend approximately $14.4 million, plus the estimated $4.2 million net proceeds to the Company from this offering, on additional manufacturing equipment to accelerate the growth of its specialty yarn business, respond to anticipated increases in demand for its fabric products, and achieve its marketing, productivity, quality, service and financial objectives. The Company produces all of its yarn and fabric products in its four manufacturing plants in Fall River, Massachusetts, where Quaker has over one million square feet of manufacturing space. In addition to distribution from the Company's facilities in Fall River, Quaker maintains domestic distribution centers in High Point, North Carolina, Tupelo, Mississippi, and Los Angeles, California. To provide better service to its international customers, the Company also has a distribution center in Mexico and maintains inventory in Holland. Quaker's executive offices are located at 941 Grinnell Street, Fall River, Massachusetts 02721 and the Company's telephone number is (508) 678-1951. SELLING STOCKHOLDERS In September 1989, the Company was acquired (the "1989 Acquisition") by a European company and Nortex Holdings, Inc. ("Nortex Holdings"), a corporation owned by three officers of the Company, including Larry A. Liebenow, the President and Chief Executive Officer of the Company. In early 1993, the Company reacquired all of the European company's interest in Quaker in a management-led recapitalization (the "1993 Recapitalization"). To finance the 1993 Recapitalization, the Company issued Common Stock and other securities to MLGA Fund II, L.P. ("MLGA Fund") and other affiliates of Morgan Lewis Githens & Ahn, Inc., an investment banking firm. MLGA Fund and Nortex Holdings are the Selling Stockholders and are selling 3,000,000 and 100,000 shares of Common Stock, respectively. Upon completion of this offering, MLGA Fund and Nortex Holdings will beneficially own 8.1% (2.0% if the Underwriters' over-allotment option is exercised in full) and 23.3% of the outstanding Common Stock, respectively. See "Management" and "Principal and Selling Stockholders." THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company........................... 300,000 shares Common Stock Offered by the Selling Stockholders.............. 3,100,000 shares Common Stock to be Outstanding after the Offering(1).......... 8,321,097 shares Use of Proceeds by the Company................................ To acquire production equipment to expand chenille yarn manufacturing capacity. See "Use of Proceeds." Nasdaq National Market Symbol................................. QFAB </TABLE> - ------------------------ (1) Does not include (i) 918,354 shares of Common Stock which may be issued pursuant to the Company's stock option plans, of which options to purchase 682,848 shares of Common Stock were outstanding on February 24, 1997 (including 330,000 shares which have been granted subject to stockholder approval), (ii) 5,000 shares of Common Stock which may be issued upon exercise of an option granted to a director and (iii) 370,359 shares of Common Stock which may be issued upon exercise of an option issued to Nortex Holdings (the "Nortex Option"). See "Management -- Benefit Plans." Ankyra(TM), Quaker(TM) and Whitaker(TM) are trademarks of the Company. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> FISCAL YEAR ENDED --------------------------------------------------------------------- JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 4, 1993(1) 1994 1994 1995 1997(1) ----------- ----------- ------------ ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE AND PER YARD DATA) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales....................................... $ 123,414 $ 147,867 $180,842 $173,487 $ 198,856 Cost of products sold........................... 92,855 110,753 133,168 137,083 152,787 -------- -------- -------- -------- -------- Gross margin.................................... 30,559 37,114 47,674 36,404 46,069 Selling, general and administrative expenses.... 18,862 22,292 27,560 26,176 29,121 -------- -------- -------- -------- -------- Operating income................................ 11,697 14,822 20,114 10,228 16,948 Interest expense, net........................... 4,148 4,936 3,863 3,898 4,092 Other expenses, net............................. 479 299 34 98 77 -------- -------- -------- -------- -------- Income before provision for income taxes........ 7,070 9,587 16,217 6,232 12,779 Provision for income taxes...................... 2,925 4,218 6,691 712 4,217 -------- -------- -------- -------- -------- Income before extraordinary item................ 4,145 5,369 9,526 5,520 8,562 Extraordinary item: loss on extinguishment of debt.......................................... -- (2,550) -- -- -- Net income...................................... 4,145 2,819 9,526 5,520 8,562 Preferred stock dividends....................... 420 70 -- -- -- -------- -------- -------- -------- -------- Net income applicable to common stock........... $ 3,725 $ 2,749 $ 9,526 $ 5,520 $ 8,562 ======== ======== ======== ======== ======== Earnings per common share before extraordinary item(2)....................................... $ 0.55 $ 0.75 $ 1.15 $ 0.67 $ 1.03 ======== ======== ======== ======== ======== Weighted average shares outstanding(2).......... 8,536 8,536 8,301 8,293 8,332 ======== ======== ======== ======== ======== SELECTED OPERATING DATA: EBITDA(3)....................................... $ 15,597 $ 19,710 $ 25,920 $ 16,821 $ 24,569 Depreciation and amortization................... 4,379 5,019 5,603 6,462 7,437 Net capital expenditures(4)..................... 5,186 10,558 18,727 13,165 11,979 Unit volume (in yards).......................... 32,228 36,289 41,641 40,761 43,552 Average gross sales price per yard.............. $ 3.66 $ 3.87 $ 4.06 $ 3.88 $ 4.05 </TABLE> <TABLE> <CAPTION> JANUARY 4, 1997 ------------------------- ACTUAL AS ADJUSTED(5) --------- -------------- BALANCE SHEET DATA: (IN THOUSANDS) - ----------------------------------------------------------------------------------------- <S> <C> <C> Working capital...................................................................... $ 32,620 $ 32,620 Total assets......................................................................... 148,832 153,039 Long-term debt and capital leases.................................................... 42,235 42,235 Stockholders' equity................................................................. 66,572 70,779 </TABLE> - ------------------ (1) The fiscal years ended January 2, 1993 and January 4, 1997 were 53-week periods. (2) Earnings per share for 1994, 1995 and 1996 is computed using the weighted average number of common shares and common share equivalents outstanding during the year. Earnings per share for 1992 and 1993 gives effect to the 1993 Recapitalization and the use of proceeds from the Company's initial public offering of Common Stock in 1993 (the "1993 Offering") as if both events had occurred at the beginning of 1992. (3) Represents income from continuing operations before extraordinary items plus interest, taxes, depreciation, amortization and other non-cash expenses. Although the Company has measured EBITDA consistently between the periods presented, EBITDA as a measure of liquidity is not governed by generally accepted accounting principles ("GAAP"), and, as such, may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA, while providing useful information, should not be considered in isolation or as an alternative to either (i) operating income determined in accordance with GAAP as an indicator of operating performance or (ii) cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. (4) Net capital expenditures reflect assets acquired by purchase and capital lease. (5) Adjusted to give effect to the sale of 300,000 shares of Common Stock offered hereby by the Company at an assumed offering price of $16.25 per share (the last reported sales price for the Common Stock on the Nasdaq National Market on February 24, 1997) after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company and the application of the net proceeds to the Company therefrom to purchase production equipment. See "Use of Proceeds" and "Capitalization."

parsed_sections/prospectus_summary/1997/CIK0000200243_artra_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following is a summary of certain of the information contained in this Prospectus and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere herein. Prospective investors should carefully consider the information set forth under the caption "Risk Factors." The Company ARTRA, through its subsidiary, Bagcraft Corporation of America ("Bagcraft"), currently operates in one industry segment as a manufacturer of packaging products principally serving the food industry. All of the shares of Bagcraft are owned by BCA Holdings, Inc. ("BCA"), which is a wholly owned subsidiary of ARTRA. BCA has no assets other than the shares of Bagcraft. ARTRA is a public company, whose stock is listed on the New York and Pacific Stock Exchanges under the symbol ATA. ARTRA, along with its wholly-owned subsidiary, Fill-Mor Holding, Inc. ("Fill-Mor"), also owns a significant minority interest in COMFORCE Corporation ("COMFORCE"), consisting of 1,727,000 shares or approximately 13% of the outstanding common stock of COMFORCE as of October 16, 1997. COMFORCE provides telecommunications and computer technical staffing services worldwide to Fortune 500 companies and maintains an extensive global database of technical specialists, with an emphasis on wireless communications capabilities. COMFORCE is a public company, whose stock is listed on The American Stock Exchange under the symbol "CFS." On October 16, 1997, the last reported sale price for the Common Stock of COMFORCE was $8.50 per share. Fill-Mor has no assets other than the COMFORCE shares. The Offering ARTRA is required under certain agreements it has entered into with shareholders and warrant holders to register the shares of Common Stock held by such shareholders or issuable upon the exercise of warrants held by such warrantholders. Existing security holders of the Company are offering up to 5,192,471 shares of Common Stock held by them, or issuable to them upon the exercise of options or warrants held by them. Common Stock Offered by the Selling Shareholders.............. 5,192,471 shares* Common Stock Outstanding as of October 16, 1997............... 8,290,182 shares Common Stock Issuable Under Options as of October 16, 1997.... 913,050 shares Common Stock Issuable Under Warrants as of October 16, 1997... 2,558,983 shares - ----------------- *Includes Common Stock issuable under options and warrants. Neither the warrants or options are being registered. The Company is registering shares of common stock issuable upon exercise of the options and warrants, shares issuable upon conversion of certain notes, and shares issued in payment of ARTRA notes and other obligations. See "Selling Shareholders" and "Plan of Distribution." Proceeds From Exercise of Warrants or Options The Company will not receive any proceeds from the sale of the Common Stock offered hereby by the Selling Shareholders. However, if the holders of options or warrants to purchase shares of Common Stock exercise their warrants or options in order to sell the underlying shares, the Company will receive the amount of the exercise prices of any warrants or options so exercised. Neither - 3 - <PAGE> the warrants or options are being registered. The Company is registering shares of common stock issuable upon exercise of the warrants, shares issuable upon conversion of certain notes, and shares issued in payment of ARTRA notes and obligations. The Company cannot predict when or if it will receive proceeds from the exercise of warrants or options, or the amount of any such proceeds. The Company intends to use the proceeds, if any, received from the exercise of warrants or options to retire or reduce indebtedness, to pay certain expenses of the offering and for working capital.

parsed_sections/prospectus_summary/1997/CIK0000206030_axsys_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus, including information under "Risk Factors." Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. All references to the "Company" in this Prospectus include Axsys Technologies, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires. All share and per share amounts appearing in this Prospectus reflect the Company's July 25, 1996 one- for-five reverse Common Stock split. A glossary of terms appears on page 57. THE COMPANY The Company designs, manufactures and sells custom precision optical and positioning components, subsystems and systems for high-performance markets, such as defense, space, high-end digital imaging and electronics capital equipment. The Company also designs, manufactures and sells interconnect devices and distributes precision ball bearings for use in a variety of industrial, commercial and consumer applications. Through its Precision Systems Group ("PSG"), the Company offers its capabilities in magnetics, electronics, optics, precision machining and systems integration to high-performance Original Equipment Manufacturers ("OEMs") and end-users, enabling them to design and utilize systems that meet leading-edge performance requirements. PSG designs, manufactures and sells high-end components such as precision sensors, high-performance motors, precision metal optics and airbearings. These products enable OEMs to improve measurement precision, positioning performance (speed and power), inspection throughput and manufacturing yields. PSG also designs, manufactures and sells subsystems which integrate several of the Company's components. Subsystems include laser autofocus systems which automatically focus microscopes used for optical inspection, airbearing laser scanners and laser imaging systems used in the electronic pre-press market, and direct drive motor and resolver assemblies used in cluster tool robotics for positioning semiconductor wafers. In addition, PSG designs, manufactures and sells systems, such as head stack assembly (HSA) testers used to dynamically test computer disk drive magnetic heads, electrical probers for advanced flat panel displays, and infrared microscopes used to locate defects in microprocessors. Through its Industrial Components Group ("ICG"), the Company designs, manufactures and sells interconnect products. It also distributes and services precision ball bearings used by OEMs in a variety of commercial industries. The interconnect products include safety agency (e.g., U.L.) approved barrier terminal blocks and power connectors which are primarily used to interface industrial or process control computers to sensors, motors and other signal level and power devices. The precision ball bearings distributed by the Company are acquired from various domestic and international sources and are used in machine tools, office automation, semiconductor manufacturing and other motion control applications to provide for smooth and precise rotary motion. The Company's current business reflects a strategic shift that commenced in 1995. In that year, the Company began to expand its PSG business to include not only components for defense and military space applications, but also value- added subsystems and systems for a broad range of industrial and commercial markets. This shift was timed to take advantage of the increased demand for high-performance components, subsystems and systems in these markets as commercial manufacturers began to seek new methods to increase throughput and yield. The Company believes that the change in these markets was the result of several factors, including: (i) the demand on manufacturers to produce smaller, higher-performance products with precise tolerances; (ii) pressures imposed on manufacturers to enhance productivity and quality, which in turn required integration of process control technology directly into the manufacturing process; and (iii) the lowering of costs associated with electronic controls. In furtherance of its shift in strategy, the Company acquired various synergistic technologies and assets. In April 1996, the Company acquired Precision Aerotech, Inc. ("PAI"). PAI's subsidiaries, Speedring, Inc. ("Speedring") and Speedring Systems, Inc. ("Speedring Systems"), are leading manufacturers and suppliers of high-performance laser scanners and optics, as well as suppliers of precision-machined specialty materials, such as beryllium and quartz, for space and other high-technology applications. In October 1996, the Company acquired substantially all of the assets of Lockheed Martin Beryllium Corporation ("LMBC"), a supplier of precision-machined beryllium. Components made of beryllium are significant elements of space telescopes, weather and direct broadcast satellites, and low-earth-orbit satellites used in cellular communication. Most recently, in May 1997, the Company acquired Teletrac, Inc. ("Teletrac") which designs, manufactures and sells laser-based precision measurement systems as well as precision linear and rotary positioning systems for use in the electronics capital equipment industry. The Company's primary goal is to be a leading provider of components, subsystems and systems that enhance throughput and yield to customers requiring high-performance devices in their equipment and to end-users in their manufacturing and quality assurance processes. The Company's strategy is to leverage its resources and capabilities to develop higher-level subsystems and systems, employing its precision optical and positioning technologies, while maintaining and continuing to grow ICG. Key elements of this strategy include: (i) integrating technologies; (ii) capitalizing on cross-selling opportunities; (iii) increasing investment in engineering and manufacturing infrastructure; and (iv) expanding through acquisitions. The Company was originally incorporated in 1959 in New York under the name Vernitron Corporation, was reincorporated in Delaware in 1968 and changed its name to Axsys Technologies, Inc. in December 1996. The Company's principal executive office is located at 645 Madison Avenue, New York, New York 10022, and its telephone number is (212) 593-7900. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 1,064,809 shares Common Stock offered by the Selling Share- holder...................................... 463,741 shares Common Stock to be outstanding after the Of- fering...................................... 4,113,190 shares(1) Use of Proceeds.............................. Repayment of bank debt, repurchase of warrants, working capital and other general corporate purposes, including possible acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol................ AXYS </TABLE> - -------- (1) Based on the number of outstanding shares of Common Stock as of August 15, 1997. Excludes 400,000 shares of Common Stock reserved for issuance under the Company's Long-Term Stock Incentive Plan (as amended), under which options to purchase 48,600 shares of Common Stock were outstanding as of August 15, 1997, and 100,000 shares of Common Stock issuable in the future to the minority shareholders of Teletrac (the "Teletrac Minority Shareholders"). The Company anticipates that, concurrently with the effectiveness of this Offering, options to purchase shares of Common Stock will be granted to a number of the Company's employees, including executive officers, covering a significant part of the shares available for grant under the Long-Term Stock Incentive Plan. See "Management--Stock Incentive Plan," "Certain Transactions," "Description of Capital Stock--Warrants" and "Shares Eligible for Future Sale." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ----------------- 1992 1993 1994 1995 1996(1) 1996(1) 1997(2) ------- ------- ------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales............... $62,912 $58,649 $62,132 $65,213 $91,301 $ 40,545 $ 58,849 Gross profit............ 15,831 15,311 17,229 17,240 23,818 10,655 15,738 Income (loss) from con- tinuing operations be- fore extraordinary item................... (1,042) (3,856) 27 884 2,855 1,202 2,366 Net income (loss)....... 102 (4,526) 3,681 884 2,682 1,029 2,366 Preferred stock divi- dends.................. 158 375 355 574 847 405 102 Net income (loss) applicable to common shareholders........... (56) (4,901) 3,326 310 1,835 624 2,264 Net income (loss) per share from continuing operations before extraordinary item..... $ (1.15) $ (4.1) $ (0.20) $ 0.12 $ 0.74 $ 0.34 $ 0.69 Net income (loss) per share applicable to common shareholders.... $ (0.05) $ (4.75) $ 1.95 $ 0.12 $ 0.68 $ 0.24 $ 0.69 Weighted average common shares outstanding..... 1,036 1,037 1,702 2,511 2,691 2,615 3,277 </TABLE> <TABLE> <CAPTION> JUNE 30, 1997 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital........................................ $23,180 $25,331 Total assets........................................... 74,695 74,695 Long-term debt and capital lease obligations (less cur- rent portion)......................................... 26,056 3,586 Shareholders' equity................................... 23,594 48,215 </TABLE> - -------- (1) In April 1996, the Company acquired the stock of PAI and, in October 1996, purchased substantially all of the assets of LMBC. These acquisitions have been accounted for under the purchase method of accounting and, accordingly, the results of the continuing operations of PAI and LMBC have been included in the Company's Consolidated Statement of Operations since their respective dates of acquisition. See Note 3 to the Consolidated Financial Statements. (2) In May 1997, the Company acquired the stock of Teletrac. This acquisition was accounted for under the purchase method of accounting and, accordingly, the results of Teletrac's operations have been included in the Company's Consolidated Statement of Operations since the date of acquisition. See Note 3 to the Consolidated Financial Statements. (3) Adjusted to reflect the sale of 1,064,809 shares of Common Stock offered by the Company hereby at an assumed offering price of $34.00 per share and the anticipated application of the estimated net proceeds therefrom, including the repurchase by the Company of warrants representing 314,809 shares of Common Stock concurrently with the consummation of this Offering at a price per share of Common Stock subject to the respective warrant equal to the excess of the public offering price, less the underwriting discount set forth on the cover page of this Prospectus, over the exercise price of such warrant. See "Use of Proceeds," "Capitalization," "Description of Capital Stock--Warrants" and Note 12 to the Consolidated Financial Statements. Recent Developments Third Quarter Charge for Discontinued Operations In the third quarter of 1997, the Company recorded a charge to discontinued operations of $244,000, net of taxes (approximately $0.07 per share), relating to increases in reserves for certain environmental costs associated with a formerly-owned property. See "Risk Factors--Environmental Regulation" and "Business --Environmental Regulation."

parsed_sections/prospectus_summary/1997/CIK0000276327_midcoast_prospectus_summary.txt

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS." UNLESS THE CONTEXT INDICATES OTHERWISE, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "MIDCOAST" ARE TO MIDCOAST ENERGY RESOURCES, INC. AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS. CERTAIN TERMS, INCLUDING SEVERAL TECHNICAL TERMS COMMONLY USED IN THE NATURAL GAS INDUSTRY, ARE DEFINED IN THE GLOSSARY CONTAINED HEREIN. UNLESS OTHERWISE INDICATED, ALL INFORMATION SET FORTH IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. THE COMPANY The Company is primarily engaged in the transportation, gathering, processing and marketing of natural gas and other petroleum products. The Company owns and operates an interstate transmission pipeline system, two intrastate transmission systems, 18 end-user systems and 25 gathering systems representing over 1,000 miles of pipeline with an aggregate daily throughput capacity of over 791 Mmcf/d. The Company's principal business consists of providing transportation services through its pipelines to both end-users and natural gas producers, providing natural gas marketing services to these customers and processing natural gas. In connection with these services, the Company acquires and constructs bypass pipelines to supply natural gas directly to industrial and municipal end-users and provides access to pipeline systems for natural gas producers through its gathering systems. The Company's principal assets are located in two core geographic areas: Alabama/Mississippi and Texas. The Company's key operations include (i) a 288-mile interstate transmission pipeline and two end-user pipelines in northern Alabama (collectively, the "AlaTenn Systems"), (ii) the Magnolia system in the Black Warrior Basin of central Alabama which consists of over 111 miles of natural gas transmission and gathering pipelines and a 4,000 horsepower compressor station (the "Magnolia System"), (iii) the Harmony gas processing system in Mississippi which includes a sour gas processing plant and over 150 miles of natural gas gathering pipelines (the "Harmony System") and (iv) the Company's Texas pipeline systems which consist of over 162 miles of gas gathering and bypass pipelines. Since the first quarter of 1994, the Company has grown significantly by acquiring or constructing 32 pipeline systems at an aggregate cost of over $50 million, and increasing its average daily throughput by over twelve-fold to 280 Mmcf/d for the first quarter of 1997 after giving effect to the AlaTenn Acquisition (defined below). Primarily as a result of these acquisitions, the Company's EBITDA (as defined in the Glossary) increased to $12.7 million on a pro forma basis in 1996 for the acquisition of the Harmony System (the "Harmony Acquisition") and the AlaTenn Acquisition, from $0.6 million on a historical basis in 1994. See "Unaudited Pro Forma Consolidated Financial Statements." BUSINESS STRATEGY The Company's principal business strategy is to increase its earnings and cash flow by acquiring or constructing pipeline systems, aggressively pursuing end-user customers, increasing the utilization of its existing pipeline systems and processing plants in order to enhance the Company's profitability and improving cost efficiencies. The Company implements this strategy through the following steps: o ACQUISITION OR CONSTRUCTION OF PIPELINE AND PROCESSING SYSTEMS. The Company seeks to acquire or construct natural gas transmission, end-user, gathering and processing systems which offer the opportunity for increased utilization and expansion of the system due to their proximity to geographic areas where municipal and industrial demand for natural gas is growing or where drilling activity is expected to increase. The Company seeks to acquire or construct additional transmission and gathering systems or processing facilities in its core geographic areas of operation when the Company believes such additional systems will enhance the overall profitability of the area of operation. o FOCUS ON END-USERS. As a result of recent regulatory changes, natural gas customers have more flexibility to negotiate their natural gas purchase and transportation contracts. The Company actively pursues direct sales to these end-users, such as industrial plants and municipalities, which are seeking alternative supplies to meet their energy needs. The Company seeks to build pipeline systems directly connecting these customers to transmission systems and to enter into long-term transportation agreements that provide the Company with more predictable gas throughput and cash flow. The Company also offers gas marketing services to its end-user customers who usually incur a reduced transportation cost by receiving natural gas through a Company-owned pipeline. o UTILIZATION OF EXISTING SYSTEMS' CAPACITY. After a system is acquired or constructed, the Company begins an aggressive marketing effort to fully utilize the system's capacity. As part of this process, the Company focuses on providing quality service to its end-user and natural gas producer customers. Many of the Company's existing intrastate pipeline and processing systems were designed with excess natural gas throughput capacity that provide the Company with opportunities to pursue additional gas volumes with little incremental capital cost and to provide high-margin "swing" sales during periods of increased gas demand. o COST EFFICIENCIES. The Company generally seeks to achieve administrative and operational efficiencies by reducing overhead, increasing utilization of equipment and personnel, capitalizing on the geographic proximity of many of its systems and further integrating gas transmission and marketing services. The Company also seeks to acquire or construct additional transmission and gathering systems or processing facilities in its core geographic areas of operation where it can achieve administrative or operational efficiencies when integrated with the Company's existing systems. The Company emphasizes strict cost controls in all aspects of its business. THE ALATENN ACQUISITION Consistent with the Company's business strategy, in May 1997, Midcoast acquired the AlaTenn Systems and their related pipeline and energy services operations from Atrion Corporation ("Atrion") for cash consideration of approximately $39.4 million and up to $2 million in contingent deferred payments (the "AlaTenn Acquisition"). These operations include (i) a 288-mile interstate transmission pipeline located in northern Alabama, Mississippi and southern Tennessee that transports natural gas to eight industrial and 17 municipal customers (the "MIT System"), (ii) a 38-mile and a one-mile pipeline in northern Alabama that primarily serve two large industrial customers (the "Champion System" and "Monsanto System," respectively) and (iii) a natural gas marketing company which primarily serves customers of the AlaTenn Systems. The AlaTenn Acquisition complements the Company's operations in the Alabama/Mississippi area, which include the Magnolia System, the Harmony System and 11 other gathering and transmission systems. The Company believes there are numerous opportunities for increasing the utilization of the AlaTenn Systems. The Company also intends to pursue new construction and acquisition opportunities in this core geographic area through additional transmission systems that interconnect to or otherwise provide synergies with the AlaTenn Systems and the Company's other pipeline systems in the area. The Company further intends to make these systems more cost effective and emphasize its gas marketing efforts throughout this region. THE OFFERING Common Stock Offered by the Company(1)......................... 2,000,000 shares Common Stock Offered by Selling Stockholder........................ 100,000 shares ---------- Total...................... 2,100,000 shares ========== Common Stock Outstanding(1)(2): Before the Offering............. 2,500,000 shares After the Offering.............. 4,500,000 shares Use of Proceeds...................... The net proceeds from the sale of the Common Stock offered hereby will be used to repay bank indebtedness incurred in connection with the AlaTenn Acquisition. See "Use of Proceeds." AMEX Symbol.......................... MRS - ------------ (1) Excludes 315,000 shares of Common Stock subject to purchase upon exercise of the Underwriters' over-allotment option. See "Underwriting." (2) Based on the number of shares of Common Stock outstanding on May 15, 1997. Does not include (i) 100,000 shares of Common Stock issuable upon exercise of outstanding warrants to purchase Common Stock exercisable at $14.20 per share commencing in August 1998 ("Warrants"), (ii) 34,349 shares issuable upon exercise of outstanding warrants to purchase Common Stock exercisable at $7.85 per share ("Triumph Warrants") and (iii) 280,000 shares of Common Stock reserved for issuance upon the exercise of outstanding stock options under the Company's stock option plans. See "Management -- Executive Compensation" and "Description of Capital Stock -- Outstanding Warrants." SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA The following summary unaudited pro forma consolidated financial and operating data for the year ended December 31, 1996 and the three months ended March 31, 1997 give effect to (i) the Harmony Acquisition under the purchase method of accounting, (ii) the AlaTenn Acquisition under the purchase method of accounting and the related assumptions and adjustments described in the notes to the Unaudited Pro Forma Consolidated Financial Statements, (iii) the incurrence of $39.4 million in bank indebtedness (the "Acquisition Debt") to finance the AlaTenn Acquisition, plus an estimated $475,000 in related financing costs and (iv) the issuance and sale of 2,000,000 shares of Common Stock by the Company pursuant to the Offering and the application of the net proceeds therefrom to repay approximately $28 million of Acquisition Debt. The Unaudited Pro Forma Consolidated Financial Statements have been prepared based upon assumptions deemed appropriate by the Company and may not be indicative of actual results. The summary unaudited pro forma statement of operations data give effect to the Harmony Acquisition, the AlaTenn Acquisition and related financings as if such transactions had occurred as of January 1, 1996. For balance sheet data purposes pro forma adjustments give effect to the AlaTenn Acquisition, the Offering and the application of the net proceeds therefrom (assuming no exercise of the Underwriters' over-allotment option). The summary unaudited pro forma consolidated financial and operating data should be read in conjunction with the "Unaudited Pro Forma Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Consolidated Financial Statements" and "Combined Financial Statements" of the three companies acquired from Atrion in the AlaTenn Acquisition (the "AlaTenn Subsidiaries") and the "Historical Summary of Revenue and Direct Operating Expenses" related to the Harmony System included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1996 MARCH 31, 1997 ------------------------------------ ------------------------------------ HISTORICAL HISTORICAL -------------------- PRO FORMA -------------------- PRO FORMA COMPANY ALATENN AS ADJUSTED COMPANY ALATENN AS ADJUSTED -------- -------- ------------ -------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Operating revenues............... $29,415 $113,429 $146,406 $12,964 $32,055 $ 45,019 Operating income(1).............. 2,573 6,727 11,294 1,299 1,786 3,441 Interest expense................. 413 1 1,620 95 -- 360 Income before income taxes....... 1,914 7,275 9,977 1,132 1,790 3,013 Net income....................... 1,914 4,633 6,883 1,132 1,142 2,037 Net income applicable to common shareholders................... 1,891 4,633 6,860 1,132 1,142 2,037 PER SHARE DATA: Net income applicable to common shareholders................... $ 1.00 -- $ 1.77 $ 0.45 -- $ 0.45 Weighted average number of common shares outstanding............. 1,886 -- 3,886 2,500 -- 4,500 OTHER DATA: Depreciation, depletion and amortization................... $ 818 $ 584 $ 1,614 $ 255 $ 147 $ 437 General and administrative....... 1,223 3,961 3,632 374 873 856 EBITDA(2)........................ 3,193 7,311 12,710 1,494 1,933 3,818 Cash flow from operating activities..................... 2,564 6,257 -- 2,948 542 -- Capital expenditures............. 9,391 331 -- 425 36 -- </TABLE> MARCH 31, 1997 ------------------------- PRO FORMA ACTUAL AS ADJUSTED --------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working capital.................. $ 1,722 $ 3,524 Property, plant and equipment, net............................. 17,148 54,356 Total assets..................... 27,653 72,441 Long-term debt, net of current portion(3)...................... 5,943 15,876 Shareholders' equity............. 14,583 42,348 <TABLE> <CAPTION> DECEMBER 31, 1996 MARCH 31, 1997 -------------------------------- -------------------------------- HISTORICAL HISTORICAL ------------------- ------------------- COMPANY ALATENN PRO FORMA COMPANY ALATENN PRO FORMA -------- -------- ---------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> OPERATING DATA: Miles of pipeline(4)............. 584 327 911 702 327 1,029 Operating pipeline systems: Interstate transmission..... -- 1 1 -- 1 1 Intrastate transmission..... 2 -- 2 2 -- 2 End-user.................... 17 2 19 16 2 18 Gathering................... 24 -- 24 25 -- 25 -------- -------- ---------- -------- -------- ---------- Total operating pipeline systems..................... 43 3 46 43 3 46 ======== ======== ========== ======== ======== ========== Natural gas transported or sold, net (Mmcf/d)(5)................ 102 131 233 133 147 280 Daily volume capacity (Mmcf/d)... 574 210 784 581 210 791 </TABLE> - ------------ (1) Operating revenues less operating expenses. (2) See "Glossary" for a definition of EBITDA. EBITDA is not a measure of operating income, operating performance, or liquidity under generally accepted accounting principles. The Company includes EBITDA data because it understands such data is used by certain investors to determine the Company's historical ability to service its indebtedness. (3) See Note 5 to the Company's "Consolidated Financial Statements." (4) Includes all of the miles of pipeline of the various active pipelines that the Company owns an interest in or operates. (5) Includes natural gas volumes contracted for, transported or sold through the Company's pipeline systems. Transported oil volumes have been converted to an equivalent unit basis which is 6 Mcf to 1 Bbl, consistent with industry standards, for the year ended December 31, 1996 and the three-month period ended March 31, 1997. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA The summary historical consolidated financial and operating data for the fiscal years ended December 31, 1994, 1995 and 1996, and for the three months ended March 31, 1996 and 1997, set forth below, are derived from and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein and the Company's "Consolidated Financial Statements" and the notes thereto included elsewhere in this Prospectus. The data for the three months ended March 31, 1996 and 1997 are derived from and qualified by reference to the Company's "Consolidated Financial Statements" appearing elsewhere herein and, in the opinion of management of the Company, includes all adjustments that are of a normal recurring nature and necessary for a fair presentation. See "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Consolidated Financial Statements." <TABLE> <CAPTION> FOR THE YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNT) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Operating revenues.................. $ 14,969 $ 15,622 $ 29,415 $ 5,584 $ 12,964 Operating income(1)................. 349 2,569 2,573 533 1,299 Interest expense.................... 189 339 413 120 95 Income before income taxes and cumulative effect of a change in accounting principle.............. 148 2,193 1,914 374 1,132 Net income.......................... 27 2,193 1,914 374 1,132 Net income (loss) applicable to common shareholders............... (32) 2,134 1,891 359 1,132 PER SHARE DATA: Net income (loss) applicable to common shareholders............... $ (0.02) $ 1.48 $ 1.00 $ 0.24 $ 0.45 Weighted average number of common shares outstanding................ 1,391 1,440 1,886 1,466 2,500 OTHER DATA: Depreciation, depletion and amortization...................... $ 259 $ 452 $ 818 $ 151 $ 255 General and administrative.......... 849 785 1,223 199 374 EBITDA(2)........................... 609 3,021 3,193 664 1,494 Cash flow from operating activities........................ (515) 2,361 2,564 1,306 2,948 Capital expenditures................ 1,088 3,885 9,391 1,286 425 </TABLE> <TABLE> <CAPTION> DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit)........... $ (1,105) $ (99) $ 1,135 $ (441) $ 1,722 Property, plant and equipment, net............................... 4,994 8,206 16,965 8,171 17,148 Total assets........................ 7,272 11,089 27,303 11,887 27,653 Long-term debt, net of current portion(3)........................ 1,781 3,961 4,015 3,442 5,943 Shareholders' equity................ 2,007 4,157 13,593 4,522 14,583 OPERATING DATA: Miles of pipeline(4)................ 35 146 584 233 702 Operating pipeline systems: Intrastate transmission........ 0 1 2 1 2 End-user....................... 11 11 17 12 16 Gathering...................... 5 5 24 11 25 --------- --------- --------- --------- --------- Total operating pipeline systems........................... 16 17 43 24 43 ========= ========= ========= ========= ========= Natural gas volumes transported or sold, net (Mmcf/d)(5)............. 31 44 102 113 133 Daily volume capacity (Mmcf/d)...... 182 302 574 462 581 </TABLE> (FOOTNOTES ON FOLLOWING PAGE) - ------------ (1) Operating revenues less operating expenses. (2) See "Glossary" for a definition of EBITDA. EBITDA is not a measure of operating income, operating performance, or liquidity under generally accepted accounting principles. The Company includes EBITDA data because it understands such data is used by certain investors to determine the Company's historical ability to service its indebtedness. (3) See Note 5 to the Company's "Consolidated Financial Statements." (4) Includes all of the miles of pipeline of the various pipelines that the Company owns an interest in or operates. (5) Includes natural gas volumes contracted for, transported or sold through the Company's pipeline systems. Transported oil volumes have been converted to an equivalent unit basis which is 6 Mcf to 1 Bbl, consistent with industry standards, for each of the years ended December 31, 1994, 1995 and 1996 and the three-month period ended March 31, 1997.

parsed_sections/prospectus_summary/1997/CIK0000319459_mission_prospectus_summary.txt

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. REFERENCES TO "BELLWETHER" OR THE "COMPANY" HEREIN INCLUDE BELLWETHER EXPLORATION COMPANY AND ITS PREDECESSORS AND SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES. BELLWETHER'S FISCAL YEAR ENDS ON JUNE 30. PRO FORMA INFORMATION REGARDING BELLWETHER GIVES EFFECT TO THE PENDING ACQUISITION, THE OFFERINGS AND THE OTHER TRANSACTIONS DESCRIBED UNDER "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA" (COLLECTIVELY, THE "TRANSACTIONS") AS IF THEY OCCURRED ON THE DATES INDICATED. THE ESTIMATES AS OF JUNE 30, 1996 OF THE COMPANY'S NET PROVED RESERVES ARE BASED ON THE REPORT OF WILLIAMSON PETROLEUM CONSULTANTS INC. ("WILLIAMSON"), AND THE ESTIMATES OF NET PROVED RESERVES OF THE ACQUIRED PROPERTIES (AS HEREINAFTER DEFINED) ARE DERIVED FROM A RESERVE REPORT PREPARED BY THE COMPANY AND AUDITED BY RYDER SCOTT COMPANY PETROLEUM ENGINEERS ("RYDER SCOTT"). UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS IN THE COMMON STOCK OFFERING WILL NOT BE EXERCISED. CERTAIN TERMS RELATING TO THE OIL AND GAS INDUSTRY ARE DEFINED IN "GLOSSARY." THE COMPANY Bellwether is an independent energy company primarily engaged in the acquisition, exploitation, development and exploration of oil and gas properties. The Company has grown and diversified its reserve base through the acquisition of oil and gas properties and the subsequent development of these properties. Bellwether's estimated net proved reserves have increased at a compounded annual growth rate of 65.9%, from 1.6 MMBOE as of June 30, 1993 to 7.3 MMBOE as of June 30, 1996. During this period, average net daily production increased at a compounded annual growth rate of 73.6%, from 618.0 BOE/d in fiscal 1993 to 3,235.0 BOE/d in fiscal 1996, and EBITDA increased at a compounded annual growth rate of 89.0%, from $1.6 million in fiscal 1993 to $10.8 million in fiscal 1996. The Company's net cash flows from operations have increased at a compounded annual growth rate of 67.4%, from $1.6 million in fiscal 1993 to $7.5 million in fiscal 1996. The Company believes its primary strengths are a demonstrated ability to identify and acquire properties which have significant potential for further exploitation, development and exploration, an inventory of development and exploration projects, expertise in the use of advanced technologies such as 3-D seismic and horizontal drilling and a conservative capital structure supportive of continued investment in its core properties as well as additional acquisitions. The Company has recently agreed to acquire (the "Pending Acquisition") the oil and gas properties (the "Acquired Properties") and associated working capital owned by partnerships and other entities (the "Sellers") managed or sponsored by Torch Energy Advisors Incorporated ("Torch"). Bellwether believes that the Pending Acquisition provides the opportunity to significantly increase reserves and cash flow at an attractive price while providing opportunities for future reserve growth through exploitation and exploration activities. On a pro forma basis, Bellwether's estimated net proved reserves as of June 30, 1996 were 46.6 MMBOE (86% developed and 62% natural gas) with a PV-10 Value (pre-tax) of $260.1 million. Pro forma average daily net production was 22.7 MBOE/d for fiscal 1996 and pro forma EBITDA for fiscal 1996 was $74.9 million, excluding non-recurring gas contract settlements payable to the Company aggregating $18.9 million. Following the Pending Acquisition, the Company's properties will be concentrated in Texas, Louisiana, Alabama, California and the Gulf of Mexico. BUSINESS STRATEGY Bellwether's strategy is to maximize long-term shareholder value through aggressive growth in reserves and cash flow using advanced technologies, implementation of a low cost structure and maintenance of a capital structure supportive of growth. Bellwether expects the additional cash flows from the AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission ("SEC"). Reports, proxy and information statements and other information filed by the Company with the SEC pursuant to the informational requirements of the Exchange Act may be inspected at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004, and at the following Regional Offices of the SEC: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and New York Regional Office, 7 World Trade Center, New York, New York 10048. Copies of such material may also be obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed rates. The Registration Statement was filed with the SEC electronically. The SEC maintains a site on the World Wide Web that contains documents filed with the SEC electronically. The address of such site is http://www.sec.gov, and the Registration Statement may be inspected at such site. The Common Stock is traded on the Nasdaq National Market. The Company's registration statements, reports, proxy and information statements, and other information may also be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. This Prospectus constitutes a part of a Registration Statement on Form S-1 filed by the Company with the SEC under the Securities Act of 1933 ("Securities Act"). This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement for further information with respect to the Company and the securities offered hereby. Any statements contained herein concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the SEC are not necessarily complete and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. Acquired Properties will finance a significant portion of its growth strategy. Key elements of this strategy are: OPPORTUNISTIC ACQUISITIONS Bellwether seeks to acquire properties that have produced significant quantities of oil and gas and have upside potential which can be exploited using 3-D seismic, computer aided exploration ("CAEX"), horizontal drilling, workovers and other enhanced recovery techniques. Such acquisitions have included the Fausse Pointe field in south Louisiana, the Cove field offshore Texas and the Fort Trinidad field in east Texas. EXPLOITATION AND DEVELOPMENT OF PROPERTIES The Company actively pursues the exploitation of its properties through recompletions, waterfloods and development wells, including horizontal drilling. Examples of recent exploitation successes include a five well workover program and two development wells in the Cove field, which increased Bellwether's average net production in this field from 1.0 MMcf/d in January 1996 to 11.1 MMcf/d in February 1997. In addition, the Company recently drilled a successful horizontal development well into the Buda formation in the Fort Trinidad field which tested in January 1997 at 420 Bbls/d of oil. Bellwether also initiated a waterflood project in the Fort Trinidad field during fiscal 1996. Future planned exploitation projects include in excess of 20 horizontal drilling locations in the Buda and Glen Rose B formations in the Fort Trinidad field and up to three horizontal drilling locations to exploit the Company's exploratory success in the Giddings field in the Austin Chalk formation. In addition, because the Sellers were formed to distribute net cash flows rather than reinvest in the exploitation of the Acquired Properties, the Company believes that such properties will provide significant exploitation and development opportunities. The Company's exploitation budget for fiscal 1997 is $8.6 million, of which approximately $4.8 million had been spent as of December 31, 1996. During fiscal 1997, the capital expenditures on the Acquired Properties are estimated to be $23.2 million of which $5.7 million had been spent as of December 31, 1996. For fiscal 1998, the Company has identified exploitation projects totaling $25.2 million (including amounts to be spent on the Acquired Properties). EXPLORATION ACTIVITIES The Company's exploration activities focus on projects with potential for substantial reserve increases. In January 1997, the Company completed a successful exploration well in the Austin Chalk formation in the Giddings field in central Texas. Exploration projects in the remainder of fiscal 1997 and in fiscal 1998 include multiple wells in the Fausse Pointe field and an exploration well west of the Cove field, both of which are operated by the Company. In addition, the Company also expects the Acquired Properties to present exploration opportunities. For example, in the Ship Shoal complex in the Gulf of Mexico, the Sellers declined to acquire available 3-D seismic surveys and to participate in six offshore exploration or exploitation wells in 1996, all of which were successful. The Company plans to acquire this and other 3-D seismic surveys of the Acquired Properties and to participate in future wells based on its interpretation of the data. During fiscal 1997, the Company has budgeted $4.8 million for exploration, of which $2.1 million had been spent as of December 31, 1996. For fiscal 1998, the Company has identified exploration projects totaling $17.6 million (including amounts to be spent on the Acquired Properties). ADVANCED TECHNOLOGY The Company seeks to improve the efficiency and reduce the risks associated with its exploration and exploitation activities using advanced technologies. These advanced technologies include 3-D seismic, CAEX techniques and horizontal drilling. The Company acquired a 3-D survey on the Cove field, conducted a 3-D survey on the Fausse Pointe field and plans to acquire three 3-D surveys on certain of the Acquired Properties. The Company believes its existing properties and the Acquired Properties will benefit from the application of advanced technologies. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. REFERENCES TO "BELLWETHER" OR THE "COMPANY" HEREIN INCLUDE BELLWETHER EXPLORATION COMPANY AND ITS PREDECESSORS AND SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES. BELLWETHER'S FISCAL YEAR ENDS ON JUNE 30. PRO FORMA INFORMATION REGARDING BELLWETHER GIVES EFFECT TO THE PENDING ACQUISITION, THE OFFERINGS AND THE OTHER TRANSACTIONS DESCRIBED UNDER "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA" (COLLECTIVELY, THE "TRANSACTIONS") AS IF THEY OCCURRED ON THE DATES INDICATED. THE ESTIMATES AS OF JUNE 30, 1996 OF THE COMPANY'S NET PROVED RESERVES ARE BASED ON THE REPORT OF WILLIAMSON PETROLEUM CONSULTANTS INC. ("WILLIAMSON"), AND THE ESTIMATES OF NET PROVED RESERVES OF THE ACQUIRED PROPERTIES (AS HEREINAFTER DEFINED) ARE DERIVED FROM A RESERVE REPORT PREPARED BY THE COMPANY AND AUDITED BY RYDER SCOTT COMPANY PETROLEUM ENGINEERS ("RYDER SCOTT"). UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS IN THE COMMON STOCK OFFERING WILL NOT BE EXERCISED. CERTAIN TERMS RELATING TO THE OIL AND GAS INDUSTRY ARE DEFINED IN "GLOSSARY." THE COMPANY Bellwether is an independent energy company primarily engaged in the acquisition, exploitation, development and exploration of oil and gas properties. The Company has grown and diversified its reserve base through the acquisition of oil and gas properties and the subsequent development of these properties. Bellwether's estimated net proved reserves have increased at a compounded annual growth rate of 65.9%, from 1.6 MMBOE as of June 30, 1993 to 7.3 MMBOE as of June 30, 1996. During this period, average net daily production increased at a compounded annual growth rate of 73.6%, from 618.0 BOE/d in fiscal 1993 to 3,235.0 BOE/d in fiscal 1996, and EBITDA increased at a compounded annual growth rate of 89.0%, from $1.6 million in fiscal 1993 to $10.8 million in fiscal 1996. The Company's net cash flows from operations have increased at a compounded annual growth rate of 67.4%, from $1.6 million in fiscal 1993 to $7.5 million in fiscal 1996. The Company believes its primary strengths are a demonstrated ability to identify and acquire properties which have significant potential for further exploitation, development and exploration, an inventory of development and exploration projects, expertise in the use of advanced technologies such as 3-D seismic and horizontal drilling and a conservative capital structure supportive of continued investment in its core properties as well as additional acquisitions. The Company has recently agreed to acquire (the "Pending Acquisition") the oil and gas properties (the "Acquired Properties") and associated working capital owned by partnerships and other entities (the "Sellers") managed or sponsored by Torch Energy Advisors Incorporated ("Torch"). Bellwether believes that the Pending Acquisition provides the opportunity to significantly increase reserves and cash flow at an attractive price while providing opportunities for future reserve growth through exploitation and exploration activities. On a pro forma basis, Bellwether's estimated net proved reserves as of June 30, 1996 were 46.6 MMBOE (86% developed and 62% natural gas) with a PV-10 Value (pre-tax) of $260.1 million. Pro forma average daily net production was 22.7 MBOE/d for fiscal 1996 and pro forma EBITDA for fiscal 1996 was $74.9 million, excluding non-recurring gas contract settlements payable to the Company aggregating $18.9 million. Following the Pending Acquisition, the Company's properties will be concentrated in Texas, Louisiana, Alabama, California and the Gulf of Mexico. BUSINESS STRATEGY Bellwether's strategy is to maximize long-term shareholder value through aggressive growth in reserves and cash flow using advanced technologies, implementation of a low cost structure and maintenance of a capital structure supportive of growth. Bellwether expects the additional cash flows from the Acquired Properties will finance a significant portion of its growth strategy. Key elements of this strategy are: OPPORTUNISTIC ACQUISITIONS. Bellwether seeks to acquire properties that have produced significant quantities of oil and gas and have upside potential which can be exploited using 3-D seismic, computer aided exploration ("CAEX"), horizontal drilling, workovers and other enhanced recovery techniques. Such acquisitions have included the Fausse Pointe field in south Louisiana, the Cove field offshore Texas and the Fort Trinidad field in east Texas. EXPLOITATION AND DEVELOPMENT OF PROPERTIES. The Company actively pursues the exploitation of its properties through recompletions, waterfloods and development wells, including horizontal drilling. Examples of recent exploitation successes include a five well workover program and two development wells in the Cove field, which increased Bellwether's average net production in this field from 1.0 MMcf/d in January 1996 to 11.1 MMcf/d in February 1997. In addition, the Company recently drilled a successful horizontal development well into the Buda TORCH RELATIONSHIP The Company operates under an Administrative Services Agreement with Torch. Torch has a staff of 39 geologists, geophysicists, reservoir engineers and landmen and 59 financial personnel and professionals. The Company believes that its relationship with Torch provides it with access to acquisition opportunities and financial and technical expertise that are generally only available to significantly larger companies. In addition, the fees payable to Torch reduce significantly on a BOE basis as the Company's asset base and production grow. LOW COST STRUCTURE The Company's cost structure will benefit from the Pending Acquisition and the Company believes that its larger asset and production base will allow it to maintain a low cost structure prospectively. Because general and administrative costs are spread over higher production, pro forma general and administrative costs per BOE in fiscal 1996 and the six months ended December 31, 1996 were $1.01 and $0.99, respectively, compared with $2.55 and $2.37, respectively, on a historical basis. PENDING ACQUISITION In March 1997, the Company agreed to purchase the Acquired Properties and an estimated $18.0 million of working capital for $188.3 million, plus a contingent payment of up to $9.0 million, the actual amount of which will be based on 1997 gas prices (the "Contingent Payment"). The effective date of the Pending Acquisition is July 1, 1996 and the estimated net adjusted purchase price assuming an April 8, 1997 closing date is $141.9 million plus the Contingent Payment. As of June 30, 1996, estimated net proved reserves attributable to the Acquired Properties were 39.2 MMBOE (89% developed and 59% gas) with a PV-10 Value (pre-tax) of $212.0 million. The Company will finance the cash portion of the Pending Acquisition and related fees, estimated to aggregate $173.8 million, including repayment of an estimated $12.0 million of existing indebtedness with the proceeds of the Offerings (estimated to be $144.6 million) and $29.3 million of borrowings under its new credit facility ("New Credit Facility"). Torch and a subsidiary of Torchmark Corporation ("Torchmark"), the parent corporation of a Selling Stockholder, have interests in the Acquired Properties and will receive an estimated $18.0 million and $12.7 million, respectively, of the purchase price paid for the Acquired Properties. Torch and Torchmark will also receive fees payable in cash and Common Stock in connection with the Pending Acquisition aggregating an estimated $3.3 million. See "Risk Factors -- Conflicts of Interest" and "Transactions with Related Persons." The Pending Acquisition will close simultaneously with the Offerings, except that Bellwether has agreed to acquire the interest of one investor which owns less than $2.2 million of properties on April 15, 1997. See "Business and Properties_-- Structure of the Pending Acquisition." The Company has identified for divestiture non-core properties representing approximately 10% of the estimated net proved reserves attributable to the Acquired Properties as of June 30, 1996. These properties are primarily small working interests in geographically diverse locations, with generally low production rates and cash flows, and limited potential for development. The Company expects to sell these properties during fiscal 1997 and fiscal 1998. The net proceeds from these divestitures, which will be used to repay indebtedness, are currently estimated to be $15 million, but will depend on prevailing market conditions at the time of sale. The Company's address is 1331 Lamar, Suite 1455, Houston, TX 77010, and its phone number is (713) 650-1025. formation in the Fort Trinidad field which tested in January 1997 at 420 Bbls/d of oil. Bellwether also initiated a waterflood project in the Fort Trinidad field during fiscal 1996. Future planned exploitation projects include in excess of 20 horizontal drilling locations in the Buda and Glen Rose B formations in the Fort Trinidad field and up to three horizontal drilling locations to exploit the Company's exploratory success in the Giddings field in the Austin Chalk formation. In addition, because the Sellers were formed to distribute net cash flows rather than reinvest in the exploitation of the Acquired Properties, the Company believes that such properties will provide significant exploitation and development opportunities. The Company's exploitation budget for fiscal 1997 is $8.6 million, of which approximately $4.8 million had been spent as of December 31, 1996. During fiscal 1997, the capital expenditures on the Acquired Properties are estimated to be $23.2 million of which $5.7 million had been spent as of December 31, 1996. For fiscal 1998, the Company has identified exploitation projects totaling $25.2 million (including amounts to be spent on the Acquired Properties). EXPLORATION ACTIVITIES. The Company's exploration activities focus on projects with potential for substantial reserve increases. In January 1997, the Company completed a successful exploration well in the Austin Chalk formation in the Giddings field in central Texas. Exploration projects in the remainder of fiscal 1997 and in fiscal 1998 include multiple wells in the Fausse Pointe field and an exploration well west of the Cove field, both of which are operated by the Company. In addition, the Company also expects the Acquired Properties to present exploration opportunities. For example, in the Ship Shoal complex in the Gulf of Mexico, the Sellers declined to acquire available 3-D seismic surveys and to participate in six offshore exploration or exploitation wells in 1996, all of which were successful. The Company plans to acquire this and other 3-D seismic surveys of the Acquired Properties and to participate in future wells based on its interpretation of the data. During fiscal 1997, the Company has budgeted $4.8 million for exploration, of which $2.1 million had been spent as of December 31, 1996. For fiscal 1998, the Company has identified exploration projects totaling $17.6 million (including amounts to be spent on the Acquired Properties). ADVANCED TECHNOLOGY. The Company seeks to improve the efficiency and reduce the risks associated with its exploration and exploitation activities using advanced technologies. These advanced technologies include 3-D seismic, CAEX techniques and horizontal drilling. The Company acquired a 3-D survey on the Cove field, conducted a 3-D survey on the Fausse Pointe field and plans to acquire three 3-D surveys on certain of the Acquired Properties. The Company believes its existing properties and the Acquired Properties will benefit from the application of advanced technologies. TORCH RELATIONSHIP. The Company operates under an Administrative Services Agreement with Torch. Torch has a staff of 39 geologists, geophysicists, reservoir engineers and landmen and 59 financial personnel and professionals. The Company believes that its relationship with Torch provides it with access to acquisition opportunities and financial and technical expertise that are generally only available to significantly larger companies. In addition, the fees payable to Torch reduce significantly on a BOE basis as the Company's asset base and production grow. LOW COST STRUCTURE. The Company's cost structure will benefit from the Pending Acquisition and the Company believes that its larger asset and production base will allow it to maintain a low cost structure prospectively. Because general and administrative costs are spread over higher production, pro forma general and administrative costs per BOE in fiscal 1996 and the six months ended December 31, 1996 were $1.01 and $0.99, respectively, compared with $2.55 and $2.37, respectively, on a historical basis. THE COMMON STOCK OFFERING <TABLE> <CAPTION> <S> <C> Shares of Common Stock offered by the Company............................ 4,400,000 shares Shares of Common Stock offered by the Selling Stockholders............... 475,000 shares Shares of Common Stock outstanding after the Offerings(a)(b):......... 13,707,979 shares Notes Offering....................... Concurrently with the Common Stock Offering, the Company is offering $100,000,000 aggregate principal amount of Notes to the public. The closings of the Common Stock Offering and the Notes Offering are contingent upon each other and upon the consummation of the Pending Acquisition. See "Notes Offering." Use of Proceeds...................... The Company will use the proceeds of the Common Stock Offering and the Notes Offering, together with bank borrowings under the New Credit Facility (collectively, the "Financing"), to finance the cash portion of the Pending Acquisition, to repay bank borrowings under the Company's existing credit facility and to pay transaction costs. See "Use of Proceeds."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the financial statements and related notes appearing elsewhere in this Prospectus. As used herein, the "Company" means Dawson Geophysical Company, the "Selling Shareholder" means L. Decker Dawson, President of the Company, and "Common Stock" means the Company's Common Stock, $.33 1/3 par value per share, unless the context otherwise requires. Unless otherwise indicated, all financial information and share data in this Prospectus assume no exercise of the Underwriters' over-allotment option. Investors should carefully consider the information set forth under "Risk Factors." THE COMPANY Founded in 1952, Dawson Geophysical Company acquires and processes three-dimensional ("3-D") seismic data used in the exploration, development and field management of oil and natural gas reserves. The Company's operations consist of six 3-D seismic data acquisition crews and a seismic data processing center located in Midland, Texas. As a result of an increase in industry-wide demand for 3-D seismic surveys and the Company's competitive position, the Company has experienced increasing demand for its 3-D seismic services. The Company acquires and processes seismic data for its clients, ranging from major oil and gas companies to independent oil and gas operators, who retain exclusive rights to the information obtained. The Company's land-based data acquisition crews operate primarily in the southwestern United States, but have responded to demand from south Texas to North Dakota. As a result of the addition of a sixth crew equipped with the versatile I/O System Two(R)* Remote Seismic Recorder ("RSR"), the Company has expanded its capabilities to accommodate more difficult and remote terrains such as east Texas and the Rocky Mountains. The Company operates five I/O System Two recording systems, one with RSR capability, and one MDS-18X(R)* recording system. The Company's six seismic crews are equipped with an aggregate capacity of 14,200 recording channels and 45 vibrator energy source units, which are configured to meet the demands of specific survey designs. Each crew consists of approximately 40 technicians, 25 associated vehicles with off-road capabilities, 31,000 geophones, a recording system, energy sources, electronic cables and a variety of other equipment. 3-D seismic surveys provide an immense volume of concentrated subsurface information to the oil and gas industry. Detailed subsurface resolution from 3-D seismic data enhances the exploration for new reserves and enables oil and gas companies to better delineate existing fields and to augment reservoir management techniques. Benefits of incorporating 3-D seismic technology into exploration and development programs include reducing drilling risk, decreasing oil and gas finding costs, lowering field development expenditures and recovering a greater portion of reserves in place. The Company believes that it maintains a competitive advantage in the industry by (i) acquiring equipment to expand capacity in response to client demand, (ii) updating its equipment to take advantage of advances in geophysical technology, (iii) maintaining skilled and experienced personnel for its data acquisition and processing operations, (iv) focusing its operations on the domestic onshore seismic industry, and (v) providing integrated in-house operations necessary to complete all phases of 3-D seismic data acquisition and processing, including project design, permitting and surveying. Since fiscal 1990, the Company has spent approximately $57 million to acquire new 3-D telemetry recording systems and associated equipment, including approximately $26 million since fiscal 1995. Consistent with the Company's strategy of maintaining technologically advanced equipment and the financial flexibility to expand its 3-D capacity, the Company intends to use, of the net proceeds it receives from this offering, (i) approximately $10 million to reduce bank debt of the Company, (ii) approximately $8 million to acquire - --------------- * I/O System Two(R) is a registered trademark of Input/Output, Inc. and MDS-18X(R) is a registered trademark of I/O Exploration Products. new equipment and to upgrade existing equipment for the six 3-D seismic crews now operated by the Company, and (iii) the balance to increase working capital of the Company and for general corporate purposes. The Company intends to continue its program of acquiring new seismic equipment and upgrading its existing equipment. The headquarters of the Company, a Texas corporation, are located at 208 South Marienfeld, Midland, Texas 79701, and its telephone number is (915) 682-7356. THE OFFERING Common Stock offered by the Company............................. 1,000,000 shares(1) Common Stock offered by the Selling Shareholder......................... 500,000 shares Common Stock to be outstanding after this offering....................... 5,200,000 shares(1) Use of proceeds..................... Approximately $10 million to reduce bank debt, approximately $8 million to acquire new equipment and to upgrade existing equipment for the Company's six 3-D seismic crews, and the balance to be added to working capital and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol....... "DWSN" - --------------- (1) Excludes 89,000 shares of Common Stock issuable upon exercise of outstanding employee stock options. See "Management -- Compensation Plans." SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary financial information for the five fiscal years ended September 30, 1997 was derived from the audited financial statements of the Company. The following information should be read in conjunction with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's financial statements and notes thereto and the other financial data included elsewhere in this Prospectus. <TABLE> <CAPTION> YEARS ENDED SEPTEMBER 30, ------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Operating revenues........................ $17,016 $23,027 $28,188 $33,518 $48,227 Operating costs: Operating expenses..................... 12,497 15,478 20,067 23,763 32,293 General and administrative............. 842 887 975 1,299 1,477 Depreciation........................... 1,830 3,016 4,150 5,818 7,321 ------- ------- ------- ------- ------- 15,169 19,381 25,192 30,880 41,091 ------- ------- ------- ------- ------- Income from operations.................... 1,847 3,646 2,996 2,638 7,136 Other income (expense).................... 950 (129) 444 122 (20) Income before extraordinary item.......... $ 1,862 $ 2,266 $ 2,174 $ 1,888 $ 4,570 Net income................................ $ 2,739(1) $ 2,266 $ 2,174 $ 1,888 $ 4,570 PER SHARE DATA: Income per share before extraordinary item................................... $ .62 $ .74 $ .54 $ .45 $ 1.09 Net income per share...................... $ .91 $ .74 $ .54 $ .45 $ 1.09 Weighted average equivalent common shares outstanding............................ 3,008 3,045 3,990 4,183 4,202 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1997 --------------------------- HISTORICAL AS ADJUSTED(2) ---------- -------------- <S> <C> <C> BALANCE SHEET DATA (AT PERIOD END): Working capital........................................... $11,048 $ Net property, plant and equipment......................... 35,807 Total assets.............................................. 53,561 Long-term debt, less current maturities................... 7,893 Stockholders' equity...................................... 37,545 </TABLE> - --------------- (1) During 1993, the Company fully utilized its remaining net operating loss carryforwards for federal income tax purposes resulting in an extraordinary benefit of $877,000. (2) As adjusted to reflect the sale by the Company in this offering of 1,000,000 shares of Common Stock and the application of the estimated net proceeds it receives therefrom as described under "Use of Proceeds."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. The Company The Company was incorporated on December 9, 1980 under the laws of the state of Texas, and is engaged in the business of a life insurance general agency for sales to United States military personnel. The Company has six wholly-owned subsidiaries engaged in the same business in the states of Hawaii, Wyoming, Montana, New York, Nevada, and Alabama respectively. The Company's wholly-owned subsidiary, United Services Planning Association, Inc. ("USPA"), is also a Texas corporation, and is a broker-dealer of securities. The Company's wholly-owned subsidiary, First Command Bank, is a federal savings bank. (See "Business of the Company.") The Company's principal executive offices are located at 4100 South Hulen Street, Fort Worth, Texas 76109. The Offering Type of Securities Class B Nonvoting Common Stock Number of Shares Outstanding Prior to Offering 922,257 Number of Shares Offered to be Sold 150,000 Number of Shares to be Outstanding After Offering assuming that all of the Shares offered hereby are sold 1,072,257 Estimated Net Proceeds to Company assuming that all of the Shares offered hereby are sold $3,981,000 This offer is extended to agents and certain key employees of the Company only, pursuant to a Form S-1 filing with the Securities and Exchange Commission and compliance with state securities laws in the states where offered. Prior to this offering there has been no public market for the common stock of the Company and it is extremely unlikely that a market for the common stock will ever develop. Therefore, the stock price cannot be and is not determined by actions and considerations of any such market. The Company has made prior offerings of Class B Nonvoting Common Stock as follows: a Regulation A offering in 1981 to Company agents, an S-18 offering to this group in 1982, a Regulation A offering to this group in 1984, a Regulation A offering to this group in 1985, a Regulation A offering to this group in 1987, an S-18 offering to this group in 1990, an S-18 offering to this group in 1993, an S-1 offering to this group in 1995, and an S-1 offering to this group in 1996. Presently, the Company has approximately four hundred eighty (480) shareholders, all of whom are required by Texas law to hold licenses as Texas insurance agents. In addition, all holders of common shares are subject to Stock Agreements with the Company. The form of Stock Agreement which first time subscribers to shares of Class B Nonvoting Common Stock will be required to enter into is set forth in "Appendix A" attached hereto. Under this Stock Agreement the holder agrees that, in accordance with Texas law pertaining to incorporated insurance agencies, the holder must be duly licensed as a Texas life insurance agent, and, in the event the holder ceases to be so licensed, the holder and the Company agree that the holder's shares will be repurchased by the Company. The shares will also be repurchased by the Company (1) in the event that the holder ceases to be a duly authorized agent of the Company, (2) in the event of the holder's death, or (3) in the event that the holder desires to sell or otherwise dispose of his/her shares. Upon the receipt of written notice of any such event, the Company has ninety (90) days within which to close the repurchase of such shares. Under the terms of the Stock Agreement, the price at which the Company will repurchase such shares is determined by the Company, in its sole and absolute discretion, at least annually. The Company will determine to pay the repurchase price in cash, by delivery of the Company's unsecured promissory note containing such terms and provisions as the Company shall determine, or by a combination of cash and such a promissory note. Under the Stock Agreement, the holder agrees not to transfer, pledge, assign, or otherwise in any manner encumber any such shares, except pursuant to the terms of the Stock Agreement. (See "Description of Securities.") As a result of these statutory and contractual restrictions on disposal of the Company's Class B Stock, no market, other than the Company, has ever developed for the Stock, and it is very unlikely that such a market ever will develop. Therefore, the stock price cannot be and is not determined by actions and considerations of any such market. While the Company may change its methodology or adjust the Stock price based on other factors at any time in the future, the price at which the Company has purchased Class B Nonvoting Common Stock in the past has been determined from the per share book value* of the Stock at the end of the Company's current fiscal year, reduced by dividends declared for payment on the current year's earnings. In the event that in a given year the entire current year's earnings are not paid as a dividend, the resultant net increase in per share book value over the previous year's similarly computed Stock price is then added incrementally, 1/12th per month for the ensuing 12 months to the current September 30 Stock price (based upon the prior year's computation). The book value per share at the end of the fiscal year ended September 30, 1995, less any dividends declared at the end of fiscal year 1995 resulted in a Class B Stock price at September 30, 1996, of $27.04 per share. The increase in book value per share for the fiscal year ended September 30, 1996, based on the Company's earnings for such fiscal year, was $7.63*, all of which was paid as a dividend on December 2, 1996. Because the Company paid out the full increase in book value between September 30, 1995 and September 30, 1996 as a dividend, the price which the Company will pay throughout fiscal 1997 will remain $27.04 per share. Because there is no public market for the Class B Stock of the Company, this method of determining the price the Company will pay for the Stock may be deemed to be arbitrary. (See "Determination of Offering Price.") The shares will be offered until fully subscribed, but in no event beyond midnight on June 30, 1997 (unless extended by the Company for up to an additional thirty (30) days). Ownership of these shares is limited to those agents executing Stock Agreements and licensed as life insurance agents in Texas. The shares offered are Class B Nonvoting Common Stock. (See "Risk Factors," "Plan of Distribution" and "Description of Securities.")

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+PROSPECTUS SUMMARY The following is a summary of the more detailed information and financial statements appearing elsewhere in this Prospectus. This Prospectus contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the "1934 Act"). The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; (iii) the Company's business strategies; and (iv) the declaration and payment of dividends. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The accompanying information contained in this Prospectus, including without limitation the information set forth under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as information contained in the Company's 1934 Act filings with the Securities and Exchange Commission (the "Commission"), identify important factors that could cause such differences. THE COMPANY Dataflex Corporation (the "Company"), incorporated in New Jersey in 1976, is a direct marketer of microcomputer equipment, related products and computer services. The Company markets computer equipment and related products supplied primarily by major manufacturers, including Compaq, Hewlett-Packard, IBM and Toshiba. The Company's customers are business organizations with diverse desktop computing requirements located throughout the United States, with a primary concentration in the Southeast. The Company provides its customers with single-source, value-added desktop computing solutions and services, including product sales, system integration, network installations, help desk support, training, consultation services and equipment repair maintenance. The Company is also a certified Novell Education Center and a certified Microsoft Authorized Technical Education Center capable of providing on-site or off-site manufacturer authorized education. The computer services business continues to be the fastest growing segment of the Company's operations and includes dedicated on-site remedial and nonremedial maintenance support to the Company's customers through the Company's Mainsite(TM) program, field service repairs and maintenance, system configuration, asset management, authorized training centers, LAN/WAN consulting and system integration, help desk support through its toll-free support line for all computer and computer related problems, and FlexStaff, which provides dedicated high-end technical support on a contract basis to customers for short and long-term requirements. In addition, the Company is a member of a national network of service partners to enhance its ability to deliver nationwide, on-site services to its customers. The Company focuses its efforts on customer service. The Company conducts ongoing training for its associates, monitors response and repair time regarding customer requests and concerns, measures delivery time for services and conducts customer surveys to determine the level of customer satisfaction. Over the past twelve months, the Company has divested its Eastern (New Jersey-based), Midwestern (Chicago-based), and Western (California- and Arizona-based) regions in a series of transactions. These divestitures are a reversal of the Company's expansion strategy implemented in 1994 and 1995 and resulted from the Company's inability to successfully integrate these acquisitions promptly and effectively. Additionally, management determined that the Company lacked adequate capital (or access to adequate capital) to support its expanded infrastructure, to make necessary additional capital expenditures and to service the significant indebtedness incurred in connection with the acquisitions. Management concluded that it was necessary to reduce the burden of this indebtedness. The divestitures have reduced the Company's indebtedness and allowed it to focus on its core competencies. In particular, management believed that the Company's best opportunities were in the Southeastern United States and therefore concentrated the Company's efforts in this region. As a result, the Company disposed of its other operations, including its Eastern region (the original business of the Company) in 1996. The Company also recently sold its Kindergarten through 12th Grade Education business to Computer Plus, Inc. ("Computer Plus"). The Company has offices in Tallahassee, Maitland (Orlando), Hollywood (Miami-Ft. Lauderdale) and Clearwater (Tampa Bay), Florida, as well as in Smyrna (Atlanta), Georgia. The Company's headquarters are located at 2145 Calumet Street, Clearwater, Florida 34625, and its telephone number is (813) 562-2200. <TABLE> <CAPTION> THE OFFERING <S> <C> Common Stock Offered by the Selling Shareholders . . . . . . . . . . . . . . . . 270,000 shares Common Stock Outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,847,199 shares Nasdaq National Market Symbol . . . . . . . . . . . . . . . . . . . . . . . . . . DFLX </TABLE> - -------------------- (1) Based upon the number of shares outstanding as of March 31, 1997. Excludes (i) 1,089,222 shares of Common Stock issuable upon the exercise of options outstanding which had a weighted average exercise price of $3.725 per share and of which 421,813 shares were exercisable at a weighted average exercise price of $4.966 per share and (ii) 849,116 shares of Common Stock reserved for future issuance under the Company's Stock Option Plans. See "Description of Capital Stock." SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> For the Nine Months Ended For the Years Ended March 31, December 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1996 1995 -------- --------- ---------- -------- ----------- ------------ ------------ (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenue . . . . . . . . $472,102 $273,851 $ 122,348 $ 77,306 $ 99,031 $ 210,899 $ 340,804 Cost of Revenue . . . . 419,592 242,564 108,818 65,555 80,733 185,327 302,462 -------- -------- --------- --------- ---------- ----------- ----------- Gross Profit . . . . . 52,510 31,287 13,530 11,751 18,298 25,572 38,342 Selling, General and Administrative Expenses . . . . . . 42,995 24,259 10,675 10,272 11,116 21,594 30,632 Amortization of Goodwill . . . . . . 1,265 594 0 0 0 530 932 Restructuring and Other Charges . . . . . . . 5,353 0 0 0 0 0 0 -------- -------- --------- --------- ---------- ----------- ----------- Operating Income . . . 2,897 6,434 2,855 1,479 7,182 3,448 6,778 Interest (Expense) Income . . . . . . . (8,063) (2,677) 4 (13) (123) (4,051) (5,717) Loss on Dispositions of Businesses . . . . . (4,632) 0 0 0 0 (6,230) 0 Litigation Settlement and Related Costs . . 0 0 (847) 0 0 0 0 -------- -------- --------- --------- ---------- ----------- ----------- (Loss) Income Before Income Taxes. . . . . (9,798) 3,757 2,012 1,466 7,059 (6,833) 1,061 (Benefit from) Provision for Income Taxes . . . . (3,463) 1,617 884 653 2,931 (2,412) 456 -------- -------- --------- --------- ---------- ----------- ----------- Net (Loss) Income . . . (6,335) 2,140 1,128 813 4,128 (4,421) 605 ======== ======== ========= ========= ========== =========== =========== (Loss) Earnings per Common Share. . . . . (1.22) .45 .28 .20 .95 (.78) .11 ======== ======== ========= ========= ========== =========== =========== Weighted Average Common Shares . . . . . . . 5,214 4,733 4,085 4,080 4,335 5,644 5,422 ======== ======== ========= ========= ========== =========== =========== </TABLE> <TABLE> <CAPTION> BALANCE SHEET DATA: March 31, December 31, -------------------------------------------------- ------------ 1996 1995 1994 1993 1992 1996 ------------------ ---------- -------------------- ------------ <S> <C> <C> <C> <C> <C> <C> Working Capital . . . . $ 57,531 $ 46,971 $ 22,629 $20,973 $20,722 $ 9,363 Total Assets . . . . . 170,313 146,581 56,337 37,943 42,179 68,982 Long-Term Debt . . . . 54,062 52,510 228 -0- 213 4,687 Total Shareholders' Equity . . . . . . . . 31,849 34,140 26,680 25,338 24,970 27,915 </TABLE>

parsed_sections/prospectus_summary/1997/CIK0000703701_ushealth_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. All financial information set forth herein is presented in accordance with generally accepted accounting principles ("GAAP"), unless otherwise noted. See "Glossary of Insurance Terms" for definitions of certain terms used in this Prospectus. THE COMPANY Westbridge Capital Corp. ("Westbridge" and, together with its consolidated subsidiaries, the "Company") markets medical expense and supplemental health insurance products and managed care health plans to individuals in 41 states. Since 1992, the Company has grown through a combination of acquisitions and, more recently, increased sales of its underwritten products. Primarily as a result of acquisitions, the Company's total premiums grew from approximately $56.7 million in 1992 to approximately $98.7 million in 1994. During the first quarter of 1995, the Company embarked on a strategy of expanding the number of agents in its marketing distribution system to increase sales of its underwritten products. As a result of this initiative, the Company's net annualized written premiums increased from $19.9 million in 1994 to $79.1 million in 1996 with total premiums increasing 59.0% from $98.7 million in 1994 to $156.8 million in 1996. During the middle of 1996, the Company reduced the marketing of its underwritten products due to statutory capital and surplus constraints caused by its rapid growth. The Company intends to increase the marketing of its underwritten products following the sale of the Notes offered hereby. The Company has taken advantage of its marketing distribution system to market certain managed care health plans which are underwritten by health maintenance organizations ("HMOs") and other non-affiliated managed care organizations. Through this marketing effort, which generates sales commissions, the Company's fee and service income has increased from approximately $2.3 million in 1995 to approximately $9.5 million in 1996. Fee and service income can be generated without regard to the statutory capital and surplus requirements that apply to the Company's underwritten products. The Company's strategy is (i) to expand its underwriting and marketing of medical expense health insurance products in rural areas where managed care health plans are often unavailable, (ii) to increase its fee and service income by continuing to expand its marketing of managed care health plans underwritten primarily by HMOs and other managed care organizations, primarily in urban markets where managed care health plans are readily available, and (iii) to focus on cross-selling its underwritten supplemental health insurance products in connection with its marketing of managed care health plans. The Company believes that its supplemental health insurance products are attractive to managed care consumers who are concerned with the choice limitations of managed care health plans, particularly in the event of serious illness. In addition, the Company intends to evaluate opportunities for further growth through acquisitions. MARKETING DISTRIBUTION SYSTEM The Company markets health insurance products and managed care health plans through a distribution system of (i) general agencies in which the Company has a controlling ownership interest and (ii) independently-owned general agencies which have entered into exclusive contractual arrangements to sell the Company's Medical Expense Products (as defined below). The Company believes that its success in attracting and retaining agents is based on its unique distribution model which (i) begins with focused telemarketing to generate high quality sales leads at a relatively low cost, (ii) includes intensive training programs that yield highly productive agents, (iii) focuses upon the Company having an ownership interest in its major distributors to provide incentives for long-term stability and (iv) offers innovative agent compensation which includes participation in the Company's restricted stock plan. The principal general agencies in which the Company has a controlling ownership interest are LifeStyles Marketing Group, Inc. ("LifeStyles Marketing"), Senior Benefits, LLC ("Senior Benefits"), Health Care- One Insurance Agency, Inc. ("Health Care-One"), and Health Care-One Marketing Group, Inc. ("HCO Marketing"). These general agencies market a variety of insurance products underwritten by the Company, as well as HMO, Preferred Provider Organization ("PPO") and Medicare SELECT products underwritten by managed care organizations such as Blue Cross of California and UniCARE Life and Health Insurance Company ("UniCARE"), each of which are subsidiaries of WellPoint Health Networks, Inc. ("WellPoint"), Foundation Health National Life Insurance Company ("Foundation Health") and MEDFIRST Health Plans of Louisiana, Inc. ("MEDFIRST"). The principal independent general agencies which sell the Company's products are Cornerstone National Marketing Corporation ("Cornerstone") and National Farm & Ranch Group, Inc. ("Farm & Ranch"), each of which currently markets the Company's Medical Expense Products. PRODUCTS The major underwritten product lines currently being marketed by the Company are: - "Medical Expense Products," which include policies providing reimbursement for various costs of medical and hospital care and offering reduced deductibles and coinsurance payments to policyholders which use the Company's contracted PPOs; and - "Critical Care and Specified Disease Products," which include indemnity policies for treatment of specified diseases and "event specific" and "critical care" policies which provide fixed benefits or lump sum payments upon diagnosis of internal cancer or other catastrophic diseases. Within each of these product lines, the Company continues to develop new policies and products to respond to changes in the health care environment. The Company has recently developed its "MSA Major Medical Plan" which allows individuals to take advantage of certain federal tax benefits by purchasing high deductible major medical insurance together with a medical savings account that includes a unique package of additional benefits. Additionally, the Company has developed a new "critical care" product to cross-sell in connection with its marketing of HMO and PPO products. Historically, the Company has also underwritten a significant amount of "Medicare Supplement Products" designed to provide reimbursement for certain expenses not covered by the Medicare program. However, due to the relatively low margins for this product, the Company intends to significantly reduce its underwriting of these products in favor of marketing the Medicare Supplement Products of other insurers. The major managed care products underwritten by HMOs and other managed care organizations which are currently being marketed by the Company are: - HMO products underwritten by Blue Cross of California, MEDFIRST and Foundation Health; - PPO products underwritten by UniCARE; and - Medicare SELECT products underwritten by UniCARE which utilize the Company's network of contracted Medicare SELECT providers. Westbridge was incorporated as a Delaware holding company in September 1982 for its wholly-owned subsidiary, National Foundation Life Insurance Company ("NFL"). NFL has been in the insurance business since 1960. Westbridge's other insurance subsidiaries consist primarily of National Financial Insurance Company ("NFIC"), American Insurance Company of Texas ("AICT") and Freedom Life Insurance Company of America ("FLICA," and together with NFL, NFIC and AICT, the "Insurance Subsidiaries"). The Company's executive offices are located at 777 Main Street, Suite 900, Fort Worth, Texas 76102, and its telephone number is (817) 878-3300. SUMMARY FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996(1) 1995 1994(2) 1993 1992 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Premiums............................... $ 156,780 $ 120,093 $ 98,703 $ 68,731 $ 56,731 Net investment income.................. 8,736 7,421 5,764 4,120 3,932 Total revenues......................... 175,146 130,032 106,546 75,292 62,634 Net income............................. 8,261 5,324 6,425 3,531 2,896 Preferred stock dividends.............. 1,650 1,650 1,190 -- -- Income applicable to common stockholders......................... $ 6,611 $ 3,674 $ 5,235 $ 3,531 $ 2,896 Net income per share: -- Primary........................... $ 1.08 $ 0.63 $ 1.13 $ 0.78 $ 0.66 -- Fully-diluted..................... $ 0.97 $ 0.65 $ 1.03 $ 0.78 $ 0.66 Weighted average number of shares outstanding: -- Primary........................... 6,131,000 5,836,000 4,617,000 4,555,000 4,381,000 -- Fully-diluted..................... 8,540,000 8,204,000 6,267,000 4,555,000 4,381,000 </TABLE> <TABLE> <CAPTION> AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996(1) 1995 1994(2) 1993 1992 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT SHARE DATA AND RATIOS) <S> <C> <C> <C> <C> <C> SUPPLEMENTARY DATA: Net annualized written premiums(3)........... $79,127 $60,686 $19,909 $11,602 $ 9,674 Loss ratio(4)................................ 60.1% 58.7% 54.3% 48.2% 46.8% Expense ratio(5)............................. 36.9% 40.0% 40.1% 48.7% 54.4% Ratio of earnings to fixed charges(6)........ 3.0x 3.0x 3.0x 2.6x 2.2x Ratio of earnings to combined fixed charges and preferred stock dividends(7)........... 2.3x 2.0x 2.3x Supplemental adjusted ratio of earnings to fixed charges(6)(8)........................ 1.3x Book value per share -- fully diluted........ $ 8.09 $ 7.53 $ 6.93 $ 5.09 $ 4.30 Statutory capital and surplus(9)............. $18,648 $24,038 $23,564 $16,066 $14,265 </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, 1996 --------------------------- ACTUAL(1) AS ADJUSTED(5) --------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Total assets................................................ $220,716 $277,152 Notes payable............................................... 21,210 12,646 Senior subordinated notes................................... 19,350 19,350 Convertible subordinated notes.............................. -- 65,000 Redeemable preferred stock(10).............................. 20,000 20,000 Stockholders' equity........................................ 47,903 47,903 </TABLE> - --------------- (see footnotes on following page) (1) Includes operations of FLICA's parent, Freedom Holding Company ("FHC"), from June 1, 1996. See "Business -- Acquisitions." (2) Includes operations of NFIC and AICT from April 12, 1994. See "Business -- Acquisitions." (3) Represents first-year annualized premiums attributable to policies that have been underwritten and issued by the Company. Excludes net annualized premiums for acquired blocks of business and premiums assumed in connection with coinsurance agreements. (4) Calculated as a percent of premiums and reflects a changing mix of the policies issued by the Company between 1992 and 1996. See "Business -- Products" and "-- Regulation." (5) Expense amounts include level commissions, amortization of goodwill and deferred policy acquisition costs ("DPAC"), general insurance expenses and taxes, licenses and fees for the Company's wholly-owned insurance subsidiaries. The expense ratio is calculated as a percent of premiums and excludes the effects of net investment income, fee and service income, realized gains (losses) and the financial results of the Company's non-insurance operations. (6) In computing the ratio of earnings to fixed charges, fixed charges consist of interest on indebtedness, amortization of debt expense and such portion of rental expense which is estimated to be representative of the interest factor, all on a pre-tax basis. Earnings consist of pre-tax income from continuing operations plus fixed charges. (7) In computing the ratio of earnings to combined fixed charges and preferred stock dividends, fixed charges consist of interest on indebtedness, amortization of debt expense, such portion of rental expense which is estimated to be representative of the interest factor and required preferred stock dividends (preferred stock dividends are applicable only to the years ended December 31, 1996, 1995 and 1994), all on a pre-tax basis. Earnings consist of pre-tax income from continuing operations plus fixed charges. (8) Adjusted to give effect to the receipt of the proceeds of the offering of the Notes hereby and the initial uses thereof. See "Use of Proceeds." (9) Calculated in accordance with statutory accounting practices ("SAP") and applicable solely to the wholly-owned insurance subsidiaries of Westbridge. (10) At December 31, 1996, consists of 20,000 shares of Westbridge's Series A Cumulative Convertible Redeemable Exchangeable Preferred Stock (the "Series A Preferred Stock"), which were convertible, at the option of the holders thereof, into an aggregate of 2,378,120 shares of Common Stock at a conversion price of $8.41 per share of Common Stock. The Series A Preferred Stock is exchangeable, at the option of Westbridge, into that principal amount of Convertible Subordinated Notes due April 12, 2004 of Westbridge (the "Convertible Subordinated Notes") equal to the aggregate liquidation preference of the shares of Series A Preferred Stock to be exchanged. Following the offering of the Notes hereby, the Company intends to call the Series A Preferred Stock for redemption at a time at which the then current market price of the Common Stock will provide an incentive to the holders of the Series A Preferred Stock to convert their shares in accordance with the terms thereof prior to any such redemption. See "Capitalization" and "Description of Capital Stock -- Series A Preferred Stock." THE OFFERING Notes Offered................... $65,000,000 principal amount of % Convertible Subordinated Notes due 2004 (the "Notes"). Maturity Date................... May 1, 2004. Interest Payment Dates.......... May 1 and November 1, commencing November 1, 1997. Interest........................ % per annum. Conversion...................... The Notes are convertible at the option of the holder into Common Stock at any time prior to maturity, unless previously redeemed or repurchased, at a conversion price of $ per share, subject to adjustment in certain circumstances. See "Description of the Notes -- Conversion of the Notes." Redemption at the Option of Westbridge...................... The Notes are not redeemable prior to May 1, 2000. Thereafter, the Notes are redeemable at any time and from time to time at the option of Westbridge, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. See "Description of the Notes -- Optional Redemption by Westbridge." Repurchase at the Option of Holders Upon Change of Control....................... Upon a Change of Control (as defined herein), Westbridge will offer to repurchase the Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. See "Description of the Notes -- Repurchase at the Option of Holders Upon Change of Control." Subordination................... The Notes are unsecured and subordinate to all existing and future Senior Indebtedness (as defined herein). At February 28, 1997, Senior Indebtedness was $40.1 million. The Indenture does not restrict the incurrence of additional indebtedness by Westbridge or any of its subsidiaries. See "Description of the Notes -- Subordination." Use of Proceeds................. Westbridge will use approximately $25.0 million of the proceeds of the offering of Notes hereby to provide additional statutory capital and surplus to the Insurance Subsidiaries and to recapture a block of reinsured insurance policies, with the remainder to be used for general corporate purposes. See "Use of Proceeds."

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+Prospectus Summary; Risk Factors 4. Use of Proceeds . . . . . . . . . . . . . . . . . . Prospectus Summary; Use of Proceeds 5. Determination of Offering Price . . . . . . . . . . Not applicable 6. Dilution . . . . . . . . . . . . . . . . . . . . . Not applicable 7. Selling Security Holders . . . . . . . . . . . . . Principal and Selling Shareholders 8. Plan of Distribution . . . . . . . . . . . . . . . Outside and Inside Front Cover Pages; Plan of Distribution 9. Description of Securities to be Registered . . . . Description of Capital Stock; Description of Notes; Dividend Policy 10. Interests of Named Experts and Counsel . . . . . . Legal Matters; Experts 11. Information with Respect to the Registrant . . . . Outside and Inside Front Cover Pages; Prospectus Summary; Risk Factors; Price Range of Common Stock; Dividend Policy; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Relationships and Related Transactions; Principal Shareholders; Description of Capital Stock; Consolidated Financial Statements; Outside Back Cover Page 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . Not applicable </TABLE> information statements, and other information that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web site can be accessed at http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Notes and Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company, the Notes and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all exhibits thereto, may be obtained from the Commission's principal office in Washington, D.C. upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission described above. Adaptec, EZ-SCSI and SCSIselect are registered trademarks of Adaptec, Inc. This Prospectus also uses trademarks and registered trademarks of companies other than the Company and its subsidiaries. PROSPECTUS Adaptec, Inc. U.S. $230,000,000 4 3/4% Convertible Subordinated Notes due February 1, 2004 and Shares of Common Stock Issuable Upon Conversion Thereof --------------------- This Prospectus relates to $230,000,000 aggregate principal amount of 4 3/4% Convertible Subordinated Notes due February 1, 2004 (the "Notes") of Adaptec, Inc. (the "Company") under the Securities Act of 1933, as amended (the "Securities Act"), and the shares of Common Stock, $.001 par value of the Company, ("Common Stock") issuable upon the conversion of the Notes (the "Conversion Shares"). The Notes registered hereby were issued and sold on February 3, 1997 (the "Original Offering") in transactions exempt from the registration requirements of the Securities Act, to persons reasonably believed by Bear, Stearns & Co. Inc., Lehman Brothers, Robertson Stephens & Company LLC, and Unterberg Harris, as the initial purchasers (the "Initial Purchasers") of the Notes, to be "qualified institutional buyers" (as defined by Rule 144A under the Securities Act) or other institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under Regulation D of the Securities Act) or in compliance with the provisions of Regulation S under the Securities Act. The Notes and the Common Stock issuable upon conversion thereof may be offered and sold from time to time by the holders named herein or by their transferees, pledgees, donees or their successors (collectively, the "Selling Securityholders") pursuant to this Prospectus. The Registration Statement of which this Prospectus is a part has been filed with the Securities and Exchange Commission pursuant to a registration rights agreement dated as of February 3, 1997 (the "Registration Agreement") between the Company and the Initial Purchasers, entered into in connection with the Original Offering. The Notes are convertible at the option of the holder into shares of Common Stock of the Company (at any time on or after May 5, 1997 and prior to redemption or maturity, at a conversion rate of 19.3573 shares per $1,000 principal amount of Notes), subject to adjustment under certain circumstances. Interest on the Notes is payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 1997. On June 18, 1997, the closing price of the Common Stock, which is quoted on the Nasdaq National Market under the symbol "ADPT," was $37.00 per share. --------------------- THE NOTES AND THE COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Upon the closing of this offering, all of the Company's issued and outstanding shares of Convertible Preferred Stock will be converted into, and the Company will issue to the holders of such preferred stock, 2,100,000 shares of Common Stock. Prospective investors should consider carefully the information under "Risk Factors." THE COMPANY Cascade Systems Incorporated ("Cascade" or the "Company") designs, develops, markets and supports workflow and content management software solutions for newspapers, magazine and book publishers, commercial printers, retailers and other corporate publishers. The Company's DataFlow system manages the process of publishing information by providing content and data management, tracking, workflow and archiving functionality. The Company's MediaSphere system is designed to meet the archiving, search and retrieval needs of organizations dealing with large amounts of multimedia data. DataFlow and MediaSphere also are designed to permit access to and delivery of content over the Internet. The Company's newspaper customers include The Los Angeles Times, Newsday, The Miami Herald, The Mirror Group PLC (U.K.), The Boston Globe and The Daily Telegraph (U.K.). Other customers include magazine publishers such as The McGraw-Hill Companies, Inc. and Conde Nast Publications Inc., commercial printers such as Bowne & Co., Inc. and R.R. Donnelley & Sons Company, and retailers and catalog publishers including Amway Corporation and Val-Pak Direct Marketing Systems, Inc. The worldwide publishing industry is undergoing significant change in response to competitive pressures. Publishers of newspapers and magazines are consolidating into larger organizations with multiple titles, formats and geographic locations. Publishing enterprises are also facing competition from alternative publishing on new media such as the Internet. Increased competition for subscribers has resulted in a trend toward more demographically targeted editorial, feature and advertising content. As a result, publishers are beginning to view their content assets, such as photos, graphics, illustrations, text and captions, as key competitive differentiators. Newspapers, publishers and other organizations are seeking ways to improve content management and utilization while continuing to meet demanding time schedules and reduce costs. The Company believes it has established a pre-eminent position in the newspaper marketplace for workflow and content management solutions. The Company's products are designed to handle complex data formats and large files associated with the pre-press production process and are able to fit seamlessly with other pre-press applications, while maintaining a record of job status throughout the process. As part of its strategy, the Company intends to continue to leverage opportunities created by its technology and client base to expand its position in the newspaper market in the U.S. and internationally, both for advertising and other editorial applications. The Company also intends to continue to leverage its technology through enhancements to support the Internet and other evolving technologies. In addition, the Company believes that the expertise that it has acquired in developing workflow and content management solutions for time-critical applications in the newspaper industry will permit it to expand to other publishing markets which face similar requirements for workflow and content management solutions, such as magazines, catalogs, and special purpose publishers. The Company is developing a workgroup content management solution to address the requirement of commercial printers and trade shops, and intends to apply its solutions to meet the needs of other organizations, such as retailers and consumer product companies, that manage a high volume of text and images internally. The Company intends to expand its global sales capabilities by increasing the size of its direct sales organization in major markets to target strategic accounts and by developing VAR and OEM relationships to target specific vertical markets. The Company markets its products and services primarily through its own direct sales force and distributors in certain overseas markets. The Company has a sales and marketing organization of 27 persons, as well as a services and support organization of 35 persons. In addition, the Company has established a strategic relationship with Applied Graphics Technologies, Inc. for selling its solutions to corporate customers. The Company was initially incorporated in February 1994 under the name Cascade Systems International Inc., the parent company of Cascade Systems Limited, a United Kingdom based company, and Cascade Systems Incorporated, a Massachusetts corporation, both of which were organized in 1993. In 1996, the Massachusetts corporation was merged into the Company and the Company changed its name to Cascade Systems Incorporated. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............................... 2,250,000 shares Common Stock offered by the Selling Stockholders.................. 550,000 shares Common Stock to be outstanding after the offering................. 7,125,525 shares(1) Use of proceeds................................................... For working capital and other general corporate purposes. Proposed Nasdaq National Market symbol............................ CSCD </TABLE> - --------------- (1) Excludes 1,917,650 shares of Common Stock issuable upon the exercise of options outstanding as of August 31, 1997 at a weighted average exercise price of $4.51 per share, of which options to purchase 311,730 shares were then exercisable. Includes 1,700,000 shares of Common Stock issuable upon conversion of 1,700,000 shares of Series A Preferred Stock and 400,000 shares of Common Stock issuable upon conversion of 400,000 shares of Series B Preferred Stock, effective upon the closing of this offering. See "Capitalization," "Management -- Executive Compensation," and "Description of Capital Stock." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> INCEPTION SIX MONTHS (FEBRUARY 5, 1993) YEAR ENDED ENDED THROUGH DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------- --------------- 1993 1994 1995 1996 1996 1997 ------------------- ------- ------- ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Software license revenues................. $ 494 $ 2,658 $ 4,905 $5,913 $2,558 $4,386 Maintenance and service revenues................. 236 1,177 2,243 4,428 1,653 2,639 Hardware and other revenues................. 2,071 8,238 10,564 8,170 5,067 2,334 ------------------- ------- ------- ------ ------ ------ Total revenues...... 2,801 12,073 17,712 18,511 9,278 9,359 Income (loss) from operations............... (312) (793) (1,390) 4 (204) 172 Net income (loss).......... $ (313) $ (745) $(1,400) $ 93 $ (114) $ 231 Pro forma net income per common and common equivalent share......... $ 0.02 $ 0.04 Weighted average common and common equivalent shares outstanding.............. 6,008 6,066 </TABLE> <TABLE> <CAPTION> JUNE 30, 1997 ------------------------- ACTUAL AS ADJUSTED(1) ------ -------------- <S> <C> <C> BALANCE SHEET DATA: Cash......................................................... $2,071 $ 22,246 Working capital.............................................. 1,260 21,435 Total assets................................................. 6,933 27,108 Total stockholders' equity................................... 2,305 22,480 </TABLE> - --------------- (1) As adjusted to give effect to the sale of the 2,250,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. -------------------- Except as otherwise indicated, all information in this Prospectus (i) reflects the conversion of all outstanding shares of the Company's Series A and Series B Preferred Stock into an aggregate of 2,100,000 shares of Common Stock upon the closing of this offering, (ii) reflects the further amendment and restatement of the Company's Amended and Restated Certificate of Incorporation, to be effective upon the closing of this offering, to remove the Company's existing series of Preferred Stock and to create a class of authorized but undesignated Preferred Stock, and (iii) assumes no exercise of the Underwriters' over-allotment option.

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO UP TO 1,282,042 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE PURSUANT TO THE COMPANY'S 1996 INCENTIVE STOCK OPTION PLAN (THE "PLAN"). THE INFORMATION IN THIS PROSPECTUS RELATING TO SHARES OF COMMON STOCK AND PER SHARE AMOUNTS GIVES EFFECT TO A 1-FOR-5 REVERSE STOCK SPLIT WHICH BECAME EFFECTIVE ON JANUARY 9, 1997. FOR THE MEANINGS OF CERTAIN TECHNICAL TERMS USED IN THIS PROSPECTUS IN REGARD TO THE BUSINESS OF THE COMPANY, PLEASE SEE THE GLOSSARY COMMENCING ON PAGE 58. THE COMPANY Radyne has been involved in the advanced design and production of digital data communications equipment and associated equipment for satellite telecommunications systems for over sixteen years. Since the Company's inception in 1980, Radyne has established itself as a supplier in the satellite ground equipment business. Radyne designs, manufacturers and sells satellite modems, frequency converters, ancillary products and equipment racks containing integrated modems and supporting equipment for data communications. Although the Company was forced to file for Chapter 11 bankruptcy protection in April 1994, it successfully emerged from bankruptcy in December of that year upon the acquisition of approximately 91% of its Common Stock by Engineering and Technical Services, Inc. ("ETS"), then a major customer of Radyne. On August 12, 1996, ETS was acquired by Singapore Technologies Pte Ltd through its indirect wholly owned subsidiary, Stetsys US, Inc. ("ST"). As a result, approximately 91% of the Company's Common Stock is now held by ST. ST is wholly owned by Stetsys Pte Ltd, which is wholly owned by Singapore Technologies Pte Ltd, which is in turn wholly owned by Temasek Holdings (Private) Limited, the sole shareholder of which is the Minister for Finance (Incorporated) of Singapore. See "Principal and Management Stockholders." In 1995, ETS caused Radyne to install a new management team, which promptly moved the Company's operations from New York to Phoenix, Arizona and commenced the hiring of an almost all new staff of engineering, sales and support personnel. With funding provided by ETS, and subsequently ST and its affiliates, the new Radyne team has reinstituted Radyne's research, development and marketing programs and reinvigorated its product line. The Company's engineering staff and support facilities are dedicated to (i) maintaining the state-of-the-art status of Radyne's traditional products for the satellite ground equipment segment of the market, (ii) designing and enhancing products for emerging markets, such as rural telephony for developing areas, high-speed satellite communications, government data equipment and the growing private network market, and (iii) providing special configurations to satisfy customers' special needs. Radyne's modems cover data rates from 2.4 Kilobytes per second to 50 Megabytes per second. The Company's frequency converters handle all three frequency bands used in satellite communications. Radyne believes that most of its current line of modems and converters are smaller and lower priced than the previous generation of products, enabling large system installation in significantly less rack space than the products of the Company's competitors. The Company also markets redundancy switches which operate in conjunction with satellite modems and converters and provide automatic fault monitoring and switch over to standby equipment in the event of modem or converter failure. Radyne's line of frequency converter products is usable in virtually all earth stations for the conversion of intermediate frequencies to microwave frequencies for satellite transmission. These converters are competitively priced, small in size and offer either single, dual or all three bands used in the satellite industry. In addition to being offered to commercial customers, there is a military market for the three-band units. The Company's newer products include a low cost modem with expanded features and super fast acquisition capabilities, making it attractive for use in both private networks and rural telephone systems being offered in China, Indonesia and India, and a line of satellite frequency translators presently used for testing in satellite earth stations. The development of digital compression technology has allowed the transmission of television in a small bandwidth which has made TV transmission by satellite more economical than ever before. Video compression allows 10 to 12 times as many channels on a satellite as before, producing a new market of major interest. This compression technology is or may be used for transmission of TV to all network facilities, distribution of cable TV to cable companies, high definition TV distribution and video teleconferencing. Radyne has developed a modulator product to be used in conjunction with compression equipment and has been shipping this product for the past seven months. Radyne's operating strategy is to (i) continue to build on the experience, skills and customer access of its new management team, (ii) capitalize on its development of smaller, less costly satellite modems, and (iii) expand into market segments, such as rural telephone, private networks and compressed television transmission. See "Business." Notwithstanding the foregoing, investors should be aware that the Company's plans are subject to a number of variables outside of its control, and there can be no assurance that the Company will be able to implement any or all of such plans or that such plans, when and if implemented, will be successful. See "Risk Factors." Radyne was incorporated in the State of New York on November 25, 1980. The Company's current address is 5225 South 37th Street, Phoenix, Arizona 85040 and its telephone number is (602) 437-9620. PURPOSE OF THE RIGHTS OFFERING AND USE OF PROCEEDS The Rights Offering, together with the Rights Options, is intended to raise approximately $5,640,000 of gross proceeds as part of the Company's on-going efforts to improve its ability to fund the growth of its business, in particular the cash needs associated with sharply increased orders for Radyne products. In establishing the size of the Rights Offering, the Board of Directors consulted with management, and considered the Company's need for additional capital. If the Rights Offering is consummated, the maximum gross proceeds to the Company from the Rights Offering, together with the Rights Options, would be approximately $5,640,000 before payment of related fees and expenses estimated to be $260,000. However, although the Company has been informed that ST's affiliate, Stetsys Pte Ltd ("SPL"), intends to fully exercise its ST Rights, no assurance can be given that any or all of the Rights received by others or the Rights Options will be exercised. Shares underlying any unexercised Rights will not be reoffered to the public or otherwise. Therefore, the actual proceeds from the Rights Offering could be somewhat lower. The Company currently expects that the net proceeds from the Rights Offering will be used to repay the Company's indebtedness to ST (approximately $4,142,000 including principal and interest) and either to reduce the Company's short-term bank debt or for general corporate and working capital purposes (including research and development costs), although a final determination as to the use or uses will not be made until after the completion of the Rights Offering. Factors that will be considered at that time in determining how the net proceeds will be used will include: the amount of net proceeds actually generated, the Company's actual and projected working capital requirements at that time, the amount of the Company's bank debt, interest rates in effect at that time and such other factors as the Board of Directors considers to be relevant at that time. For a description of the Company's debt, including interest rates, maturity dates and use of proceeds from such debt, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Subscription Price has been established by the Board of Directors at $2.50 per share, which the Board considers to be the fair market value of the Common Stock. See "Purpose of the Rights Offering and Use of Proceeds." THE RIGHTS OFFERING <TABLE> <S> <C> Shareholder Rights..................... Shareholders, other than ST and residents of California, will receive three Rights for every five shares of Common Stock held on the Record Date, as adjusted by the 1-for-5 reverse stock split approved by the shareholders on January 8, 1997 and effective on January 9, 1997 (the "Reverse Split"). An aggregate of approximately 215,833 Shareholder Rights will be distributed. Holders are entitled to purchase at the Subscription Price one share of Common Stock for each Shareholder Right exercised. The Shareholder Rights will expire on the Expiration Date. The Shareholder Rights will be transferable. No fractional Shareholder Rights will be issued. ST Rights.............................. SPL will receive three Rights for every five shares of Common Stock held by ST on the Record Date (as adjusted for the Reverse Split), a total of 2,040,000 Rights, each entitling the Holder to purchase one share of Common Stock at the Subscription Price. SPL will make available 74,000 of such Rights to employees of its affiliates, including non-employee directors of the Company. The ST Rights will otherwise be nontransferable. The ST Rights will expire on the Expiration Date, except that 280,000 of such Rights will be exercisable, if at all, only during the five business days next following the Expiration Date. See "Rights Options" below. Rights Options......................... Concurrently with the distribution of the Rights, 280,000 options (the "Rights Options") granted under the Company's 1996 Incentive Stock Option Plan will become exercisable at the Subscription Price until the Expiration Date. The Rights Options were granted by the Board on November 13, 1996, and extended on March 3, 1997, at the request of ST. In order to ensure that ST's interest, rather than the other shareholders' interests, in the Company would be diluted by the exercise of the Rights Options, 280,000 of the ST Rights will not be exercisable, if at all, until the Expiration Date. A portion of these 280,000 ST Rights, up to the number of Shareholder Rights and Rights Options, if any, which expire unexercised, will then be exercisable during the five business days following the Expiration Date. See "Management--Stock Option Plan.") Subscription Price..................... $2.50 per Rights Share. </TABLE> <TABLE> <S> <C> Record Date............................ January 15, 1997. Transferability of Shareholder Rights............................... The Shareholder Rights will be transferable, but it is not anticipated that a market will be made in the Rights or that they will be listed for trading on any exchange. Because subscriptions cannot be accepted from residents of California, Shareholder rights may not be transferred to such residents. Expiration Date........................ 5:00 p.m., New York time, on June 16, 1997, unless the Board of Directors determines that a material event has occurred that necessitates one or more extensions of the Expiration Date in order to permit adequate disclosure to Holders of information concerning such event. Procedure for Exercising Rights........ Rights may be exercised by properly completing the certificate evidencing such Rights (a "Subscription Certificate") and forwarding such Subscription Certificate to the Subscription Agent or the Company (or following the Guaranteed Delivery Procedures, referred to below) on or prior to the Expiration Date, together with payment in full of the Subscription Price with respect to such Rights. If the mail is used to forward Subscription Certificates, it is recommended that insured, registered mail be used. The exercise of a Right may not be revoked or amended. If time does not permit a Holder of a Right to deliver its Subscription Certificate to the Subscription Agent or the Company on or before the Expiration Date, such Holder should make use of the Guaranteed Delivery Procedures described under "The Rights Offering-- Exercise of Rights." THE EXERCISE OF RIGHTS IS IRREVOCABLE ONCE MADE. NO INTEREST WILL BE PAID ON THE MONEY DELIVERED IN PAYMENT OF THE SUBSCRIPTION PRICE. If paying by uncertified personal check, please note that the funds paid thereby may take at least five business days to clear. Accordingly, Holders who wish to pay the Subscription Price by means of uncertified personal check are urged to make payment sufficiently in advance of the Expiration Date to ensure that such payment is received and clears by such date and are urged to consider payment by means of certified or cashier's check or money order. A Right may not be exercised in part and fractional Rights Shares will not be issued. Condition to Exercise by Shareholders......................... Any shareholder of record who wishes to exercise a Shareholder Right must submit his Common Stock share certificate(s), either simultaneously with his Subscription Certificate or prior to that time, for exchange into a new share certificate reflecting the Reverse Split. SUBSCRIPTION </TABLE> <TABLE> <S> <C> CERTIFICATES WILL NOT BE ACCEPTED FROM SHAREHOLDERS OF RECORD WHO DO NOT COMPLY WITH THIS REQUIREMENT. However, this requirement will not affect the transferability of Shareholder Rights. Persons Holding Shares, or Wishing to Exercise Rights, Through Others...... Persons holding shares of Common Stock, and receiving Shareholder Rights distributable with respect thereto, through a broker, dealer, commercial bank, trust company or other nominee, as well as persons holding certificates for Common Stock personally who would prefer to have such institutions effect transactions relating to the Shareholder Rights on their behalf, should contact the appropriate institution or nominee and request it to effect the transactions for them. Issuance of Common Stock............... Certificates representing Rights Shares issuable upon exercise of Rights will be delivered to the Holder of such Rights as soon as practicable after such Rights are validly exercised. Funds delivered to the Subscription Agent will be held by the Subscription Agent until the issuance of the related Rights Shares. No interest will be paid to Holders on funds held by the Subscription Agent regardless of whether such funds are applied to the Subscription Price or returned to the Holders. Subscription Agent..................... Continental Stock Transfer & Trust Company Information............................ Any questions regarding the Rights Offering, including the procedure for exercising Rights, and requests for additional copies of this Prospectus, the Subscription Certificate or the notice of guaranteed delivery should be directed to the Company at 5225 South 37th Street, Phoenix, Arizona 85040, Attention: Director of Administration. Telephone: (602) 437-9620. Maximum Shares of Common Stock Outstanding after the Rights Offering............................. 6,015,554 shares based on 3,759,721 shares outstanding on December 31, 1996 after adjustment for the Reverse Split. Does not give effect to the issuance of 1,002,042 shares reserved for issuance upon the exercise of options (other than Rights Options) heretofore granted or that may be granted from time to time under the 1996 Incentive Stock Option Plan. </TABLE> For more information regarding the Rights Offering, including the procedure for exercising Rights, see "The Rights Offering."

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, WHEN USED HEREIN "HPSC" REFERS TO HPSC, INC., A DELAWARE CORPORATION, AND THE "COMPANY" REFERS TO HPSC AND ITS SUBSIDIARIES, AS DESCRIBED BELOW. INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS RELATED TO THE PURCHASE OF NOTES OF THE COMPANY. SEE "RISK FACTORS."

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+SUMMARY The following is a summary only and should be read in light of the more detailed financial and other information included elsewhere in this Prospectus. Except as otherwise indicated, all financial information is presented on the basis of generally accepted accounting principles. References to the "Company" or "Terra" shall mean Terra Industries Inc., including, where the context so requires, its direct and indirect subsidiaries. Terms defined in this Summary shall have the same meanings when used elsewhere in this Prospectus. Prospective investors are urged to read this Prospectus in its entirety. See "Investment Considerations" for a discussion of certain factors that should be considered by prospective investors in the Common Shares offered hereby. The Company The Company is a leader in each of its three business segments: (i) the distribution of crop production inputs and services, (ii) the manufacture of nitrogen products and (iii) the manufacture of methanol. The Company owns and operates the largest independent farm service center network in North America and is the second largest supplier of crop production inputs in the United States. The Company is also the third largest producer of anhydrous ammonia and the largest producer of nitrogen solutions in the United States and Canada. In addition, the Company is one of the largest U.S. manufacturers and marketers of methanol. In 1996, the Company generated revenues and operating income of $2.3 billion and $295.2 million, respectively. The Company's distribution network for fertilizer, crop protection products and seed has grown over the last several years to 421 farm service centers and about 780 affiliated dealer locations serving the United States and the eastern region of Canada, as of May 30, 1997. This growth generally has been the result of a healthy farm economy, acquisitions, additional facilities and aggressive marketing. The Company's distribution network is supplied by both independent sources and the Company's own production facilities, which presently include one crop protection chemical dry flowable and liquid formulation plant and seven other liquid chemical formulation facilities in addition to its nitrogen production facilities. In 1996, distribution revenues and operating income constituted approximately 67% and 9% of the Company's total revenues and operating income, respectively. Nitrogen fertilizer is a basic crop nutrient which is applied seasonally by farmers to improve crop yield and quality. Nitrogen fertilizer is produced by combining gaseous nitrogen with hydrogen to form anhydrous ammonia, the simplest form of nitrogen fertilizer, which can be further processed or upgraded into other fertilizer products such as urea and nitrogen solutions. The Company presently owns five nitrogen fertilizer facilities with total annual gross production capacity of 2.7 million tons of ammonia. In 1996, approximately 11% of the Company's fertilizer production tonnage was supplied to its farm service center locations for sale to growers, while the rest was sold to other customers. The Company believes that it is among the lowest cost providers of nitrogen fertilizer in the markets it serves, benefiting from favorable transportation logistics and other operating synergies. The Company suffered a major explosion in December 1994 at one of its nitrogen fertilizer facilities, for which it was insured. The Company began producing ammonia again at the facility in late December 1995, and the urea and nitrogen solution upgrading facilities became operational in May 1996. In 1996, nitrogen products revenues (including intercompany sales) and operating income constituted approximately 28% and 85% of the Company's total revenues and operating income, respectively. Methanol is used primarily as a feedstock in the production of other chemical products such as formaldehyde, acetic acid, adhesives and plastics. Methanol is also used as a feedstock in the production of methyl tertiary butyl ether ("MTBE"), an oxygenate and octane enhancer used as an additive in reformulated gasoline to provide cleaner burning fuels. The Company's methanol production capacity is approximately 320 million gallons per year, representing approximately 13% of the total United States rated capacity. The Company's methanol facility in Beaumont, Texas (the "Beaumont Facility") is the second largest such facility in the U.S. In 1996, methanol revenues and operating income constituted approximately 5% and 6% of the Company's total revenues and operating income, respectively. The Company's long-term strategy for growth is to: (i) acquire and upgrade production and distribution facilities, (ii) increase distribution volumes by expanding sales from Company-operated locations and its affiliated dealer network, (iii) change its product mix to include more profitable value-added products and (iv) continue to build customer loyalty by providing value-added services. As part of this strategy, in April 1993, the Company acquired a fertilizer manufacturing facility and 32 farm service centers in Canada; in December 1993, the Company acquired 12 farm service centers in Florida; in September 1994, the Company acquired a minority interest in a 100 location distributor of crop input and protection products in the mid-Atlantic region; in October 1994, the Company acquired Agricultural Minerals and Chemicals Inc. ("AMCI") which provided the Company two fertilizer plants having 1.4 million tons of annual gross production capacity of ammonia as well as the Beaumont Facility; in July 1996, the Company completed a construction project at its Courtright Facility enabling the upgrade of 65,000 tons of ammonia annually into urea and UAN; and in May 1997, the Company acquired 18 farm service centers which include grain operations and are located in or near southern Minnesota. In addition, certain other distribution location acquisitions and manufacturing upgrade projects have been completed during the past few years. The Company will, at an appropriate price, consider a sale or joint venture involving its methanol business. Terra's common shares are traded on the NYSE and the Toronto Stock Exchange under the symbol "TRA." As of May 30, 1997, Minorco, an international natural resources company with operations in gold, base metals, industrial minerals, paper and packaging and agribusiness ("Minorco"), owned through its wholly owned subsidiaries 56.8% of Terra's outstanding common shares. As of May 30, 1997, five of the Company's nine directors were also officers and/or directors of Minorco or its affiliates. Company Structure The following chart substantially represents the organization of the Company and its principal subsidiaries as of the date hereof. Terra Capital Holdings, Inc. ("Terra Holdings") and Terra Capital, Inc. ("Terra Capital") are wholly owned subsidiaries of the Company. Terra International, Inc. ("Terra International") owns three of the Company's five nitrogen fertilizer plants through subsidiaries and also conducts the distribution segment of the Company's business. Terra International (Canada) Inc. ("Terra Canada"), a wholly owned subsidiary of Terra International, owns the Company's Canadian operations. Terra International (Oklahoma) Inc. ("Terra Oklahoma"), a wholly owned subsidiary of Terra International, owns the Company's combined nitrogen and methanol manufacturing facility in Woodward, Oklahoma. Port Neal Corporation ("PNC"), a wholly owned subsidiary of Port Neal Holdings Corp. ("PN Holdings"), owns the Company's nitrogen manufacturing plant located in Iowa. Terra International owns 100% of the common stock of PN Holdings and an unrelated third party owns preferred stock in PN Holdings representing a 25% voting interest. Terra Nitrogen Corporation ("TNC") owns the general partner interest and certain limited partner interests of Terra Nitrogen Company, L.P. ("TNCLP"), for a total 61% equity interest in TNCLP. Approximately 5% of TNCLP is owned by Terra Capital and approximately 34% of TNCLP is publicly traded and owned by others in the form of Common Units. See "Description of Certain Indebtedness and Other Obligations--TNCLP Common Units." All of the operating assets of TNCLP, which include two of the Company's five nitrogen fertilizer plants, are owned by Terra Nitrogen, Limited Partnership ("TNLP"), in which TNC holds a 1% general partner interest and TNCLP holds a 99% limited partner interest. The methanol business of the Company is conducted principally through Beaumont Methanol, Limited Partnership ("BMLP"). BMC Holdings, Inc. ("BMCH") is the sole limited partner of BMLP and holds a 99% limited partner interest in BMLP. Terra Methanol Corporation ("TMC") is the general partner of BMLP and holds a 1% general partner interest in BMLP. Terra Capital Funding LLC ("TCF") is owned 99% by Terra Capital and 1% by Terra Holdings. Terra Funding Corporation ("Funding"), a wholly owned subsidiary of TCF, is a special purpose entity that purchases and sells receivables. Terra Capital owns 100% of the capital stock of Terra International, TNC, BMCH and TMC. --------------- Terra --------------- --------------- Terra Holdings --------------- --------------- Terra Capital --------------- ---------------------------------------------------------------------------- - -------------- ------- -------- ------- ---------- Terra International ------------------ TNC BMCH TMC TCF - -------------- Public Unitholders ------------------ ------- -------- ------- ---------- - ------------ ------------ ------- -------- ---------- Terra Canada Unrelated TNCLP BMLP Funding Third Party - ------------ ------------ ------- -------- ---------- ------------ ------- - -------------- PN Holdings TNLP Terra Oklahoma ------------ ------- - -------------- ------------ PNC ------------ Summary Financial Data The following table presents (i) summary consolidated financial data for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 derived from the Company's audited consolidated financial statements, except Summary Operating Data and Other Data, and (ii) summary consolidated financial data for the three months ended March 31, 1996 and 1997 derived from the Company's unaudited consolidated financial statements for such period. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Financial Data" and the consolidated financial statements of the Company and related notes thereto included elsewhere herein. <TABLE> <CAPTION> Three Months Year Ended December 31, Ended March 31, ---------------------------------------------------------- ---------------------- 1992 1993 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- ---- ---- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Total revenues................................. $1,082,191 $1,238,001 $1,665,947 $2,292,173 $2,316,486 $ 394,741 $ 433,710 Cost of sales.................................. 910,395 1,026,332 1,344,062 1,657,070 1,722,450 277,517 338,052 Selling, general and administrative expenses... 146,077 172,116 207,333 259,295 300,897 62,080 68,309 Operating income............................... 25,719 41,828 115,295 377,702 295,181 54,063 26,326 Net interest expense........................... (7,533) (9,683) (16,541) (51,086) (52,845) (9,234) (12,774) Income from continuing operations before income taxes........................... 18,186 32,145 89,945 279,382 197,851 31,660 6,642 Income tax provision........................... (7,757) (9,300) (33,700) (115,500) (63,900) (13,260) (2,740) Income from continuing operations.............. 10,429 22,845 56,245 163,882 133,951 18,400 3,902 Per Common Share: Income from continuing operations............. $ 0.15 $ 0.33 $ 0.77 $ 2.01 $ 1.72 $ 0.23 $ 0.05 Dividends..................................... -- $ 0.02 $ 0.08 $ 0.10 $ 0.15 $ 0.03 $ 0.04 Summary Operating Data: Net fertilizer production (thousands of tons) Ammonia....................................... 404.2 686.1 780.6 1,040.7 1,204.0 333.9 280.0 Urea.......................................... 126.7 222.6 297.9 560.0 641.5 142.8 166.0 Nitrogen solutions (UAN)...................... 759.8 987.3 1,295.2 2,614.7 3,120.5 738.7 853.0 Methanol production (millions of gallons)...... -- -- 81.2 298.9 311.7 84.3 79.6 Revenues by business segment (1) Distribution.................................. $ 958,725 $1,019,438 $1,318,416 $1,495,166 $1,573,827 $ 222,913 $ 260,543 Nitrogen Products............................. 125,659 228,910 296,557 635,126 654,486 153,067 135,918 Methanol...................................... -- -- 70,274 194,565 132,533 28,896 42,998 Other Data: Number of Distribution locations owned at end of period................................. 299 347 355 382 393 389 403 Balance Sheet Data (at end of period): Net working capital............................ $ 215,817 $ 231,287 $ 273,941 $ 307,873 $ 187,157 $ 285,519 $ 170,325 Net property, plant and equipment.............. 91,969 110,670 552,843 694,358 846,353 747,001 848,404 Total assets................................... 580,192 634,482 1,687,970 1,867,858 1,969,365 2,074,921 2,140,452 Minority interest.............................. -- -- 170,630 182,901 173,893 182,843 170,413 Long-term debt (including current maturities).. 133,679 121,384 558,256 411,573 407,312 410,246 405,976 Total stockholders' equity..................... 221,476 242,980 418,429 571,583 606,092 590,453 590,751 </TABLE> - ----------- (1) Includes intercompany sales and excludes revenues not included in any of the three business segments.

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as set forth in the financial statements or as otherwise indicated herein, information in this Prospectus (i) gives effect to the anticipated reincorporation of the Company from California to Delaware to be effected prior to the closing of this offering, (ii) reflects the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock, which will occur automatically upon the closing of this offering, and (iii) assumes that the Underwriters' over-allotment option is not exercised. See "Description of Capital Stock" and "Underwriting." This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual events or results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Il Fornaio owns and operates 13 full-service, white tablecloth Italian restaurants serving creatively prepared, premium quality Italian cuisine based on authentic regional recipes. The Company's restaurants offer an extensive menu, featuring house-made and imported pasta, poultry and game roasted over a wood-fired rotisserie, meat and fresh fish from a charcoal grill, pizza from a wood-burning oven, soups, salads and desserts. Il Fornaio's menu is distinguished by fresh, hand-made breads, pastries and other baked goods that are produced in the Company's restaurants and five wholesale bakeries. Il Fornaio's wholesale bakeries also sell baked goods to quality grocery stores, specialty retailers, hotels and other fine restaurants. In addition, the Company operates a retail market in each restaurant, which sells baked goods, prepared foods and a variety of Il Fornaio-brand products, allowing guests to recreate the Il Fornaio dining experience at home. The Company's objectives are to offer guests the most authentic Italian dining experience available outside of Italy and to establish a brand identity that provides a competitive advantage in every market in which the Company operates. The Company's strategy to achieve these objectives includes the following key elements: (i) serve premium quality, authentic regional Italian cuisine created by native-born Italian chefs and complemented by hand-made Il Fornaio baked goods; (ii) build brand awareness through its wholesale bakeries and retail markets, which reinforce the Company's image as a provider of premium quality, authentic Italian food and enable guests to recreate the Il Fornaio dining experience at home; (iii) create a distinctive authentic Italian atmosphere with restaurant designs unique to each location; (iv) consistently execute Il Fornaio's high standards of food quality, service and cleanliness through its employee-designed Five Star Service Program; and (v) foster a strong corporate culture which attracts and retains highly qualified management, chefs and hourly employees. The Company believes that these elements, combined with an average check per guest of $20.93, provide an excellent dining value. The Company operates 11 restaurants in California and has most recently opened restaurants in Portland and Las Vegas. The Company believes that its restaurants provide superior unit economics. In 1996, the Company's 10 comparable restaurants generated average sales of approximately $4.5 million and average cash flow of approximately $884,000, or 19.9% of restaurant sales. Since 1991, the Company's total investment per restaurant, net of landlord contributions, has averaged approximately $1.7 million, with additional average pre-opening costs per restaurant of approximately $200,000. The restaurants range in size from 5,000 to 10,900 square feet, seat between 76 and 220 guests and serve both lunch and dinner. Il Fornaio intends to develop restaurants in both existing and new geographic markets and to locate restaurants at sites in affluent urban and suburban areas. The flexibility of the Il Fornaio concept enables the Company to develop successful restaurants in a variety of locations, including residential neighborhoods, shopping centers, office buildings and hotels. The Company intends to open one additional restaurant in 1997 in Denver and three new restaurants in 1998, including locations in Santa Monica and Seattle, for which leases have been signed. The Company expects that its planned future restaurants will generally range in size from 7,000 to 10,000 square feet and will require, on average, a total investment by the Company per restaurant, net [IL FORNAIO LOGO] [Photograph of main dining room [Photograph of exterior of in Beverly Hills restaurant] Las Vegas restaurant] Beverly Hills Las Vegas [Photograph of main dining room [Photograph of retail bakery in and bar area in Irvine restaurant] Burlingame restaurant] Irvine Burlingame [Photograph of main dining room and [Graphic depictions of outdoor patio in Portland restaurant] Il Fornaio's Bakerman logo] Portland of anticipated landlord contributions, of approximately $1.7 million, with additional average pre-opening costs per restaurant of approximately $200,000. Il Fornaio's business and expansion strategy has been developed and implemented by an experienced senior management team with a record of successful restaurant operations. In 1987, Laurence B. Mindel joined the Company as Chairman, Chief Executive Officer and President, after spending over 15 years at Spectrum Foods, where he created and operated innovative restaurants throughout California, including Chianti, MacArthur Park, Harry's Bar and American Grill, Ciao, Prego and Guaymas. In 1995, Michael J. Hislop joined the Company as President and Chief Operating Officer, after serving as Chairman and Chief Executive Officer of Chevy's Mexican Restaurants for four years and guiding its expansion from 17 to 63 restaurants. These individuals, along with the seven other members of senior management, have over 150 years of combined experience in the restaurant and bakery businesses. Because of the experience level of its senior management, the Company believes it has a competitive advantage in its industry with respect to concept development and execution, site selection, unit operations, training, product quality and service. The Company was incorporated in California in June 1980, and intends to reincorporate in Delaware prior to the closing of this offering. The Company's executive office is located at 1000 Sansome Street, Suite 200, San Francisco, California 94111. The Company's telephone number is (415) 986-1505. Il Fornaio(R) and the Il Fornaio logo are registered marks of the Company, and Festa Regionale and Passaporto are marks used and owned by the Company. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............... 1,000,000 shares Common Stock offered by the Selling Stockholders.................................... 500,000 shares Common Stock to be outstanding after the offering........................................ 5,582,891 shares(1) Use of proceeds................................... To finance the development of additional restaurants and for general corporate purposes. Proposed Nasdaq National Market symbol............ ILFO </TABLE> - --------------- (1) Excludes, as of August 15, 1997, outstanding options to purchase 980,295 shares of Common Stock and outstanding warrants to purchase 32,487 shares of Common Stock. See "Management -- Employee Benefit Plans" and "Description of Capital Stock -- Warrants." [Photograph of main dining room [Photograph of the loggia in and sunroom in Carmel restaurant] Sacramento restaurant] Carmel-by-the-Sea Sacramento [Photograph of main dining room [Photograph of bar area in in Corte Madera restaurant] San Jose Restaurant] Corte Madera San Jose [Photograph of main dining room in San Francisco restaurant overlooking outdoor plaza] San Francisco SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE, OPERATING AND FOOTNOTE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED(1) ------------------ ------------------------------------------------------------------------ JUNE DECEMBER 27, DECEMBER 29, DECEMBER 25, DECEMBER 31, DECEMBER 29, JUNE 30, 29, 1992 1993 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Restaurants................. $ 30,737 $ 42,402 $ 39,485 $ 43,647 $ 50,599 $ 24,733 $32,116 Wholesale bakeries.......... 4,049 4,328 4,951 5,181 6,016 2,891 3,150 Retail bakeries............. 3,727 4,866 5,208 5,312 4,137 2,600 311 ------- ------- ------- ------- ------- ------- ------- Total revenues....... 38,513 51,596 49,644 54,140 60,752 30,244 35,577 Income (loss) from operations(2)............... 716 (2,670) 2,300 2,013 2,224 1,125 2,111 Income (loss) before provision (benefit) for income taxes....................... 687 (2,820) 2,247 2,072 2,351 1,169 2,220 Provision (benefit) for income taxes(3).................... 6 70 332 (2,432) 898 476 915 Net income (loss)............. 681 (2,890) 1,915 4,504 1,453 693 1,305 Net income (loss) per share (fully diluted)............. $ 0.20 $ (0.67) $ 0.43 $ 1.00 $ 0.32 $ 0.16 $ 0.27 Weighted average common shares outstanding (fully diluted).................... 3,424 4,344 4,477 4,499 4,839 4,809 5,037 OPERATING DATA: Comparable restaurant sales increase (decrease)(4)...... 1.5% (4.8%) (3.4%) (1.7%) 4.8% 2.9% 6.1% Restaurants open at end of period(5)................... 9 9 9 11 12 12 13 Wholesale bakeries open at end of period................... 5 6 6 6 6 6 5 Retail bakeries open at end of period(6)................... 6 9 8 8 4 8 -- </TABLE> <TABLE> <CAPTION> JUNE 29, 1997 ------------------------------ ACTUAL AS ADJUSTED(7) ------------ --------------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital................................................................... $ 1,116 $ 9,333 Total assets...................................................................... 37,180 45,397 Long-term debt (excluding current portion)........................................ -- -- Stockholders' equity.............................................................. 24,489 32,706 </TABLE> - --------------- (1) All years reported include 52 weeks, except the year ended December 31, 1995, which includes 53 weeks. (2) Includes (i)a $2.3 million pre-tax charge recorded in 1993 associated with the Company's decision to dispose of its restaurant in Costa Mesa and a free-standing retail bakery in Los Angeles, (ii) a $932,000 pre-tax charge recorded in 1995 associated with the default by the buyer of the Company's Etrusca restaurant and (iii) a $470,000 pre-tax reversal of the 1993 reserve recorded in the first six months of 1997 associated with the disposition of the Company's Costa Mesa restaurant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Closure of Non-Core Operations." (3) Includes a tax benefit of $2.7 million recorded in 1995 as a result of the recognition of deferred tax assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." (4) A new restaurant is included in the calculation of the change in comparable restaurant sales after the first full month following the eighteenth month of that restaurant's operation. (5) During 1993, the Company opened two new restaurants and commenced the disposition of two existing restaurants that differed from the Il Fornaio restaurant concept. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Closure of Non-Core Operations." (6) Reflects the disposition of four of the Company's free-standing retail bakeries in the third quarter of 1996 and the disposition of the Company's four remaining free-standing retail bakeries in the first quarter of 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Closure of Non-Core Operations."

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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Prospectus. As used herein, unless the context otherwise requires, "Company" means Proffitt's, Inc. and its subsidiaries, and the terms "Proffitt's," "McRae's," "Younkers," "Parisian" and "Herberger's" refer to the Company's five department store chains, and the existing and predecessor entities that conduct or conducted business under such names. Reference in this Prospectus to the Company's fiscal year means the fiscal year ended on the Saturday nearest January 31 of the following calendar year (e.g., "fiscal 1995" means the fiscal year ended February 3, 1996). Unless the context otherwise requires, references in this Prospectus to "pro forma" financial information reflect the acquisition by the Company of Parisian as if the acquisition had occurred on February 4, 1996. Historical financial information presented in this Prospectus includes the results of Parisian from and after October 11, 1996, the date of its acquisition by the Company. THE EXCHANGE OFFER The Exchange Offer......... The Exchange Offer consists of this Prospectus and the related Letter of Transmittal, and is being made solely to eligible holders of Series A Notes. Upon the terms and subject to the conditions of the Exchange Offer, the Company is offering eligible holders of Series A Notes the opportunity to exchange its Series A Notes that have not been registered under the Securities Act for the Exchange Notes that have been registered under the Securities Act. Exchange Offer Expiration Date..................... The Exchange Offer expires at 5:00 P.M., Eastern Time on August 7, 1997 unless extended by the Company in its sole discretion. Exchange Notes Offered..... The Exchange Notes consist of $125,000,000 aggregate principal amount of 8 1/8% Senior Notes due 2004, Series B. Procedures for Tendering Series A Notes........... Brokers, dealers, commercial banks, trust companies and other nominees who hold Series A Notes through DTC (as defined herein) may effect tenders by book-entry transfer in accordance with DTC's Automated Tender Offer Program ("ATOP"). Holders of such Series A Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee are urged to contact such person promptly if they wish to tender Series A Notes. In order for Series A Notes to be tendered by a means other than by book-entry transfer, a Letter of Transmittal must be completed and signed in accordance with the instructions contained herein. The Letter of Transmittal and any other documents required by the Letter of Transmittal must be delivered to the Exchange Agent by mail, facsimile, hand delivery or overnight carrier, and either such Series A Notes must be delivered to the Exchange Agent or specified procedures for guaranteed delivery must be complied with. See "The Exchange Offer -- Procedures for Tendering." Letters of Transmittal and certificates representing Series A Notes should not be sent to the Company. Such documents should only be sent to the Exchange Agent. See "The Exchange Offer -- Exchange Agent." THE NOTES Maturity Date of the Notes...................... May 15, 2004. Interest Payment Dates..... May 15 and November 15 of each year, commencing November 15, 1997. Limited Nature of Guarantees................. The Notes are fully and unconditionally guaranteed on a senior basis by the Subsidiary Guarantors. Under certain circumstances, future subsidiaries (other than Accounts Receivables Subsidiaries and Foreign Subsidiaries) of the Company may be requested to guarantee the Notes. In addition, the Guarantees are subject to release under certain circumstances. See "Description of the Notes -- Exchange Note Guarantees" and "Description of the Exchange Notes -- Limitations on Guarantees by Restricted Subsidiaries." Ranking.................... The Notes rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Guarantees rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of the Subsidiary Guarantors. The Notes and the Guarantees will be effectively subordinated to all secured indebtedness of the Company and the Subsidiary Guarantors to the extent of the value of the assets securing such indebtedness. As of May 3, 1997, on a pro forma basis after giving effect to the issuance of the Notes and the application of the net proceeds therefrom, the Company and the Subsidiary Guarantors would have had an aggregate of approximately $521.2 million of indebtedness outstanding, of which approximately $295.3 million would have been senior indebtedness and approximately $60.3 million would have been secured indebtedness. See "Description of the Exchange Notes." Change of Control.......... Following the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to make an offer to purchase all outstanding Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. See "Description of the Notes -- Change of Control." Certain Covenants.......... The Indenture under which the Notes are issued contains certain covenants that, among other things, limit (i) the incurrence of additional indebtedness, (ii) certain restricted payments, (iii) certain asset sales, (iv) transactions with affiliates, (v) consolidations, mergers and dispositions of assets on a consolidated basis, and (vi) the Company's restricted subsidiaries from guaranteeing certain other indebtedness of the Company unless such restricted subsidiaries also guarantee the Notes. The Indenture also prohibits certain restrictions on distributions from restricted subsidiaries of the Company. These covenants are subject to important exceptions and qualifications. The Indenture provides that after the Notes achieve an investment grade rating from both Standard & Poor's Ratings Services, a Division of the McGraw-Hill Companies, Inc., and Moody's Investors Service, Inc., the Company's obligation to comply with certain of the restrictive covenants described herein will be terminated. See "Description of the Notes -- Certain Covenants." Use of Proceeds............ The Company will not receive any proceeds from the issuance of the Exchange Notes pursuant to the Exchange Offer. The net proceeds to the Company from the sale of the Series A Notes are being used to repay certain outstanding mortgage and other indebtedness of the Company, to reduce certain borrowings under the Credit Facility and for general corporate purposes. See "Use of Proceeds." Shelf Registration Statement................ If (i) the Exchange Offer is not permitted by applicable law or (ii) any holder of Transfer Restricted Notes (as defined herein) notifies the Company within 20 business days of the commencement of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and holds Series A Notes acquired directly from the Company or an affiliate of the Company, the Company will be required to provide the Shelf Registration Statement to cover resales of the Notes by such holders thereof. If the Company fails to satisfy these registration obligations, it will be required to pay Additional Interest (as defined herein) to the holders of Notes under certain circumstances. See "The Exchange Offer." Absence of an Established Trading Market for the Notes.................... The Series A Notes are new securities that were issued on May 21, 1997 (the "Issue Date" or "Closing Date"). There is currently no established trading market for the Notes or the Exchange Notes. Although Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Smith Barney Inc. (the "Initial Purchasers") have informed the Company that they currently intend to make a market in the Series A Notes and, upon issuance, the Exchange Notes, they are not obligated to do so and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes. To the extent Series A Notes are exchanged in this Exchange Offer, the liquidity of the market for the remaining Series A Notes may be reduced. The Series A Notes have been designated eligible for trading in the Private Offerings, Resale and Trading through Automatic Linkages (PORTAL) market. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through Nasdaq. See "Risk Factors -- Absence of a Public Market." THE COMPANY The Company is a leading regional department store chain operating 175 stores in 24 states, primarily in the Southeast and Midwest. The Company operates its stores under five chain names: Proffitt's (19 stores), McRae's (29 stores), Younkers (48 stores), Parisian (40 stores) and Herberger's (39 stores). Each chain operates primarily as a leading branded traditional department store in its communities, with Parisian serving as a better branded specialty department store. Most of the stores are located in premier regional malls in the respective trade areas served. The Company's stores offer a wide selection of fashion apparel, accessories, cosmetics and decorative home furnishings, featuring assortments of premier brands, private brands and specialty merchandise. Each of the Company's chains operates with its own merchandising, marketing and store operations team in order to tailor regional assortments to the local customer. At the same time, the Company coordinates merchandising among the chains and consolidates administrative and support functions to realize scale economies, to promote a competitive cost structure and to increase margins. Under the leadership of R. Brad Martin and an experienced senior management team, the Company has executed a disciplined acquisition strategy and strategic approach to new store openings, growing from 11 stores and net sales of $94.8 million in fiscal 1989 to 175 stores and pro forma net sales of $2.3 billion in fiscal 1996. In addition, the Company has increased EBITDA from $8.9 million in fiscal 1989 to $167.2 million in fiscal 1996, on a pro forma basis. Members of the Company's senior management have substantial investments in the Company. As of April 25, 1997, Mr. Martin beneficially owned approximately 4.7% of the Company's Common Stock and all directors and executive officers of the Company as a group beneficially owned approximately 13.2% of the Company's Common Stock. The Company was incorporated under the laws of the State of Tennessee in 1919. The principal executive offices of the Company are located at 3455 Highway 80 West, Jackson, Mississippi 39209, and its telephone number is (601) 968-4400. BUSINESS STRENGTHS The Company believes that it is well-positioned to build upon its historical success by capitalizing on its competitive strengths, including the following: Strong Regional Focus. The Company places a high priority on being a market leader in each of the markets in which it operates. In smaller communities, the Company's stores are frequently the only branded name department store catering to middle and upper income customers and offering an array of brands that frequently are not otherwise available to shoppers in such markets. In most larger metropolitan markets, the Company seeks to maximize its market share by operating multiple stores in prime locations. While the Company has grown through the acquisition of regional chains, its philosophy has been to (i) maintain existing trade names and retain merchandising and store personnel and (ii) utilize previously developed regional expertise and knowledge of the local customer base by allowing each chain to tailor merchandise assortments to the local customer. The Company believes that the increased sales and gross margins resulting from a coordinated but decentralized merchandising effort outweigh any incremental operating cost savings associated with a completely centralized strategy. Scale Economies. With pro forma sales of approximately $2.3 billion in fiscal 1996, the Company realizes scale economies in purchasing and distribution, administrative areas such as accounting, proprietary credit card administration, management information systems, and other infrastructure-related areas. Although the Company's chains control regional merchandising, the Proffitt's Merchandising Group coordinates merchandising, planning and execution, visual presentation, marketing and advertising activities among the chains. The Proffitt's Merchandising Group manages strategic relationships with the Company's top vendors to ensure that each chain is afforded the purchasing leverage of the Company as a whole. In addition to seeking economies of scale in purchasing, the Proffitt's Merchandising Group will continue to capitalize on corporate level marketing synergies, such as the coordination of media buying and direct mail programs, the establishment of preferred advertising rates, and the production of store catalogs. Proven Track Record of Integrating Acquisitions. In recent years, the Company has grown primarily through the acquisition of strong, regional department store chains at valuations believed to be attractive by management. The following table sets forth certain information concerning the Company's significant acquisitions: <TABLE> <CAPTION> TRANSACTION VALUE(A) EQUITY AS A % AS A MULTIPLE OF: DATE OF NUMBER TRANSACTION OF TRANSACTION ---------------------------- COMPANY ACQUIRED ACQUISITION OF STORES VALUE(A) VALUE(A) LTM SALES(B) LTM EBITDA(B) - ---------------- ----------- --------- ----------- -------------- ------------ ------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> McRae's, Inc.................... March 31, 1994 28 $264.8 5% 0.6x 5.3x Younkers, Inc................... February 3, 1996 51 321.6 79 0.5 6.5 Parisian, Inc................... October 11, 1996 38 375.0 28 0.5 8.7 G.R. Herberger's, Inc........... February 1, 1997 39 176.9 88 0.5 7.4 </TABLE> - --------------- (a) Transaction value is the total consideration paid in the form of: (i) cash; (ii) notes; (iii) equity (valued as of the announcement date for pooling-of-interest transactions and in accordance with generally accepted accounting principles for purchase accounting transactions); and (iv) assumed long-term debt, net of cash, as of the end of the last full fiscal quarter prior to the acquisition date. (b) LTM Sales and LTM EBITDA of the acquired company represent data for the twelve months ending on the last day of the last full fiscal quarter prior to the acquisition date. Additionally, EBITDA for Herberger's is adjusted for ESOP expense of $4.3 million. See "-- Summary Historical and Pro Forma Financial and Operating Data" for the definition of EBITDA. The Company employs a "best practices" approach to integrating acquired companies. Best practices is a process whereby each acquired chain's operating procedures and policies are reviewed to determine those practices which the Company believes will increase synergies while minimizing business interruptions. The Company believes the implementation of best practices throughout the Company's chains has resulted in improved comparable store sales and increased operating margins through better and more consistent inventory control and pricing, and other operating efficiencies. Strong Financial Position. The Company has been able to realize significant growth while maintaining moderate leverage. Since February 1996, the acquisitions of Younkers, Herberger's and Parisian have resulted in an increase in net sales of approximately $1.6 billion, while senior debt as a percentage of total capitalization decreased slightly. In addition to conservative balance sheet management, the Company's strong cash flow generation has allowed it to fund all capital expenditures, incremental working capital requirements and fixed charges with internally generated cash flow. On a pro forma basis, the Company's ratio of EBITDA to interest expense in fiscal 1996 would have been 3.7x. The Company's strong financial performance has provided it with significant financial flexibility, including the ability to use its publicly-traded common stock as consideration for selected acquisitions. Geographic and Demographic Diversity. The Company operates 175 stores in 24 states. Stores are operated in metropolitan markets such as Atlanta, Georgia and Indianapolis, Indiana, as well as in smaller markets such as Ames, Iowa and Kalispell, Montana. The Company believes that its geographic diversity and the demographic breadth of its target customer groups may to some extent serve to insulate the Company from sales and earnings volatility typically associated with poor weather conditions, or changes in local or regional economic conditions. Attractive Real Estate. The Company believes that its stores are primarily located in premier malls in the markets in which the Company operates. As is consistent with national trends, the Company further believes that construction of new malls in many of its markets is likely to be limited. The Company anticipates that the attractiveness of its existing locations, combined with limited new mall development, may contribute to improved comparable store sales. BUSINESS STRATEGY The Company's business objective is to maximize profitability and shareholder value by (i) expanding its core business through comparable store sales growth, new store openings and margin expansion, and (ii) monitoring acquisition opportunities while maintaining a strong capital structure. Comparable Store Sales Growth. The Company expects that comparable store sales will benefit from a number of merchandising initiatives including (i) implementing best practices, (ii) expanding sales of key brands, and (iii) increasing sales of the Company's private brands. As part of best practices, the Company benchmarks sales of product categories and brand assortments for each store and identifies and targets opportunities to strengthen such sales by altering the merchandise mix. The Company has successfully used this strategy by applying the long history of strength in the cosmetics business of McRae's and Proffitt's stores to increase the penetration and profitability of Younkers stores' cosmetics business. The Company believes that it will be able to further utilize this strategy to increase sales in the Younkers shoe business, increase McRae's women's apparel sales and introduce home goods into select Parisian stores. The Company believes that comparable store sales will also benefit from expanded sales of key brands, such as Tommy Hilfiger, Liz Claiborne, Jones New York, Polo/Ralph Lauren, Calvin Klein, Guess, and Nine West, among others. The Company's large scale and proven track record with these vendors has enabled the Company to introduce certain of these brands into acquired stores which, prior to combining with the Company, did not have access to these vendors. For instance, Tommy Hilfiger, Nautica and Lancome will now be carried in select Herberger's stores. Additionally, the Company plans to increase sales of its private brand offerings within the apparel and housewares categories from 6% of total net sales to 12% to 15% over the next two to three years. For example, the Company has recently developed its own line of men's dress shirts and accessories, under the brand name RBM. The RBM collection is designed to fill a niche for quality men's furnishings at moderate prices. New Store Openings. The Company plans to open 15 to 20 new stores across all chains over the next three years and to make selective real estate acquisitions in existing or new markets. The Company targets premier mall locations principally based on favorable demographic profiles and trends, as well as the compatibility and traffic draws of other tenants. High quality real estate is a primary criterion for all new stores. In addition, the Company plans to selectively remodel or expand certain existing stores. Margin Expansion. The Company has implemented the following strategies to increase margins: (i) leveraging key vendor relationships; (ii) capitalizing on purchasing economies of scale; (iii) extending key brands into certain acquired stores; (iv) shifting the merchandise mix toward higher margin products; (v) increasing private brand penetration; (vi) consolidating administrative and support areas and eliminating redundant expenses; and (vii) realizing efficiencies related to the re-engineering of certain operating activities. The Company intends to further increase gross margins by increasing sales of its private brand products, which typically generate higher margins and enhance customer loyalty. Operating margins are also expected to benefit from sales productivity enhancements across the Company's chains and from the integration cost savings programs developed by management in conjunction with the Younkers, Parisian, and Herberger's acquisitions. These programs reduced operating expenses by a total of $6 million in fiscal 1996 (consistent with the Company's announced target) and are expected to produce annualized expense savings of $20 million in fiscal 1997 and $29 million in fiscal 1998 (compared to the 1995 cost structure of the chains on an independent basis). Monitor Acquisition Opportunities. The Company has an established record of successfully acquiring and integrating regional department store chains. The Company believes that its philosophy of retaining the local identity and merchandising organization of acquired companies makes the Company an attractive acquirer for regional department store companies. The Company's criteria in evaluating strategic opportunities include (i) strong market presence; (ii) prime real estate locations; (iii) similar merchandising strategies targeted toward middle to upper income consumers; (iv) geographic proximity to the Company's core markets; (v) compatible corporate culture; and (vi) favorable demographics in the regions served. Although the Company currently has no agreements, arrangements or understandings with respect to future acquisitions, the Company expects the department store industry will continue to consolidate, and the Company will regularly evaluate possible acquisition opportunities as they arise. Maintain Strong Capital Structure. The Company intends to maintain a strong balance sheet to support its growth objectives. The fulfillment of this objective has been facilitated by strong cash flows and the Company's issuance of its Common Stock as all or part of the consideration used in its recent acquisitions. The Company believes that, absent any additional acquisitions, future cash flows from operations (with seasonal needs supplemented by borrowings under its Credit Facility) will be sufficient to service debt and lease payments, and to fund capital expenditures and working capital requirements. RECENT DEVELOPMENTS Strengthening and Retaining Management. In recent months, the Company has acted to strengthen and retain its senior management in light of its recent growth and strategic objectives. In April 1997, the Board of Directors of the Company authorized a new five-year employment agreement with R. Brad Martin, its Chairman and Chief Executive Officer since 1989. Among other recent appointments, the Company also named Douglas E. Coltharp as Executive Vice President and Chief Financial Officer, William D. Cappiello as President and Chief Executive Officer of Parisian, Frank E. Kulp as President and Chief Executive Officer of Herberger's, Mark Shulman as President and Chief Executive Officer of Younkers, Toni E. Browning as President and Chief Executive Officer of the Proffitt's Division, Dawn H. Robertson as President and Chief Executive Officer of McRae's, and Donald E. Wright as Senior Vice President of Finance and Accounting. Implementation of Capital Structure Improvements. The Company is in the process of implementing a number of capital structure improvements to position it for future growth. The issuance of the Notes is part of a plan to improve the Company's capital structure by (i) reducing the amount of the Company's secured indebtedness; (ii) reducing the amount of the Company's indebtedness that bears interest at a floating rate; and (iii) extending the average life of the Company's indebtedness. On June 26, 1997, the Company amended and restated its existing credit facility (as amended and restated, the "Credit Facility") to, among other things, (a) increase the revolving Credit Facility from $275 million to $400 million, (b) extend the maturity from October 11, 1999 to June 26, 2002, (c) make provision for, upon any senior indebtedness of Proffitt's being rated investment grade, the elimination of the inventory borrowing base limitation on borrowings under the Credit Facility, (d) reduce the financial performance benchmarks at which more favorable pricing options are made available to the Company, and (e) lessen in varying degrees the scope of the affirmative and negative covenants applicable to the Company and its subsidiaries. The Company may use the proceeds of borrowings under the Credit Facility to refinance certain existing indebtedness, to finance capital expenditures, for general corporate purposes and to finance certain acquisitions. Furthermore, the Company is pursuing a restructuring of one of its existing accounts receivable financing arrangements covering receivables generated by all the stores, except Younkers, in an effort to extend the term of a portion of such arrangements from one year to three to five years through the sale of investment grade term asset-backed securities. The Company anticipates that such transaction may be completed during or shortly after the Exchange Offer. There is no assurance, however, that such transaction will be completed as presently contemplated. See "Receivables Securitization Facilities."

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR PURPOSES OF PRESENTING FINANCIAL INFORMATION IN THIS PROSPECTUS (OTHER THAN THE FINANCIAL STATEMENTS), THE COMPANY'S FISCAL YEARS ARE INDICATED AS ENDING ON JANUARY 31, ALTHOUGH BEFORE DECEMBER OF 1996 SUCH PERIODS ACTUALLY ENDED ON THE FRIDAY NEAREST SUCH DATE AND AFTER NOVEMBER OF 1996 SUCH PERIODS ACTUALLY END ON THE SATURDAY NEAREST SUCH DATE.

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+PROSPECTUS SUMMARY The following material is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. The Company conducts all its operations through its subsidiaries, Sigma 7 Corporation ("Sigma 7"), Particle Interconnect Corporation ("PI Corp.") and California Tube Laboratory, Inc. ("CTL"). As used in this Prospectus, the term "Company" includes Intercell Corporation and all of its subsidiaries, and references to "Sigma 7" include Sigma 7 and all of its subsidiaries. Certain technical terms used herein are defined in the "GLOSSARY." This Prospectus contains forward-looking statements which involve risks and other uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "RISK FACTORS" and elsewhere in this Prospectus. THE COMPANY GENERAL Intercell Corporation (the "Company") was incorporated under the laws of Colorado on October 4, 1983, and was originally engaged in the marketing of business and cellular telephone equipment. This business was discontinued and all remaining assets of the Company were liquidated or otherwise abandoned during 1991, and all obligations of the Company were paid or otherwise satisfied. From 1991 until the acquisition of Modern Industries, Inc. on July 7, 1995, which subsequently changed its name to Energy Corporation ("Energy"), the Company was generally inactive and reported no operating revenues prior to the fiscal year ending December 31, 1994. During that time period, the Company considered various new business and investment opportunities involving, primarily, companies engaged in specialty lines of business in the wireless communications and electronic technology industries. On July 7, 1995, the Company purchased all of the assets and liabilities of Energy. Energy's principal asset was its wholly owned subsidiary, California Tube Laboratory, Inc. ("CTL"). This transaction was accounted for as an acquisition of the Company by Energy and, as such, the historical financial statements contained herein reflect the financial statements of Energy. The results of operations of the Company have been included only since the date of such acquisition. See "INDEX TO FINANCIAL STATEMENTS" and "PROSPECTUS SUMMARY- Summary Historical Consolidated Financial Data of the Company."

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+SUMMARY

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Recycling Industries, Inc. is a full-service metals recycler primarily engaged in the collection and processing of various ferrous and non-ferrous metals for resale to domestic and foreign steel producers and other metals producers and processors. The Company operates eight metals recycling facilities in Las Vegas, Nevada ("NRI"); Brownsville, Harlingen, McAllen and San Juan, Texas ("Anglo Iron & Metal"); Ste. Genevieve, Missouri ("Mid-America Shredding"); Waterloo, Iowa ("Weissman Iron & Metal"); and Metter, Georgia ("Addlestone Recycling Corporation"). The Company commenced its metals recycling operations in May 1994 and has increased its revenues from approximately $4.8 million for the year ended September 30, 1994 to $27.6 million for the year ended September 30, 1996. The revenues for the six months ended March 31, 1997 have increased to $ 23.5 million from $ 10.8 million for the six months ended March 31, 1996. Over the same period, the Company's metals shredding capacity increased over 34% and its total metals processing capacity increased over 46%. The largest portion of the Company's operations involves the collection, processing and sale of ferrous scrap, the primary raw material for mini-mill steel producers who utilize electric arc furnace ("EAF") technology. The increase in domestic EAF production from 14.9 million net tons (11.0% of total domestic steel production) in 1966 to 40.6 million net tons (39.4% of total domestic steel production) in 1995 has resulted in strong demand and prices for processed ferrous scrap. According to industry reports, the anticipated continuing increase in EAF production to an estimated 50.0 million net tons by the year 2000 may cause ferrous scrap shortages, resulting in further increases in processed ferrous scrap prices. The Company is also engaged in the processing of non-ferrous materials such as copper, aluminum and brass, which are sold to secondary smelters and other non-ferrous metals processors. The Company's non-ferrous operations complement its ferrous operations, as most unprocessed scrap contains ferrous and non- ferrous components which require separation in preparation for resale. The lower cost of producing non-ferrous metals from scrap relative to the cost of primary smelting has resulted in strong demand for processed non-ferrous scrap. The Company's objective is to become one of the largest metals recyclers in North America through targeted acquisitions of independent metals recyclers. The Company seeks to capitalize on the opportunity presented by the growing demand for processed ferrous scrap, the expanding markets created by the rapid proliferation of new EAF operations and the availability of metals recycling facilities. By pursuing a consolidation strategy within the metals recycling industry, the Company believes that it can significantly enhance the competitive position and profitability of the operations that it acquires through improved managerial and financial resources. The Company also believes that geographic diversity will reduce its vulnerability to the dynamics of any particular local or regional market. Furthermore, as EAF capacity and demand for processed ferrous scrap continue to increase, the Company believes that multi-regional and national EAF operators such as Nucor Corporation, Birmingham Steel Corporation and North Star Steel Co. will increasingly rely on suppliers who can provide a dependable quantity and quality of processed scrap as well as a high degree of service. The Company believes that it is the only metals recycler pursuing a consolidation strategy on a national basis and therefore will be in an ideal position to become a preferred supplier to major EAF operators. The Company estimates that the total revenues generated in the metals recycling markets in 1995 were approximately $19.1 billion, comprised of $8.9 billion attributable to ferrous metals and $10.2 billion attributable to non- ferrous metals. The Company believes that there are over 3,000 independent metals recyclers in North America. Based upon reports published by the Institute for Scrap Recycling Industries ("ISRI"), approximately 200 of these independent metals recyclers operate heavy-duty automotive shredders, which constitute the primary equipment used in processing large volumes of ferrous and non-ferrous scrap for sale to steel and other metals producers. Because of the highly fragmented nature of the industry, the Company believes that no single metals recycler has a significant share of the national processed scrap market, although certain recyclers may have a dominant share of their local or regional market. Similar to the ongoing consolidation within the municipal solid waste industry, the metals recycling industry has recently begun to experience local market consolidation due to: (i) increasing capital requirements caused by more stringent environmental and governmental regulations, and (ii) the exit of aging independent recyclers who desire to sell closely-held businesses in the absence of a successor owner or operator. In implementing its acquisition strategy, the Company seeks to identify potential acquisition targets with: - dominant or strategic positions in local or regional markets; - excess or underutilized capacity; - the ability to supply an existing or planned metals production facility, such as an EAF; - access to rail, water or interstate highway transportation systems; and - either operational shredding equipment, the ability to supply the Company's existing shredding equipment or adequate facilities to permit the installation of such equipment. By continuing to acquire facilities that meet these criteria, the Company believes it can achieve rapid growth and expansion of its customer base. An essential component of the Company's acquisition strategy is improving the operating efficiency, output and capacity of each acquired facility by targeting three phases of the Company's operations: (i) the purchase of raw scrap; (ii) the processing of raw scrap into saleable product; and (iii) the sale of processed scrap. Each acquired facility is integrated into the Company's operations through a comprehensive program that targets these operating phases through the installation of management and financial reporting systems, the implementation of expanded purchasing and marketing programs, the centralization of operating functions to achieve economies of scale, selective reductions in personnel and improved inventory and other financial controls. Where necessary, the Company implements a capital improvements program to repair or replace outdated and inefficient equipment and to improve the facility's scrap processing operations and processed scrap output. Of the Company's revenues for the six months ended March 31, 1997, approximately 62% was attributable to sales of ferrous scrap, 24% was attributable to sales of non-ferrous scrap, and the balance was primarily attributable to paper and plastic recycling, retail finished steel sales and brokerage sales conducted at certain of the Company's facilities. The Company's executive offices are located at 384 Inverness Drive South, Suite 211, Englewood, Colorado 80112, and its telephone number is 303-790-7372. THE OFFERING <TABLE> <S> <C> Common Stock Outstanding before the Offering ...... 13,944,429 shares (1)(2) Common Stock Offered by the Selling Securityholders ................................. 10,189,541 shares (3) Common Stock Outstanding if all Series C Preferred are converted and all Warrants are exercised .... 18,379,491 shares (4) Use of Proceeds ................................... The net proceeds from the exercise of the Warrants, if any, will be used to complete future acquisitions and for working capital purposes. See "Use of Proceeds." NASDAQ National Market Symbol ..................... RECY </TABLE> - ----------- (1) Does not include Common Stock reserved for issuance as follows: (i) 632,411 shares issuable upon conversion of the Series C Preferred; (ii) 4,119,584 shares issuable upon exercise of currently outstanding warrants; (iii) 978,996 shares issuable upon exercise of currently outstanding options; and (iv) shares reserved for additional options to be granted under the Company's stock option plans. See "Description of Capital Stock" and "Shares Eligible for Future Sale." (2) Includes 363,636 shares of Common Stock issued in connection with the acquisition of Weissman and 30,000 shares issued from March 31, 1997 to June 20, 1997 for the exercise of the Company's Series I Warrants. (3) Includes 632,411 shares issuable upon conversion of the Series C Preferred and 3,697,651 shares issuable upon exercise of Common Stock Purchase Warrants and Options. (4) The Company is not aware of any arrangements for the conversion of the Series C Preferred or the exercise of the Warrants and there is no assurance that all or any of the outstanding Series C Preferred will be converted or Warrants will be exercised. SUMMARY FINANCIAL INFORMATION The following information presents, for the periods and dates indicated, summary consolidated financial information of the Company. This information should be read in conjunction with "Selected Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's historical and pro forma financial statements and notes thereto included elsewhere herein. <TABLE> FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- PRO FORMA(2) PRO FORMA(2) ------------ ------------ 1992(1) 1993(1) 1994(1) 1995(3) 1995 1996(3) 1996 ------- ------- --------- --------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Revenues.......................... $ -0- $ -0- $ 4,831 $ 13,853 $ 69,781 $ 27,623 $ 75,061 Cost of Sales..................... -0- -0- 4,110 10,869 54,381 25,654 61,096 Cost of Brokerage................. -0- -0- -0- -0- 3,075 936 4,310 ------- ------- --------- --------- ---------- -------- --------- Gross Profit.................... -0- -0- 721 2,984 12,325 1,033 9,655 Selling and administrative expenses........................ 2,951 2,335 1,660 2,279 5,638 3,323 6,401 Loss from joint ventures and equity investee.............. 462 467 -0- -0- -0- -0- -0- ------- ------- --------- --------- ---------- -------- --------- Income (loss) from operations..... (3,413) (2,802) (939) 705 6,687 (2,290) 3,254 Interest expense................ (114) (156) (203) (407) (1,528) (732) (2,685) ------- ------- --------- --------- ---------- -------- --------- Income (loss) before income taxes......................... (3,527) (2,958) (1,142) 298 5,159 (3,022) 569 Income tax provision (benefit).. -0- -0- -0- (711) (338) 9 9 ------- ------- --------- --------- ---------- -------- --------- Income (loss) from continuing operations, net of income taxes........................... $(3,527) $(2,958) $ (1,142) $ 1,009 $ 5,497 $ (3,031) $ 560 ------- ------- --------- --------- ---------- -------- --------- ------- ------- --------- --------- ---------- -------- --------- Income (loss) per share from continuing operations, net of income taxes................. $ (1.73) $ (1.24) $ (0.46) $ 0.17 $ 0.76 $ (.30) $ .05 ------- ------- --------- --------- ---------- -------- --------- ------- ------- --------- --------- ---------- -------- --------- Net income (loss) after extraordinary item and income taxes........................... $(1,147) $(2,483) $ (924) $ 1,815 $ 6,303 $ (2,961) $ 630 ------- ------- --------- --------- ---------- -------- --------- ------- ------- --------- --------- ---------- -------- --------- Net income (loss) per share....... $ (0.56) $ (1.04) $ (0.37) $ 0.30 $ .87 $ (.29) $ .06 ------- ------- --------- --------- ---------- -------- --------- ------- ------- --------- --------- ---------- -------- --------- Weighted average shares outstanding.................... 2,043 2,377 2,505 6,100 7,234 10,212 10,755 ------- ------- --------- --------- ---------- -------- --------- ------- ------- --------- --------- ---------- -------- --------- BALANCE SHEET DATA: Working capital (deficit)....... $(2,721) $(3,853) $ (4,175) $ 376 NA $ 1,597 NA Property and equipment.......... 43 30 6,590 6,686 NA 20,492 NA Long-term debt.................. -0- -0- 519 2,152 NA 12,018 NA Total assets.................... 1,865 1,147 9,618 10,297 NA 34,855 NA Total liabilities............... 2,801 3,853 6,852 3,843 NA 19,192 NA Stockholders' equity (deficit).. (936) (2,706) 2,766 6,454 NA 14,163 NA OPERATING AND OTHER DATA: Shipments: Ferrous (tons).................. -0- -0- 24,600 57,100 321,293 141,731 364,398 Non-ferrous (pounds)............ -0- -0- 3,676,300 8,805,600 41,141,343 18,564,412 45,146,218 Average Selling Price(4): Ferrous (per ton)............... NA NA $ 100 $ 120 $ 142 $ 122 $ 129 Net Cash Flow From: Operating activities............ $(1,613) $ (118) $ (862) $ 113 NA $ (1,549) NA Investing activities............ (1,526) (617) (255) (926) NA (12,964) NA Financing activities............ 3,125 735 1,232 882 NA 15,779 NA EBITDA(5)......................... $(2,979) $(2,445) $ (547) $ 1,489 $ 10,007 $ (1,023) $ 5,584 <CAPTION> SIX MONTHS ENDED MARCH 31, ------------------------------ ------------------------- 1996 1997 ---------- ---------- STATEMENT OF OPERATIONS DATA(1): Revenues.......................... $ 10,763 $ 23,537 Cost of Sales..................... 9,352 18,324 Cost of Brokerage................. -0- 1,489 ---------- ---------- Gross Profit.................... 1,411 3,724 Selling and administrative expenses........................ 1,553 2,663 Loss from joint ventures and equity investee.............. -0- -0- ---------- ---------- Income (loss) from operations..... (142) 1,061 Interest expense................ (245) (890) Income (loss) before income taxes......................... $ (387) $ 171 Income tax provision (benefit).. (437) (295) ---------- ---------- Income from continuing operations, net of income taxes........................... 50 466 ---------- ---------- ---------- ---------- Income available to common shareholders before extraordinary item and net of an imputed deemed dividend $ 50 $ 186 ---------- ---------- ---------- ---------- Income per share from continuing operations, net of income taxes and an imputed deemed dividend......... $ 0.01 $ 0.01 ---------- ---------- ---------- ---------- Net income after extraordinary item and income taxes.......................... $ 98 $ 466 ---------- ---------- ---------- ---------- Net income available to common shareholders after extraordinary item and net of an imputed deemed dividend $ 98 $ 186 ---------- ---------- ---------- ---------- Net income per share net of an imputed deemed dividend $ 0.01 $ 0.01 ---------- ---------- ---------- ---------- Weighted average shares outstanding.................... 9,982 14,356 ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Working capital ....... $ 105 $ 2,017 Property and equipment.......... 8,421 20,455 Long-term debt.................. 2,521 11,042 Total assets.................... 19,938 35,582 Total liabilities............... 9,045 18,527 Stockholders' equity .. 10,893 15,555 OPERATING AND OTHER DATA: Shipments: Ferrous (tons).................. 55,500 116,435 Non-ferrous (pounds)............ 6,739,000 16,904,000 Average Selling Price(4): Ferrous (per ton)............... $ 123 $ 126 Net Cash Flow From: Operating activities............ $ (748) $ (114) Investing activities............ (978) (1,362) Financing activities............ 2782 553 EBITDA(5)......................... $ (337) $ 2,137 </TABLE> - ------------- (1) Prior to May 1994, the Company was engaged in the development of the MSW Technology. For comparative purposes, financial data prior to 1994 reflects the Company's efforts to develop such technology. The Company's current operations commenced in May 1994 with the acquisition of NRI. The financial information for fiscal 1994 reflects five months of operating results of NRI. The financial information for fiscal 1995 reflects 12 months of operating results of NRI and reflects the efforts of the Company to acquire other metals recycling facilities. (2) The pro-forma date gives effect to the acquisitions of Anglo Iron & Metal (December 1995), Mid-America Shredding (April 1996), Weissman (August , (1996), Addlestone Recycling Corporation (April 1997) and Addlestone International Corporation (definitive agreement to purchase assets) as if each had occurred at the beginning of the periods presented. In addition, the pro forma information is based upon available information and certain assumptions and adjustments. See notes to the pro forma financial statements. (3) The historical operating results for the year ended September 30, 1996 are not comparable to those of the corresponding period ended September 30, 1995 due to the acquisitions of Anglo Iron & Metal that occurred in December 1995 and Mid-America Shredding that occurred in April 1996 and Weissman that occurred on August 1996. (4) Average selling price for non-ferrous scrap is not meaningful as there are significant differences in the price per pound of the various component non-ferrous metals (e.g., aluminum, copper, brass) produced by the Company. (5) EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") represents operating income plus depreciation and amortization. The Company has included EBITDA (which is not a measure of financial performance under generally accepted accounting principles) because it understands such data is used by certain investors to determine the Company's ability to service its indebtedness. EBITDA is not a substitute for income from continuing operations, net income or cash flows presentation under generally accepted accounting principles.

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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Prospectus. As used herein, unless the context otherwise requires, "Company" means Proffitt's, Inc. and its subsidiaries, and the terms "Proffitt's," "McRae's," "Younkers," "Parisian" and "Herberger's" refer to the Company's five department store chains, and the existing and predecessor entities that conduct or conducted business under such names. Reference in this Prospectus to the Company's fiscal year means the fiscal year ended on the Saturday nearest January 31 of the following calendar year (e.g., "fiscal 1995" means the fiscal year ended February 3, 1996). Unless the context otherwise requires, references in this Prospectus to "pro forma" financial information reflect the acquisition by the Company of Parisian as if the acquisition had occurred on February 4, 1996. Historical financial information presented in this Prospectus includes the results of Parisian from and after October 11, 1996, the date of its acquisition by the Company. THE EXCHANGE OFFER The Exchange Offer......... The Exchange Offer consists of this Prospectus and the related Letter of Transmittal, and is being made solely to eligible holders of Series A Notes. Upon the terms and subject to the conditions of the Exchange Offer, the Company is offering eligible holders of Series A Notes the opportunity to exchange its Series A Notes that have not been registered under the Securities Act for the Exchange Notes that have been registered under the Securities Act. Exchange Offer Expiration Date..................... The Exchange Offer expires at 5:00 P.M., Eastern Time on August 7, 1997 unless extended by the Company in its sole discretion. Exchange Notes Offered..... The Exchange Notes consist of $125,000,000 aggregate principal amount of 8 1/8% Senior Notes due 2004, Series B. Procedures for Tendering Series A Notes........... Brokers, dealers, commercial banks, trust companies and other nominees who hold Series A Notes through DTC (as defined herein) may effect tenders by book-entry transfer in accordance with DTC's Automated Tender Offer Program ("ATOP"). Holders of such Series A Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee are urged to contact such person promptly if they wish to tender Series A Notes. In order for Series A Notes to be tendered by a means other than by book-entry transfer, a Letter of Transmittal must be completed and signed in accordance with the instructions contained herein. The Letter of Transmittal and any other documents required by the Letter of Transmittal must be delivered to the Exchange Agent by mail, facsimile, hand delivery or overnight carrier, and either such Series A Notes must be delivered to the Exchange Agent or specified procedures for guaranteed delivery must be complied with. See "The Exchange Offer -- Procedures for Tendering." Letters of Transmittal and certificates representing Series A Notes should not be sent to the Company. Such documents should only be sent to the Exchange Agent. See "The Exchange Offer -- Exchange Agent." THE NOTES Maturity Date of the Notes...................... May 15, 2004. Interest Payment Dates..... May 15 and November 15 of each year, commencing November 15, 1997. Limited Nature of Guarantees................. The Notes are fully and unconditionally guaranteed on a senior basis by the Subsidiary Guarantors. Under certain circumstances, future subsidiaries (other than Accounts Receivables Subsidiaries and Foreign Subsidiaries) of the Company may be requested to guarantee the Notes. In addition, the Guarantees are subject to release under certain circumstances. See "Description of the Notes -- Exchange Note Guarantees" and "Description of the Exchange Notes -- Limitations on Guarantees by Restricted Subsidiaries." Ranking.................... The Notes rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Guarantees rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of the Subsidiary Guarantors. The Notes and the Guarantees will be effectively subordinated to all secured indebtedness of the Company and the Subsidiary Guarantors to the extent of the value of the assets securing such indebtedness. As of May 3, 1997, on a pro forma basis after giving effect to the issuance of the Notes and the application of the net proceeds therefrom, the Company and the Subsidiary Guarantors would have had an aggregate of approximately $521.2 million of indebtedness outstanding, of which approximately $295.3 million would have been senior indebtedness and approximately $60.3 million would have been secured indebtedness. See "Description of the Exchange Notes." Change of Control.......... Following the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to make an offer to purchase all outstanding Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. See "Description of the Notes -- Change of Control." Certain Covenants.......... The Indenture under which the Notes are issued contains certain covenants that, among other things, limit (i) the incurrence of additional indebtedness, (ii) certain restricted payments, (iii) certain asset sales, (iv) transactions with affiliates, (v) consolidations, mergers and dispositions of assets on a consolidated basis, and (vi) the Company's restricted subsidiaries from guaranteeing certain other indebtedness of the Company unless such restricted subsidiaries also guarantee the Notes. The Indenture also prohibits certain restrictions on distributions from restricted subsidiaries of the Company. These covenants are subject to important exceptions and qualifications. The Indenture provides that after the Notes achieve an investment grade rating from both Standard & Poor's Ratings Services, a Division of the McGraw-Hill Companies, Inc., and Moody's Investors Service, Inc., the Company's obligation to comply with certain of the restrictive covenants described herein will be terminated. See "Description of the Notes -- Certain Covenants." Use of Proceeds............ The Company will not receive any proceeds from the issuance of the Exchange Notes pursuant to the Exchange Offer. The net proceeds to the Company from the sale of the Series A Notes are being used to repay certain outstanding mortgage and other indebtedness of the Company, to reduce certain borrowings under the Credit Facility and for general corporate purposes. See "Use of Proceeds." Shelf Registration Statement................ If (i) the Exchange Offer is not permitted by applicable law or (ii) any holder of Transfer Restricted Notes (as defined herein) notifies the Company within 20 business days of the commencement of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and holds Series A Notes acquired directly from the Company or an affiliate of the Company, the Company will be required to provide the Shelf Registration Statement to cover resales of the Notes by such holders thereof. If the Company fails to satisfy these registration obligations, it will be required to pay Additional Interest (as defined herein) to the holders of Notes under certain circumstances. See "The Exchange Offer." Absence of an Established Trading Market for the Notes.................... The Series A Notes are new securities that were issued on May 21, 1997 (the "Issue Date" or "Closing Date"). There is currently no established trading market for the Notes or the Exchange Notes. Although Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Smith Barney Inc. (the "Initial Purchasers") have informed the Company that they currently intend to make a market in the Series A Notes and, upon issuance, the Exchange Notes, they are not obligated to do so and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes. To the extent Series A Notes are exchanged in this Exchange Offer, the liquidity of the market for the remaining Series A Notes may be reduced. The Series A Notes have been designated eligible for trading in the Private Offerings, Resale and Trading through Automatic Linkages (PORTAL) market. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through Nasdaq. See "Risk Factors -- Absence of a Public Market." THE COMPANY The Company is a leading regional department store chain operating 175 stores in 24 states, primarily in the Southeast and Midwest. The Company operates its stores under five chain names: Proffitt's (19 stores), McRae's (29 stores), Younkers (48 stores), Parisian (40 stores) and Herberger's (39 stores). Each chain operates primarily as a leading branded traditional department store in its communities, with Parisian serving as a better branded specialty department store. Most of the stores are located in premier regional malls in the respective trade areas served. The Company's stores offer a wide selection of fashion apparel, accessories, cosmetics and decorative home furnishings, featuring assortments of premier brands, private brands and specialty merchandise. Each of the Company's chains operates with its own merchandising, marketing and store operations team in order to tailor regional assortments to the local customer. At the same time, the Company coordinates merchandising among the chains and consolidates administrative and support functions to realize scale economies, to promote a competitive cost structure and to increase margins. Under the leadership of R. Brad Martin and an experienced senior management team, the Company has executed a disciplined acquisition strategy and strategic approach to new store openings, growing from 11 stores and net sales of $94.8 million in fiscal 1989 to 175 stores and pro forma net sales of $2.3 billion in fiscal 1996. In addition, the Company has increased EBITDA from $8.9 million in fiscal 1989 to $167.2 million in fiscal 1996, on a pro forma basis. Members of the Company's senior management have substantial investments in the Company. As of April 25, 1997, Mr. Martin beneficially owned approximately 4.7% of the Company's Common Stock and all directors and executive officers of the Company as a group beneficially owned approximately 13.2% of the Company's Common Stock. The Company was incorporated under the laws of the State of Tennessee in 1919. The principal executive offices of the Company are located at 3455 Highway 80 West, Jackson, Mississippi 39209, and its telephone number is (601) 968-4400. BUSINESS STRENGTHS The Company believes that it is well-positioned to build upon its historical success by capitalizing on its competitive strengths, including the following: Strong Regional Focus. The Company places a high priority on being a market leader in each of the markets in which it operates. In smaller communities, the Company's stores are frequently the only branded name department store catering to middle and upper income customers and offering an array of brands that frequently are not otherwise available to shoppers in such markets. In most larger metropolitan markets, the Company seeks to maximize its market share by operating multiple stores in prime locations. While the Company has grown through the acquisition of regional chains, its philosophy has been to (i) maintain existing trade names and retain merchandising and store personnel and (ii) utilize previously developed regional expertise and knowledge of the local customer base by allowing each chain to tailor merchandise assortments to the local customer. The Company believes that the increased sales and gross margins resulting from a coordinated but decentralized merchandising effort outweigh any incremental operating cost savings associated with a completely centralized strategy. Scale Economies. With pro forma sales of approximately $2.3 billion in fiscal 1996, the Company realizes scale economies in purchasing and distribution, administrative areas such as accounting, proprietary credit card administration, management information systems, and other infrastructure-related areas. Although the Company's chains control regional merchandising, the Proffitt's Merchandising Group coordinates merchandising, planning and execution, visual presentation, marketing and advertising activities among the chains. The Proffitt's Merchandising Group manages strategic relationships with the Company's top vendors to ensure that each chain is afforded the purchasing leverage of the Company as a whole. In addition to seeking economies of scale in purchasing, the Proffitt's Merchandising Group will continue to capitalize on corporate level marketing synergies, such as the coordination of media buying and direct mail programs, the establishment of preferred advertising rates, and the production of store catalogs. Proven Track Record of Integrating Acquisitions. In recent years, the Company has grown primarily through the acquisition of strong, regional department store chains at valuations believed to be attractive by management. The following table sets forth certain information concerning the Company's significant acquisitions: <TABLE> <CAPTION> TRANSACTION VALUE(A) EQUITY AS A % AS A MULTIPLE OF: DATE OF NUMBER TRANSACTION OF TRANSACTION ---------------------------- COMPANY ACQUIRED ACQUISITION OF STORES VALUE(A) VALUE(A) LTM SALES(B) LTM EBITDA(B) - ---------------- ----------- --------- ----------- -------------- ------------ ------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> McRae's, Inc.................... March 31, 1994 28 $264.8 5% 0.6x 5.3x Younkers, Inc................... February 3, 1996 51 321.6 79 0.5 6.5 Parisian, Inc................... October 11, 1996 38 375.0 28 0.5 8.7 G.R. Herberger's, Inc........... February 1, 1997 39 176.9 88 0.5 7.4 </TABLE> - --------------- (a) Transaction value is the total consideration paid in the form of: (i) cash; (ii) notes; (iii) equity (valued as of the announcement date for pooling-of-interest transactions and in accordance with generally accepted accounting principles for purchase accounting transactions); and (iv) assumed long-term debt, net of cash, as of the end of the last full fiscal quarter prior to the acquisition date. (b) LTM Sales and LTM EBITDA of the acquired company represent data for the twelve months ending on the last day of the last full fiscal quarter prior to the acquisition date. Additionally, EBITDA for Herberger's is adjusted for ESOP expense of $4.3 million. See "-- Summary Historical and Pro Forma Financial and Operating Data" for the definition of EBITDA. The Company employs a "best practices" approach to integrating acquired companies. Best practices is a process whereby each acquired chain's operating procedures and policies are reviewed to determine those practices which the Company believes will increase synergies while minimizing business interruptions. The Company believes the implementation of best practices throughout the Company's chains has resulted in improved comparable store sales and increased operating margins through better and more consistent inventory control and pricing, and other operating efficiencies. Strong Financial Position. The Company has been able to realize significant growth while maintaining moderate leverage. Since February 1996, the acquisitions of Younkers, Herberger's and Parisian have resulted in an increase in net sales of approximately $1.6 billion, while senior debt as a percentage of total capitalization decreased slightly. In addition to conservative balance sheet management, the Company's strong cash flow generation has allowed it to fund all capital expenditures, incremental working capital requirements and fixed charges with internally generated cash flow. On a pro forma basis, the Company's ratio of EBITDA to interest expense in fiscal 1996 would have been 3.7x. The Company's strong financial performance has provided it with significant financial flexibility, including the ability to use its publicly-traded common stock as consideration for selected acquisitions. Geographic and Demographic Diversity. The Company operates 175 stores in 24 states. Stores are operated in metropolitan markets such as Atlanta, Georgia and Indianapolis, Indiana, as well as in smaller markets such as Ames, Iowa and Kalispell, Montana. The Company believes that its geographic diversity and the demographic breadth of its target customer groups may to some extent serve to insulate the Company from sales and earnings volatility typically associated with poor weather conditions, or changes in local or regional economic conditions. Attractive Real Estate. The Company believes that its stores are primarily located in premier malls in the markets in which the Company operates. As is consistent with national trends, the Company further believes that construction of new malls in many of its markets is likely to be limited. The Company anticipates that the attractiveness of its existing locations, combined with limited new mall development, may contribute to improved comparable store sales. BUSINESS STRATEGY The Company's business objective is to maximize profitability and shareholder value by (i) expanding its core business through comparable store sales growth, new store openings and margin expansion, and (ii) monitoring acquisition opportunities while maintaining a strong capital structure. Comparable Store Sales Growth. The Company expects that comparable store sales will benefit from a number of merchandising initiatives including (i) implementing best practices, (ii) expanding sales of key brands, and (iii) increasing sales of the Company's private brands. As part of best practices, the Company benchmarks sales of product categories and brand assortments for each store and identifies and targets opportunities to strengthen such sales by altering the merchandise mix. The Company has successfully used this strategy by applying the long history of strength in the cosmetics business of McRae's and Proffitt's stores to increase the penetration and profitability of Younkers stores' cosmetics business. The Company believes that it will be able to further utilize this strategy to increase sales in the Younkers shoe business, increase McRae's women's apparel sales and introduce home goods into select Parisian stores. The Company believes that comparable store sales will also benefit from expanded sales of key brands, such as Tommy Hilfiger, Liz Claiborne, Jones New York, Polo/Ralph Lauren, Calvin Klein, Guess, and Nine West, among others. The Company's large scale and proven track record with these vendors has enabled the Company to introduce certain of these brands into acquired stores which, prior to combining with the Company, did not have access to these vendors. For instance, Tommy Hilfiger, Nautica and Lancome will now be carried in select Herberger's stores. Additionally, the Company plans to increase sales of its private brand offerings within the apparel and housewares categories from 6% of total net sales to 12% to 15% over the next two to three years. For example, the Company has recently developed its own line of men's dress shirts and accessories, under the brand name RBM. The RBM collection is designed to fill a niche for quality men's furnishings at moderate prices. New Store Openings. The Company plans to open 15 to 20 new stores across all chains over the next three years and to make selective real estate acquisitions in existing or new markets. The Company targets premier mall locations principally based on favorable demographic profiles and trends, as well as the compatibility and traffic draws of other tenants. High quality real estate is a primary criterion for all new stores. In addition, the Company plans to selectively remodel or expand certain existing stores. Margin Expansion. The Company has implemented the following strategies to increase margins: (i) leveraging key vendor relationships; (ii) capitalizing on purchasing economies of scale; (iii) extending key brands into certain acquired stores; (iv) shifting the merchandise mix toward higher margin products; (v) increasing private brand penetration; (vi) consolidating administrative and support areas and eliminating redundant expenses; and (vii) realizing efficiencies related to the re-engineering of certain operating activities. The Company intends to further increase gross margins by increasing sales of its private brand products, which typically generate higher margins and enhance customer loyalty. Operating margins are also expected to benefit from sales productivity enhancements across the Company's chains and from the integration cost savings programs developed by management in conjunction with the Younkers, Parisian, and Herberger's acquisitions. These programs reduced operating expenses by a total of $6 million in fiscal 1996 (consistent with the Company's announced target) and are expected to produce annualized expense savings of $20 million in fiscal 1997 and $29 million in fiscal 1998 (compared to the 1995 cost structure of the chains on an independent basis). Monitor Acquisition Opportunities. The Company has an established record of successfully acquiring and integrating regional department store chains. The Company believes that its philosophy of retaining the local identity and merchandising organization of acquired companies makes the Company an attractive acquirer for regional department store companies. The Company's criteria in evaluating strategic opportunities include (i) strong market presence; (ii) prime real estate locations; (iii) similar merchandising strategies targeted toward middle to upper income consumers; (iv) geographic proximity to the Company's core markets; (v) compatible corporate culture; and (vi) favorable demographics in the regions served. Although the Company currently has no agreements, arrangements or understandings with respect to future acquisitions, the Company expects the department store industry will continue to consolidate, and the Company will regularly evaluate possible acquisition opportunities as they arise. Maintain Strong Capital Structure. The Company intends to maintain a strong balance sheet to support its growth objectives. The fulfillment of this objective has been facilitated by strong cash flows and the Company's issuance of its Common Stock as all or part of the consideration used in its recent acquisitions. The Company believes that, absent any additional acquisitions, future cash flows from operations (with seasonal needs supplemented by borrowings under its Credit Facility) will be sufficient to service debt and lease payments, and to fund capital expenditures and working capital requirements. RECENT DEVELOPMENTS Strengthening and Retaining Management. In recent months, the Company has acted to strengthen and retain its senior management in light of its recent growth and strategic objectives. In April 1997, the Board of Directors of the Company authorized a new five-year employment agreement with R. Brad Martin, its Chairman and Chief Executive Officer since 1989. Among other recent appointments, the Company also named Douglas E. Coltharp as Executive Vice President and Chief Financial Officer, William D. Cappiello as President and Chief Executive Officer of Parisian, Frank E. Kulp as President and Chief Executive Officer of Herberger's, Mark Shulman as President and Chief Executive Officer of Younkers, Toni E. Browning as President and Chief Executive Officer of the Proffitt's Division, Dawn H. Robertson as President and Chief Executive Officer of McRae's, and Donald E. Wright as Senior Vice President of Finance and Accounting. Implementation of Capital Structure Improvements. The Company is in the process of implementing a number of capital structure improvements to position it for future growth. The issuance of the Notes is part of a plan to improve the Company's capital structure by (i) reducing the amount of the Company's secured indebtedness; (ii) reducing the amount of the Company's indebtedness that bears interest at a floating rate; and (iii) extending the average life of the Company's indebtedness. On June 26, 1997, the Company amended and restated its existing credit facility (as amended and restated, the "Credit Facility") to, among other things, (a) increase the revolving Credit Facility from $275 million to $400 million, (b) extend the maturity from October 11, 1999 to June 26, 2002, (c) make provision for, upon any senior indebtedness of Proffitt's being rated investment grade, the elimination of the inventory borrowing base limitation on borrowings under the Credit Facility, (d) reduce the financial performance benchmarks at which more favorable pricing options are made available to the Company, and (e) lessen in varying degrees the scope of the affirmative and negative covenants applicable to the Company and its subsidiaries. The Company may use the proceeds of borrowings under the Credit Facility to refinance certain existing indebtedness, to finance capital expenditures, for general corporate purposes and to finance certain acquisitions. Furthermore, the Company is pursuing a restructuring of one of its existing accounts receivable financing arrangements covering receivables generated by all the stores, except Younkers, in an effort to extend the term of a portion of such arrangements from one year to three to five years through the sale of investment grade term asset-backed securities. The Company anticipates that such transaction may be completed during or shortly after the Exchange Offer. There is no assurance, however, that such transaction will be completed as presently contemplated. See "Receivables Securitization Facilities."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial information appearing elsewhere in this Prospectus. Unless the context clearly suggests otherwise, references to the "Company" include Greater Bay Bancorp and its subsidiaries, collectively, and references to "Greater Bay" include the parent company only. In addition to the historical information contained herein, certain statements in this Prospectus constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 (the "Reform Act") which involve risks and uncertainties. The Company's actual results may differ significantly from those discussed herein. Factors that might cause such a difference include, but are not limited to, those discussed under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this Prospectus. See "Risk Factors--Forward-Looking Statements." THE COMPANY Greater Bay is a bank holding company operating Cupertino National Bank & Trust ("CNB") and Mid-Peninsula Bank (separately, "MPB" and together with CNB, the "Banks") with seven regional offices in Cupertino, Palo Alto, San Mateo, San Carlos and San Jose, California. Greater Bay is the result of the merger (the "Merger"), effective November 27, 1996, of Cupertino National Bancorp ("Cupertino") and Mid-Peninsula Bancorp ("Mid-Peninsula"). At December 31, 1996, the Company had total assets of $622.0 million, total net loans of $441.6 million and total deposits of $559.3 million. The Company, through the Banks, provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers and property managers, business executives, professionals and other individuals, primarily in the Santa Clara and San Mateo Counties of California. Services include personal and business checking and savings accounts, time deposits and individual retirement accounts, cash management, international trade services and accounting services and the making of commercial, consumer and real estate loans, which generally do not include long-term residential mortgage loans. Additionally, the Company offers several specialized services including a Small Business Administration ("SBA") Department which makes SBA guaranteed loans to assist smaller businesses, a venture lending division (the "Venture Lending Group") that services companies in their start-up and development phase and a trust department (the "Greater Bay Trust Company") that offers a full range of fee-based trust services directly to its clients. In order to meet the demands of the increasingly competitive banking and financial services industries, management has adopted a business philosophy referred to as the "Super Community Banking Philosophy." The Super Community Banking Philosophy is based on management's belief that banking customers value doing business with locally managed institutions that can provide a full service commercial banking relationship through an understanding of the customer's financial needs and the flexibility to customize products and services to meet those needs. Management further believes that banks are better able to build successful customer relationships by affiliating with a holding company that provides cost effective administrative support services while promoting bank autonomy and flexibility. To implement this philosophy, Greater Bay operates CNB and MPB as separate subsidiaries by retaining their independent names along with their individual Boards of Directors. Both MPB and CNB have established strong reputations and customer followings in their respective market areas through attention to client service and an understanding of client needs. In an effort to capitalize on the identities and reputations of the Banks, the Company will continue to market its services under the CNB and MPB names, primarily through each Bank's relationship managers. The primary focus for the Banks' relationship managers is to cultivate and nurture their client relationships. Relationship managers are assigned to each borrowing client to provide continuity in the relationship. This emphasis on personalized relationships requires that all of the relationship managers maintain close ties to the - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- communities in which they serve, so they are able to capitalize on their efforts through expanded business opportunities for the Banks. While client service decisions and day-to-day operations are maintained at the Banks, Greater Bay offers the advantages of affiliation with a multi-bank holding company by providing improved access to the capital markets and expanded client support services, such as business cash management, international trade services and accounting services. In addition, Greater Bay provides centralized administrative functions, including support in credit policy formulation and review, investment management, data processing, accounting and other specialized support functions, thereby allowing the Banks to focus on client service. The Company's business strategy is to focus on increasing its market share within the communities it serves through continued internal growth. As a result of the Merger, the Company has the opportunity to market the specialized products and services of the Venture Lending Group, the Greater Bay Trust Company and the SBA Department to a larger customer base. The Company believes that these products and services, available prior to the Merger only to customers of CNB, will be attractive to customers and contacts of MPB in the venture capital community and the high net worth customers of MPB. The Company believes that the infrastructure developed by Cupertino to support the Greater Bay Trust Company, the SBA Department and the Venture Lending Group will allow the Company to offer the products and services of these groups without significant additional overhead costs. The Company also will pursue opportunities to expand its market share through select acquisitions that management believes complement the Company's businesses. While management would prefer to make acquisitions which would expand its presence in its current market areas in Santa Clara and San Mateo Counties, it will also pursue opportunities to expand its market through acquisitions in other parts of the South, East, and North Bay Areas of San Francisco. The Company was incorporated in California in 1984 under the name San Mateo County Bancorp. See "Business--History." The Company's principal offices are located at 2860 West Bayshore Road, Palo Alto, California 94303 and its telephone number is (415) 813-8200. GBB CAPITAL GBB Capital is a statutory business trust formed under Delaware law pursuant to (i) the Trust Agreement and (ii) the filing of a Certificate of Trust with the Delaware Secretary of State on March 3, 1997. GBB Capital's business and affairs are conducted by the Property Trustee, Delaware Trustee and three individual Administrative Trustees who are officers of the Company. GBB Capital exists for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures issued by Greater Bay, and (iii) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Trust Securities). Accordingly, the Junior Subordinated Debentures will be the sole assets of GBB Capital, and payments by Greater Bay under the Junior Subordinated Debentures and the Expense Agreement will be the sole revenues of GBB Capital. All of the Common Securities will be owned by Greater Bay. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Trust Preferred Securities, except that upon the occurrence and during the continuance of an event of default under the Trust Agreement resulting from an event of default under the Indenture, the rights of Greater Bay as holder of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of the Trust Preferred Securities. See "Description of the Trust Preferred Securities--Subordination of Common Securities of GBB Capital Held by Greater Bay." Greater Bay will acquire Common Securities in an aggregate liquidation amount equal to 3.0% of the total capital of GBB Capital. GBB Capital has a term of 31 years, but may terminate earlier as provided in the Trust Agreement. GBB Capital's principal offices are located at 2860 West Bayshore Road, Palo Alto, California 94303 and its telephone number is (415) 813-8200. - - ------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- THE OFFERING <TABLE> <C> <S> Trust Preferred Securities issuer.......................... GBB Capital Securities offered............... 800,000 Trust Preferred Securities. The Trust Preferred Securities represent undivided beneficial interests in GBB Capital's assets, which will consist solely of the Junior Subordinated Debentures and payments thereunder. Distributions.................... The Distributions payable on each Trust Preferred Security will be fixed at a rate per annum of % of the Liquidation Amount of $25 per Trust Preferred Security, will be cumulative, will accrue from the date of issuance of the Trust Preferred Securities, and will be payable quarterly in arrears on the 15th day of March, June, September and December of each year, commencing on June 15, 1997 (subject to possible deferral as described below). The amount of each Distribution due with respect to the Trust Preferred Securities will include amounts accrued through the date the Distribution payment is due. See "Description of the Trust Preferred Securities--Distributions." Extension periods................ So long as no Debenture Event of Default (as defined herein) has occurred and is continuing, Greater Bay will have the right, at any time, to defer payments of interest on the Junior Subordinated Debentures by extending the interest payment period thereon for a period not exceeding 20 consecutive quarters with respect to each deferral period (each an "Extension Period"), provided that no Extension Period may extend beyond the Stated Maturity of the Junior Subordinated Debentures. If interest payments are so deferred, Distributions on the Trust Preferred Securities will also be deferred and Greater Bay will not be permitted, subject to certain exceptions described herein, to declare or pay any cash distributions with respect to Greater Bay's capital stock or debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. During an Extension Period, Distributions will continue to accumulate with income thereon compounded quarterly. Because interest would continue to accrue and compound on the Junior Subordinated Debentures, to the extent permitted by applicable law, holders of the Trust Preferred Securities will be required to accrue income for United States federal income tax purposes. See "Description of Junior Subordinated Debentures--Option to Defer Interest Payment Period" and "Certain Federal Income Tax Consequences--Interest Income and Original Issue Discount." Maturity......................... The Junior Subordinated Debentures will mature on , 2027 which date may be shortened (such date, as it may be shortened, the "Stated Maturity") to a date not earlier than , 2002 if certain conditions are met (including Greater Bay having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve). </TABLE> - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- <TABLE> <C> <S> Redemption....................... The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures at their Stated Maturity or their earlier redemption in an amount equal to the amount of Junior Subordinated Debentures maturing on or being redeemed at a redemption price equal to the aggregate Liquidation Amount of the Trust Preferred Securities plus accumulated and unpaid Distributions thereon to the date of redemption. Subject to Federal Reserve approval, if then required under applicable capital guidelines or policies of the Federal Reserve, the Junior Subordinated Debentures are redeemable prior to maturity at the option of Greater Bay (i) on or after , 2002 in whole at any time or in part from time to time, or (ii) at any time, in whole (but not in part), upon the occurrence and during the continuance of a Tax Event, an Investment Company Event or a Capital Treatment Event, in each case at a redemption price equal to 100% of the principal amount of the Junior Subordinated Debentures so redeemed, together with any accrued but unpaid interest to the date fixed for redemption. See "Description of the Trust Preferred Securities--Redemption" and "Description of Junior Subordinated Debentures-- Redemption." Distribution of Junior Subordinated Debentures......... Greater Bay has the right at any time to terminate GBB Capital and cause the Junior Subordinated Debentures to be distributed to holders of Trust Preferred Securities in liquidation of GBB Capital, subject to Greater Bay having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. See "Description of the Trust Preferred Securities--Distribution of Junior Subordinated Debentures." Guarantee........................ Taken together, Greater Bay's obligations under various documents described herein, including the Guarantee Agreement, provide a full guarantee of payments by GBB Capital of Distributions and other amounts due on the Trust Preferred Securities. Under the Guarantee Agreement, Greater Bay guarantees the payment of Distributions by GBB Capital and payments on liquidation of or redemption of the Trust Preferred Securities (subordinate to the right to payment of Senior and Subordinated Debt of Greater Bay, as defined herein) to the extent of funds held by GBB Capital. If GBB Capital has insufficient funds to pay Distributions on the Trust Preferred Securities (i.e., if Greater Bay has failed to make required payments under the Junior Subordinated Debentures), a holder of the Trust Preferred Securities would have the right to institute a legal proceeding directly against Greater Bay to enforce payment of such Distributions to such holder. See "Description of Junior Subordinated Debentures--Enforcement of Certain Rights by Holders of the Trust Preferred Securities," "Description of Junior Subordinated Debentures--Debenture Events of Default" and "Description of Guarantee." </TABLE> - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- <TABLE> <C> <S> Ranking.......................... The Trust Preferred Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities of GBB Capital held by Greater Bay, except as described under "Description of the Trust Preferred Securities--Subordination of Common Securities of GBB Capital Held by Greater Bay." The obligations of Greater Bay under the Guarantee, the Junior Subordinated Debentures and other documents described herein are unsecured and rank subordinate and junior in right of payment to all current and future Senior and Subordinated Debt, the amount of which is unlimited. At December 31, 1996, the aggregate outstanding Senior and Subordinated Debt of Greater Bay was approximately $3.0 million. In addition, because Greater Bay is a holding company, all obligations of Greater Bay relating to the securities described herein will be effectively subordinated to all existing and future liabilities of Greater Bay's subsidiaries, including the Banks. Greater Bay may cause additional Trust Preferred Securities to be issued by trusts similar to GBB Capital in the future, and there is no limit on the amount of such securities that may be issued. In this event, Greater Bay's obligations under the Junior Subordinated Debentures to be issued to such other trusts and Greater Bay's guarantees of the payments by such trusts will rank pari passu with Greater Bay's obligations under the Junior Subordinated Debentures and the Guarantee, respectively. Voting rights.................... The holders of the Trust Preferred Securities will generally have limited voting rights relating only to the modification of the Trust Preferred Securities, the dissolution, winding-up or termination of GBB Capital and certain other matters described herein. See "Description of the Trust Preferred Securities--Voting Rights; Amendment of the Trust Agreement." Proposed Nasdaq National Market symbol.......................... GBBKP Use of proceeds.................. The proceeds to GBB Capital from the sale of the Trust Preferred Securities offered hereby will be invested by GBB Capital in the Junior Subordinated Debentures of Greater Bay. Greater Bay intends to invest approximately $10.0 million of the net proceeds in the Banks to increase their capital levels to support future growth. Greater Bay intends to use the remaining net proceeds for general corporate purposes, which may include without limitation, funding additional investments in, or extensions of credit to, the Banks and possible future acquisitions. Greater Bay expects the Trust Preferred Securities to qualify as Tier 1 capital under the capital guidelines of the Federal Reserve. See "Use of Proceeds."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, included elsewhere in this Prospectus. As used in this Prospectus, unless otherwise indicated or unless the context otherwise requires, references herein to (i) the "Transactions" refer collectively to the Acquisition (as defined) and the Financings (as defined), (ii) "Holdings" refer to Hedstrom Holdings, Inc. and, where appropriate, its subsidiaries, (iii) "Hedstrom" refer to Hedstrom Corporation and, where appropriate, its subsidiaries, (iv) "ERO" refer to ERO, Inc. and, where appropriate, its subsidiaries, and (v) the "Company" refer to Hedstrom and its subsidiaries and ERO and its subsidiaries on a combined basis after completion of the Transactions, including the businesses conducted by Hedstrom and ERO prior to the Transactions. Unless otherwise specified, all financial, statistical and other data regarding the Company contained herein is presented on a pro forma basis after giving effect to the Transactions. Market and market share data used throughout this Prospectus are estimates provided by the management of the Company. Such estimates are based on management's internal research and experience in the Company's markets. Such estimates, while believed by management to be accurate, have not been verified by any independent source. THE COMPANY The Company (consisting of the businesses of Hedstrom and ERO) is a leading North American manufacturer and marketer of well-established children's leisure and activity products. The Company's diversified product lines are in such "evergreen" product categories as outdoor gym sets, wood gym kits and slides, spring horses, playballs, arts and crafts kits, game tables, and licensed indoor sleeping bags, play tents and wall decorations. The Company considers such product categories to be "evergreen" in nature because each is characterized by proven longevity, demonstrated market demand and consistent sales over time. For example, the Company believes products such as outdoor gym sets and playballs have been marketed and sold in the United States for over 30 years. The Company believes that in the U.S. markets for nine of its ten principal product categories, it enjoys the competitive advantage of being the market share leader, the low-cost producer or both. For the twelve-month period ended December 31, 1996, approximately half of the Company's pro forma net sales were derived from product categories for which the Company believes it has a market share of approximately 75% or greater. As a result of the Company's leading market shares, the Company enjoys favorable relationships with its customers and suppliers and with licensors of popular characters that decorate certain of the Company's products. The Company believes its focus on evergreen product categories in which it has competitive advantages provides consistent sales and cash flows. The Company's products are sold primarily through national retailers, mass merchants, home improvement centers, sporting goods stores, drug store chains and supermarkets. COMPETITIVE STRENGTHS The Company believes that the following characteristics contribute to the Company's position as a leading manufacturer and marketer of children's leisure and activity products: - Leading Share in Selected Niche Markets. The Company believes its outdoor gym sets, spring horses, playballs, ball pits and licensed sleeping bags and play tents each command market shares of approximately 75% or greater. Sales from these product categories accounted for approximately half of the Company's pro forma net sales for the twelve-month period ended December 31, 1996. In addition, the Company believes it is one of the leading suppliers in the U.S. markets for wood gym kits and slides, children's arts and crafts kits, game tables and wall decorations. The Company believes its position as a market share leader in selected niche markets (i) provides the Company with certain advantages over existing competitors and prospective entrants in such markets, (ii) creates the strong relationships with retailers that are critical to securing and maintaining valuable retail shelf space for existing and new products and (iii) provides a platform for introducing new products. - Stable and Established Product Categories. Substantially all of the Company's products are in evergreen categories within the children's leisure and activity products industry. For example, the Company believes products such as outdoor gym sets and playballs have been marketed and sold in the United States for over 30 years. The Company believes its diverse portfolio of evergreen products will contribute to stable revenues and cash flows, providing resources for the Company to implement its business strategies. See "-- Business Strategy." - Low-Cost Manufacturing Capabilities. The Company believes that it is the low-cost manufacturer in the markets for each major product category which the Company manufactures internally. The Company believes its leading market share in such niche markets as outdoor gym sets, spring horses, playballs and ball pits provides it with a significant cost advantage relative to smaller competitors in such markets due to the Company's greater sales volume and resultant operating leverage and efficiencies. With respect to the Company's children's arts and crafts kits and game tables, the Company is able to realize cost advantages from the low labor rates, low overhead and extensive vertical integration of its Canadian manufacturing facility. The Company believes its position as a low-cost manufacturer will enable it to (i) maintain operating profit margins, (ii) respond to competitive pressures through flexibility in pricing strategies, (iii) realize sales growth by offering superior quality products at competitive prices and (iv) expand its existing product lines and enter new product categories. BUSINESS STRATEGY The Company's strategy is to enhance its operating margins and strengthen its position as a leading manufacturer and marketer of children's leisure and activity products. The Company plans to improve its profitability by rationalizing its cost structure and utilizing the Company's excess capacity at certain of its facilities through, among other things, pursuing counter-seasonal sales opportunities. Furthermore, the Company has identified several opportunities for revenue growth, including enhancing existing products, introducing complementary products, focusing its licensed products on traditional characters and pursuing international sales opportunities. - Achieve Cost Savings. Management believes it will realize annual cost savings in excess of $6 million as a result of cost saving initiatives implemented or being implemented as a result of the Acquisition, such as rationalizing sales, marketing and general administrative functions, consolidating purchases of raw materials and eliminating less profitable product lines. Independent of the Acquisition, the Company expects to realize in excess of $9 million of permanent cost savings in 1997 and thereafter as a result of cost reduction programs implemented at Hedstrom in the second half of 1996. See "-- Hedstrom 1996 Cost Reduction Plan," "Unaudited Pro Forma Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Hedstrom and Holdings." - Utilize Excess Capacity. The Company produces its outdoor gym sets, wood gym kits and slides at its facility in Bedford, Pennsylvania, primarily in the period from December through April. During the balance of the year, the Bedford facility remains relatively inactive. The Company believes it can enhance sales and profitability by identifying products that it can manufacture during the May through November period, either for itself or for original equipment manufacturers ("OEMs"). The Company has already identified several products that it will begin producing in the second half of 1997. In addition, management is pursuing opportunities to increase the utilization of its low-cost plastic molding operations at its Ashland, Ohio facility, which already supplies a variety of components to OEMs of industrial and consumer products. - Enhance Existing Products and Develop Complementary Products. The Company has maintained sales growth and its leading market shares by continuously enhancing its principal products and designing and developing complementary products and accessories. Management believes that by pursuing this strategy it can continue growth within its core product lines with minimal economic risk. In addition, the Company will evaluate opportunities to expand its product lines, increase its market shares and acquire complementary products through strategic acquisitions. - Focus Licensed Products on Traditional Characters. The Company believes that it can differentiate certain of its products and stimulate sales more effectively and inexpensively through the licensing of recognized traditional characters rather than the development and promotion of its own brand names. For the Company's products lines that feature licensed characters, such as sleeping bags, play tents and wall decorations, the Company intends to emphasize traditionally popular characters such as the classic Disney and Looney Tunes(TM) characters, although the Company will also complement such characters by obtaining licenses for event-driven characters. The Company estimates that products featuring licensed traditional characters (including products featuring the 101 Dalmatians characters, which experienced increased sales in 1996 as a result of the release of a new version of the 101 Dalmatians movie) accounted for approximately 14% of the Company's pro forma net sales for the twelve-month period ended December 31, 1996, while products based on licensed event-driven characters also accounted for approximately 14% of the Company's pro forma net sales for such period. - Pursue International Sales Opportunities. To date, the Company has not focused a significant amount of resources toward the development of an international customer base. For the twelve-month period ended December 31, 1996, the Company's pro forma net sales outside the United States and Canada totaled less than 4% of the Company's total pro forma net sales. The Company believes there are significant sales opportunities for the Company's products in Europe and Latin America, particularly its children's arts and crafts kits, outdoor gym sets, playballs and ball pits. ACQUISITION RATIONALE Hedstrom and ERO are leading manufacturers and marketers of children's leisure and activity products. Hedstrom's principal products include outdoor gym sets, wood gym kits and slides, spring horses, playballs and ball pits. ERO's principal products include children's arts and crafts kits, game tables and licensed indoor sleeping bags, play tents and wall decorations. The acquisition of ERO by Hedstrom created one of the largest North American manufacturers and marketers of children's evergreen leisure and activity products and provides Hedstrom with (i) a more diverse portfolio of products, (ii) significant growth potential through ERO's Amav division ("Amav"), (iii) decreased seasonality as a result of more balanced sales throughout the year, (iv) significant cost savings and operating efficiencies and (v) additional advantages resulting from increased scale. - Product Diversity in Well-Established Markets. The combination of Hedstrom and ERO significantly reduces the Company's dependence on any particular product line while expanding the Company's overall presence in children's evergreen leisure and activity product categories. With the combination of Hedstrom and ERO, the Company has ten principal product categories, with its largest product line (outdoor gym sets) accounting for approximately 20% of the Company's pro forma net sales for the twelve-month period ending December 31, 1996. - Growth Potential at Amav. In October 1995, ERO established its Amav division through the acquisition of Amav Industries, Ltd., a Canadian-based manufacturer of children's arts and crafts kits and game tables. Amav has grown rapidly over the four-year period ended December 31, 1996, with sales increasing at a compound annual rate in excess of 40% over such period. Management attributes Amav's success to its strategy of targeting large, established product lines in which it can apply its design, engineering and manufacturing expertise to produce a high-quality product at a lower cost than its competitors. Management believes Amav's low-cost manufacturing, design and engineering capabilities will enable the Company to continue to increase sales of its existing products lines as well as to add complementary product lines. - Reduced Seasonality. The combination of Hedstrom and ERO significantly reduces the effect of seasonality on the Company's business. The peak selling season for Hedstrom's products is the first half of the calendar year whereas the peak selling season for ERO's products is the second half of the calendar year. As a result of the Acquisition, the Company's sales throughout the year will be relatively balanced. Pro forma net sales for the Company for each calendar quarter during the twelve months ended December 31, 1996 were 24.6%, 26.5%, 22.8% and 26.1%, respectively, of total pro forma net sales for such twelve-month period. Balanced sales throughout the year will reduce seasonal fluctuations in working capital and will enable the Company to generate more consistent cash flow. - Cost Savings. As discussed under "-- Business Strategy," management believes that the cost saving initiatives which have been or which are being implemented as a result of the combination of Hedstrom and ERO will allow the Company to realize cost savings in excess of $6 million per year. - Additional Advantages Resulting from Increased Scale. With over $280 million in pro forma net sales for the twelve-month period ending December 31, 1996, management believes the Company will have significantly more clout with retailers, suppliers and licensors than either Hedstrom or ERO individually. In addition, management anticipates that the Company's size also will enable it to pursue international sales opportunities more effectively. HEDSTROM 1996 COST REDUCTION PLAN From fiscal 1992 through fiscal 1995, Hedstrom's operating income increased at a compound annual rate of approximately 33.5%. In fiscal 1996, Hedstrom's operating income declined 52% relative to fiscal 1995. In addition, from fiscal 1992 through fiscal 1995, Hedstrom's EBITDA increased at a compound annual rate of approximately 25%. In fiscal 1996, Hedstrom's EBITDA declined modestly. In order to improve Hedstrom's profitability in 1997 and thereafter, management implemented a plan in the second half of 1996 (the "1996 Cost Reduction Plan") to reduce costs by over $9 million in 1997 and thereafter as compared with fiscal 1996 levels. Important elements of the plan include: - Implementing Just-in-Time Manufacturing. In late 1996, Hedstrom restructured certain of its manufacturing operations to increase its daily production capacity of outdoor gym sets. This restructuring has enabled Hedstrom to manufacture outdoor gym sets to specific customer orders rather than producing outdoor gym sets in anticipation of customer orders, which Hedstrom had done in the past because of capacity constraints. In fiscal 1996, prior to implementing this restructuring, Hedstrom experienced a significant and unexpected change in its sales mix of outdoor gym sets, requiring Hedstrom to use third party warehouses to store many of the outdoor gym sets it had produced in anticipation of customer demand. As a result, Hedstrom incurred approximately $2.1 million of higher warehouse and material handling costs. Through the first six months of 1997, Hedstrom has successfully manufactured outdoor gym sets on a just-in-time basis, resulting in significantly lower warehouse and material handling expense as compared to the same period in 1996. The implementation of just-in-time manufacturing of outdoor gym sets has enabled Hedstrom to carry a lower level of outdoor gym set inventory and, as a result, to eliminate the need for utilizing third party warehouses for outdoor gym sets. Management believes the Company will save approximately $2.1 million of warehouse and material handling expense in 1997 and thereafter as a result of implementing just-in-time manufacturing of outdoor gym sets. - Improved Manufacturing Procedures. In an effort to streamline outdoor gym set production and improve manufacturing efficiencies, in 1996 Hedstrom (i) reduced its number of outdoor gym set product offerings, (ii) redesigned certain outdoor gym set components to reduce the cost of such components and (iii) further standardized many of the components among its various outdoor gym set product offerings. Management believes these actions will improve profitability by approximately $2.0 million in 1997 and thereafter over fiscal 1996 levels. - In-sourcing Certain Plastic Components. Hedstrom periodically evaluates the economics of producing internally certain plastic components used in the production and assembly of its outdoor gym sets versus purchasing such components externally. In 1996, Hedstrom invested approximately $3.0 million in new plastic blow-molding equipment to manufacture many of the plastic slides that it had previously purchased from third-party vendors. Management estimates that producing these slides internally is currently providing annual cost savings of approximately $1.5 million as compared to fiscal 1996 levels. - Discontinuation of Trial Advertising Campaign. Hedstrom historically has advertised its products in cooperation with its retail customers, principally through print media such as newspaper circulars and free-standing inserts sponsored by its customers. In fiscal 1996, Hedstrom initiated, on a trial basis, its own multi-media advertising program designed to increase consumer awareness of the Hedstrom brand over time. The total cost for this advertising program was approximately $1.5 million. After careful review, management determined that this trial advertising campaign would not provide an acceptable return on investment and elected to discontinue it. Therefore, such costs will not be incurred in 1997 and thereafter. - Restructure Promotional Programs. Consistent with industry practice, Hedstrom provides retailers with certain promotional allowances, a portion of which typically is fixed in nature and a portion of which is based on the volume of customer purchases of Hedstrom products. In late 1996, Hedstrom reduced the fixed component of certain of its promotional allowances and restructured its promotional programs with several customers by raising the required volumes necessary to achieve certain promotional discounts. Management believes these initiatives will improve profitability in 1997 and thereafter by approximately $1.4 million over fiscal 1996 levels. - Personnel Reductions. Hedstrom reduced its number of full-time employees by approximately 30 people in a variety of departments in the second half of 1996. Management believes that such personnel reductions will result in savings of approximately $0.7 million in 1997 and thereafter over fiscal 1996 levels. The implementation of the 1996 Cost Reduction Plan has resulted in marked improvement in Hedstrom's profitability in 1997 and management expects that such initiatives will continue to contribute to enhanced profitability during the remainder of 1997. For the six months ended June 30, 1997, which includes the results of ERO for the month of June 1997, Hedstrom recorded net sales and operating income of $104.1 million and $14.2 million, respectively, as compared with net sales and operating income for the comparable period in 1996 of $96.1 million and $8.1 million, respectively. Operating income as a percentage of net sales increased to 14% for the six-month period ended June 30, 1997 from 8% for the comparable period in 1996. The enhanced profitability of Hedstrom has resulted in EBITDA of $17.0 million for the six months ended June 30, 1997, as compared with EBITDA for the comparable period in 1996 of $10.4 million. EBITDA as a percentage of net sales increased to 16% for the six months ended June 30, 1997 from 11% for the comparable period in 1996. Management believes the results of operations of ERO for the period from June 1, 1997 through June 11, 1997, prior to the Merger (as defined), are not significant to Holdings results of operations for the six-months ended June 30, 1997. After giving pro forma effect to the Transactions, the Company's pro forma net sales and operating income for the twelve-month period ended December 31, 1996 would have been $283.3 million and $24.2 million, respectively. Also, after giving pro forma effect to the Transactions, pro forma EBITDA for the twelve-month period ended December 31, 1996 would have been $38.7 million. Assuming the Transactions occurred and assuming implementation of the 1996 Cost Reduction Plan at the beginning of the twelve-month period ended December 31, 1996, pro forma net sales and operating income would have been $283.3 million and $30.0 million, respectively. Also, assuming the Transactions occurred and assuming implementation of the 1996 Cost Reduction Plan at the beginning of the twelve-month period ended December 31, 1996, pro forma EBITDA, would have been $44.5 million. THE TRANSACTIONS On April 10, 1997, Hedstrom and HC Acquisition Corp., a wholly owned subsidiary of Hedstrom ("Acquisition Co."), entered into an Agreement and Plan of Merger with ERO (the "Merger Agreement") to acquire ERO for a total enterprise value of approximately $200 million. Pursuant to the Merger Agreement, Acquisition Co. commenced a tender offer for all of the outstanding shares of the common stock of ERO at a purchase price of $11.25 per share (the "Tender Offer"). The Tender Offer was consummated on June 12, 1997. On that date, subsequent to the consummation of the Tender Offer, (i) Acquisition Co. was merged with and into ERO (the "Merger") with ERO surviving the Merger as a wholly owned subsidiary of Hedstrom, (ii) certain of ERO's outstanding indebtedness was refinanced by Hedstrom (the "ERO Refinancing") and (iii) Hedstrom refinanced (the "Hedstrom Refinancing") its then existing revolving credit facility (the "Old Revolving Credit Facility") and term loan facility (the "Old Term Loan Facility"). The Tender Offer, the Merger, the ERO Refinancing and the Hedstrom Refinancing are collectively referred to herein as the "Acquisition". Holdings and Hedstrom required approximately $301.1 million in cash to consummate the Acquisition, including approximately (i) $122.6 million paid in connection with the Tender Offer and the Merger, (ii) $82.6 million paid in connection with the ERO Refinancing, (iii) $74.9 million paid in connection with the Hedstrom Refinancing and (iv) $21.0 million incurred in respect of fees and expenses. The funds required to consummate the Acquisition were provided by (i) $75.0 million of term loans (the "Tranche A Term Loans") under a new six-year senior secured term loan facility (the "Tranche A Term Loan Facility"), (ii) $35.0 million of term loans (the "Tranche B Term Loans" and, together with the Tranche A Term Loans, the "Term Loans") under a new eight-year senior secured term loan facility (the "Tranche B Term Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term Loan Facilities"), (iii) $16.1 million of borrowings under a new $70.0 million senior secured revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facilities, the "Senior Credit Facilities"), (iv) $110.0 million of gross proceeds from the offering (the "Original Senior Subordinated Notes Offering") by Hedstrom of the Old Senior Subordinated Notes, (v) $25.0 million of gross proceeds from the offering (the "Units Offering" and, together with the Original Senior Subordinated Notes Offering, the "Original Offerings") by Holdings of 44,612 units (the "Units") consisting of the Old Discount Notes and 2,705,896 shares (the "Shares") of Common Stock, $.01 par value per share, of Holdings ("Holdings Common Stock") and (vi) $40.0 million of gross proceeds from the private placement (the "Equity Private Placement" and, together with the Original Offerings and the borrowings under the Senior Credit Facilities, the "Financings") of 31,520,000 shares of Non-Voting Common Stock, $.01 par value per share, of Holdings ("Holdings Non-Voting Common Stock") and 480,000 shares of Holdings Common Stock. The following table sets forth the sources and uses of funds in connection with the Transactions. <TABLE> <CAPTION> SOURCES OF FUNDS AMOUNT ---------------- ------ (IN MILLIONS) <S> <C> Revolving Credit Facility........ $ 16.1 Tranche A Term Loans............. 75.0 Tranche B Term Loans............. 35.0 Original Senior Subordinated Notes Offering................. 110.0 Units Offering................... 25.0 Equity Private Placement......... 40.0 ------ Total Sources............... $301.1 ====== </TABLE> <TABLE> <CAPTION> SOURCES OF FUNDS AMOUNT ---------------- ------ (IN MILLIONS) <S> <C> Tender Offer/Merger.............. $122.6 ERO Refinancing(a)............... 82.6 Hedstrom Refinancing(a).......... 74.9 Fees and expenses(b)............. 21.0 ------ Total Uses.................. $301.1 ====== </TABLE> - --------------- (a) Includes accrued interest expense. (b) Fees and expenses include Initial Purchasers' discount, bank fees, financial advisory fees, legal and accounting fees, printing costs and other expenses related to the Transactions. ORGANIZATIONAL CHART The following chart depicts (i) the summary organizational structure of Holdings and the Company and its material subsidiaries after consummation of the Transactions and (ii) the sources of financing for the Transactions. [Flow-Chart] DESCRIPTION OF ORGANIZATIONAL CHART (FOR EDGAR PURPOSES ONLY) The chart provided in the prospectus is a vertical flow-chart. The first (i.e., the top box of the flow chart) represents Holdings. It indicates that Holdings received $25 million pursuant to the Units Offering and $40 million pursuant to the Equity Private Placement. The second box in the flow chart represents Hedstrom, and show that Hedstrom is a direct, wholly owned subsidiary of Holdings. It also indicates that Hedstrom received (i) $16.1 million pursuant to borrowings under the Revolving Credit Facility(1), (ii) $75.0 million pursuant to the Tranche A Term Loans, (iii) $35.0 million pursuant to the Tranche B Term Loans and (iv) $110.0 million pursuant to the Original Senior Subordinated Notes Offering. The third box of the flow chart represents ERO and shows that ERO is a direct, wholly owned subsidiary of Hedstrom. The fourth and final box of the flow chart represents all of the operating subsidiaries of ERO and shows that such operating subsidiaries are direct or indirect wholly owned subsidiaries of ERO. - --------------- (1) The Revolving Credit Facility provides for borrowings of up to $70 million (subject to certain borrowing base requirements). See "Description of the Senior Credit Facilities." MANAGEMENT AND OWNERSHIP The principal shareholders of Holdings are Hicks, Muse, Tate & Furst Equity Fund II, L.P. ("HM Fund II"), an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), and certain members of Hedstrom's senior management. Hicks Muse is a private investment firm based in Dallas, New York, St. Louis and Mexico City that specializes in acquisitions, recapitalizations and other principal investing activities. Since Hicks Muse's inception in 1989, the firm has completed or has pending over 70 transactions having a combined transaction value of approximately $19 billion. Hedstrom's senior management team, led by Arnold E. Ditri, its President and Chief Executive Officer, has extensive and diverse experience in managing consumer and industrial products companies, especially within the confines of a leveraged capital structure. In October 1995, HM Fund II, together with certain other investors (the "HM Group"), acquired an 82% common equity interest in Holdings in a transaction that was accounted for as a recapitalization (the "1995 Recapitalization"). The total enterprise value of Hedstrom at the time of the 1995 Recapitalization, including the assumption and refinancing of certain indebtedness, was approximately $75 million. The HM Group paid approximately $27 million for its common equity interest, which, together with Hedstrom senior management's 18% retained common equity ownership, implied a total equity value of Holdings at that time of approximately $33 million. Pursuant to the Equity Private Placement, HM Fund II and certain affiliates thereof purchased an additional $40 million of Holdings' common equity. RECENT DEVELOPMENTS On October 29, 1997, Hedstrom entered into an Asset Purchase Agreement with RDM Sports Group, Inc. and Sports Group, Inc. (neither of which is affiliated with Hedstrom), pursuant to which Hedstrom has agreed to purchase certain inventory, equipment and intellectual property of Sports Group, Inc. for $10,000,000 in cash on the terms and subject to the conditions set forth in such agreement. RDM Sports Group, Inc., Sports Group, Inc. and certain of their affiliates are debtors and debtors-in-possession in cases pending in the United States Bankruptcy Court for the Northern District of Georgia under Chapter 11 of Title 11 of the United States Code Sections 101 et seq., Case Nos. 97-12788 through 97-12796. Subject to required bankruptcy court approval, Hedstrom anticipates that the purchase will be consummated early in December 1997. Hedstrom also is presently in discussions with another unaffiliated party with respect to the proposed purchase by Hedstrom of certain portions of that party's inventory, equipment and intellectual property for approximately $14,250,000 in cash subject to the terms and conditions of a definitive asset purchase agreement. There can be no assurance, however, that an agreement will be reached. In connection with these proposed asset acquisitions (the "Proposed Asset Acquisitions"), Hedstrom contemplates that the Credit Agreement (as defined) will be amended to permit the acquisitions and to provide for an additional $10,000,000 of Tranche B Term Loans, in which case the amortization payments with respect to the existing Tranche B Term Loans will be increased pro rata. It is contemplated that the balance of the funds required to consummate the Proposed Asset Acquisitions will be obtained through a draw under the Revolving Credit Facility. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $110.0 million aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $110.0 million aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Hedstrom, Holdings and the Subsidiary Guarantors, Hedstrom, Holdings and the Subsidiary Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Hedstrom, Holdings or any Subsidiary Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement.................. The Old Senior Subordinated Notes were sold by Hedstrom on June 12, 1997, in a private placement. In connection with the sale, Hedstrom and Holdings entered into a Registration Rights Agreement with the initial purchasers (the "Initial Purchasers") of the Old Notes (the "Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on December 4, 1997, or such later date and time to which it is extended. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such New Senior Subordinated Note is exchanged. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by Hedstrom. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to Hedstrom that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iii) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Hedstrom, Holdings or any Subsidiary Guarantor, or if it is an affiliate, such holder or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such holder or other person is not a broker-dealer, neither the holder nor any such other person is engaged in or intends to engage in the distribution of such New Senior Subordinated Notes, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement................ Pursuant to the Registration Rights Agreement, Hedstrom and Holdings are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes (and use their reasonable best efforts to cause such shelf registration statement to be declared effective by the Commission and keep it continuously effective, supplemented and amended for prescribed periods) if (i) Hedstrom is not permitted to effect the Senior Subordinated Notes Exchange Offer because of any change in law or in applicable interpretations thereof by the staff of the Commission, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 180 days of the date of issuance of the Old Senior Subordinated Notes, (iii) any Initial Purchaser so requests with respect to Old Senior Subordinated Notes not eligible to be exchanged for New Senior Subordinated Notes in the Senior Subordinated Notes Exchange Offer and held by it following consummation of the Senior Subordinated Notes Exchange Offer, or (iv) any holder of Old Senior Subordinated Notes (other than a broker-dealer electing to exchange Old Notes, acquired for its own account as a result of market-making activities or other trading activities, for New Notes (an "Exchanging Dealer")) is not eligible to participate in the Senior Subordinated Notes Exchange Offer or, in the case of any holder of Old Senior Subordinated Notes (other than an Exchanging Dealer) that participates in the Senior Subordinated Notes Exchange Offer, such holder does not receive freely tradeable New Senior Subordinated Notes upon consummation of the Senior Subordinated Notes Exchange Offer. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... Hedstrom will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered in the Senior Subordinated Notes Exchange Offer prior to the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... IBJ Schroder Bank & Trust Company is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Considerations of the Exchange Offers." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE DISCOUNT NOTES EXCHANGE OFFER: The Discount Notes Exchange Offer applies to $44,612,000 aggregate principal amount at maturity of the Old Discount Notes. The form and terms of the New Discount Notes will be the same as the form and terms of the Old Discount Notes except that (i) the Accreted Value (as defined) of the New Discount Notes will be calculated from the date of issuance of the Old Discount Notes, and (ii) the New Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Discount Notes will evidence the same debt as the Old Discount Notes and will be entitled to the benefits of the Discount Notes Indenture (as defined) pursuant to which the Old Discount Notes were issued. The Old Discount Notes and the New Discount Notes are sometimes referred to collectively herein as the "Discount Notes." See "Description of New Discount Notes." The Discount Notes Exchange Offer.................... $1,000 principal amount at maturity of New Discount Notes in exchange for each $1,000 principal amount at maturity of Old Discount Notes. As of the date hereof, Old Discount Notes representing $44,612,000 aggregate principal amount at maturity are outstanding. The terms of the New Discount Notes and the Old Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Discount Notes issued pursuant to the Discount Notes Exchange Offer in exchange for Old Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Discount Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Discount Notes for its own account in exchange for Old Discount Notes, where those Old Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Discount Notes. See "Plan of Distribution." Registration Rights Agreement.................. The Old Discount Notes were sold by Holdings on June 12, 1997, in a private placement. In connection with the sale, Hedstrom and Holdings entered into the Registration Rights Agreement providing for, among other things, the Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on December 4, 1997, or such later date and time to which it is extended. Withdrawal................. The tender of Old Discount Notes pursuant to the Discount Notes Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Discount Notes Exchange Offer. Accreted Value of the New Discount Notes and Old Discount Notes........... The Accreted Value of each New Discount Note will be calculated from the date of issuance of the Old Discount Note for which such New Discount Note is exchanged. Conditions to the Discount Notes Exchange Offer....... The Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by Hedstrom. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Discount Notes......... Each holder of Old Discount Notes wishing to accept the Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Discount Notes Exchange Offer (the "Discount Notes Letter of Transmittal"; the Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Discount Notes Letter of Transmittal, or the copy, together with the Old Discount Notes and any other required documentation, to the Discount Notes Exchange Agent (as defined) at the address set forth in the Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the Depository Trust Company ("DTC") and wishing to accept the Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Discount Notes acquired pursuant to the Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Discount Notes, whether or not such person is the holder of the Old Discount Notes, (ii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Discount Notes within the meaning of the Securities Act, (iii) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, or if it is an affiliate, such holder or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such holder or other person is not a broker-dealer, neither the holder nor any such other person is engaged in or intends to engage in the distribution of such New Discount Notes, and (v) if such holder or other person is a broker-dealer, that it will receive New Discount Notes for its own account in exchange for Old Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such new Discount Notes. Shelf Registration Requirement................ Pursuant to the Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Discount Notes (and use its best efforts to cause such shelf registration statement to be declared effective by the Commission and keep it continuously effective, supplemented and amended for prescribed periods) if (i) Holdings is not permitted to effect the Discount Notes Exchange Offer because of any change in law or in applicable interpretations thereof by the staff of the Commission, (ii) the Discount Notes Exchange Offer is not consummated within 180 days of the date of issuance of the Old Discount Notes, (iii) any Initial Purchaser so requests with respect to Old Discount Notes not eligible to be exchanged for new Discount Notes in the Discount Notes Exchange Offer and held by it following consummation of the Discount Notes Exchange Offer, or (iv) any holder of Old Discount Notes (other than an Exchanging Dealer) is not eligible to participate in the Discount Notes Exchange Offer or, in the case of any holder of Old Discount Notes (other than an Exchanging Dealer) that participates in the Discount Notes Exchange Offer, such holder does not receive freely tradeable New Discount Notes upon consummation of the Discount Notes Exchange Offer. Acceptance of Old Discount Notes and Delivery of New Discount Notes........... Holdings will accept for exchange any and all Old Discount Notes which are properly tendered in the Discount Notes Exchange Offer prior to the Expiration Date. The New Discount Notes issued pursuant to the Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Discount Notes Exchange Agent...................... United States Trust Company of New York is serving as Exchange Agent (the "Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Considerations of the Exchange Offers." Effect of Not Tendering.... Old Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES: Issuer..................... Hedstrom Corporation. Securities Offered......... $110.0 million aggregate principal amount of 10% Senior Subordinated Notes Due 2007. Maturity................... June 1, 2007. Interest Payment Dates..... June 1 and December 1 of each year, commencing December 1, 1997. Optional Redemption........ The New Senior Subordinated Notes will not be redeemable at the option of Hedstrom prior to June 1, 2002, except (i) that until June 1, 2000, Hedstrom may redeem, at its option, in the aggregate up to $44,000,000 principal amount of the Senior Subordinated Notes at the redemption price set forth herein with the net proceeds of one or more Equity Offerings (as defined) if at least $66,000,000 principal amount of the Senior Subordinated Notes remains outstanding after any such redemption and (ii) upon a Change of Control (as defined), as described below. On or after June 1, 2002, the New Senior Subordinated Notes may be redeemed at the option of Hedstrom, in whole or in part, at any time at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Hedstrom will have the option, at any time on or prior to June 1, 2002, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium (as defined) and accrued and unpaid interest, if any, to the date of redemption, and (ii) if Hedstrom does not redeem the New Senior Subordinated Notes pursuant to clause (i) above or if such Change of Control occurs after June 1, 2002, each holder of New Senior Subordinated Notes may require Hedstrom to repurchase all or any portion of such holder's New Senior Subordinated Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that Hedstrom will be able to raise sufficient funds to meet this repurchase obligation should it arise. See "Description of the New Senior Subordinated Notes -- Optional Redemption" and "-- Change of Control." Ranking and Guaranties..... The New Senior Subordinated Notes will be unsecured senior subordinated obligations of Hedstrom and will be unconditionally guaranteed (jointly and severally) on a senior basis by Holdings (the "Holdings Guaranty") and on a senior subordinated basis (the "Subsidiary Guaranties" and, together with the Holdings Guaranty, the "Guaranties") by each domestic subsidiary of Hedstrom (the "Subsidiary Guarantors"). The New Senior Subordinated Notes will be subordinated in right of payment to all Senior Indebtedness (as defined) of Hedstrom and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of Hedstrom. The Holdings Guaranty will be an unsecured senior obligation of Holdings and will rank pari passu in right of payment with all Holdings Senior Indebtedness (as defined). Each Subsidiary Guaranty will be subordinated in right of payment to all Subsidiary Guarantor Senior Indebtedness (as defined) of the relevant Subsidiary Guarantor and will rank pari passu in right of payment with all Subsidiary Guarantor Senior Subordinated Indebtedness (as defined) of the relevant Subsidiary Guarantor. As of June 30, 1997, Senior Indebtedness of Hedstrom, Holdings Senior Indebtedness and Subsidiary Guarantor Senior Indebtedness were approximately $117.7 million, $244.3 million and $112.7 million, respectively, and Senior Subordinated Indebtedness of Hedstrom and Subsidiary Guarantor Senior Subordinated Indebtedness were approximately $110.0 million and $110.0 million, respectively. See "Description of New Senior Subordinated Notes -- Guaranties" and "-- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture contains certain covenants that, among other things, limit (i) the incurrence of additional Indebtedness by Hedstrom and its Restricted Subsidiaries (as defined), (ii) the payment of dividends and other restricted payments by Hedstrom and its Restricted Subsidiaries, (iii) restrictions on distributions from Restricted Subsidiaries, (iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of Restricted Subsidiary capital stock and (vii) mergers and consolidations. All of these limitations and prohibitions, however, are subject to a number of important qualifications and exceptions. See "Description of New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to Hedstrom from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with proceeds from the other Financings, to effect the Acquisition. NEW DISCOUNT NOTES: Issuer..................... Hedstrom Holdings, Inc. Securities Offered......... $44,612,000 aggregate principal amount at maturity of 12% Senior Discount Notes Due 2009. Maturity................... June 1, 2009. Yield and Interest......... The Old Discount Notes were issued at a substantial discount from the principal amount at maturity of such notes. Principal on each New Discount Note will accrete from the date of issuance of the Old Discount Notes to a principal amount of $1,000 on June 1, 2002, representing a yield to maturity of 12% (based on the issue price of a Unit and computed on a semi-annual bond equivalent basis). Except as described herein, no cash interest will accrue on the New Discount Notes prior to June 1, 2002. Thereafter, cash interest will accrue at a rate of 12% per annum, and cash interest will be payable on June 1 and December 1 of each year, commencing December 1, 2002. There can be no assurance that Holdings will have adequate cash available at the time of any scheduled cash interest payments. Original Issue Discount.... For U.S. federal income tax purposes, the New Discount Notes will bear original issue discount ("OID") and each holder of a New Discount Note will be required to include such OID in gross income for U.S. federal income tax purposes, on a constant yield to maturity basis, in advance of the receipt of the cash payments to which such income is attributable. See "Certain United States Federal Income Tax Considerations with Respect to the New Notes." Optional Redemption........ The New Discount Notes will not be redeemable at the option of Holdings prior to June 1, 2002, except (i) that until June 1, 2000, Holdings may redeem, at its option, in the aggregate up to 40% of the Accreted Value of the Discount Notes at the redemption price set forth herein with the net proceeds of one or more Equity Offerings if at least $26,767,200 principal amount at maturity of the Discount Notes remains outstanding after any such redemption and (ii) upon a Change of Control, as described below. On or after June 1, 2002, the New Discount Notes may be redeemed at the option of Holdings, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. See "Description of the New Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to June 1, 2002, to redeem the New Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and accrued and unpaid interest, if any, to the date of redemption, and (ii) if Holdings does not redeem the New Discount Notes pursuant to clause (i) above or if such Change of Control occurs after June 1, 2002, each holder of New Discount Notes may require Holdings to repurchase all or any portion of such holder's New Discount Notes at a purchase price equal to 101% of the Accreted Value thereof plus accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that Holdings will be able to raise sufficient funds to meet this repurchase obligation should it arise. See "Description of the New Discount Notes -- Optional Redemption" and "-- Change of Control." Ranking.................... The New Discount Notes will be unsecured senior obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including the Holdings Guaranty and Holdings' guarantee of the Senior Credit Facilities. Except for the 1995 Recapitalization Notes (as defined) in an aggregate principal amount of $2.5 million, Holdings has not issued, and does not have any arrangement to issue, any indebtedness that would be subordinated to the New Discount Notes. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of Hedstrom, all of which is pledged to secure Holdings' guarantee of the Senior Credit Facilities. As a result of the holding company structure, the holders of the New Discount Notes will effectively rank junior in right of payment to all creditors of Hedstrom and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of June 30, 1997, the New Discount Notes were effectively subordinated to approximately $282.4 million of aggregate liabilities (including trade payables) of Hedstrom and its subsidiaries. Restrictive Covenants...... The Discount Notes Indenture (as defined) contains certain covenants that, among other things, limit (i) the incurrence of additional Indebtedness by Holdings and its Restricted Subsidiaries, (ii) the payment of dividends and other restricted payments by Holdings and its Restricted Subsidiaries, (iii) restrictions on distributions from Restricted Subsidiaries, (iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of Restricted Subsidiary capital stock and (vii) mergers and consolidations. All of these limitations and prohibitions, however, are subject to a number of important qualifications and exceptions. See "Description of the New Discount Notes -- Certain Covenants."

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+JOINT PROXY STATEMENT/PROSPECTUS SUMMARY CERTAIN INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS SUMMARIZED BELOW. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. Hanover Gold Company, Inc. Hanover is an exploration stage mining company that holds significant mining claims and leases in the Alder Gulch area of the historic Virginia City Mining District of southwestern Montana. Its efforts, at least since 1995, have been aimed at consolidating its land position in the district in order to facilitate continued exploration and development, and to make its holdings more attractive to potential development partners such as major mining companies. At March 31, 1997, its mining properties consisted of 482 contiguous claims and one state mining lease located in the Alder Gulch area of the district. The company recently entered into a Reorganization Agreement with Easton-Pacific providing for the merger of Easton-Pacific into the company, in exchange for 7,000,000 shares of Hanover's Common Stock. Easton-Pacific owns or controls 36 patented mining claims, 151 unpatented claims and two state mining leases covering the upper part of the Browns Gulch, Hungry Hollow and Barton Gulch areas of the Virginia City Mining District. These properties are generally contiguous to Hanover's mining claims and lease in the Alder Gulch area. The merger has been approved by the boards of directors of Easton-Pacific and Hanover, and is expected to be approved by the shareholders of each company at meetings to be held on September 15 and September 17, 1997, respectively. If the merger is completed, as is expected, Hanover's consolidation efforts in the district will have been largely concluded. Hanover has no established proven or probable reserves, although exploration activities on the properties conducted by it and others support the existence of a potential, significant mineralized gold deposit. A mineralized deposit is a mineralized body which has been delineated by appropriate drilling or underground sampling to support estimates of tonnage and average mineral grade. A mineralized deposit does not qualify as a reserve until a comprehensive evaluation has been completed and the economic feasibility of exploiting the deposit has been determined. Hanover has not yet undertaken a comprehensive evaluation of its mining properties and probably will not do so until it has obtained the financial assistance of a development partner and conducted additional exploration. Hanover was incorporated as a Delaware corporation in 1984. Its principal executive offices are located at 1000 Northwest Boulevard, Suite 100, Coeur d'Alene, Idaho 83814, and its telephone number is (208) 664- 4653. Hanover also maintains a web site at http://wwp.hanovergold.com where additional information can be obtained. More detailed information concerning Hanover and its mining properties is included in the sections of this Joint Proxy Statement/Prospectus entitled "The Company" and "Business". The terms and conditions of Hanover's proposed merger with Easton-Pacific are included in the section entitled "The Easton-Pacific Transaction" and historical and proforma combined financial information concerning Hanover and Easton-Pacific, and the two companies in combination, is included in the section entitled "Supplemental Financial Information" and in the Financial Statements. Information concerning Hanover's management and the ownership of its Common Stock is included in the "Management" and "Principal Stockholders" sections, and a description of the Common Stock is included in the section entitled "Description of Capital Stock". Easton-Pacific and Riverside Mining Company Easton-Pacific is an exploration stage mining company that owns or controls 36 patented mining claims, 151 unpatented claims and two state mining leases covering the upper part of the Browns Gulch, Hungry Hollow and Barton Gulch areas of the Virginia City Mining District. These properties form a contiguous claim block adjacent to the west side of Hanover's mining properties in the Alder Gulch area of the district. The company was incorporated in Montana in 1959 and has conducted only limited exploration activities since inception. Since 1996, it has been in discussions with Hanover regarding the consolidation of their respective land positions in the Virginia City Mining District in order to make these holdings more attractive to potential development partners. These discussions are described below, in the section entitled "The Easton- Pacific Transaction". Easton-Pacific uses the same office as its secretary, which is located at 21 Courthouse Square, St. Cloud, Minnesota 56303. The company pays no rent for this facility. Easton-Pacific also leases a facility in Montana to store ore samples, for which it pays a nonaffiliate rental at the rate of $40 per month. More detailed information concerning Easton-Pacific, its mining properties, its management and the ownership of its capital stock is included in the section of this Joint Proxy Statement/Prospectus entitled "Easton-Pacific". The terms and conditions of Easton-Pacific's proposed merger with Hanover are included in the section entitled "The Hanover/Easton-Pacific Transaction", and historical and proforma combined financial information concerning Easton-Pacific and Hanover, and the two companies in combination, is included in the section entitled "Supplemental Financial Information" and in the Financial Statements. The Offering The securities offered pursuant to this Prospectus consist of: 7,000,000 shares of Common Stock offered by Hanover to the shareholders of Easton-Pacific in connection with the merger of Easton-Pacific into Hanover under the terms of the Reorganization Agreement; up to 2,000,000 shares of Common Stock offered by Hanover for sale to the public for cash; and 6,356,248 previously issued shares of Common Stock, and 205,000 shares of Common Stock issuable upon the exercise of outstanding stock options, which are offered for resale by the Selling Stockholders. This Joint Proxy Statement/Prospectus sets forth important information to be considered by Hanover's and Easton-Pacific's shareholders in conjunction with their shareholder meetings to consider the merger. Assuming Hanover's and Easton-Pacific's shareholders approve the merger, and all other conditions to closing set forth in the Reorganization Agreement are met, these shares will be deemed to have been sold to the Easton-Pacific shareholders as of the effective time set forth in the Reorganization Agreement. Certificates for the Hanover shares are expected to be issued within 45 days of the date the merger is approved. The shares of Common Stock offered by Hanover for sale for cash will be offered and sold on Hanover's behalf by certain of its directors and executive officers, who will not be compensated for such sales, from time- to-time during the twelve month period commencing with the date of this Joint Proxy Statement/Prospectus. The prices received for these shares will equal the closing sales prices of the Common Stock as reported on the Nasdaq SmallCap Market as of the dates of sale. Proceeds from the sale of these shares will be used for general corporate purposes, including additional exploration of the company's mining properties. The shares of Common Stock offered for resale by the Selling Stockholders will also be sold during the twelve month period commencing with the date of this Joint Proxy Statement/Prospectus, in the over-the- counter market, in other permitted public sales or in privately negotiated transactions, at market prices or at negotiated prices. The Selling Shareholders acquired these shares at prices or values per share equal to then-prevailing market prices for the Common Stock for cash, in exchange for their interests in corporations that were formerly affiliated with Hanover and have since been merged into Hanover, as consideration for mining properties and other assets conveyed to Hanover, for services rendered on Hanover's behalf and as consideration for the guarantee of some of Hanover's obligations. Hanover will receive no proceeds from the sale of the shares offered for resale by the Selling Stockholders. Some of the Selling Stockholders whose shares would otherwise be eligible for resale under this Joint Proxy Statement/Prospectus have entered into lock-up agreements with Hanover limiting the number of shares that can be resold. The persons who are parties to these agreements are either present or former affiliates of Hanover, or persons who are affiliates of Easton-Pacific. The present and former Hanover affiliates who are parties to these agreements are generally prohibited from reselling more than 30% of their shares during the six-month period ending September 3, 1997. The Easton-Pacific affiliates who are parties to these agreements are prohibited from reselling any of their shares acquired in the merger prior to December 26, 1997, and are prohibited from thereafter reselling more than one-half of the number of shares they own until July 15, 1998, following which the lock-up prohibitions terminate. See "Selling Stockholders and "Plan of Distribution." As of the date of this Joint Proxy Statement/Prospectus, 23,204,411 shares of Hanover's Common Stock were outstanding or deemed outstanding pursuant to presently exercisable options. See "Management" and "Principal Stockholders." The Merger Transaction THE REORGANIZATION AGREEMENT. Under the terms of the Reorganization Agreement, Hanover will issue 7,000,000 shares of its Common Stock, currently valued at approximately $6.16 million, upon the conversion of, and in exchange for the outstanding capital stock of Easton-Pacific. Assuming the merger is approved by Easton-Pacific's and Hanover's shareholders, each Easton-Pacific shareholder who votes to approve the merger and does not elect to exercise dissenter's appraisal rights will receive 6.721656 shares of Common Stock for each share of Easton-Pacific capital stock registered in such shareholder's name. No fractional shares will be issued and no payment will be made for fractional shares. Rather, fractional shares will be rounded to the nearest whole share of Common Stock into which the Easton-Pacific capital stock is converted. SHAREHOLDER APPROVAL REQUIREMENTS. Completion of the merger is subject to the approval of the Reorganization Agreement by Easton-Pacific's and Hanover's shareholders at meetings to be held prior to September 30, 1997 for such purpose. Pursuant to the Delaware General Corporation Law and Hanover's bylaws, the holders of a majority of Hanover's shares of Common Stock are required to approve the Reorganization Agreement; pursuant to the Montana Business Corporation Act and Easton-Pacific's bylaws, the holders of two-thirds of Easton-Pacific's shares of capital stock are required to give such approval. The holders of 17.8% of the outstanding shares of Easton-Pacific's capital stock have executed irrevocable proxies authorizing their proxies and attorneys-in-fact to vote in favor of the merger, and the holders of 35.6% of the outstanding shares of Common Stock of Hanover have expressed their intention to vote in favor of the merger. RECOMMENDATIONS OF THE BOARDS OF DIRECTORS. Hanover's and Easton- Pacific's boards of directors have approved the Reorganization Agreement and recommend that it be approved by the shareholders of their respective companies. The directors of each company believe that the combination of Easton-Pacific and Hanover will make their mining properties in the Virginia City Mining District more conducive to exploration and development, and more attractive to a potential development partner. If the merger is approved by the shareholders, Hanover's land position in the district will increase to 669 patented and unpatented claims and three state mining leases encompassing a contiguous area of approximately 25 square miles. DISSENTER'S APPRAISAL RIGHTS. Easton-Pacific's shareholders have statutory rights of appraisal under the Montana Business Corporation Act in connection with the merger, meaning that if they vote against the Reorganization Agreement and take other steps to perfect their rights, they will be entitled to receive the fair value of their Easton-Pacific shares in cash. No such rights are available to Hanover's shareholders. TAX CONSEQUENCES OF THE MERGER. Hanover and Easton-Pacific will each treat the merger for federal income tax purposes as a reorganization under section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), meaning that neither Hanover nor Easton-Pacific, nor any of their shareholders, will be required to recognize any gain or other income or loss from the transaction for federal income tax purposes. Easton-Pacific will receive an opinion of counsel to Hanover to such effect at closing. More detailed information concerning the merger transaction is set forth elsewhere in this Joint Proxy Statement/Prospectus, in the section entitled "The Easton-Pacific Transaction". Risk Factors An investment in the Common Stock is extremely risky and is suitable only for persons who can afford a loss of their investment. Hanover is an exploration stage mining company that has lost money in every year since its inception. It has only limited cash resources and no proven or probable reserves. Development of its mining properties and the mining properties it will acquire through the merger of Easton-Pacific is contingent on a number of factors, including additional drilling and other exploratory activities to determine whether a commercially minable ore body exists, the preparation of a comprehensive feasibility study, compliance with all regulatory and environmental permitting requirements, and the procurement of funds or the negotiation of other arrangements, such as a joint venture with a major mining company, to cover the significant costs and expenses of opening and operating a mine. See "Risk Factors."

parsed_sections/prospectus_summary/1997/CIK0000779226_diversifie_prospectus_summary.txt

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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO THE "COMPANY" REFER TO DIVERSIFIED CORPORATE RESOURCES, INC. AND ITS SUBSIDIARIES AND PREDECESSORS COLLECTIVELY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR THE REPRESENTATIVE'S WARRANTS. THE COMPANY Diversified Corporate Resources, Inc. is an employment services firm that provides professional and technical personnel on a permanent, temporary and contract placement basis to high-end niche employment markets with a primary emphasis on the information technology ("IT") market. While the majority of the Company's revenues are derived from providing IT staffing solutions, the Company also fills other high-end niche employment positions in the engineering/technical, accounting/finance and professional/ technical sales disciplines. The Company offers permanent placement, temporary and contract staffing services in this broad variety of disciplines in order to position itself as a single source provider of solutions that meets all the high-end staffing needs of its clients. In addition to maintaining this competitively balanced business model, the Company focuses on recruiting qualified applicants for placement and enhancing its training capabilities. The Company manages its operations as a group of profit centers, each of which is incentivized to share leads and draw from each other's information resources, as well as to achieve strong independent performance. The Company serves its clients, including several Fortune 500 companies, through its network of offices located in Dallas, Houston and Austin, Texas, Atlanta, Georgia, Chicago, Illinois, Kansas City, Missouri and Raleigh, North Carolina. The employment services industry has experienced significant growth. According to a May 16, 1997 Staffing Industry Report, 1995 and 1996 revenues for the U.S. staffing industry and its segments were estimated at $63.7 billion and $74.4 billion, respectively, a 17% increase, and 1997 revenues are projected to be $86.6 billion, a 16% increase. Such growth reflects fundamental changes in the employer-employee relationship which have caused employers to impose heightened hiring criteria for permanent employees and have increased the demand for project-oriented contract hiring. These employers require the ability to outsource their staffing needs and the use of permanent, temporary or contract personnel to help them keep personnel costs variable, achieve maximum flexibility and avoid the negative effects of layoffs. These trends have been compounded by the ever increasing rate at which companies must respond to, and take advantage of, advances in IT, particularly because these advances create a significant corresponding need for access to professionals with up-to-date IT skills. The IT services industry has undergone and continues to undergo rapid evolution and growth. "IT" is a term that now encompasses not only computer and communications systems hardware but also the personnel who design, manage and maintain those systems. According to a May 16, 1997 Staffing Industry Report, 1995 and 1996 revenues for the IT services sector were estimated at $8.9 billion and $11.7 billion, respectively, a 31% increase, and 1997 revenues are projected to be $14.9 billion, a 27% increase. The growth of the IT services industry has been driven by: (i) businesses' increasing reliance on information technology as a strategic tool; (ii) the shift to distributed computing through the movement from mainframe to client/server environments; (iii) the fact that these computer networks are comprised of interdependent hardware and software products produced by a wide variety of independent vendors; and (iv) the integration of telecommunications and computers. As businesses struggle to integrate multiple processing platforms and software applications which serve an increasing number of end-users, systems and applications development has become increasingly challenging. Furthermore, as businesses continue to focus on their core competencies, but at the same time strive to operate more efficiently with fewer people, managing and planning staffing requirements to meet IT needs becomes more difficult. To keep up with these changes, companies are increasingly seeking employment services firms like the Company to provide IT professionals on a permanent, temporary or contract basis. The Company's objective is to become a nationally recognized leader in permanent placement and contract specific personnel solutions for high-end niche employment markets. The Company's business strategy is to: (i) maintain its high margin niche focus; (ii) build on its single source provider strategy for staffing services; (iii) focus on recruiting, management and retention of highly skilled professionals; (iv) improve and expand its training programs; and (v) broaden its geographic coverage. The Company believes that its business strategy will provide it with certain competitive advantages that will enable it to address the demands of the high-end niche employment markets it serves. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company................................. 825,900 shares The Selling Shareholders.................... 314,100 shares Common Stock to be outstanding after the Offering...................................... 2,616,212 shares(1) Use of Proceeds................................. For enhancement of the Company's training facilities, for expansion and improvement of its applicant database capabilities, to retire certain factoring and/or other credit facilities, for possible acquisitions and for general corporate purposes. See "Use of Proceeds." American Stock Exchange symbol.................. "HIR" </TABLE> - ------------------------ (1) Excludes an aggregate 315,000 shares of Common Stock reserved for issuance under options granted to certain members of management under the Company's 1996 Amended and Restated Nonqualified Stock Option Plan (the "1996 Stock Option Plan") and 82,590 shares of Common Stock issuable upon exercise of the Representative's Warrant. See "Management--Stock Option Plans" and "Underwriting." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------- ---------------------- <S> <C> <C> <C> <C> <C> 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- OPERATING DATA: Net service revenues............................. $ 15,233 $ 19,358 $ 27,430 $ 13,027 $ 15,653 Cost of services................................. 11,132 14,332 19,675 9,250 10,969 ---------- ---------- ---------- ---------- ---------- Gross margin................................... 4,101 5,026 7,755 3,777 4,684 Selling, general and administrative expenses(1).................................... 4,147 4,497 5,703 2,707 3,717 Other income (expenses).......................... 62 (183) (288) (169) (40) ---------- ---------- ---------- ---------- ---------- Income before income taxes and extraordinary item......................................... 16 346 1,764 901 927 Income taxes, net................................ -- (60) (225) (112) (93) Extraordinary item, net.......................... 208 175 246 -- 43 ---------- ---------- ---------- ---------- ---------- Net income(1).................................. $ 224 $ 461 $ 1,785 $ 789 $ 877 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Primary earnings per share(1).................... $ .13 $ .26 $ .98 $ .43 $ .48 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding............................. 1,758,211 1,758,211 1,814,016 1,853,064 1,828,141 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- <CAPTION> AS OF DECEMBER 31, ---------------------------------- AS OF 1994 1995 1996 JUNE 30, 1997 ---------- ---------- ---------- ---------------------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................ $ 46 $ 6 $ 613 $ 272 Working capital (deficit)........................ (1,142) (1,060) 95 297 Total assets..................................... 2,563 3,007 5,204 6,563 Total liabilities................................ 3,476 3,459 4,016 4,535 Stockholders' equity (capital deficiency)........ (913) (452) 1,188 2,028 </TABLE> - ------------------------ (1) Included in selling, general and administrative expenses are litigation expenses of $12,000 and $237,000 for the six month periods ended June 30, 1996 and 1997, respectively. If such litigation expenses were excluded, net income would have been $801,000 and $1,114,000 and primary earnings per share would have been $0.43 and $0.61 for the six month periods ended June 30, 1996 and 1997, respectively.

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the term "Company" means Century Bancshares, Inc. and its subsidiary. Unless otherwise indicated, the information contained in this Prospectus (i) assumes that the Underwriter's over-allotment option is not exercised and (ii) reflects the five percent Common Stock dividends declared during 1993, 1994, 1995 and 1997, and the seven percent Common Stock dividend declared during 1996. THE COMPANY Century Bancshares, Inc. (the "Company") is a bank holding company headquartered in Washington, D.C. that was organized in July 1985 as a Delaware corporation to own and control all of the capital stock of Century National Bank, a national banking association (the "Bank"). The Bank opened in 1982 and engages in a general commercial banking business with a particular emphasis on the needs of professionals, entrepreneurs, small to medium-sized businesses and not-for-profit organizations located in the Washington, D.C. metropolitan area. At June 30, 1997, the Company had total assets of $111 million, total loans of $74 million, total deposits of $95 million and total stockholders' equity of $7 million. Net income for the first six months of 1997 was $288,000, or $.21 per share. The Company's strategic plan is directed toward the enhancement of its franchise value and operating profitability through a significant increase in its asset size, further expansion into nearby Virginia and Maryland markets and the development of new commercial accounts. See "Business -- Strategic Plan." Accordingly, the Company has invested significantly in computer and telecommunications systems which have positioned the Company to realize economies of scale as it executes its strategy. One method by which the Company plans to grow is by conducting business in multiple locations in high growth markets in Virginia and Maryland. Although the Company successfully expanded the scope of its operations in downtown Washington, D.C. by acquiring a branch office from the Resolution Trust Corporation in 1994, management believes the Company's most profitable growth opportunities are in the contiguous markets of Fairfax County, Virginia and Montgomery County, Maryland. Both of these markets are characterized by high concentrations of small to medium-sized businesses and professionals. Fairfax County is one of the more densely populated and affluent counties in Virginia. Fairfax County's median household income is the highest in the country at $71,610, which is nearly double the national median, and its population is projected to increase approximately eight percent from 1996 to 2001. The demographic characteristics of Montgomery County are also compelling. Median household income of $61,595 ranks ninth nationwide, and the County's population is projected to increase by approximately six percent between 1996 and 2001. Management executed the first step of the Company's branch expansion strategy in 1996 by establishing a loan production office in Tysons Corner, Virginia, which is Fairfax County's largest business center. The office quickly surpassed management's performance goals, and as a result was converted to a full service branch in April 1997. The Company is following a similar strategy with respect to establishing a foothold in Montgomery County, Maryland. In June 1997, the Company opened a loan production office in Bethesda, Maryland, which is one of Montgomery County's largest business centers. The Company plans to replace this office with a full service branch in downtown Bethesda in early 1998, for which it has already received regulatory approval. In furtherance of its expansion strategy, the Company recently entered into an agreement to assume the deposit liabilities and leasehold interest of a branch of Eastern American Bank, FSB ("Eastern American") located in McLean, Virginia approximately three miles from the Bank's office in Tysons Corner. In conjunction with the assumption of these liabilities, the Company will acquire approximately $9.2 million in mortgage loans from Eastern American's portfolio. The transaction, which has received regulatory approval, is expected to close in October 1997. As of the date of the agreement, there were approximately $34 million in deposits at the Eastern American branch. See "The Eastern American Transaction" and "Use of Proceeds." The Company competes in its markets by providing a breadth of products comparable to a regional bank, while maintaining the quick response and personal service of a locally headquartered bank. Management believes it can solidify the Company's competitive advantage through establishing long-term relationships to foster customer loyalty and by continuing to provide a broad array of commercial account and loan products. The Company's principal executive offices are located at 1275 Pennsylvania Avenue, N.W., Washington, D.C. 20004, and its telephone number is (202) 496-4000. THE OFFERING <TABLE> <S> <C> Securities Offered(1)..................... 850,000 shares of Common Stock. Common Stock Outstanding After the Offering(1)............................. 2,067,429 shares. Use of Proceeds........................... The Company will contribute to the Bank from the net proceeds of this Offering an amount (currently estimated at $4.5 million, or 83% of the estimated net proceeds) sufficient to cause the Bank to continue to be "well capitalized" for bank regulatory purposes in view of the deposit transaction with Eastern American and will use the balance for general corporate purposes. The Bank will use the proceeds contributed to it to fund the future growth of its business and for other general corporate purpose. See "Use of Proceeds." NASDAQ Trading Symbol..................... The Common Stock has been authorized for trading in the Nasdaq SmallCap Market under the symbol "CTRY." Risk Factors.............................. Prospective investors in the Common Stock should consider the information discussed under the caption "Risk Factors." </TABLE> - --------------- (1) Assumes no exercise of the Underwriter's over-allotment option to purchase up to 127,500 shares of Common Stock. See "Underwriting." Excludes approximately 343,787 shares of Common Stock issuable upon exercise of outstanding stock options and warrants exercisable as of June 30, 1997 at a weighted average exercise price of $4.72 per share.

parsed_sections/prospectus_summary/1997/CIK0000787784_american_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information set forth under "Risk Factors." Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriter's over-allotment option. Unless the context otherwise requires, references to the Company include the Company, its subsidiary partnerships and corporations, and the Company's predecessor, American Retirement Communities, L.P. ("ARCLP" or the "Predecessor"). Immediately prior to the Company's initial public offering in May 1997 (the "IPO"), the Predecessor was reorganized (the "Reorganization") and all of its assets and liabilities were contributed to the Company. See "The Company -- Reorganization." THE COMPANY The Company is a national senior living and health care services company providing a broad range of care and services to the elderly, including independent living, assisted living, skilled nursing, and home health care services. Established in 1978, the Company believes it ranks among the leading operators in the senior living and health care services industry. Currently, the Company operates 22 senior living communities in 12 states, consisting of 12 owned communities, three leased communities, and seven managed communities, with an aggregate capacity for approximately 5,800 residents. In the fourth quarter of 1997, the Company expects to acquire a long-term leasehold in an additional community located in Richmond, Virginia with capacity for 917 residents. The Company operates 15 home health care agencies, ten of which are owned and five of which are managed. At June 30, 1997, the Company's owned communities had a stabilized occupancy rate of 95%, its leased communities had a stabilized occupancy rate of 94%, and its managed communities had a stabilized occupancy rate of 94% (stabilized communities are generally defined as communities or expansions thereof that have (i) achieved 95% occupancy; or (ii) been open at least 12 months). For the year ended December 31, 1996, and the six months ended June 30, 1997, revenues attributable to the Company's senior living communities accounted for 91.5% and 89.8%, respectively, of the Company's total revenues, and revenues attributable to the Company's home health care agencies accounted for 6.2% and 8.0%, respectively, of the Company's total revenues. Approximately 92.4% of the Company's total revenues for the year ended December 31, 1996 and approximately 89.2% of the Company's total revenues for the six months ended June 30, 1997 were derived from private pay sources. Since 1992, the Company has experienced significant growth, primarily through the acquisition of 14 senior living communities. The Company's revenues have grown from $17.8 million in 1992 to $75.6 million in 1996, an average annual growth rate of 43.5%. During the same period, the Company's income from operations has grown from $2.3 million to $15.6 million, an average annual growth rate of 61.7%. The Company intends to continue its growth by developing senior living networks through a combination of (i) development of free-standing assisted living residences, including special living units and programs for residents with Alzheimer's and other forms of dementia; (ii) selective acquisitions of senior living communities, including assisted living residences; (iii) expansion of existing communities; and (iv) development and acquisition of home health care agencies. As part of its growth strategy, the Company is currently developing 27 free-standing assisted living residences, with an estimated aggregate capacity for approximately 2,400 residents, and is expanding nine of its existing communities to add capacity to accommodate approximately 800 additional residents. The Company was founded by Dr. Thomas F. Frist, Sr. and Jack C. Massey, the principal founders of Hospital Corporation of America. The Company's operating philosophy was inspired by Dr. Frist's and Mr. Massey's vision to enhance the lives of the elderly by providing the highest quality of care and services in well-operated communities designed to improve and protect the quality of life, independence, personal freedom, privacy, spirit, and dignity of its residents. The Company believes that its senior management, led by W.E. Sheriff, its Chairman and Chief Executive Officer, and Christopher J. Coates, its President and Chief Operating Officer, is one of the most experienced management teams in the senior living industry. The Company's 12 senior officers have been employed by the Company for an average of ten years and have an average of 14 years of industry experience. The executive directors of the Company's communities have been employed by the Company for an average of four years and have an average of 11 years of experience in the senior living industry. The Company's target market, which consists of seniors age 75 and older, is one of the fastest growing segments of the United States population. According to the United States Census Bureau, this age group is expected to grow from 13.2 million in 1990 to over 16.6 million by 2000, an increase of 26%. The Company believes that the market for senior living and health care services, including Alzheimer's and dementia care services, will continue to grow as a result of (i) the aging of the U.S. population; (ii) rising public and private cost-containment pressures; (iii) declining availability of traditional nursing home beds as a result of nursing home operators focusing on higher acuity patients; (iv) the quality of life advantages of assisted living residences over traditional skilled nursing facilities; and (v) the decreasing availability of family care as an option for elderly family members. The Company believes that its experience, reputation, and market presence favorably position it to take advantage of opportunities in the rapidly growing senior living and health care industry. THE OFFERING Debentures Offered............ $100,000,000 aggregate principal amount of the Company's % Convertible Subordinated Debentures Due 2002 ($115,000,000 if the Underwriter's over-allotment option is exercised in full). Interest Payment Dates........ and , commencing , 1998. Maturity...................... Due on , 2002. Conversion of Debentures...... The Debentures will be convertible at any time on or after December 31, 1997 and prior to maturity, unless previously redeemed, into shares of Common Stock at a price of $ per share, subject to adjustment in certain events. Optional Redemption........... The Debentures will be redeemable at any time and from time to time on or after , 2000 at the option of the Company, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest thereon to the redemption date. Ranking....................... The Debentures will be subordinated to all present and future Senior Indebtedness of the Company. In addition, the Debentures will be effectively subordinated to all liabilities of the Company's subsidiaries. The Indenture will not limit the amount of Senior Indebtedness or other liabilities the Company or its subsidiaries may incur from time to time. At June 30, 1997, the Company's outstanding Senior Indebtedness totaled approximately $90.9 million and liabilities of the Company's subsidiaries totaled approximately $85.9 million. Change in Control............. Upon a Change in Control, each holder of the Debentures will have the right, subject to certain conditions and restric- tions, to require the Company to repurchase any or all outstanding Debentures owned by such holder at 101% of the principal amount thereof, plus accrued and unpaid interest. Use of Proceeds............... For general corporate purposes, including the development and construction of free-standing assisted living residences, possible acquisitions of businesses engaged in activities similar or complementary to the Company's business, and the possible prepayment of indebtedness. NYSE symbol................... "ACR02" SUMMARY COMBINED AND CONSOLIDATED FINANCIAL AND OTHER DATA The following summary combined and consolidated financial and other data is qualified in its entirety by the more detailed information in the financial statements and pro forma financial information appearing elsewhere in this Prospectus. The summary financial data for the year ended December 31, 1994 and for the three months ended March 31, 1995 is derived from the combined financial statements of certain affiliated partnerships and corporations (collectively, the "Predecessor Entities"). The summary financial data for the nine months ended December 31, 1995, the six months ended June 30, 1996, and the year ended December 31, 1996 is derived from the consolidated financial statements of the Predecessor. The summary financial data for the six months ended June 30, 1997 is derived from the unaudited consolidated financial statements of the Company and includes the operations of the Predecessor for the period January 1, 1997 through May 28, 1997 and the Company for the period May 29, 1997 through June 30, 1997. See "The Company -- Reorganization" and Note 1 to the Combined and Consolidated Financial Statements. <TABLE> <CAPTION> PREDECESSOR ENTITIES (COMBINED) PREDECESSOR --------------------------- --------------------------------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED JUNE 30, 1996 DECEMBER 31, MARCH 31, DECEMBER 31, ----------------------- ---------------------- 1994 1995 1995 ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) ------------ ------------ ------------ -------- ------------ ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues................ $33,341 $12,356 $48,763 $ 75,617 $ 79,543 $34,806 $38,732 Operating expenses............ 28,126 10,270 38,730 60,066 63,861 27,313 30,685 ------- ------- ------- -------- -------- ------- ------- Income from operations....... 5,215 2,086 10,033 15,551 15,682 7,493 8,047 Other income (expense), net... (5,053) (3,334) (6,682) (10,938) (11,353) (4,609) (5,718) ------- ------- ------- -------- -------- ------- ------- Income (loss) before income taxes and extraordinary item......................... 162 (1,248) 3,351 4,613 4,329 2,884 2,329 Income tax expense (benefit) -- current(2)...... -- 20 55 (920) (920) -- -- Income tax expense -- deferred(3).................. -- -- -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Income (loss) before extraordinary item........... 162 (1,268) 3,296 5,533 5,249 2,884 2,329 Extraordinary item(4)......... -- -- -- (2,335) (2,335) (2,335) (2,335) ------- ------- ------- -------- -------- ------- ------- Net income (loss)............. $ 162 $(1,268) $ 3,296 $ 3,198 $ 2,914 $ 549 $ (6) ======= ======= ======= ======== ======== ======= ======= Net income (loss) available for distribution to partners and shareholders............. $ 162 $(1,268) $ 2,171 $ 2,094 $ 2,590 $ (165) $ (330) ======= ======= ======= ======== ======== ======= ======= UNAUDITED PRO FORMA TAX DATA(5): Income before income taxes and extraordinary item........... $ 4,613 $ 4,329 $ 2,884 $ 2,329 Pro forma income tax expense.. 820 712 1,096 886 -------- -------- ------- ------- Pro forma income before extraordinary item........... $ 3,793 $ 3,617 $ 1,788 $ 1,443 ======== ======== ======= ======= Pro forma income before extraordinary item available for distribution to partners and shareholders............. $ 2,689 $ 3,293 $ 1,074 $ 1,119 ======== ======== ======= ======= Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders........... $ 0.29 $ 0.35 $ 0.11 $ 0.12 ======== ======== ======= ======= Shares used in computing pro forma per share data(7).... 9,375 9,375 9,375 9,375 ======== ======== ======= ======= Pro forma as adjusted per share data(8): Income before extraordinary item available for distribution to partners and shareholders........... $ 0.29 $ 0.10 ======== ======= Shares used in computing pro forma as adjusted per share data(9).................... 11,406 11,406 ======== ======= <CAPTION> SIX MONTHS ENDED JUNE 30, 1997 -------- <S> <C> STATEMENT OF OPERATIONS DATA: Total revenues................ $44,389 Operating expenses............ 35,867 ------- Income from operations....... 8,522 Other income (expense), net... (6,308) ------- Income (loss) before income taxes and extraordinary item......................... 2,214 Income tax expense (benefit) -- current(2)...... 92 Income tax expense -- deferred(3).................. 10,728 ------- Income (loss) before extraordinary item........... (8,606) Extraordinary item(4)......... -- ------- Net income (loss)............. $(8,606) ======= Net income (loss) available for distribution to partners and shareholders............. $(8,606) ======= UNAUDITED PRO FORMA TAX DATA(5): Income before income taxes and extraordinary item........... $ 2,214 Pro forma income tax expense.. 841(6) ------- Pro forma income before extraordinary item........... $ 1,373 ======= Pro forma income before extraordinary item available for distribution to partners and shareholders............. $ 1,373 ======= Pro forma per share data: Income before extraordinary item available for distribution to partners and shareholders........... $ 0.14 ======= Shares used in computing pro forma per share data(7).... 9,752 ======= Pro forma as adjusted per shar Income before extraordinary item available for distribution to partners and shareholders........... $ 0.12 ======= Shares used in computing pro forma as adjusted per share data(9).................... 11,406 ======= </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1997 -------------------------- AS ACTUAL ADJUSTED(10) -------- ------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 21,863 $118,963 Working capital............................................. 15,472 112,572 Total assets................................................ 246,072 346,072 Long-term debt, including current portion................... 167,259 267,259 Shareholders' equity........................................ 50,122 50,122 </TABLE> <TABLE> <CAPTION> PREDECESSOR ENTITIES (COMBINED) PREDECESSOR --------------------------- ---------------------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, 1996 ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- JUNE 30, JUNE 30, 1994 1995 1995 ACTUAL PRO FORMA(1) 1996 1997 ------------ ------------ ------------ ------- ------------ ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> OTHER FINANCIAL DATA: Adjusted EBITDA(11)............. $8,407 $3,262 $15,815 $23,679 $23,198 $10,782 $12,031 Ratio of Adjusted EBITDA to interest expense(12)........... 1.6x 1.4x 2.1x 2.0x 1.9x 2.3x 1.9x Ratio of earnings to fixed charges(13).................... 1.0x 0.5x 1.4x 1.4x 1.3x 1.6x 1.3x Distribution to partners, including preferred distributions.................. $2,580 $1,400 $ 5,189 $ 7,139 $ 6,359(14) $ 3,546 $ 2,500(15) OPERATING DATA: Revenue mix: Private pay.................... 93.0% 92.2% 91.2% 92.4% 92.5% 91.3% 89.2% Medicare and other(16)......... 7.0 7.8 8.8 7.6 7.5 8.7 10.8 ------ ------ ------- ------- ------- ------- ------- Total.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Resident capacity (at period end): Owned.......................... 2,141 2,386 2,594 3,369 2,886 3,369 3,002 Leased......................... -- -- -- -- 483 -- 573 Managed........................ 3,315 3,079 3,008 2,159 2,159 2,159 2,159 ------ ------ ------- ------- ------- ------- ------- Total.................... 5,456 5,465 5,602 5,528 5,528 5,528 5,734 Average occupancy rate: Owned.......................... 89% 91% 93% 94% 94% 93% 94% Leased......................... -- -- -- -- 89 -- 93 Managed........................ 93 95 91 91 90 90 93 ------ ------ ------- ------- ------- ------- ------- Total.................... 90% 93% 92% 92% 92% 92% 93% </TABLE> - --------------- (1) Gives effect to the following transactions as if they had occurred on January 1, 1996: (a) the May 1996 acquisition (the "Carriage Club Acquisitions") of Carriage Club of Charlotte, L.P. and Carriage Club of Jacksonville, L.P. (collectively, "Carriage Club"), and (b) the January 1997 sale-leaseback by the Company of two communities (the "Sale-Leaseback Transactions") and the application of a portion of the net proceeds therefrom to retire debt. See "Unaudited Pro Forma Condensed Combined Financial Information."

parsed_sections/prospectus_summary/1997/CIK0000793720_nationwide_prospectus_summary.txt

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and financial statements appearing elsewhere in this Prospectus. The Company was formed in November 1996 as a holding company for Nationwide Life Insurance Company and the other companies within the Nationwide Insurance Enterprise that offer or distribute long-term savings and retirement products. The information contained in this Prospectus gives effect to the contribution by Nationwide Corporation to the Company of Nationwide Life and such other companies and the other transactions described under "Recent History." Except as otherwise indicated, consolidated financial statements and statistical data presented in this Prospectus for the Company (including all data set forth in the "Actual" column of any table contained herein) consist of the consolidated financial statements of Nationwide Life and such other companies and give effect to the transactions described under "Recent History," other than the Special Dividends (as defined herein). Except as otherwise indicated: (i) the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised and (ii) all financial data and ratios presented herein have been prepared using generally accepted accounting principles ("GAAP"). See "Glossary of Selected Insurance Terms" for the definitions of certain insurance terms used herein. As used in this Prospectus, the "Company" means Nationwide Financial Services, Inc. and, unless the context otherwise requires, its subsidiaries; "Nationwide Life" means Nationwide Life Insurance Company and, unless the context otherwise requires, Nationwide Life and Annuity Insurance Company; "Nationwide Corp." means Nationwide Corporation; "Nationwide Mutual" means Nationwide Mutual Insurance Company; and "Nationwide Insurance Enterprise" means Nationwide Mutual and its subsidiaries and affiliates. Nationwide(R) is a registered service mark of Nationwide Mutual, and The Best of America(R) is a registered service mark of Nationwide Life. THE COMPANY OVERVIEW The Company is a leading provider of long-term savings and retirement products to retail and institutional customers throughout the United States. The Company offers variable annuities, fixed annuities and life insurance as well as mutual funds and pension products and administrative services. By developing and offering a wide variety of products, the Company believes that it has positioned itself to compete effectively in various stock market and interest rate environments. The Company markets its products through a broad spectrum of wholesale and retail distribution channels, including financial planners, pension plan administrators, securities firms, banks and Nationwide Insurance Enterprise insurance agents. The Company is one of the leaders in the development and sale of variable annuities. For the first nine months of 1996, the Company was the third largest U.S. writer of individual variable annuity contracts based on sales, according to The Variable Annuity Research & Data Service ("VARDS"). Its principal variable annuity series, The Best of America, allows the customer to choose from 36 investment options, including mutual funds managed by such well-known firms as Dreyfus, Fidelity, Janus, Neuberger & Berman, Oppenheimer, T. Rowe Price, Templeton, Twentieth Century, Vanguard and Warburg Pincus, as well as mutual funds managed by the Company. The Company is a member of the Nationwide Insurance Enterprise, which is known nationally as a writer of automobile and homeowners' insurance throughout the United States. The property/casualty insurers within the Nationwide Insurance Enterprise are the fifth largest property/casualty insurance group in the United States based on 1995 net premiums written, according to A.M. Best Company, Inc. ("A.M. Best"). In the mid-1970s, to capitalize on anticipated opportunities in the growing market for long-term savings and retirement products, the Company embarked on a specific strategy of broadening its distribution channels and product offerings beyond selling traditional life insurance to the automobile and homeowner customers of the Nationwide Insurance Enterprise. Over a 20-year period, the Company added financial planners, pension plan administrators, securities firms and banks as new distribution channels. Such distribution channels in the aggregate accounted for approximately 93.4% of the Company's sales in 1995. Currently, the Company administers approximately 15,000 pension plans and has distribution arrangements with 125 banks and other financial institutions, over 1,000 broker/dealers and over 30,000 registered representatives. The Company has payroll deduction variable annuity enrollee customers in approximately 6,000 state and local government entities and 1,800 school districts, which have been obtained principally through sponsorship relationships with the National Association of Counties and The United States Conference of Mayors and an exclusive contractual arrangement with The National Education Association of the United States. The Company has grown substantially in recent years as a result of its long- term investment in developing the distribution channels necessary to reach its target customers and the products required to meet the demands of these customers. The Company believes its growth has been further enhanced by favorable demographic trends, the growing tendency of Americans to supplement traditional sources of retirement income with self-directed investments, such as products offered by the Company, and the performance of the financial markets, particularly the U.S. stock markets, in recent years. From 1991 to 1995, the Company's assets grew from $16.8 billion to $37.8 billion, a compound annual growth rate of 22.5%. Asset growth during this period resulted from sales of the Company's products as well as market appreciation of assets in the Company's separate accounts and in its general account investment portfolio. During the same period, the Company's net operating income (i.e., net income excluding realized gains and losses on investments and cumulative effect of accounting changes) grew from $82.0 million to $184.8 million, a compound annual growth rate of 22.5%. The Company's sales of variable annuities grew from $984.0 million in 1991 to $4.40 billion in 1995, a compound annual growth rate of 45.4%. The Company's separate account assets, which are generated by the sale of variable annuities and variable universal life insurance, grew from 27.5% of total assets at December 31, 1991 to 49.3% of total assets at December 31, 1995. During this period of substantial growth, the Company controlled its operating expenses by taking advantage of economies of scale and by increasing productivity through investments in technology. From 1991 to 1995, the Company's total assets increased by 124.9% while operating expenses increased by only 89.5%. As a result, its ratio of operating expenses to total assets fell from 1.00% in 1991 to 0.84% in 1995. The Company believes that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for its products. According to U.S. Census Bureau projections, the number of Americans between the ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1 million in 2005, making this "preretirement" age group the fastest growing segment of the U.S. population. The Company believes that Americans increasingly are supplementing traditional sources of retirement income, such as employer-provided defined benefit plans and Social Security, with self- directed investments. Reflecting this shift, industry sales of individual variable annuity products grew from $17.3 billion in 1991 to $51.5 billion in 1995, a compound annual growth rate of 31.4%, according to VARDS. During the same period, industry individual variable annuity assets grew from $176 billion to $401 billion, a compound annual growth rate of 22.9%, according to VARDS. The Company has three product segments: Variable Annuities, Fixed Annuities and Life Insurance. The Variable Annuities segment, which accounted for $67.8 million (or 27.3%) of the Company's operating income before income taxes for the first nine months of 1996, consists of annuity contracts that provide the customer with the opportunity to invest in mutual funds managed by independent investment managers and the Company, with investment returns accumulating on a tax-deferred basis. The Fixed Annuities segment, which accounted for $103.8 million (or 41.7%) of the Company's operating income before income taxes for the first nine months of 1996, consists of annuity contracts that generate a return for the customer at a specified interest rate, fixed for a prescribed period, with returns accumulating on a tax-deferred basis. Such contracts consist of single premium deferred annuities, flexible premium deferred annuities and single premium immediate annuities. The Fixed Annuities segment also includes the fixed option under the Company's variable annuity contracts, which accounted for 69.0% of the Company's fixed annuity policy reserves as of December 31, 1995. For the year ended December 31, 1995, the average crediting rate on contracts (including the fixed option under the Company's variable annuity contracts) in the Fixed Annuities segment was 6.58%. Substantially all of the Company's crediting rates on its fixed annuity contracts are guaranteed for a period not exceeding one year. See "Business--Product Segments--Fixed Annuities." The Life Insurance segment, which accounted for $46.2 million (or 18.6%) of the Company's operating income before income taxes for the first nine months of 1996, consists of insurance products, including variable life insurance, that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. BUSINESS STRATEGIES The Company's objective is to continue its record of profitable growth by following the strategies set forth below: Enhance the Company's Leading Position in the Market for Variable Annuities. The Company believes that the variable annuity business is attractive because it generates fee income and requires significantly less capital support than fixed annuities and life insurance. The Company also believes, based on the aging of the U.S. population and recent increases in sales of retirement savings products, that variable annuities will continue to experience high rates of industry sales growth and that the Company possesses distinct competitive advantages that will allow it to continue to benefit from this anticipated growth. Some of the Company's most important advantages include its innovative product offerings and strong relationships with independent, well-known fund managers. For example, the Company's The Best of America IV and The Best of America--America's Vision individual variable annuity contracts allow the customer to choose from 36 investment options, including mutual funds managed by a variety of well-known fund managers and the Company. In the aggregate, the Company's group variable annuity products offer over 100 underlying investment options. The Company works closely with its investment managers and product distributors to adapt the Company's products and services to changes in the retail and institutional marketplace. Capture a Growing Share of Sales in all Distribution Channels. The Company's broad distribution system permits it to offer its products across a wide range of markets and customers. The Company continually seeks to gain a larger share of each of its distributor's sales by offering products that are attractive to its distributors from both a financial perspective and in helping the distributor build relationships with its customers. In addition to providing new products to its distributors, the Company seeks to increase sales in each of its existing distribution channels by cross-selling those products not currently offered through such channel. The Company also seeks to add new distributors to its existing channels and regularly evaluates possible new distribution channels. While many of the Company's competitors employ a variety of distribution channels, the Company believes that few of its competitors have a developed distribution system that is as broad as the Company's and that this distinguishing characteristic provides the Company with an important competitive advantage. Maintain a Diverse Product Portfolio. The Company offers a diverse mix of variable annuity, fixed annuity, mutual fund and life insurance products. Based on its experience, the Company believes that demand for, and financial results of, certain of these products are sensitive to stock market and/or interest rate environments, while some products are relatively insensitive to such factors. The Company emphasizes the sale and development of variable annuities, which tend to experience higher sales growth when interest rates are low, and fixed annuities, which tend to experience higher sales growth when interest rates are high. The Company also sells traditional life insurance products which it believes provide it with a stable source of revenues throughout changing market conditions. The Company's strategy is to rely on a variety of products, each of which may perform differently in given stock market and interest rate environments, so that the Company will be able to grow profitably in a variety of such environments. Emphasize Payroll Deductions and Tax-Qualified and Group Annuities. To further enable it to grow profitably in a variety of stock market and interest rate environments, the Company concentrates on the sale of annuities through payroll deductions and the sale of tax-qualified and group annuities. Annuities sold through payroll deductions are somewhat insulated from changes in market conditions because of the recurring nature of their deposits. In 1995, 41.1% of the Company's total annuity statutory premiums and deposits were attributable to payroll deductions. Group annuities and tax- qualified annuities are also somewhat insulated from changes in market conditions because they usually are provided through employers as a voluntary retirement benefit with a limited number of competing investment options. In addition, tax-qualified annuities subject the customer to a tax penalty for early withdrawal. Tax-qualified annuities accounted for 71.9% and group annuities accounted for 44.1% of the Company's total annuity statutory premiums and deposits in 1995. Build on the Company's Brand Strength. The Company believes that the brand names it uses in connection with its products, such as Nationwide and The Best of America, are well-known and have a strong reputation in the financial services market. The Company intends to extend its brand names across markets, applying The Best of America name across many of its wholesale and retail distribution channels. The Company believes that, as the numbers of products and competitors in its markets grow, consumers, distributors, retirement plan sponsors and other decision makers in the market for long-term savings and retirement products will continue to emphasize nationally known brand names. Continue Commitment to Technological Excellence. The Company has made and is committed to continue making significant investments in information systems to enable it to offer innovative products, to more effectively cross-sell products across distribution channels and to offer high quality service. The information systems that the Company has developed for its variable products are costly to replicate. The Company believes that these systems provide it with a significant competitive advantage and impose a barrier to entry for new competitors. PRINCIPAL STOCKHOLDER Following the Equity Offerings, Nationwide Corp. will be the controlling stockholder of the Company. Upon completion of the Equity Offerings, Nationwide Corp. will own all of the outstanding shares of the Class B Common Stock, representing % and % ( % and % if the Underwriters' over-allotment option is exercised in full) of the total number of shares of Common Stock outstanding and the combined voting power of the stockholders of the Company, respectively. Nationwide Corp. is a subsidiary of Nationwide Mutual. Nationwide Mutual and Nationwide Mutual Fire Insurance Company ("Nationwide Mutual Fire") are mutual companies which are the controlling entities of the Nationwide Insurance Enterprise. The Nationwide Insurance Enterprise is an affiliated group of over 100 companies that offers a wide range of insurance and investment products and services. Nationwide Mutual and Nationwide Mutual Fire control the companies within the Nationwide Insurance Enterprise through a variety of means, including security ownership, management contracts and common directors. The Nationwide Insurance Enterprise had $64.7 billion in total statutory assets as of September 30, 1996. See "Risk Factors--Control by and Relationship with the Nationwide Insurance Enterprise; Conflicts of Interest," "Recent History" and "Certain Relationships and Related Transactions." THE FIXED INCOME OFFERINGS Shortly following the Equity Offerings, the Company expects to consummate the public offering of $300 million aggregate principal amount of Senior Notes (the "Note Offering"), and the NFS Trust expects to consummate the public offering of Capital Securities with an aggregate liquidation amount of $100 million (the "Capital Securities Offering," and together with the Note Offering, the "Fixed Income Offerings"). The consummation of the Equity Offerings is not conditioned on the completion of the Fixed Income Offerings, and there can be no assurance that either one or both of the Fixed Income Offerings will be consummated. See "Use of Proceeds" and "The Fixed Income Offerings." The Fixed Income Offerings are being made pursuant to separate prospectuses. ---------------- The Company's executive offices are located at One Nationwide Plaza, Columbus, Ohio 43215, and its telephone number is (614) 249-7111. THE EQUITY OFFERINGS <TABLE> <CAPTION> <C> <S> Class A Common Stock: U.S. Offering.................................................. shares International Offering......................................... shares Total.................................................... shares Class A Common Stock outstanding after the Equity Offerings(1).. shares Class B Common Stock outstanding after the Equity Offerings..... shares Common Stock outstanding after the Equity Offerings(1).......... shares Voting Rights................................................... On all matters submitted to a vote of stockholders, holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. See "Description of Capital Stock." Use of Proceeds................................................. Of the $ million estimated net proceeds from the Equity Offerings, the Company will contribute approximately $ million to the capital of Nationwide Life and retain the balance for general corporate purposes. The Company expects to contribute all of the net proceeds from the Fixed Income Offerings to the capital of Nationwide Life. See "Use of Proceeds" and "The Fixed Income Offerings." Proposed NYSE symbol............................................ NFS Dividend policy................................................. The Company currently intends to pay quarterly cash dividends of $ per share, subject to declaration by the Company's Board of Directors. The Company anticipates that the first dividend will be declared at the end of the second quarter and paid during the third quarter of 1997. There can be no assurances, however, that this dividend or any dividends will be paid by the Company. See "Dividend Policy." </TABLE> - -------- (1) Does not include million shares of Class A Common Stock reserved for issuance under the Company's Long-Term Equity Compensation Plan. See "Management--Long-Term Equity Compensation Plan."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY J.D. Edwards develops, markets and supports highly functional Enterprise Resource Planning software solutions that operate on multiple computing platforms and are designed to accelerate customers' time to benefit, lower customers' cost of ownership and reduce information systems risks arising from changes in technology and business practices. The Company's integrated software application suites support manufacturing, finance, distribution/logistics and human resources operations for multi-site and multinational organizations. Through its Configurable Network Computing architecture, the Company's ERP software is specifically designed to enable customers to change technology and/or business practices while minimizing costs and business interruptions. The Company provides implementation, training and support services designed to enable customers to rapidly achieve the benefits of the Company's ERP solutions. The Company has developed and marketed ERP solutions for over 20 years, principally for operation on AS/400 and other IBM mid-range systems and, more recently, on leading UNIX and Windows NT servers through Windows- and Internet browser-enabled desktop clients. The Company's family of application suites is designed to improve most organizations' core business processes. In addition, the Company extends its application suites to address certain vertical markets with specific configurations, templates and additional software features designed to meet these industries' needs. The Company offers two versions of its application suites -- WorldSoftware and OneWorld. WorldSoftware operates in a host-centric environment on the AS/400 platform. OneWorld incorporates the Company's CNC architecture and operates on leading UNIX and NT servers, as well as the AS/400 platform. The Company believes its network-centric CNC architecture provides a valuable extension beyond traditional client/server architectures by masking complexity, lowering cost of change and facilitating greater scalability. In addition, WorldSoftware and OneWorld are capable of operating together in a unified enterprise-wide environment. The Company also provides WorldSoftware and OneWorld toolsets to enable rapid implementation, customization and modification of its application suites. The Company distributes, implements and supports its products worldwide through 46 offices and 166 third-party business partners. To date, the Company has more than 4,000 customers with sites in over 90 countries including Amgen, Inc., E&J Gallo Winery, Harley Davidson Europe Ltd., Lexmark International, Inc., Mobil Corporation, Samsonite Corporation and SmithKline Beecham plc. THE OFFERING <TABLE> <S> <C> U.S. offering............................................. 12,640,000 shares International offering.................................... 3,160,000 shares Total............................................. 15,800,000 shares (including 12,500,000 shares by the Company and 3,300,000 shares by the Selling Stockholders) Common Stock to be outstanding after the offering......... 91,684,910 shares(1) Use of proceeds........................................... For general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................... JDEC </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> TEN MONTHS NINE MONTHS ENDED ENDED YEAR ENDED OCTOBER 31, JULY 31, OCTOBER 31, -------------------------------------------- -------------------- 1992(2) 1993 1994 1995 1996 1996 1997 ----------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue........................... $ 119,513 $196,834 $240,587 $340,766 $478,048 $323,783 $431,209 Total costs and expenses................ 116,154 184,546 223,140 311,888 434,421 308,754 406,751 Operating income........................ 3,359 12,288 17,447 28,878 43,627 15,029 24,458 Net income (loss)....................... (267) 7,380 12,063 18,209 26,326 8,672 14,398 Earnings (loss) per common share(3)..... $ (.00) $ .09 $ .15 $ .22 $ .30 $ .10 $ .15 Weighted average common shares outstanding(3)........................ 81,406 81,935 82,201 82,452 87,615 87,404 95,140 </TABLE> <TABLE> <CAPTION> JULY 31, 1997 --------------------------------------- PRO PRO FORMA AS ACTUAL FORMA(4) ADJUSTED(5) -------- -------- ------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................................................... $ 38,649 $ 38,649 $ 297,762 Total assets........................................................................ 300,939 318,126 577,239 Mandatorily redeemable shares, at redemption value.................................. 99,076 -- -- Stockholders' equity (deficit)...................................................... (15,300) 100,963 360,076 </TABLE> --------------------- (1) Based on the number of shares outstanding as of July 31, 1997. Excludes (i) 22,121,540 shares of Common Stock issuable upon exercise of outstanding options as of July 31, 1997, with a weighted average exercise price of $4.53 per share, and (ii) 17,137,190 shares of Common Stock reserved for issuance under the Company's stock plans as of July 31, 1997. Subsequent to July 31, 1997, the Company adopted new employee stock plans. The Company does not anticipate making future grants under stock plans that were in effect prior to July 31, 1997. As a result, as of the date of this offering, there will be 12,000,000 shares of Common Stock reserved for future issuance under all new employee stock plans. See "Management -- Employee Benefit Plans" and Note 7 of Notes to Consolidated Financial Statements. (2) In 1992, the Company changed its fiscal year end from December 31 to October 31. The consolidated statement of operations data for the period ended October 31, 1992 reflects 10 months of operating activity as compared with 12 months for all other fiscal year periods. (3) See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of earnings (loss) per common share and weighted average common shares outstanding. (4) Reflects the elimination of the mandatory redemption feature of the mandatorily redeemable shares and the income tax benefits resulting from the lapse of restrictions on certain shares of the Company's outstanding Common Stock, both of which will occur automatically upon the closing of this offering. See "Certain Transactions" and Note 1 of Notes to Consolidated Financial Statements. (5) Pro forma as adjusted to reflect the receipt by the Company of the estimated net proceeds from the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $22.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Capitalization" and "Use of Proceeds." - -------------------------------------------------------------------------------- NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ----- <S> <C> Prospectus Summary..................... 3 Risk Factors........................... 4 The Company............................ 16 Use of Proceeds........................ 17 Dividend Policy........................ 17 Capitalization......................... 18 Dilution............................... 19 Selected Consolidated Financial Data... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 21 Business............................... 31 Management............................. 48 Certain Transactions................... 57 <CAPTION> PAGE ----- <S> <C> Principal and Selling Stockholders..... 59 Description of Capital Stock........... 61 Shares Eligible for Future Sale........ 63 Certain United States Federal Income Tax Considerations for Non-U.S. Holders of Common Stock.............. 65 Underwriters........................... 67 Legal Matters.......................... 70 Experts................................ 70 Change in Accountants.................. 70 Additional Information................. 71 Index to Consolidated Financial Statements........................... F-1 </TABLE> ------------------------ J.D. Edwards & Company, J.D. Edwards and WorldVision are registered trademarks of the Company. WorldSoftware, OneWorld, Genesis and Configurable Network Computing are trademarks of the Company. All other trade names and trademarks referred to in this Prospectus are the property of their respective owners. ------------------------ Unless the context otherwise requires, the "Company" or "J.D. Edwards" refers to J.D. Edwards & Company and its consolidated subsidiaries. Except as otherwise noted herein, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus: (i) reflects the conversion of all outstanding shares of Series A Convertible Preferred Stock into an aggregate of 3,190,000 shares of Common Stock, the conversion of all outstanding shares of Series B Convertible Preferred Stock into an aggregate of 365,000 shares of Common Stock for additional consideration to the Company of $1.67 per share, and the conversion of all outstanding shares of Non-Voting Common Stock into an aggregate of 110,000 shares of Common Stock, upon or prior to the completion of this offering (the "Capital Stock Conversions") and (ii) assumes that the over-allotment option granted to the Underwriters by the Company will not be exercised. The Company is the successor to the business conducted by Conning, Inc. and its operating subsidiary, Conning & Company (collectively, "Conning, Inc."), and Conning Asset Management Company, formerly known as General American Investment Management Company ("GAIMCO"), pursuant to a merger (the "Strategic Merger") effected in August 1995. Prior to the Strategic Merger, Conning, Inc. and GAIMCO were unrelated business entities. Conning, Inc. was an 85-year old Hartford, Connecticut based insurance specialty asset management firm which provided asset management services and research for the insurance industry. GAIMCO was a registered investment adviser which provided investment advisory services primarily to its parent, General American Life Insurance Company ("General American"), and its affiliates. The parties effected the Strategic Merger in order to combine complementary businesses, each with specialties in the insurance industry, to build a platform from which to leverage additional growth. See "Certain Relationships and Related Transactions--The Strategic Merger." Other than historical financial statements and data, information herein concerning the Company regarding periods prior to the date of the Strategic Merger, including without limitation with respect to assets under management and private equity funds, includes the Company and its predecessors unless the context indicates otherwise. The Company is a holding company that conducts its business through three subsidiaries: (i) Conning, Inc. is a wholly-owned subsidiary of the Company and serves as an intermediate holding company; (ii) Conning & Company is a wholly-owned subsidiary of Conning, Inc. and is a registered investment adviser and broker-dealer; and (iii) Conning Asset Management Company is a wholly-owned subsidiary of Conning & Company and is a registered investment adviser. Throughout this Prospectus, the terms "Company" and "Conning" refer to Conning Corporation and its subsidiaries. See "Glossary" for definitions of certain terms used in this Prospectus. THE COMPANY GENERAL Conning is a nationally recognized asset management company providing services to the insurance industry and is also a leading provider of insurance research. As of September 30, 1997, the Company had approximately $26.4 billion of assets under discretionary management and, in total, provided services with respect to approximately $73.6 billion of assets for insurance company clients. The Company believes it is well positioned to take advantage of the continued growth in insurance industry assets and the willingness of insurance companies to consider utilizing external investment management expertise. During the period from 1992 through 1996, assets under discretionary management of the Company increased by an average of 24% per year, on a pro forma basis after giving effect to the Strategic Merger and the inclusion of assets of General American for all years. In 1996, its first full year of operations following the Strategic Merger, the Company had revenues of approximately $53.7 million and net earnings of approximately $6.2 million. During the nine months ended September 30, 1997, the Company had revenues of approximately $46.9 million and net earnings of approximately $6.4 million. The Company believes that it possesses competitive strengths in insurance asset management which may support its prospects for growth: INSURANCE INDUSTRY FOCUS AND KNOWLEDGE. Based upon the Company's extensive work with insurance companies, the Company believes that its focus on the insurance industry allows it to provide substantially all of the services and products that an insurance company seeks from an asset manager. By utilizing its specialized knowledge of insurance company investment considerations, the Company believes, based upon feedback from clients, that it offers a more comprehensive set of asset management services than many of its competitors, including asset allocation, asset and liability matching, cash forecasts, tax modeling and investment accounting & reporting. The Company offers expertise in asset classes that many insurance companies traditionally utilize, including commercial mortgage loans, investment real estate and private placements. NAME RECOGNITION WITHIN THE INSURANCE INDUSTRY. The Company believes that the established reputation of Conning within the insurance industry provides the Company with a marketing advantage. According to a 1996 survey by Eager & Associates of 156 domestic, non-captive insurance companies and 110 groups of insurance companies (representing 692 individual companies) each with assets over $30 million (the "Eager Study"), the Company ranks among the top two insurance asset management firms in terms of name recognition among survey respondents. The Company's in-depth insurance industry research has been targeted to senior executives in the insurance industry for more than 20 years, and its Strategic Studies Series is subscribed to by 44 of the 50 largest U.S. property-casualty insurance companies and 42 of the 50 largest U.S. life-health insurance companies (based on 1996 premiums as reported by OneSource Information Services, Inc. as provided to it by third parties). CLIENT SERVICE AND PERFORMANCE FOCUS. The Company attempts to differentiate itself from competitors through its insurance-specific capabilities, investment performance and frequent, responsive client communication. During the period from 1992 through 1996, the Company retained an average of approximately 95% of unaffiliated clients on an annual basis. EXPERIENCED MANAGEMENT WITH SIGNIFICANT STOCK OWNERSHIP. The Company employs an experienced management team, the members of which have an average of approximately 15 years of experience in the investment or insurance business. In total, the employees of the Company will own in the aggregate approximately 29% of the Common Stock on a fully diluted basis after the offering (including options to be granted upon the closing of this offering). See "Management" and "Principal Shareholders." COMPANY OPERATIONS The Company's business is asset management for insurance companies, which is supplemented by its in-depth research focused on the insurance industry. The Company's asset management services consist of three components: (i) discretionary asset management services, (ii) investment advisory services and (iii) investment accounting & reporting services. In connection with its discretionary asset management services, the Company originates and services commercial mortgages and manages investments in real estate assets. The Company also sponsors and manages private equity funds investing in insurance and insurance-related companies. ASSET MANAGEMENT. The Company's insurance asset management services are designed to optimize investment returns for clients within the guidelines imposed by insurance regulatory, accounting, tax and asset/liability management considerations. As of September 30, 1997, the Company provided services with respect to approximately $73.6 billion in assets, of which approximately (i) $26.4 billion represented assets under discretionary management, (ii) $21.0 billion represented assets serviced under investment advisory agreements and (iii) $26.2 billion represented assets receiving investment accounting & reporting services on a stand-alone basis. As part of its discretionary asset management services, as of September 30, 1997, the Company managed approximately $2.6 billion of commercial mortgage loans and investment real estate. The Company manages private equity funds which invest in insurance and insurance-related companies. Since 1985, the Company has sponsored five private equity funds, raising approximately $360 million in committed capital and investing more than $193 million of these proceeds in 39 portfolio company investments. INSURANCE RESEARCH. The Company believes that Conning & Company is one of the leading insurance industry research firms in the United States. The Company publishes in-depth insurance industry research covering major insurance industry trends, products, markets and business segments. The Company also publishes stock research on a broad group of publicly-traded insurance companies for some of the largest United States institutional money managers as well as pension funds, banks, mutual funds, and insurance companies. Conning & Company also from time to time participates in the underwriting of public offerings of equity securities for insurance and insurance-related companies. The Company's principal executive offices are currently located at 700 Market Street, St. Louis, Missouri 63101 (telephone number: (314) 444-0498) and at CityPlace II, 185 Asylum Street, Hartford, Connecticut 06103 (telephone number: (860) 527-1131). DEVELOPING TRENDS IN THE INSURANCE INDUSTRY Certain key insurance industry trends that also affect the management of insurance company assets are as follows: GROWING INSURANCE COMPANY ASSETS. Insurance company assets have grown over several decades and during the period from 1986 to 1996 grew at an average rate of approximately 9% per year, from approximately $1.3 trillion, to approximately $3.1 trillion, according to a standard industry source. ACCEPTANCE OF OUTSOURCING. The Company believes that many insurance companies are utilizing non-affiliated asset managers in order to respond to competitive product requirements and the pressure to achieve higher returns on investments while maintaining an acceptable level of risk. According to the Eager Study, assets under management by external, non-affiliated managers (which represented approximately 15% of industry assets in 1996) increased at a rate of 17% per year from $300 billion in 1994 to $415 billion in 1996. Based upon information provided by an industry source, insurance company assets increased at a rate of approximately 9% per year, from $2.6 trillion in 1994 to $3.1 trillion in 1996. The authors of the Eager Study concluded that externally managed assets would continue to grow, but believed that the growth rate would lose momentum over the next few years covered by the study. STRATEGY The Company's primary operating strategy is to grow recurring, fee-based asset management-related revenues, cash flow and profits through the following: LEVERAGE ESTABLISHED ASSET MANAGEMENT PLATFORM TO GENERATE GROWTH AND PROFITABILITY. The Company believes that it has established a platform, made up of core investment professionals, product expertise and systems, to support future growth in fee-based asset management revenues. Opportunities for asset management growth are expected to come from new and existing clients, strategic acquisitions and alliances and through General American and its affiliates. GENERATE GROWTH FROM NEW AND EXISTING CLIENTS. The Company intends to take advantage of the growth in insurance industry assets and a trend among insurance companies to seek external investment management expertise. The Company will pursue growth in assets under management from new clients by increasing the Company's sales and marketing efforts and by leveraging the Company's strong name recognition. Additionally, the Company will continue to pursue growth in assets under management from existing clients by seeking to increase its share of its clients' assets and from underlying growth in existing assets. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES TO EXPAND MARKET PENETRATION. The Company regularly evaluates strategic acquisitions, joint ventures and marketing alliances as a means of increasing assets under management, expanding the range of its product offerings and increasing its sales and marketing capabilities. LEVERAGE STRATEGIC ALLIANCE WITH GROWING PARTNER. The Company's relationship with General American, the Company's principal shareholder, provides opportunities for distribution of the Company's products and services to General American and its affiliates. The Company has benefited from the internal growth and acquisition activity of General American and its affiliates, with assets under management of General American and its affiliates increasing at an average rate of approximately 14% per year, from approximately $5.4 billion as of December 31, 1991 to approximately $10.6 billion as of December 31, 1996. At September 30, 1997, such affiliated assets under management totaled approximately $13.5 billion. RISK FACTORS No assurances can be given that the Company's objectives or strategies will be achieved. Prospective investors should consider carefully the factors discussed in detail elsewhere in this Prospectus under the captions "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors." <TABLE> THE OFFERING <CAPTION> <S> <C> Common Stock offered by the Company..................... 2,500,000 shares Common Stock outstanding after the offering................ 12,875,000 shares<F1> Dividend Policy............... The Company currently intends to pay quarterly cash dividends of approximately $0.04 per share of Common Stock ($0.16 annually), commencing in the first quarter of 1998. However, any dividends will be (i) dependent upon the Company's earnings, capital requirements, operating and financial condition and other relevant factors, (ii) subject to declaration by the Company's Board of Directors, and (iii) subject to certain regulatory constraints. See "Risk Fac- tors--Regulation" and "Dividend Policy." Use of Proceeds............... For general corporate purposes, including possible strategic acqui- sitions or alliances. See "Use of Proceeds." Nasdaq National Market symbol...................... "CNNG" <FN> - -------- <F1> Assumes no exercise of outstanding stock options. As of the date of this Prospectus, there are outstanding options to purchase 1,237,500 shares of Common Stock at a weighted average price of $5.65 per share. In addition, upon the closing of this offering the Company intends to grant options to purchase an additional estimated 1,294,987 shares of Common Stock at the initial public offering price. Does not include an aggregate of an estimated 905,013 shares of Common Stock reserved for future issuance under the Company's employee stock plans. See "Management--Employee Stock Plans" and Note 12 of Notes to the Company's Consolidated Financial Statements. </TABLE> <TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA <CAPTION> YEARS ENDED NINE MONTHS ENDED YEARS ENDED DECEMBER 31,<F1> DECEMBER 31,<F2> SEPTEMBER 30, ------------------------------------------ -------------------- -------------------- 1992 1993 1994 1995 1995 1996 1996 1997 PRO FORMA INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues: Asset management and related fees........................... $1,716 $2,446 $3,484 $24,050 $30,675 $40,456 $29,365 $36,018 Research services................ 0 0 0 4,090 9,480 12,148 9,582 10,278 Other income..................... 51 36 57 663 996 1,062 792 629 ------ ------ ------ ------- ------- ------- ------- ------- Total revenues............... 1,767 2,482 3,541 28,803 41,151 53,666 39,739 46,925 ------ ------ ------ ------- ------- ------- ------- ------- Operating income................... 832 1,341 2,112 6,292 7,389 11,792 9,093 10,972 Interest expense................. 0 0 0 521 1,365 729 592 233 ------ ------ ------ ------- ------- ------- ------- ------- Income before provision for income taxes............................ 832 1,341 2,112 5,771 6,025 11,063 8,501 10,739 Provision for income taxes......... 311 507 827 2,359 2,739 4,851 3,762 4,317 ------ ------ ------ ------- ------- ------- ------- ------- Net income................... $ 521 $ 834 $1,285 $ 3,412 $ 3,286 $ 6,212 $ 4,739 $ 6,422 ====== ====== ====== ======= ======= ======= ======= ======= Preferred stock dividends.......... 0 0 0 351 906 906 669 750 ------ ------ ------ ------- ------- ------- ------- ------- Net earnings available to common shareholders..................... $ 521 $ 834 $ 1,285 $ 3,061 $ 2,380 $ 5,306 $ 4,070 $ 5,672 ====== ====== ========= ======= ======= ======= ======= ======= Pro forma net income per common share and common share equivalents <F3>..... $ 0.57 $ 0.58 ======= ======= <CAPTION> AS OF DECEMBER 31, AS OF SEPTEMBER 30, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1997 1997 AS ADJUSTED <F4> BALANCE SHEET DATA: (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> Total assets....................... $1,395 $1,386 $1,683 $46,177 $50,020 $54,646 $85,255 Long-term debt..................... 0 0 0 9,000 2,000 0 0 Convertible preferred stock........ 0 0 0 17,003 24,782 36,152 0 Total common shareholders' equity........................... 958 792 1,327 4,623 4,368 68 66,829 Number of common shares outstanding end of period.................... 0.1 0.1 0.1 6,710 6,710 6,820 12,875 <CAPTION> ----------------------------------------------------- AS OF 1992 1993 1994 1995 1996 9/30/97 OTHER OPERATING DATA: (IN BILLIONS, EXCEPT AS NOTED) <S> <C> <C> <C> <C> <C> <C> Average assets under discretionary management<F5>: Unaffiliated.............................................. $ 3.3 $ 5.4 $ 6.2 $ 7.7 $ 9.5 $ 12.9 General American & affiliates............................. 5.5 6.0 6.6 7.8 9.6 13.5 --------- --------- --------- --------- --------- --------- Total................................................. 8.8 11.4 12.8 15.5 19.1 26.4 Average assets under advisory services...................... 5.2 10.1 14.7 15.3 18.3 21.0 Average assets under accounting & reporting services........ 0.0 1.3 2.6 4.8 9.2 26.2 --------- --------- --------- --------- --------- --------- Total assets serviced................................. $ 14.0 $ 22.8 $ 30.1 $ 35.6 $ 46.6 $ 73.6 ========= ========= ========= ========= ========= ========= <FN> - --------- <F1> The years 1992 to 1994 reflect the results of GAIMCO only. The year 1995 reflects the results of the consolidated activity from August 1, 1995 to December 31, 1995 and the results of GAIMCO only from January 1, 1995 to July 31, 1995. See Note 1 to the Company's Consolidated Financial Statements. <F2> Pro forma 1995 reflects the consolidated activity for the year assuming the Strategic Merger took place on January 1, 1995. The year 1996 reflects actual consolidated results. See Note 2 to the Company's Consolidated Financial Statements. <F3> Pro forma earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents considered outstanding during the period after giving effect to all dilutive common stock and common stock equivalents shares issued within twelve months of the public offering of the Company's common stock and to the Capital Stock Conversions. <F4> Gives effect to the Capital Stock Conversions and the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.50 per share and the receipt of the estimated net proceeds therefrom. <F5> Since January 1, 1995, the assets of the general account of General American have been under contract with GAIMCO (now known as Conning Asset Management Company). General account assets prior to January 1, 1995 were managed by the investment division of General American, a predecessor of GAIMCO, and are included in assets under management for 1992, 1993 and 1994. Data for 1995 and prior periods is presented on a pro forma basis to include both Conning and GAIMCO assets under management. </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED) The following financial information represents certain financial data of Conning, Inc. and its subsidiaries for the years ended December 31, 1992, 1993 and 1994, and for the six months ended June 30, 1995: <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- -------- CONNING, INC. AND SUBSIDIARIES 1992 1993 1994 1995 (IN THOUSANDS) INCOME STATEMENT DATA: <S> <C> <C> <C> <C> Revenues: Asset management and related fees....................... $ 6,643 $ 8,107 $ 9,840 $ 5,662 Research services....................................... 9,487 13,473 8,165 4,564 Other income............................................ 132 1,282 472 275 ------- ------- ------ ------- Total revenues...................................... 16,262 22,862 18,477 10,501 ------- ------- ------- ------- Operating income............................................ 582 4,441 2,751 2,092 Interest expense........................................ 111 85 0 0 ------- ------- ------- ------- Income before provision for income taxes and cumulative effect of accounting change............................... 471 4,356 2,751 2,092 Provision for income taxes.................................. 66 947 1,244 809 ------- ------- ------- ------- Income before cumulative effect of accounting change........ 405 3,409 1,507 1,283 Cumulative effect of accounting change...................... 0 131 0 0 ------- ------- ------- ------- Net income.......................................... $ 405 $ 3,540 $ 1,507 $ 1,283 ======= ======= ======= ======= Preferred stock dividends................................... 53 320 320 160 ------- ------- ------- ------- Net earnings available to common shareholders............... $ 352 $ 3,220 $ 1,187 $ 1,123 ======= ======= ======= ======= <CAPTION> AS OF AS OF DECEMBER 31, JUNE 30, ------------------------------- -------- 1992 1993 1994 1995 (IN THOUSANDS) BALANCE SHEET DATA: <S> <C> <C> <C> <C> Total assets................................................ $10,922 $11,274 $14,228 $16,003 Long-term debt.............................................. 0 0 0 0 Redeemable preferred stock.................................. 5,425 0 0 0 Cumulative preferred stock.................................. 0 3,650 3,650 3,650 Total common shareholders' equity (deficit)................. (2,682) 2,552 4,186 5,426 Number of common shares outstanding end of period........... 446 93 106 108 </TABLE>

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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Medialink is a leading worldwide provider of video and audio production and distribution services for businesses and other organizations seeking to communicate their news through television, radio and other media. The Company's principal services are based on its core business -- satellite distribution of video news releases (VNRs) and the electronic monitoring of their broadcast on television. A VNR is the video equivalent of a conventional press release and is used for the same purposes, such as to introduce a new product or service, explain a technological breakthrough, communicate during a crisis or advocate a position on an issue of public concern. VNRs are produced for easy integration into newscasts and are distributed to the media for their use in complete or edited form. The Company began offering production of video news releases in 1994 and has since developed a full range of video, audio and print services which it now provides on a global basis. Video production, audio services, and print distribution, all introduced since the beginning of 1994, accounted for approximately 27% of revenues for the nine months ended September 30, 1996. Medialink enables its clients to reach more than 3,000 newsrooms at television and radio networks, local stations, cable channels, direct broadcast satellite systems, as well as on-line services, including those available on the Internet. The Company has provided its services to more than 1,100 clients over the last twenty-four months. The Company's clients include corporations such as General Motors, IBM, Johnson & Johnson, Sony and Ciba Geigy/Sandoz; organizations such as the American Association of Retired Persons and the AFL-CIO; and the world's largest marketing communications firms such as Burson-Marsteller, Hill & Knowlton, Edelman Public Relations Worldwide and the Shandwick Group. No single client accounted for more than 4% of the Company's revenues in 1995. Materials distributed by the Company have aired on ABC, CBS, NBC and their affiliates, as well as CNN and CNBC in the United States, and the BBC, CNN International, Sky News, RAI (Italy) and NHK (Japan) internationally. Organizations that conduct public relations campaigns, including most marketing communications agencies, do not generally find it cost-effective to maintain the facilities and personnel necessary to produce material suitable for use on news broadcasts and distribute it to the media, especially on a global basis. As a result, it is often more economical to outsource such services from a specialist firm such as the Company, which can provide the necessary talent and production, distribution and monitoring facilities. The Company serves a global marketplace. Based on a combination of surveys taken by the Company and published reports, the Company estimates that it competes in a market which was approximately $500 million in 1995, considering only the United States and the United Kingdom. Medialink's competitive advantages include its extensive operating history with media outlets, key industry relationships, prominent client base, combination of professional skills, ability to integrate new technology and worldwide distribution and production capabilities. The Company has an exclusive agreement with the Associated Press (the 'AP') to use the AP's dedicated links to notify U.S. television and radio newsrooms of upcoming satellite transmissions. The Company has agreements with the AP and ABC Radio Networks Inc. ('ABC Radio') for satellite transmission of audio services to radio stations in the U.S. The Company uses Nielsen Media Research and Competitive Media Reporting to monitor domestic television station usage of video services. Internationally, the Company has a network of 17 affiliates in Europe, Latin America, South Africa, Asia and the Pacific Rim. International revenues increased approximately 317% from $360,000 in 1993 to $1.5 million in 1995. The Company plans to expand its business by (i) developing new services; (ii) leveraging its client relationships by cross-marketing services to its clients; (iii) continuing its global expansion; and (iv) pursuing acquisitions and strategic alliances with other companies that can add to the Company's service capabilities or geographic scope. In July 1996 the Company, through its wholly owned subsidiary Medialink PR Data Corporation ('Medialink PR Data'), acquired certain assets of PR Data Systems, Inc. (the 'PR Data Acquisition') to expand its research capabilities and to add print news release distribution services. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 2,000,000 shares Common Stock to be outstanding after the Offering....... 5,047,933 shares(1) Use of Proceeds......................................... For general corporate purposes and possible acquisitions. See 'Use of Proceeds.' Nasdaq National Market symbol........................... MDLK </TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------------------- --------------------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- ---------------------- --------- --------------------- PRO PRO ACTUAL FORMA(2) ACTUAL ACTUAL FORMA(2) --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................... $ 4,891 $ 5,802 $ 6,065 $ 7,548 $ 10,625 $ 12,237 $ 7,382 $ 11,158 $ 12,014 Gross profit............... 3,024 3,577 3,435 4,509 6,071 7,492 4,100 6,553 7,318 Operating income (loss).... 87 140 (215) 440 698 705 303 1,005 1,011 Net income (loss).......... $ 21(3) $ 144(3) $ (231) $ 1,464(4) $ 381 $ 374 $ 166 $ 579 $ 567 Net income (loss) before tax valuation reversal(4).............. $ 21(3) $ 144(3) $ (231) $ 222(4) $ 381 $ 374 $ 166 $ 579 $ 567 Pro forma net income per share(5)................. $ 0.11 $ 0.05 $ 0.17 Shares used to compute pro forma net income per share(5)................. 3,453 3,453 3,485 OTHER DATA: Number of offices.......... 4 4 5 6 7 8 7 8 8 Average revenues per sales employee................. $326,000 $322,000 $347,000 $414,000 $ 506,000 $532,000 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 --------------------------- ACTUAL AS ADJUSTED(6) ------ ----------------- <S> <C> <C> BALANCE SHEET DATA: Working capital...................................................................... $1,500 $19,250 Total assets......................................................................... 6,551 24,301 Long-term debt, net of current portion............................................... 284 284 Stockholders' equity................................................................. 3,173 20,923 </TABLE> - ------------------ (1) Does not include an aggregate of (i) 569,594 shares of Common Stock issuable upon exercise of options outstanding under the Company's Amended and Restated Stock Option Plan ('Stock Option Plan') and (ii) 62,400 shares of Common Stock reserved for issuance upon exercise of options outstanding under the 1996 Directors Stock Option Plan ('Directors Stock Option Plan'). (2) Gives effect to PR Data Acquisition as if the transaction occurred at the beginning of the period presented. The Company paid for the PR Data Acquisition through the payment of $120,000 cash, the issuance of 24,000 shares of Common Stock and the assumption of certain liabilities not to exceed the book value of the assets acquired by $372,000. The pro forma financial information is not necessarily indicative of the operating results which would have been achieved had the acquisition occurred at the beginning of the period presented or the results to be achieved in the future. (3) Includes a loss of $40,000 from discontinued operations in 1991 and the utilization of net operating losses resulting in tax benefits of $12,000 in 1991 and $49,000 in 1992. (4) In accordance with Statement of Financial Accounting Standards No. 109, the Company reversed its valuation allowance against deferred tax assets in the amount of $1,242,000 in 1994. See Note 5 to the Company's Financial Statements. (5) See Note 9 to the Company's Financial Statements for an explanation of the method used to determine the number of shares. (6) Gives effect to the offering of 2,000,000 shares of Common Stock (at an assumed price of $10.00 per share) and the estimated net proceeds of $17.75 million, as if the offering occurred on September 30, 1996. Medialink is headquartered in New York and maintains offices in Washington, D.C., Chicago, Dallas, Los Angeles, Atlanta and Norwalk, Connecticut. Its international activities are coordinated from its London office. Medialink was incorporated under the laws of the State of Delaware in 1986. The Company maintains its principal offices at 708 Third Avenue, New York, New York 10017. The Company's telephone number is 212-682-8300. The Company's Internet address is www.medialinkworldwide.com. Information contained in the Company's World Wide Web ('Web') site shall not be deemed part of this Prospectus. ------------------------ Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects a 1.2 for 1 stock split of the Common Stock effected in the form of a stock dividend on July 31, 1996 and (iii) gives effect to the automatic conversion of all outstanding shares of Series A, Series B and Series C Preferred Stock into an aggregate of 2,111,669 shares of Common Stock to be effective upon the closing of this offering (the 'Preferred Stock Conversions'). See 'Description of Capital Stock.' Medialink is a service mark of the Company.

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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Prospectus. As used herein, unless the context otherwise requires, "Company" means Proffitt's, Inc. and its subsidiaries, and the terms "Proffitt's," "McRae's," "Younkers," "Parisian" and "Herberger's" refer to the Company's five department store chains, and the existing and predecessor entities that conduct or conducted business under such names. Reference in this Prospectus to the Company's fiscal year means the fiscal year ended on the Saturday nearest January 31 of the following calendar year (e.g., "fiscal 1995" means the fiscal year ended February 3, 1996). Unless the context otherwise requires, references in this Prospectus to "pro forma" financial information reflect the acquisition by the Company of Parisian as if the acquisition had occurred on February 4, 1996. Historical financial information presented in this Prospectus includes the results of Parisian from and after October 11, 1996, the date of its acquisition by the Company. THE EXCHANGE OFFER The Exchange Offer......... The Exchange Offer consists of this Prospectus and the related Letter of Transmittal, and is being made solely to eligible holders of Series A Notes. Upon the terms and subject to the conditions of the Exchange Offer, the Company is offering eligible holders of Series A Notes the opportunity to exchange its Series A Notes that have not been registered under the Securities Act for the Exchange Notes that have been registered under the Securities Act. Exchange Offer Expiration Date..................... The Exchange Offer expires at 5:00 P.M., Eastern Time on August 7, 1997 unless extended by the Company in its sole discretion. Exchange Notes Offered..... The Exchange Notes consist of $125,000,000 aggregate principal amount of 8 1/8% Senior Notes due 2004, Series B. Procedures for Tendering Series A Notes........... Brokers, dealers, commercial banks, trust companies and other nominees who hold Series A Notes through DTC (as defined herein) may effect tenders by book-entry transfer in accordance with DTC's Automated Tender Offer Program ("ATOP"). Holders of such Series A Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee are urged to contact such person promptly if they wish to tender Series A Notes. In order for Series A Notes to be tendered by a means other than by book-entry transfer, a Letter of Transmittal must be completed and signed in accordance with the instructions contained herein. The Letter of Transmittal and any other documents required by the Letter of Transmittal must be delivered to the Exchange Agent by mail, facsimile, hand delivery or overnight carrier, and either such Series A Notes must be delivered to the Exchange Agent or specified procedures for guaranteed delivery must be complied with. See "The Exchange Offer -- Procedures for Tendering." Letters of Transmittal and certificates representing Series A Notes should not be sent to the Company. Such documents should only be sent to the Exchange Agent. See "The Exchange Offer -- Exchange Agent." THE NOTES Maturity Date of the Notes...................... May 15, 2004. Interest Payment Dates..... May 15 and November 15 of each year, commencing November 15, 1997. Limited Nature of Guarantees................. The Notes are fully and unconditionally guaranteed on a senior basis by the Subsidiary Guarantors. Under certain circumstances, future subsidiaries (other than Accounts Receivables Subsidiaries and Foreign Subsidiaries) of the Company may be requested to guarantee the Notes. In addition, the Guarantees are subject to release under certain circumstances. See "Description of the Notes -- Exchange Note Guarantees" and "Description of the Exchange Notes -- Limitations on Guarantees by Restricted Subsidiaries." Ranking.................... The Notes rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Guarantees rank pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of the Subsidiary Guarantors. The Notes and the Guarantees will be effectively subordinated to all secured indebtedness of the Company and the Subsidiary Guarantors to the extent of the value of the assets securing such indebtedness. As of May 3, 1997, on a pro forma basis after giving effect to the issuance of the Notes and the application of the net proceeds therefrom, the Company and the Subsidiary Guarantors would have had an aggregate of approximately $521.2 million of indebtedness outstanding, of which approximately $295.3 million would have been senior indebtedness and approximately $60.3 million would have been secured indebtedness. See "Description of the Exchange Notes." Change of Control.......... Following the occurrence of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to make an offer to purchase all outstanding Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. See "Description of the Notes -- Change of Control." Certain Covenants.......... The Indenture under which the Notes are issued contains certain covenants that, among other things, limit (i) the incurrence of additional indebtedness, (ii) certain restricted payments, (iii) certain asset sales, (iv) transactions with affiliates, (v) consolidations, mergers and dispositions of assets on a consolidated basis, and (vi) the Company's restricted subsidiaries from guaranteeing certain other indebtedness of the Company unless such restricted subsidiaries also guarantee the Notes. The Indenture also prohibits certain restrictions on distributions from restricted subsidiaries of the Company. These covenants are subject to important exceptions and qualifications. The Indenture provides that after the Notes achieve an investment grade rating from both Standard & Poor's Ratings Services, a Division of the McGraw-Hill Companies, Inc., and Moody's Investors Service, Inc., the Company's obligation to comply with certain of the restrictive covenants described herein will be terminated. See "Description of the Notes -- Certain Covenants." Use of Proceeds............ The Company will not receive any proceeds from the issuance of the Exchange Notes pursuant to the Exchange Offer. The net proceeds to the Company from the sale of the Series A Notes are being used to repay certain outstanding mortgage and other indebtedness of the Company, to reduce certain borrowings under the Credit Facility and for general corporate purposes. See "Use of Proceeds." Shelf Registration Statement................ If (i) the Exchange Offer is not permitted by applicable law or (ii) any holder of Transfer Restricted Notes (as defined herein) notifies the Company within 20 business days of the commencement of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and holds Series A Notes acquired directly from the Company or an affiliate of the Company, the Company will be required to provide the Shelf Registration Statement to cover resales of the Notes by such holders thereof. If the Company fails to satisfy these registration obligations, it will be required to pay Additional Interest (as defined herein) to the holders of Notes under certain circumstances. See "The Exchange Offer." Absence of an Established Trading Market for the Notes.................... The Series A Notes are new securities that were issued on May 21, 1997 (the "Issue Date" or "Closing Date"). There is currently no established trading market for the Notes or the Exchange Notes. Although Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Smith Barney Inc. (the "Initial Purchasers") have informed the Company that they currently intend to make a market in the Series A Notes and, upon issuance, the Exchange Notes, they are not obligated to do so and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes. To the extent Series A Notes are exchanged in this Exchange Offer, the liquidity of the market for the remaining Series A Notes may be reduced. The Series A Notes have been designated eligible for trading in the Private Offerings, Resale and Trading through Automatic Linkages (PORTAL) market. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through Nasdaq. See "Risk Factors -- Absence of a Public Market." THE COMPANY The Company is a leading regional department store chain operating 175 stores in 24 states, primarily in the Southeast and Midwest. The Company operates its stores under five chain names: Proffitt's (19 stores), McRae's (29 stores), Younkers (48 stores), Parisian (40 stores) and Herberger's (39 stores). Each chain operates primarily as a leading branded traditional department store in its communities, with Parisian serving as a better branded specialty department store. Most of the stores are located in premier regional malls in the respective trade areas served. The Company's stores offer a wide selection of fashion apparel, accessories, cosmetics and decorative home furnishings, featuring assortments of premier brands, private brands and specialty merchandise. Each of the Company's chains operates with its own merchandising, marketing and store operations team in order to tailor regional assortments to the local customer. At the same time, the Company coordinates merchandising among the chains and consolidates administrative and support functions to realize scale economies, to promote a competitive cost structure and to increase margins. Under the leadership of R. Brad Martin and an experienced senior management team, the Company has executed a disciplined acquisition strategy and strategic approach to new store openings, growing from 11 stores and net sales of $94.8 million in fiscal 1989 to 175 stores and pro forma net sales of $2.3 billion in fiscal 1996. In addition, the Company has increased EBITDA from $8.9 million in fiscal 1989 to $167.2 million in fiscal 1996, on a pro forma basis. Members of the Company's senior management have substantial investments in the Company. As of April 25, 1997, Mr. Martin beneficially owned approximately 4.7% of the Company's Common Stock and all directors and executive officers of the Company as a group beneficially owned approximately 13.2% of the Company's Common Stock. The Company was incorporated under the laws of the State of Tennessee in 1919. The principal executive offices of the Company are located at 3455 Highway 80 West, Jackson, Mississippi 39209, and its telephone number is (601) 968-4400. BUSINESS STRENGTHS The Company believes that it is well-positioned to build upon its historical success by capitalizing on its competitive strengths, including the following: Strong Regional Focus. The Company places a high priority on being a market leader in each of the markets in which it operates. In smaller communities, the Company's stores are frequently the only branded name department store catering to middle and upper income customers and offering an array of brands that frequently are not otherwise available to shoppers in such markets. In most larger metropolitan markets, the Company seeks to maximize its market share by operating multiple stores in prime locations. While the Company has grown through the acquisition of regional chains, its philosophy has been to (i) maintain existing trade names and retain merchandising and store personnel and (ii) utilize previously developed regional expertise and knowledge of the local customer base by allowing each chain to tailor merchandise assortments to the local customer. The Company believes that the increased sales and gross margins resulting from a coordinated but decentralized merchandising effort outweigh any incremental operating cost savings associated with a completely centralized strategy. Scale Economies. With pro forma sales of approximately $2.3 billion in fiscal 1996, the Company realizes scale economies in purchasing and distribution, administrative areas such as accounting, proprietary credit card administration, management information systems, and other infrastructure-related areas. Although the Company's chains control regional merchandising, the Proffitt's Merchandising Group coordinates merchandising, planning and execution, visual presentation, marketing and advertising activities among the chains. The Proffitt's Merchandising Group manages strategic relationships with the Company's top vendors to ensure that each chain is afforded the purchasing leverage of the Company as a whole. In addition to seeking economies of scale in purchasing, the Proffitt's Merchandising Group will continue to capitalize on corporate level marketing synergies, such as the coordination of media buying and direct mail programs, the establishment of preferred advertising rates, and the production of store catalogs. Proven Track Record of Integrating Acquisitions. In recent years, the Company has grown primarily through the acquisition of strong, regional department store chains at valuations believed to be attractive by management. The following table sets forth certain information concerning the Company's significant acquisitions: <TABLE> <CAPTION> TRANSACTION VALUE(A) EQUITY AS A % AS A MULTIPLE OF: DATE OF NUMBER TRANSACTION OF TRANSACTION ---------------------------- COMPANY ACQUIRED ACQUISITION OF STORES VALUE(A) VALUE(A) LTM SALES(B) LTM EBITDA(B) - ---------------- ----------- --------- ----------- -------------- ------------ ------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> McRae's, Inc.................... March 31, 1994 28 $264.8 5% 0.6x 5.3x Younkers, Inc................... February 3, 1996 51 321.6 79 0.5 6.5 Parisian, Inc................... October 11, 1996 38 375.0 28 0.5 8.7 G.R. Herberger's, Inc........... February 1, 1997 39 176.9 88 0.5 7.4 </TABLE> - --------------- (a) Transaction value is the total consideration paid in the form of: (i) cash; (ii) notes; (iii) equity (valued as of the announcement date for pooling-of-interest transactions and in accordance with generally accepted accounting principles for purchase accounting transactions); and (iv) assumed long-term debt, net of cash, as of the end of the last full fiscal quarter prior to the acquisition date. (b) LTM Sales and LTM EBITDA of the acquired company represent data for the twelve months ending on the last day of the last full fiscal quarter prior to the acquisition date. Additionally, EBITDA for Herberger's is adjusted for ESOP expense of $4.3 million. See "-- Summary Historical and Pro Forma Financial and Operating Data" for the definition of EBITDA. The Company employs a "best practices" approach to integrating acquired companies. Best practices is a process whereby each acquired chain's operating procedures and policies are reviewed to determine those practices which the Company believes will increase synergies while minimizing business interruptions. The Company believes the implementation of best practices throughout the Company's chains has resulted in improved comparable store sales and increased operating margins through better and more consistent inventory control and pricing, and other operating efficiencies. Strong Financial Position. The Company has been able to realize significant growth while maintaining moderate leverage. Since February 1996, the acquisitions of Younkers, Herberger's and Parisian have resulted in an increase in net sales of approximately $1.6 billion, while senior debt as a percentage of total capitalization decreased slightly. In addition to conservative balance sheet management, the Company's strong cash flow generation has allowed it to fund all capital expenditures, incremental working capital requirements and fixed charges with internally generated cash flow. On a pro forma basis, the Company's ratio of EBITDA to interest expense in fiscal 1996 would have been 3.7x. The Company's strong financial performance has provided it with significant financial flexibility, including the ability to use its publicly-traded common stock as consideration for selected acquisitions. Geographic and Demographic Diversity. The Company operates 175 stores in 24 states. Stores are operated in metropolitan markets such as Atlanta, Georgia and Indianapolis, Indiana, as well as in smaller markets such as Ames, Iowa and Kalispell, Montana. The Company believes that its geographic diversity and the demographic breadth of its target customer groups may to some extent serve to insulate the Company from sales and earnings volatility typically associated with poor weather conditions, or changes in local or regional economic conditions. Attractive Real Estate. The Company believes that its stores are primarily located in premier malls in the markets in which the Company operates. As is consistent with national trends, the Company further believes that construction of new malls in many of its markets is likely to be limited. The Company anticipates that the attractiveness of its existing locations, combined with limited new mall development, may contribute to improved comparable store sales. BUSINESS STRATEGY The Company's business objective is to maximize profitability and shareholder value by (i) expanding its core business through comparable store sales growth, new store openings and margin expansion, and (ii) monitoring acquisition opportunities while maintaining a strong capital structure. Comparable Store Sales Growth. The Company expects that comparable store sales will benefit from a number of merchandising initiatives including (i) implementing best practices, (ii) expanding sales of key brands, and (iii) increasing sales of the Company's private brands. As part of best practices, the Company benchmarks sales of product categories and brand assortments for each store and identifies and targets opportunities to strengthen such sales by altering the merchandise mix. The Company has successfully used this strategy by applying the long history of strength in the cosmetics business of McRae's and Proffitt's stores to increase the penetration and profitability of Younkers stores' cosmetics business. The Company believes that it will be able to further utilize this strategy to increase sales in the Younkers shoe business, increase McRae's women's apparel sales and introduce home goods into select Parisian stores. The Company believes that comparable store sales will also benefit from expanded sales of key brands, such as Tommy Hilfiger, Liz Claiborne, Jones New York, Polo/Ralph Lauren, Calvin Klein, Guess, and Nine West, among others. The Company's large scale and proven track record with these vendors has enabled the Company to introduce certain of these brands into acquired stores which, prior to combining with the Company, did not have access to these vendors. For instance, Tommy Hilfiger, Nautica and Lancome will now be carried in select Herberger's stores. Additionally, the Company plans to increase sales of its private brand offerings within the apparel and housewares categories from 6% of total net sales to 12% to 15% over the next two to three years. For example, the Company has recently developed its own line of men's dress shirts and accessories, under the brand name RBM. The RBM collection is designed to fill a niche for quality men's furnishings at moderate prices. New Store Openings. The Company plans to open 15 to 20 new stores across all chains over the next three years and to make selective real estate acquisitions in existing or new markets. The Company targets premier mall locations principally based on favorable demographic profiles and trends, as well as the compatibility and traffic draws of other tenants. High quality real estate is a primary criterion for all new stores. In addition, the Company plans to selectively remodel or expand certain existing stores. Margin Expansion. The Company has implemented the following strategies to increase margins: (i) leveraging key vendor relationships; (ii) capitalizing on purchasing economies of scale; (iii) extending key brands into certain acquired stores; (iv) shifting the merchandise mix toward higher margin products; (v) increasing private brand penetration; (vi) consolidating administrative and support areas and eliminating redundant expenses; and (vii) realizing efficiencies related to the re-engineering of certain operating activities. The Company intends to further increase gross margins by increasing sales of its private brand products, which typically generate higher margins and enhance customer loyalty. Operating margins are also expected to benefit from sales productivity enhancements across the Company's chains and from the integration cost savings programs developed by management in conjunction with the Younkers, Parisian, and Herberger's acquisitions. These programs reduced operating expenses by a total of $6 million in fiscal 1996 (consistent with the Company's announced target) and are expected to produce annualized expense savings of $20 million in fiscal 1997 and $29 million in fiscal 1998 (compared to the 1995 cost structure of the chains on an independent basis). Monitor Acquisition Opportunities. The Company has an established record of successfully acquiring and integrating regional department store chains. The Company believes that its philosophy of retaining the local identity and merchandising organization of acquired companies makes the Company an attractive acquirer for regional department store companies. The Company's criteria in evaluating strategic opportunities include (i) strong market presence; (ii) prime real estate locations; (iii) similar merchandising strategies targeted toward middle to upper income consumers; (iv) geographic proximity to the Company's core markets; (v) compatible corporate culture; and (vi) favorable demographics in the regions served. Although the Company currently has no agreements, arrangements or understandings with respect to future acquisitions, the Company expects the department store industry will continue to consolidate, and the Company will regularly evaluate possible acquisition opportunities as they arise. Maintain Strong Capital Structure. The Company intends to maintain a strong balance sheet to support its growth objectives. The fulfillment of this objective has been facilitated by strong cash flows and the Company's issuance of its Common Stock as all or part of the consideration used in its recent acquisitions. The Company believes that, absent any additional acquisitions, future cash flows from operations (with seasonal needs supplemented by borrowings under its Credit Facility) will be sufficient to service debt and lease payments, and to fund capital expenditures and working capital requirements. RECENT DEVELOPMENTS Strengthening and Retaining Management. In recent months, the Company has acted to strengthen and retain its senior management in light of its recent growth and strategic objectives. In April 1997, the Board of Directors of the Company authorized a new five-year employment agreement with R. Brad Martin, its Chairman and Chief Executive Officer since 1989. Among other recent appointments, the Company also named Douglas E. Coltharp as Executive Vice President and Chief Financial Officer, William D. Cappiello as President and Chief Executive Officer of Parisian, Frank E. Kulp as President and Chief Executive Officer of Herberger's, Mark Shulman as President and Chief Executive Officer of Younkers, Toni E. Browning as President and Chief Executive Officer of the Proffitt's Division, Dawn H. Robertson as President and Chief Executive Officer of McRae's, and Donald E. Wright as Senior Vice President of Finance and Accounting. Implementation of Capital Structure Improvements. The Company is in the process of implementing a number of capital structure improvements to position it for future growth. The issuance of the Notes is part of a plan to improve the Company's capital structure by (i) reducing the amount of the Company's secured indebtedness; (ii) reducing the amount of the Company's indebtedness that bears interest at a floating rate; and (iii) extending the average life of the Company's indebtedness. On June 26, 1997, the Company amended and restated its existing credit facility (as amended and restated, the "Credit Facility") to, among other things, (a) increase the revolving Credit Facility from $275 million to $400 million, (b) extend the maturity from October 11, 1999 to June 26, 2002, (c) make provision for, upon any senior indebtedness of Proffitt's being rated investment grade, the elimination of the inventory borrowing base limitation on borrowings under the Credit Facility, (d) reduce the financial performance benchmarks at which more favorable pricing options are made available to the Company, and (e) lessen in varying degrees the scope of the affirmative and negative covenants applicable to the Company and its subsidiaries. The Company may use the proceeds of borrowings under the Credit Facility to refinance certain existing indebtedness, to finance capital expenditures, for general corporate purposes and to finance certain acquisitions. Furthermore, the Company is pursuing a restructuring of one of its existing accounts receivable financing arrangements covering receivables generated by all the stores, except Younkers, in an effort to extend the term of a portion of such arrangements from one year to three to five years through the sale of investment grade term asset-backed securities. The Company anticipates that such transaction may be completed during or shortly after the Exchange Offer. There is no assurance, however, that such transaction will be completed as presently contemplated. See "Receivables Securitization Facilities."

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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data appearing elsewhere or incorporated by reference in this Prospectus and the Annexes hereto. Public Unitholders are urged to read this Prospectus and the Annexes in their entirety and should carefully consider the information set forth under the heading "Risk Factors and Other Considerations." Unless otherwise indicated, all unit information reflects the completion of the Oppenheimer Capital Merger and the 1.67-for-one split of the Partnership Units described in "The Partnership." THE PARTNERSHIP The Partnership is a Delaware limited partnership which as its sole business holds 26.1 million PIMCO Advisors GP Units, representing an approximately 23.9% interest in PIMCO Advisors. PIMCO Advisors is one of the nation's largest investment management firms with approximately $190 billion of assets under management at October 31, 1997 (as adjusted to include the assets under management of Oppenheimer Capital). PIMCO Advisors offers a broad range of investment management services and styles to institutional and retail investors, combining the fixed income-oriented investment management operations of Pacific Investment Management Company ("Pacific Investment Management"), the equity-oriented operations of Oppenheimer Capital and five smaller affiliated domestic and international equity investment management firms, and mutual fund operations. PIMCO Advisors provides investment management services primarily to (i) large institutional clients through separate accounts, (ii) smaller institutional clients and financial intermediaries through the institutional share classes of the PIMCO Funds (described below) and (iii) retail investors through the retail share classes of the PIMCO Funds, which are sold principally through broker-dealers. PIMCO Advisors strategy is to pursue growth by marketing the investment management expertise, performance record and reputation of its seven institutional investment management firms (the "Investment Management Firms"). The Investment Management Firms are six Delaware partnerships: Pacific Investment Management, Oppenheimer Capital, Columbus Circle Investors ("CCI"), Cadence Capital Management ("Cadence"), NFJ Investment Group ("NFJ") and Parametric Portfolio Associates ("Parametric") and one United Kingdom limited partnership, Blairlogie Capital Management ("Blairlogie"). The seven Investment Management Firms are structured as separate subsidiaries. PIMCO Advisors believes this decentralized structure enables the Investment Management Firms to implement their own distinct investment strategies and philosophies, providing financial and other incentives for the managers of each of the firms to render superior performance and client service. The Managing Directors of the Investment Management Firms have a significant profits interest in their respective Investment Management Firms, and a number of them hold substantial direct and indirect economic interests in PIMCO Advisors. The Partnership's business results from the November 30, 1997 merger of Oppenheimer Capital with a subsidiary of PIMCO Advisors (the "Oppenheimer Capital Merger"). Prior to the Oppenheimer Capital Merger, the Partnership's only asset was a 67.6% interest in Oppenheimer Capital. In the Oppenheimer Capital Merger, PIMCO Advisors acquired from the Partnership the remaining 67.6% general partner interest in Oppenheimer Capital it did not own, as a result of which Oppenheimer Capital became a wholly-owned subsidiary of PIMCO Advisors and the Partnership received 26.1 million PIMCO Advisors GP Units. PIMCO Partners, G.P. ("PGP") is the sole general partner of the Partnership and is the controlling general partner of PIMCO Advisors. [PIMCO ADVISORS LETTERHEAD] December , 1997 Dear PIMCO Advisors L.P. Public Unitholder: As you may know, we recently completed a combination of the businesses of PIMCO Advisors L.P. ("PIMCO Advisors") and Oppenheimer Capital. In the combination, Oppenheimer Capital, L.P. ("Opcap LP"), a New York Stock Exchange listed partnership, received 26.1 million PIMCO Advisors units in exchange for its interest in Oppenheimer Capital. As a result of the combination, Oppenheimer Capital became a wholly-owned subsidiary of PIMCO Advisors, and Opcap LP's publicly traded limited partner units became an indirect investment in PIMCO Advisors. The Oppenheimer Capital merger has resulted in two public investment vehicles in PIMCO Advisors: direct investments in PIMCO Advisors and indirect investments through Opcap LP. You may also know that due to recent legislation, publicly traded partnerships like PIMCO Advisors and Opcap LP will become subject to a tax on their gross income from active businesses after December 31, 1997. As a result of that legislation and pursuant to the provisions of our partnership agreement, effective December 31, 1997 the public ownership of PIMCO Advisors and Opcap LP is being combined into a single entity, Opcap LP, which will change its name to PIMCO Advisors Holdings L.P. In the restructuring, all of your PIMCO Advisors limited partner units will be contributed to Opcap LP, and you will be issued an equal number of Opcap LP limited partner units and become a limited partner in Opcap LP. After the restructuring, each Opcap LP unit will represent indirectly the same investment you now have in one PIMCO Advisors unit. The primary purposes of the restructuring are to (i) permit Public Unitholders in PIMCO Advisors to continue to maintain an investment in a publicly traded entity while consolidating all public ownership of PIMCO Advisors into one entity and (ii) allow PIMCO Advisors to become a private partnership, which will not be subject to the new tax on its gross income from active businesses. Management believes that there are several benefits associated with combining the public ownership in the PIMCO Advisors enterprise into a single entity. The number of public holders in the one entity will be greater than the number in either Opcap LP or PIMCO Advisors individually, which should have a favorable impact on market liquidity. Additionally, the combination will simplify the organizational structure of the PIMCO Advisors business and reduce confusion in the marketplace created by two publicly traded securities representing essentially the same investment. Finally, having a single public entity will substantially reduce administrative costs. The restructuring also will benefit the nonpublic unitholders of PIMCO Advisors because they will retain an interest in a partnership (PIMCO Advisors) that will not be subject to a new 3.5% federal tax that will be imposed after December 31, 1997, on the gross income of certain publicly traded partnerships, including Opcap LP. Because each Opcap LP limited partner unit represents an indirect investment in one PIMCO Advisors unit, your economic interest in the PIMCO Advisors business will not be altered or diminished in any way. Also, since our general partner will remain the controlling general partner of both partnerships, the restructuring will not result in a change in the management of your investment. YOU DO NOT NEED TO TAKE ANY ACTION FOR THE RESTRUCTURING TO OCCUR AND YOU ARE NOT BEING ASKED TO VOTE ON ANY ITEMS. On December 31, 1997, you will automatically become a limited partner of Opcap LP and cease to be a limited partner of PIMCO Advisors. A letter of transmittal to be used for surrendering your PIMCO Advisors unit certificates in exchange for Opcap LP unit certificates will be sent to you after December 31, 1997. The restructuring is intended to be a tax-free transaction for holders of PIMCO Advisors units. For further information regarding the tax consequences of the restructuring, you should review the discussion of federal tax matters included in the accompanying Prospectus. The accompanying Prospectus gives detailed information about Opcap LP and the restructuring. We encourage you to read it carefully. Sincerely yours, William D. Cvengros Chief Executive Officer <TABLE> <CAPTION> PAGE ---- <S> <C> Executive Deferred Compensation Plan................................................ 55 RELATIONSHIP BETWEEN THE PARTNERSHIP AND PIMCO ADVISORS............................... 56 Operating Agreement................................................................. 56 Exchange Rights..................................................................... 56 Expense Reimbursement............................................................... 57 CERTAIN RELATIONSHIPS AND TRANSACTIONS................................................ 57 PGP Indebtedness.................................................................... 57 Withdrawal and Removal of a General Partner of the Partnership or PIMCO Advisors.... 58 Indemnification..................................................................... 58 Contribution Agreement.............................................................. 59 Registration Rights Agreements...................................................... 59 RECENT UNIT PRICES AND DISTRIBUTIONS.................................................. 61 SELECTED FINANCIAL DATA OF OPPENHEIMER CAPITAL, L.P................................... 64 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE PARTNERSHIP.................................................................. 65 The Partnership..................................................................... 65 Oppenheimer Capital................................................................. 66 SELECTED CONSOLIDATED FINANCIAL DATA OF PIMCO ADVISORS................................ 73 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PIMCO ADVISORS................................................................... 75 Overview............................................................................ 75 Results of Operations............................................................... 75 Capital Resources and Liquidity..................................................... 82 Economic Factors.................................................................... 83 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE PARTNERSHIP..... 84 DESCRIPTION OF THE PARTNERSHIP AGREEMENT.............................................. 86 COMPARISON OF PIMCO ADVISORS LIMITED PARTNER UNITS AND PARTNERSHIP UNITS.............. 90 CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 96 Tax Consequences of the Restructuring............................................... 96 Tax Classification of the Partnership............................................... 96 Tax Allocations..................................................................... 99 Certain Limitations on Losses and Deductions........................................ 100 Disposition of Partnership Units.................................................... 100 Backup Withholding.................................................................. 101 Certain Additional Tax Considerations for Holders of Partnership Units.............. 101 Special Status Taxpayers............................................................ 101 State and Local Taxes............................................................... 102 LEGAL MATTERS......................................................................... 102 EXPERTS............................................................................... 102 AVAILABLE INFORMATION................................................................. 103 INDEX TO FINANCIAL STATEMENTS......................................................... F-1 </TABLE> THE RESTRUCTURING The Restructuring.................. Under the authority conferred by the PIMCO Advisors Partnership Agreement, the general partners, on behalf of each Public Unitholder, will contribute the PIMCO Advisors LP Units held by the Public Unitholders to the Partnership. In exchange for the PIMCO Advisors LP Units, the Partnership will issue an equal number of Partnership Units to the Public Unitholders. Each Partnership Unit represents an indirect investment in a single PIMCO Advisors unit. Accordingly, Public Unitholders will continue to hold the same economic interest in PIMCO Advisors as they did before the Restructuring. Nonpublic Unitholders will continue to maintain a direct interest in PIMCO Advisors. Distribution Ratio................. Each Public Unitholder will receive one Partnership Unit for each PIMCO Advisors LP Unit held as of the Effective Date. Effective Date..................... Following close of business on December 31, 1997. Total Number of Partnership Units to be Issued....................... Up to 20,258,372 million Partnership Units. Trading Market..................... Partnership Units are currently listed for trading on the NYSE under the symbol "OCC" and are expected to be listed for trading under the symbol "PA" after the Effective Date. Risk Factors....................... Unitholders are referred to the matters discussed in "Risk Factors and Other Important Considerations." Primary Purposes of the Restructuring...................... The primary purposes of the Restructuring are to (i) permit Public Unitholders in PIMCO Advisors to continue to maintain an investment in a publicly traded entity while consolidating all public ownership of PIMCO Advisors into one entity and (ii) allow PIMCO Advisors to become a private partnership, which will not be subject to the new tax on its gross income from active businesses. Management believes that there are several benefits associated with combining the public ownership in the PIMCO Advisors enterprise into a single entity. The number of public holders in the one entity will be greater than the number in either the Partnership or PIMCO Advisors individually, which should have a favorable impact on market liquidity. Additionally, the combination will simplify the organizational structure of the PIMCO Advisors business and reduce confusion in the marketplace created by two publicly traded securities representing essentially the same investment. Finally, having a single public entity will substantially reduce administrative costs. The Restructuring also will benefit the Nonpublic Unitholders of PIMCO Advisors because they will retain an interest in a partnership (PIMCO Advisors) that will not be subject to the new federal tax on gross income that INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 10, 1997 PROSPECTUS OPPENHEIMER CAPITAL, L.P. 800 NEWPORT CENTER DRIVE, SUITE 100 NEWPORT BEACH, CALIFORNIA 92660 ISSUANCE OF UP TO 20,258,372 UNITS OF LIMITED PARTNER INTEREST OF OPPENHEIMER CAPITAL, L.P. TO UNITHOLDERS OF PIMCO ADVISORS L.P. This Prospectus is being furnished to the Public Unitholders (as defined in the partnership agreement of PIMCO Advisors L.P. ("PIMCO Advisors")) of units of limited partner interest ("PIMCO Advisors LP Units") in PIMCO Advisors in connection with the restructuring (the "Restructuring") of the public ownership of PIMCO Advisors. As of December 31, 1997 (the "Effective Date"), all PIMCO Advisors LP Units held by Public Unitholders will be contributed by the general partners of PIMCO Advisors, on behalf of each Public Unitholder, to Oppenheimer Capital, L.P. (the "Partnership") in return for the issuance to the Public Unitholders of an equal number of units of limited partner interest in the Partnership ("Partnership Units"). This action is being taken pursuant to the power granted by the PIMCO Advisors Amended and Restated Agreement of Limited Partnership (the "PIMCO Advisors Partnership Agreement"). The Partnership is a Delaware limited partnership which as its sole business holds general partner units ("PIMCO Advisors GP Units") in PIMCO Advisors. Each Partnership Unit represents an indirect interest in one PIMCO Advisors GP Unit. PIMCO Advisors GP Units are entitled to the same economic benefits as PIMCO Advisors LP Units. Accordingly, after the Restructuring, Public Unitholders will hold the same economic interest in PIMCO Advisors as they did before the transaction. Following the Effective Date, all trading in the PIMCO Advisors Class A LP Units on the New York Stock Exchange ("NYSE") will cease, and thereafter the Partnership Units will be the sole publicly-traded investment in the PIMCO Advisors business. On the Effective Date, Public Unitholders will automatically cease to be limited partners of PIMCO Advisors and will become limited partners of the Partnership. Thereafter, Public Unitholders of record on the Effective Date may receive certificates representing Partnership Units upon surrender of their PIMCO Advisors LP Unit certificates in accordance with the instructions provided herein. Public Unitholders will receive one Partnership Unit for each PIMCO Advisors LP Unit they hold on the Effective Date. Nonpublic Unitholders (as defined in the PIMCO Advisors Partnership Agreement) will continue to maintain a direct interest in PIMCO Advisors. Partnership Units will be traded on the NYSE under the symbol "OCC" until the Effective Date and under the symbol "PA" thereafter. In addition, it is expected that after the Restructuring, the Partnership will change its name to PIMCO Advisors Holdings L.P. PIMCO Advisors Class A LP Units are expected to continue to be traded on the NYSE until the Effective Date under the symbol "PA" and thereafter will not be publicly traded. On November 4, 1997, the last trading day prior to the execution of the agreement and plan of merger relating to the Oppenheimer Capital Merger (as defined herein), the closing sale prices for the Partnership Units and PIMCO Advisors Class A LP Units on the NYSE were $52 3/16 and $30 3/8, respectively. On December 9, 1997, the closing sales prices for the Partnership Units and PIMCO Advisors Class A LP Units on the NYSE were $54 3/8 and $32 15/16, respectively. WE CALL YOUR ATTENTION TO THE FACTORS SPECIFIED UNDER THE CAPTION "RISK FACTORS AND OTHER IMPORTANT CONSIDERATIONS" BEGINNING ON PAGE 8, WHICH ADDRESS CERTAIN CONSIDERATIONS RELATING TO AN INVESTMENT IN THE PARTNERSHIP. NO VOTE OF UNITHOLDERS IS REQUIRED IN CONNECTION WITH THE RESTRUCTURING. NO PROXIES ARE BEING SOLICITED AND YOU ARE REQUESTED NOT TO SEND A PROXY. No person is authorized to give any information or to make any representation not contained in the Prospectus, and any information or representation not contained herein must not be relied upon as having been authorized by PIMCO Advisors or the Partnership. This Prospectus does not constitute an offer of any securities, and does not constitute a solicitation of a consent or an offer to sell to any person in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any issuances made hereunder shall, under any circumstances, create any implication that there has been no change in the assets, properties or affairs of PIMCO Advisors or the Partnership since the date hereof or that information set forth herein is correct as of any time subsequent. ------------------------ THE SECURITIES ISSUABLE PURSUANT TO THIS PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this Prospectus is December , 1997 will apply to certain publicly traded partnerships, including the Partnership, after December 31, 1997. See "The Restructuring -- Reasons for the Restructuring." Tax Consequences................... The Restructuring is intended to be a tax-free transaction for the Public Unitholders. Public Unitholders are, however, encouraged to seek the advice of their tax advisor to determine whether there are any tax consequences that affect them. See "Certain Federal Income Tax Consequences." Relationship with PIMCO Advisors... Following the Restructuring, the Partnership will remain a general partner of PIMCO Advisors. The relationship between the Partnership and PIMCO Advisors is governed by the PIMCO Advisors Partnership Agreement and an operating agreement (the "Operating Agreement") between the two partnerships which, among other things, provides for the maintenance of a one-for-one exchange ratio between the Partnership Units and the PIMCO Advisors units held by the Partnership (excluding the PIMCO Advisors units underlying the general partner interest in the Partnership), and provides for certain exchange rights and registration rights for Nonpublic Unitholders. See "Relationship Between the Partnership and PIMCO Advisors -- Operating Agreement." Distribution Policy................ The Partnership will make quarterly distributions of available cash on each Partnership Unit. The distributions on each Partnership Unit will generally be equal in amount to the distributions received on the underlying PIMCO Advisors units held by the Partnership less any applicable taxes because all of the expenses (other than taxes) of the Partnership will be paid by PIMCO Advisors. STRUCTURE STRUCTURE -- THE RESTRUCTURING AND AFTER THE RESTRUCTURING SUMMARY FINANCIAL DATA OF OPPENHEIMER CAPITAL, L.P. The following table sets forth summary financial data of the Partnership (retroactively restated to reflect a 1.67 to 1 unit split effective December 1, 1997) and Oppenheimer Capital for the three months ended July 31, 1997 and 1996, and each of the five years ended April 30, 1997. This information should be read in conjunction with the Financial Statements of Oppenheimer Capital, L.P. and the Consolidated Financial Statements of Oppenheimer Capital and the related notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Oppenheimer Capital, L.P." <TABLE> <CAPTION> OPPENHEIMER CAPITAL, L.P. ----------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED JULY 31, FOR THE YEARS ENDED APRIL 30, ------------------- ----------------------------------------------------------- 1997 1996 1997 1996 1995 1994 1993 ------- ------- -------- -------- ------- ------- ------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATING DATA: Revenues............................... $19,585(3) $12,280 $ 56,046(1) $ 61,316(1) $34,282 $35,091 $30,022 Expenses............................... 685 685 2,720 2,720 3,461 4,038 3,704 ------- ------- ------- ------- ------- ------- ------- Net income............................. $18,900(3) $11,595 $ 53,326(1) $ 58,596(1) $30,821 $31,053 $26,318 ======= ======= ======= ======= ======= ======= ======= Net income per unit.................... $ 0.72(3) $ 0.45 $ 2.06(1) $ 2.28(1) $ 1.21 $ 1.22 $ 1.04 Distributions declared per unit........ $ 0.57 $ 0.39 $ 2.10(2) $ 1.90(2) $ 1.30 $ 1.28 $ 1.16 Weighted average number of units outstanding.......................... 25,763 25,656 25,663 24,457 25,277 25,122 25,065 </TABLE> <TABLE> <CAPTION> APRIL 30, JULY 31, ----------------------------------------------------------- 1997 1997 1996 1995 1994 1993 ------------------- -------- -------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> FINANCIAL CONDITION DATA AT: Total assets........................... $118,313 $116,149 $110,099 $96,633 $98,116 $98,365 Total liabilities...................... 14,806 17,858 12,713 10,321 10,319 9,683 ------- -------- -------- ------- ------- ------- Partners' capital...................... $103,507 $ 98,291 $ 97,386 $86,312 $87,797 $88,682 ======== ======== ======= ======= ======= </TABLE> - --------------- (1) Includes revenues and a gain on Quest sale of $1.8 million, or $.07 per unit in fiscal 1997 and $17.7 million, or $.69 per unit in fiscal 1996. (2) Includes a special distribution related to the Quest sale of $.06 per unit in fiscal 1997 and $.33 in fiscal 1996. (3) Includes revenues and a gain on Quest sale of $2.8 million, or $.11 per unit. <TABLE> <CAPTION> OPPENHEIMER CAPITAL -------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED JULY 31, FOR THE YEARS ENDED APRIL 30, -------------------- -------------------------------------------------------- 1997 1996 1997 1996 1995 1994 1993 -------- ------- -------- -------- -------- -------- ------- (UNAUDITED) (AMOUNTS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATING DATA: Revenues.................................. $ 55,043 $41,075 $181,974 $158,215 $129,912 $112,290 $94,733 Expenses.................................. 30,302 23,441 103,064 95,551 83,066 64,683 54,707 ------- ------- -------- -------- -------- -------- ------- Operating Income.......................... 24,741 17,634 78,910 62,664 46,846 47,607 40,026 Gain on Quest sale(1)..................... 4,374 -- 2,806 27,725 -- -- -- ------- ------- -------- -------- -------- -------- ------- Income before income taxes and minority interest................................ $ 29,115 $17,634 $ 81,716 $ 90,389 $ 46,846 $ 47,607 $40,026 ======= ======= ======== ======== ======== ======== ======= Assets under management at period end (in billions)............................... $ 60.8 $ 40.4 $ 51.2 $ 40.6 $ 31.8 $ 29.4 $ 26.4 </TABLE> <TABLE> <CAPTION> APRIL 30, JULY 31, -------------------------------------------------------- 1997 1997 1996 1995 1994 1993 -------------------- -------- -------- -------- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> FINANCIAL CONDITION DATA AT: Total assets............................. $103,055 $ 93,019 $ 76,338 $ 56,129 $ 43,034 $37,677 Total liabilities........................ 54,356 53,044 41,462 41,582 30,557 27,830 Minority interest........................ 396 277 174 87 25 18 -------- -------- -------- -------- -------- ------- Partners' capital........................ $ 48,303 $ 39,698 $ 34,702 $ 14,460 $ 12,452 $ 9,829 ======== ======== ======== ======== ======== ======= </TABLE> - --------------- (1) Reflects the gain realized by Oppenheimer Capital on the sale of the investment advisory and other contracts and business relationship for its twelve Quest for Value mutual funds to Oppenheimer Funds, Inc., on November 22, 1995. SUMMARY CONSOLIDATED FINANCIAL DATA OF PIMCO ADVISORS The following table sets forth summary consolidated financial data of PIMCO Advisors for the nine months ended September 30, 1997 and 1996, and each of the five years ended December 31, 1996. PIMCO Advisors and its subsidiaries were formed on November 15, 1994, when Pacific Financial Asset Management Corporation ("PFAMCo") merged certain of its investment management businesses and substantially all of its assets (the "PFAMCo Group") into Thomson Advisory Group L.P. ("TAG L.P.") (the "Consolidation"). Under generally accepted accounting principles, the Consolidation is accounted for as an acquisition of TAG L.P. by PFAMCo Group, even though the legal form was the reverse. Therefore, the historical financial statements include the operations of PFAMCo Group, in its corporate form, prior to the Consolidation and the combined results of PIMCO Advisors, in its partnership form, for the period since the Consolidation. This information should be read in conjunction with the Consolidated Financial Statements of PIMCO Advisors L.P. and Subsidiaries and the related notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations of PIMCO Advisors." <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31, --------------------- ------------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Total revenues...................... $344,210 $287,161 $392,024 $323,014 $180,263 $165,856 $120,155 Operating expenses.................. 232,572 190,975 261,978 215,271 145,220 131,447 93,011 Amortization of intangibles, options and restricted units.............. 31,000 30,852 41,171 42,723 6,202 -- -- -------- -------- -------- -------- -------- -------- -------- Operating income.................... 80,638 65,334 88,875 65,020 28,841 34,409 27,144 Other income, net................... 3,249 2,401 3,454 3,964 1,083 864 1,115 -------- -------- -------- -------- -------- -------- -------- Income before income tax expense.... 83,887 67,735 92,329 68,984 29,924 35,273 28,259 Income tax expense.................. 1,226 834 1,201 517 10,669 15,556 11,405 -------- -------- -------- -------- -------- -------- -------- Net income.......................... $ 82,661 $ 66,901 $ 91,128 $ 68,467 $ 19,255 $ 19,717 $ 16,854 ======== ======== ======== ======== ======== ======== ======== Net income allocated to: General Partner and Class A Limited Partner units........... $ 45,329 $ 39,421 $ 52,916 $ 46,655 $ 4,976 Class B Limited Partner units..... 37,332 27,480 38,212 21,812 1,128 Pre-Consolidation................. -- -- -- -- 13,151 -------- -------- -------- -------- -------- Total............................... $ 82,661 $ 66,901 $ 91,128 $ 68,467 $ 19,255 ======== ======== ======== ======== ======== NET INCOME PER UNIT(1): General Partner and Class A Limited Partner units..................... $ 1.06 $ 0.96 $ 1.29 $ 1.16 $ 0.12 Class B Limited Partner units....... $ 1.06 $ 0.76 $ 1.05 $ 0.59 $ 0.03 WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING (POST-CONSOLIDATION): Units outstanding: General Partner................... 800 800 800 800 800 Class A Limited Partner........... 40,146 40,132 40,135 40,108 40,018 Class B Limited Partner........... 32,983 32,961 32,961 32,961 32,961 -------- -------- -------- -------- -------- Total............................... 73,929 73,893 73,896 73,869 73,779 Weighted average effect of unit options........................... 3,906 2,915 3,119 1,684 984 -------- -------- -------- -------- -------- Total............................... 77,835 76,808 77,015 75,553 74,763 ======== ======== ======== ======== ======== DIVIDENDS/DISTRIBUTIONS............. $104,042 $ 97,560 $131,604 $ 89,613 $ 24,384 $ 22,158 $ 12,950 ======== ======== ======== ======== ======== ======== ======== FINANCIAL CONDITION AT END OF PERIOD: Total assets(2)..................... $365,728 $373,545 $358,500 $369,592 $379,708 $ 70,388 $ 43,189 Total liabilities................... 86,752 68,802 62,257 38,035 34,179 44,567 17,686 -------- -------- -------- -------- -------- -------- -------- Total Partners' capital(3).......... $278,976 $304,743 $296,243 $331,557 $345,529 $ 25,821 $ 25,503 ======== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> FOR THE NINE MONTHS FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, -------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> OTHER STATISTICS: Assets under management (in millions)......................... $130,632 $104,540 $110,022 $ 95,182 $ 72,175 $ 57,182 $ 43,737 Operating Profit Available for Distribution(1)................... 113,830 97,763 132,314 111,205 12,306 -- -- Cash flows provided by operating activities........................ 112,502 119,882 140,446 86,921 25,852 23,620 9,309 Cash flows (used in) provided by investing activities.............. (16,598) (2,983) (2,446) (17,771) 22,401 (436) (1,149) Cash flows used in financing activities........................ (104,042) (97,560) (131,604) (89,238) (2,549) (14,900) (15,800) </TABLE> - --------------- (1) Computed on earnings following the Consolidation. Operating Profit Available for Distribution is defined by the PIMCO Advisors Partnership Agreement as the sum of net income plus non-cash charges from the amortization of intangible assets, non-cash compensation expenses arising from option and restricted unit plans, and losses of any subsidiary which is not a flow-through entity for tax purposes. (2) Upon completion of the Consolidation, approximately $284.9 million of intangible assets were created. See Note 3 in the Notes to the Consolidated Financial Statements of PIMCO Advisors L.P. and Subsidiaries. (3) Stockholders' equity before the Consolidation.

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+PROSPECTUS SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus and the information under "Risk Factors." Unless otherwise indicated, all information in this Prospectus (i) assumes that the Underwriters' over-allotment option will not be exercised; (ii) reflects a 24:1 reverse stock split to be effected by the Company upon consummation of the Offering; (iii) reflects the conversion of all outstanding shares of the Company's Preferred Stock into 8,682,287 shares of Common Stock upon consummation of the Offering; and (iv) the conversion of all outstanding warrants to purchase Preferred Stock into warrants exercisable for an aggregate of 481,977 shares of Common Stock. THE COMPANY Innova designs, manufactures and supports millimeter wave radios for use as short- to medium-distance wireless communication links in developed and developing telecommunications markets. Innova's products enable telecommunications service providers to establish reliable and cost-effective voice, data and video communications links within their networks. Innova's products operate in frequencies ranging from 13-38 GHz and may be used in various applications, including cellular and PCS/PCN networks, broadband communications, local loop services and long distance networks. In recent years, growing demand for telecommunications services has been driven by the emergence of improved technologies and by the recognition that effective communications can enhance business productivity and accelerate economic growth. Regulatory changes, including the privatization of state-run telephone monopolies, allocation of additional radio spectrum and licensing of new entrants to the telecommunications market, have created a competitive environment in which service providers are seeking to meet this demand and capture market share by rapidly establishing new networks and expanding existing networks. Millimeter wave radios have become an increasingly critical component of telecommunications networks. As a result, telecommunications service providers have focused on the quality and lifetime ownership cost of these systems. Innova has combined its expertise in radio frequency ("RF") systems architecture and software design to create reliable, cost-effective, intelligent and feature-rich millimeter wave radio systems that are easy to install, maintain and upgrade. Innova's millimeter wave radio systems are designed to operate at multiple E1/T1 rates in the high frequency bands used for the transmission of voice, data and video traffic. Innova's products are based on a common system architecture and are software configurable. Innova's radio systems consist of an Indoor Unit ("IDU"), which interfaces with the user's network and is digitally linked to an Outdoor Unit ("ODU"), which transmits and receives the RF signal. The common embedded software platform in the IDU and ODU is simple network management protocol ("SNMP") compliant and provides the ability to remotely monitor and manage Innova's radios within a network using the service provider's network management system. Innova's objective is to be a leading provider of digital millimeter wave radios. Innova's strategy is to: (i) continue to focus on enhancing existing and developing new solutions for the point-to-point millimeter wave radio market; (ii) expand the geographic coverage and increase the market penetration of its products by strengthening existing and establishing new strategic distribution relationships; (iii) leverage its existing system architecture to be first-to-market with high-quality, cost-effective radios; and (iv) further automate its product calibration and test processes to promote quality control and cost-effective manufacturing and to improve productivity. Innova markets its products principally to systems integrators with a strong regional presence in Europe, Latin America and Asia. Innova seeks to develop strategic relationships with these systems integrators, which provide field engineering, installation, project financing and support to service providers. To date, Innova has entered into distribution agreements with MAS Technology Limited ("MAS"), NERA ASA ("NERA") and Societe Anonyme de Telecommunications ("SAT"). Innova also markets its products directly to service providers in the U.S. and internationally. To date, the Company has supplied products, either through distribution relationships or directly, to Alestra (Mexico), Associated Communications (U.S.), Avantel (Mexico), Bouygues Telecom (France), Globtel (Slovakia), Northern Telecom Limited ("Nortel") (Canada), PacBell Mobile Services (U.S.) and Telcel (Venezuela), among others. The Company was incorporated in Delaware in 1989 and reincorporated as a Washington corporation in 1991. The Company's headquarters and principal place of business are located at Gateway North, Building 2, 3325 South 116th Street, Seattle, Washington 98168-1974. Its telephone number is (206) 439-9121. THE OFFERING <TABLE> <S> <C> Shares of Common Stock Offered by the Company.......... 2,750,000 Shares of Common Stock Shares of Common Stock Outstanding after the Offering............................................. 12,389,006 Shares of Common Stock(1) Use of Proceeds........................................ Repayment of indebtedness, equipment purchases, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.......................... INVA Risk Factors........................................... The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." </TABLE> SUMMARY FINANCIAL DATA <TABLE> <CAPTION> NINE MONTH FISCAL Six Months Ended Years Ended March 31, PERIOD ENDED June 30, ------------------------------------- DECEMBER 31, ----------------------- 1993 1994 1995 1996 1996(2) 1996 1997 ------- ------- ------- ------- ------------------ ---------- ---------- (dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues............... $ 200 $ 877 $ 2,358 $ 1,962 $ 2,104 $ 200 $12,582 Gross profit (loss).......... (464) (1,186) (2,157) (1,980) (1,635) (1,852) 3,012 Loss from operations......... (3,903) (5,234) (6,116) (8,816) (7,186) (5,759) (2,675) Net loss..................... $(5,099) $(5,400) $(6,318) $(9,061) $(7,329) $(5,890) $(3,013) Pro forma net loss per share(3)................... $ (0.73) $ (0.30) Supplementary net loss per share(3)................... $ (0.72) $ (0.27) Shares used in computing pro forma net loss per share(3)................... 10,089,442 10,111,797 Shares used in computing supplementary net loss per share(3)................... 10,128,379 10,543,969 </TABLE> <TABLE> <CAPTION> JUNE 30, 1997 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- (in thousands) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents..................................................... $ 3,834 $ 30,806 Working capital............................................................... 4,371 36,819 Total assets.................................................................. 20,208 47,038 Redeemable preferred stock(1)................................................. 47,769 -- Total stockholders' equity (deficit)(1)....................................... (39,297) 40,920 </TABLE> - --------------- (1) As of June 30, 1997. Excludes: (i) 1,655,298 shares of Common Stock issuable upon exercise of stock options issued pursuant to the Company's 1990 Stock Option Plan, at a weighted average exercise price of $2.19 per share; (ii) an additional 377,774 shares of Common Stock reserved for future issuance under the Company's 1990 Stock Option Plan; (iii) 48,263 shares of Common Stock issuable upon exercise of stock options issued pursuant to the Company's Director Stock Option Plan; (iv) an additional 71,737 shares of Common Stock reserved for future issuance under the Company's Director Stock Option Plan; and (v) 2,949,137 shares of Common Stock issuable upon exercise of warrants to purchase Common Stock. See "Management -- Benefit Plans" and "-- Certain Transactions," "Description of Capital Stock" and Notes to Consolidated Financial Statements. (2) Subsequent to March 31, 1996 the Company changed its fiscal year end to December 31. (3) See Note 1(q) to the Consolidated Financial Statements. (4) As adjusted to give effect to the (i) conversion of all outstanding shares of Preferred Stock into shares of Common Stock upon consummation of the Offering, (ii) sale of the shares of Common Stock being offered hereby at an initial public offering price of $13.00 per share (after deducting the underwriting discounts and commissions and estimated expenses of the Offering) and (iii) application of the estimated net proceeds of the Offering. See "Use of Proceeds."