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+ PROSPECTUS SUMMARY THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THE OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS PROSPECTUS. OUR COMPANY We are a leading provider of transaction services, credit services and marketing services to retail companies in North America. We focus on facilitating and managing electronic transactions between our clients and their customers through multiple distribution channels including in-store, catalog and the Internet. Our credit and marketing services assist our clients in identifying and acquiring new customers, as well as helping to increase the loyalty and profitability of their existing customers. We have a client base in excess of 300 companies, comprised mostly of specialty retailers, petroleum retailers, supermarkets and financial services companies. We generally have long-term relationships with our clients, with contracts typically ranging from three to five years in duration. The Limited, together with its retail affiliates, including Victoria's Secret Stores, Victoria's Secret Catalogue, Express, Lane Bryant, Bath & Body Works, Lerner New York, Henri Bendel and Structure, is our largest client, representing approximately 25.3% of our 2000 consolidated revenue. OUR PRODUCTS AND SERVICES Our products and services are centered around three core capabilities--Transaction Services, Credit Services and Marketing Services. We have traditionally marketed and sold our products and services on a stand-alone basis, but increasingly are marketing and selling them on a bundled and integrated basis. Our products and services and target markets are listed below. <TABLE> <CAPTION> SEGMENT PRODUCTS AND SERVICES TARGET MARKETS ----------------------------- --------------------------------------- ------------------------- <S> <C> <C> TRANSACTION SERVICES - Transaction Processing - Specialty Retail - Network Services - Petroleum Retail - Merchant Bankcard Services - Regulated and - Account Processing and Servicing De-regulated Utility - Card Processing - Mass Transit - Billing and Payment Processing - Tollways - Customer Care - Parking CREDIT SERVICES - Private Label Receivables Financing - Specialty Retail - Underwriting and Risk Management - Petroleum Retail - Merchant Processing - Receivables Funding MARKETING SERVICES - Loyalty Programs - Specialty Retail - Air Miles - Petroleum Retail - One-to-One Loyalty - Supermarkets - Database Marketing Services - Financial Services - Enhancement Services - Regulated and - Direct Marketing De-regulated Utility </TABLE> SCHEDULE II ALLIANCE DATA SYSTEMS CORPORATION CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) <TABLE> <CAPTION> BALANCE AT BALANCE AT DESCRIPTION BEGINNING OF PERIOD INCREASES DEDUCTIONS END OF PERIOD ----------- ------------------- --------- ---------- ------------- <S> <C> <C> <C> <C> Allowance for Doubtful Accounts--Trade receivables: 11 months ended December 31, 1998............ $2,561 $ 8,151 $ (7,136) $3,576 Year ended December 31, 1999................. 3,576 5,814 (8,311) 1,079 Year ended December 31, 2000................. 1,079 3,565 (768) 3,876 Allowance for Doubtful Accounts--Credit Card receivables: 11 months ended December 31, 1998............ $4,617 $15,352 $(15,081) $4,888 Year ended December 31, 1999................. 4,888 14,951 (16,182) 3,657 Year ended December 31, 2000................. 3,657 13,828 (13,828) 3,657 </TABLE> OUR MARKET OPPORTUNITY AND GROWTH STRATEGY Our services are applicable to the full spectrum of commerce opportunities involving companies that sell products and services to individual consumers. Companies increasingly seek services that compile and analyze customer purchasing behavior, enabling them to more effectively communicate with their customers. The continuing shift to electronic payment systems generates valuable information on individual consumers and their purchasing preferences. Many retailers, however, lack the economies of scale and core competencies necessary to support their own transaction processing infrastructure or credit card or database operations. In addition, we see an increasing acceptance by companies to outsource the development and management of their marketing programs, such as loyalty programs and database marketing services. Our current strategy to capitalize on these opportunities includes: - increasing the penetration of our products and services to existing clients; - expanding our client base in our existing market sectors; - continuing to expand our services and capabilities to help our clients succeed in multi-channel commerce; and - considering focused, strategic acquisitions and alliances to enhance our core capabilities or increase our scale. OUR LIQUIDITY SOURCES We finance our growth through cash from operations, issuing certificates of deposit through our credit card bank subsidiary, a $100.0 million revolving loan commitment and a securitization program. We utilize cash flow from operations, certificates of deposit and the revolving loan commitment to finance our operating activities and to fund credit enhancement and seller's interest in our securitizations. We finance substantially all our private label credit card receivables through a securitization program, which involves the packaging and selling of both current and future receivable balances of private label credit card accounts to a master trust. Our securitizations are treated as sales for accounting purposes and, accordingly, securitized receivables are removed from our balance sheet. We retain a residual interest in the trust that is commonly referred to as an "interest only strip". OUR HISTORY AND OWNERSHIP We are the result of the 1996 merger of two entities acquired by Welsh, Carson, Anderson & Stowe--J.C. Penney's transaction services business, BSI Business Services, Inc., and The Limited's credit card bank operation, World Financial Network National Bank. Since then, we have made several complementary portfolio and business acquisitions. As of April 30, 2001, Welsh, Carson, Anderson & Stowe beneficially owned approximately 74.3% of our common stock, and The Limited, through its wholly owned subsidiary Limited Commerce Corp., beneficially owned approximately 25.3% of our common stock. After this offering, Welsh Carson will have the right to designate up to three nominees for election to our board of directors and Limited Commerce Corp. will have the right to designate up to two nominees, depending on their continued ownership of our common stock above minimum thresholds. Our corporate headquarters are located at 17655 Waterview Parkway, Dallas, Texas 75252, and our telephone number is 972-348-5100. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 13,000,000 shares Common stock to be outstanding after the offering................................... 70,936,136 shares Use of proceeds.............................. We intend to use approximately $100.8 million of the net proceeds from the offering to repay outstanding debt, and the balance for general corporate purposes, including potential acquisitions and working capital. Proposed New York Stock Exchange symbol...... "ADS" </TABLE> Unless otherwise indicated, all information in this prospectus: - gives effect to the 1-for-9 reverse stock split of our common stock effected on March 15, 2000; and - assumes the conversion of all outstanding shares of our Series A cumulative convertible preferred stock into common stock. As of April 30, 2001, these shares of Series A preferred stock were convertible into 10,273,990 shares of common stock, assuming an initial public offering price of $13.00 per share. The number of shares of common stock described as being outstanding after this offering excludes up to: - 4,351,105 shares that we may issue upon the exercise of stock options outstanding as of April 30, 2001 at a weighted average exercise price of $12.43 per share; - 3,698,743 additional shares that we may issue under our stock option and restricted stock plan; - 1,500,000 shares that we may issue under our employee stock purchase plan; and - 1,950,000 additional shares that we may issue upon exercise of the underwriters' over-allotment option. SUMMARY CONSOLIDATED FINANCIAL DATA In connection with your review of the summary consolidated financial data you should consider the following information for a better understanding of the data presented: RECAST 1998. Prior to December 31, 1998, our fiscal year was based on a 52/53-week fiscal year ending on the Saturday closest to January 31. We have since changed our fiscal year end to December 31. In order to provide a better basis of comparison to our results for 1999 and 2000, we have recast our historical operating results to a calendar year basis for the year ended December 31, 1998. In our opinion, the recast historical financial information reflects all normal recurring adjustments necessary for a fair presentation of such financial information. QUARTERLY INFORMATION. The summary consolidated financial data for the three months ended March 31, 2000 and 2001 have been derived from our unaudited consolidated financial statements, which are included in this prospectus and which, in our opinion, reflect all adjustments, consisting only of adjustments of a normal and recurring nature, necessary for a fair presentation. Results for the three months ended March 31, 2001 are not necessarily indicative of results for the full year. PRO FORMA INFORMATION. We have also included unaudited pro forma information for 2000. The data contained in the pro forma column give effect to the Utilipro acquisition as if it had been consummated on January 1, 2000. The supplemental pro forma loss per share data give effect to the conversion of all outstanding Series A preferred shares and the exercise of all outstanding warrants as if the conversion and the exercise had occurred at the beginning of the period. The pro forma as adjusted data give effect to this offering as if it occurred on March 31, 2001. The unaudited pro forma data do not purport to present what our results of operations or financial position would actually have been, or to project our results of operations or financial position for any future period. You should read the following pro forma information along with the information contained throughout this prospectus, including the financial statements and the related notes that are included in this prospectus. USE OF OPERATING EBITDA. Other financial data include operating EBITDA, which is equal to operating income plus depreciation and amortization and the change in deferred revenue less the change in redemption settlement assets. We have presented operating EBITDA because we use it to monitor compliance with the financial covenants in our amended credit agreement, such as debt-to-operating EBITDA, interest coverage ratios and minimum operating EBITDA. We also use operating EBITDA as an integral part of our internal reporting to measure the performance and liquidity of our reportable segments. In addition, we believe operating EBITDA eliminates the uneven effect across all segments of considerable amounts of non-cash amortization of purchased intangibles recognized in business combinations accounted for under the purchase method. Operating EBITDA is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either operating income or net income as an indicator of operating performance, or to the statement of cash flows as a measure of liquidity. In addition, operating EBITDA is not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The operating EBITDA measure presented in this prospectus may not be comparable to similarly titled measures presented by other companies. <TABLE> <CAPTION> HISTORICAL PRO FORMA ----------------------------------------------------------------- --------------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE FOR THE THREE MONTHS THREE FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31, FOR THE YEAR MONTHS ------------------------------------- ------------------------- ENDED ENDED ACTUAL DECEMBER 31, MARCH 31, RECAST --------------------------------------------------- ------------- ----------- 1998 1999 2000 2000 2001 2000 2001 ----------- ---------- ---------- ----------- ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA Total revenue................ $ 451,537 $ 583,082 $ 678,195 $ 165,547 $ 180,692 $695,927 $184,832 Cost of operations........... 360,875 466,856 547,985 134,571 143,258 572,605 147,275 General and administrative... 23,364 35,971 32,201 7,505 9,333 32,201 9,333 Depreciation and other amortization............... 8,782 16,183 26,265 5,997 6,367 27,526 6,741 Amortization of purchased intangibles................ 46,977 61,617 49,879 13,795 11,113 51,560 11,393 ---------- ---------- ---------- ---------- ---------- -------- -------- Total expenses............. 439,998 580,627 656,330 161,868 170,071 683,892 174,742 ---------- ---------- ---------- ---------- ---------- -------- -------- Operating income............. 11,539 2,455 21,865 3,679 10,621 12,035 10,090 Other non-operating expense.................... -- -- 2,477 2,476 -- 2,477 -- Interest expense............. 29,295 42,785 38,870 8,776 9,635 40,642 9,930 Income tax expense (benefit).................. (2,622) (6,538) 1,841 716 933 (2,162) 611 ---------- ---------- ---------- ---------- ---------- -------- -------- Income (loss) from continuing operations................. (15,134) (33,792) (21,323) (8,289) 53 (28,922) (451) Income (loss) from discontinued operations, net of taxes............... (3,948) 7,688 -- -- -- -- -- Loss on disposal of discontinued operations, net of taxes............... -- (3,737) -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- -------- -------- Net income (loss)............ $ (19,082) $ (29,841) $ (21,323) $ (8,289) $ 53 $(28,922) (451) ========== ========== ========== ========== ========== ======== ======== Loss per share from continuing operations-- basic and diluted.......... $ (0.37) $ (0.78) $ (0.60) $ (0.21) $ (0.04) $ (0.76) $ (0.05) Loss per share--basic and diluted.................... $ (0.46) $ (0.70) $ (0.60) $ (0.21) $ (0.04) $ (0.76) $ (0.05) Weighted average shares used in computing per share amounts--basic and diluted.................... 41,308 47,498 47,538 47,529 47,568 47,538 47,568 Supplemental pro forma loss per share from continuing operations--basic and diluted.................... $ (0.51) $ (0.01) Supplemental pro forma loss per share--basic and diluted.................... $ (0.51) $ (0.01) Weighted average shares used in computing supplemental pro forma per share amounts--basic and diluted.................... 56,936 56,966 OTHER FINANCIAL DATA Calculation of Operating EBITDA: Operating income........... $ 11,539 $ 2,455 $ 21,865 $ 3,679 $ 10,621 $ 12,035 10,090 Depreciation and other amortization............. 8,782 16,183 26,265 5,997 6,367 27,526 6,741 Amortization of purchased intangibles.............. 46,977 61,617 49,879 13,795 11,113 51,560 11,393 ---------- ---------- ---------- ---------- ---------- -------- -------- EBITDA................... 67,298 80,255 98,009 23,471 28,101 91,121 28,224 Plus change in deferred revenue................ 20,729 91,149 40,845 10,794 13,244 40,845 13,244 Less change in redemption settlement assets...... 11,838 63,472 18,357 3,337 6,163 18,357 6,163 ---------- ---------- ---------- ---------- ---------- -------- -------- Operating EBITDA......... $ 76,189 $ 107,932 $ 120,497 $ 30,928 $ 35,182 $113,609 35,305 ========== ========== ========== ========== ========== ======== ======== Operating EBITDA as a percentage of revenue...... 16.9% 18.5% 17.8% 18.7% 19.5% 16.3% 19.1% SEGMENT OPERATING DATA Transactions processed....... 1,134,902 1,839,857 2,519,535 566,275 629,131 Statements generated......... 130,895 132,817 127,217 34,333 31,921 Average securitized portfolio.................. $1,898,851 $2,004,827 $2,073,574 $2,139,647 $2,214,044 Credit sales................. $3,049,151 $3,132,520 $3,685,069 $ 755,114 $ 780,429 Air Miles reward miles issued..................... 611,824 1,594,594 1,927,016 432,252 524,237 Air Miles reward miles redeemed................... 158,281 529,327 781,823 162,312 192,023 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, AS OF DECEMBER 31, --------------------------- ------------------------------------ 2001 PRO FORMA 1998 1999 2000 2001 AS ADJUSTED ---------- ---------- ---------- ---------- -------------- (UNAUDITED) (AMOUNTS IN THOUSANDS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA Cash and cash equivalents................................. $ 47,036 $ 56,546 $ 116,941 $ 58,756 $ 111,353 Credit card receivables and seller's interest............. 139,458 150,804 137,865 125,013 125,013 Redemption settlement assets, restricted.................. 70,178 133,650 152,007 158,171 158,171 Intangibles and goodwill, net............................. 362,797 493,609 444,549 457,011 457,011 Total assets.............................................. 1,075,707 1,301,263 1,420,606 1,304,832 1,355,928 Deferred revenue--service and redemption.................. 158,192 249,341 290,186 303,430 303,430 Certificates of deposit and other receivables funding debt.................................................... 147,984 116,900 139,400 119,700 119,700 Long-term and subordinated debt........................... 332,000 318,236 296,660 294,575 193,750 Total liabilities......................................... 780,902 921,791 1,058,215 952,609 851,784 Series A preferred stock.................................. -- 119,400 119,400 119,400 -- Total stockholders' equity................................ 294,805 260,072 242,991 232,823 504,144 </TABLE>

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+ SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE MORE DETAILED INFORMATION IN THE REST OF THIS PROSPECTUS ABOUT US AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, INCLUDING "RISK FACTORS," AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "BLACK HILLS," "WE," "US" AND "OUR" REFER TO BLACK HILLS CORPORATION AND ALL OF ITS SUBSIDIARIES COLLECTIVELY. ABOUT BLACK HILLS CORPORATION We are a growth oriented, diversified energy holding company operating principally in the United States. Our regulated and unregulated businesses have expanded significantly in recent years. Our independent energy group produces and markets power and fuel. We produce and sell electricity in a number of markets, with a strong emphasis in the western United States. We also produce coal, natural gas and crude oil primarily in the Rocky Mountain region and market fuel products nationwide. We also own Black Hills Power, Inc., an electric utility serving approximately 58,600 customers in South Dakota, Wyoming and Montana. Our communications unit offers state-of-the-art broadband communication services to residential and business customers in Rapid City and the northern Black Hills region of South Dakota. INDEPENDENT ENERGY In recent years, the independent energy group has been our primary source of revenue and net income growth. Net income from this group is expected to exceed net income derived from our regulated utility beginning in 2001. Our independent power unit acquires, develops and operates unregulated power plants, primarily in the Rocky Mountain region of the United States. In July 2000, we expanded our presence in the independent power business by acquiring Indeck Capital, Inc. This acquisition and subsequent additions provide us with varying interests in 13 operating gas-fired and hydroelectric power plants in California, Colorado, Massachusetts and New York, of which we operate 12, as well as minority interests in several power-related funds. We have a total ownership interest of approximately 250 net megawatts. We are in the process of acquiring or constructing an additional net ownership interest of approximately 470 megawatts of generation capacity, approximately 330 megawatts of which we expect to be brought into service in 2001. As of December 31, 2000, we had 275 million tons of low-sulfur sub-bituminous coal reserves at our Wyodak mine located near Gillette, Wyoming. Substantially all of our coal production is sold under long-term contracts with our electric utility and with PacifiCorp. Our Wyodak mine will also provide coal to a 90 megawatt mine-mouth power plant which is being developed for our independent power unit and is scheduled for completion in 2003. We recently announced that we have initiated the planning and permitting process for a 500 megawatt coal-fired mine mouth power plant at the Wyodak site that may be operational by 2005. Our oil and gas exploration and production unit owns and operates 298 oil and gas wells, all in Wyoming, and owns working interests in another 341 wells operated by others located in California, Montana, North Dakota, Texas, Wyoming, Louisiana, Oklahoma and offshore in the Gulf of Mexico. As of December 31, 2000, we had proved reserves of 4.4 million barrels of oil and 18.4 billion cubic feet of natural gas, with approximately 62% of our current production consisting of natural gas. Our fuel marketing and transportation unit supplies wholesale natural gas marketing and risk management products and services primarily to customers in the Rocky Mountain and West Coast regions of the United States. In addition, this unit markets oil in the south and coal in the eastern and midwestern regions of the United States. Our customers include natural gas distribution companies, FORWARD-LOOKING STATEMENTS This prospectus includes "forward-looking statements" as defined by the Securities and Exchange Commission. These statements concern our plans, expectations and objectives for future operations. All statements, other than statements of historical facts, included in this prospectus that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words "believe," "plan," "intend," "anticipate," "estimate," "goal," "aim," "project" and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, such things as: - expansion and growth of our business and operations; - future financial performance; - future acquisition and development of power plants; - future production of coal, oil and natural gas; - reserve estimates; and - business strategy. These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements, including the following factors as well as those factors discussed under the section of this prospectus entitled "Risk Factors:" - prevailing governmental polices and regulatory actions with respect to allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power and other capital investments, and present or prospective wholesale and retail competition; - changes in and compliance with environmental and safety laws and policies; - weather conditions; - population growth and demographic patterns; - competition for retail and wholesale customers; - pricing and transportation of commodities; - market demand, including structural market changes; - changes in tax rates or policies or in rates of inflation; - changes in project costs; - unanticipated changes in operating expenses or capital expenditures; - capital market conditions; - technological advances; - competition for new energy development opportunities; and - legal and administrative proceedings that influence our business and profitability. municipalities, industrial users, oil and gas producers, electric utilities and coal mines. Our average daily marketing volumes for the twelve months ended December 31, 2000 were approximately 860,800 million British thermal units of natural gas, 44,300 barrels of oil and 4,400 tons of coal. Our power marketing activities involve marketing of capacity and energy from our existing power generation facilities. ELECTRIC UTILITY Our electric utility engages in the generation, transmission and distribution of electricity to approximately 58,600 customers in South Dakota, Wyoming and Montana. We control 458 megawatts of generating capacity, including 65 megawatts of capacity purchased from others under long-term power contracts at rates which currently are significantly lower than prevailing market prices. Approximately 53% of our utility's generating capacity consists of coal-fired plants and 33% is gas- or oil-fired, with the remaining 14% purchased from others. Our revenue mix for 2000 was comprised of 29% wholesale off-system, 26% commercial, 20% residential, 14% industrial, 10% contract wholesale and 1% municipal sales. In 2000, our South Dakota customers accounted for 92% of our retail electric revenues. Our retail electric rates in South Dakota are subject to a five-year freeze expiring on January 1, 2005. Because our generation capacity typically exceeds our peak load demands, we rarely purchase power on the spot market during periods of peak usage, permitting us to preserve our low-cost rate structure for our retail customers. Off-system sales offer a means to optimize the utilization of our power supply sources by permitting us to sell capacity and energy in excess of our native load requirements to wholesale customers at market prices which sometimes exceed our regulated retail rates. Wholesale off-system sales have represented an increasing percentage of our total revenues and net income. We added 40 megawatts of additional capacity to our system with the addition of the Neil Simpson combustion turbine, which we placed into operation in June 2000. Our utility operates a transmission system of 447 miles of high voltage and 541 miles of lower voltage lines. Our system has the capability of connecting to either the midwestern or western transmission grids. This provides us with an important strategic opportunity to shift off-system power to areas of higher demand and profitability as market conditions warrant. COMMUNICATIONS Our communications group, known as Black Hills FiberCom, offers a full suite of local and long distance telephone service, expanded cable television service, cable modem Internet access and high-speed data and video services to residential and business customers. We have completed a 210 mile inter- and intra-city fiber optic network and currently operate nearly 600 miles of two-way interactive hybrid fiber coaxial cable in Rapid City and the northern Black Hills region of South Dakota. The construction of our communications network is approximately 75% complete, and we expect to substantially complete construction in 2001. Since launching our services in November 1999, we have attracted over 9,000 residential and business customers. Our goal is to double the number of our customers and to attain 50% residential market penetration within our service territory while serving 35% of all broadband business customers in that territory. Our marketing strategy centers on providing bundled telecommunications services at competitive prices to commercial and residential customers. By bundling high speed Internet access with cable television and telephone service, we are able to exploit economies of scale and scope to offer customers relatively low-cost telecommunications solutions. Approximately 80% of our residential customers have opted for bundled services to date. OUR BUSINESS STRATEGY Our strategy is to build long-term shareholder value by deploying our development, operating and marketing expertise in the energy industry. We plan to operate a mix of unregulated independent energy and regulated utility businesses, with emphasis on the independent power generation and fuel production segments. Our strategy includes the following key elements: - grow our independent power unit by developing and acquiring power projects primarily in the western United States; - expand the generating capacity of our existing sites through a strategy known as "brownfield development;" - sell a large percentage of the production from our independent power projects through long-term contracts in order to secure attractive investment returns; - increase our reserves of natural gas and expand our coal production; - exploit our fuel cost advantages and our operating and marketing expertise to remain a low-cost power producer; - exploit our knowledge and market expertise while managing the risks inherent in fuel marketing; - build and maintain strong relationships with wholesale energy customers; and - capitalize on our utility's established market presence, relationships and customer loyalty. For more details about our business strategy, see "Business--Strategy." RECENT DEVELOPMENTS ESTIMATED EARNINGS FOR FIRST QUARTER OF 2001 Although our results of operations for the first quarter of 2001 are not currently available, the following information reflects our expectations with respect to these results based on currently available information. We expect our earnings for the first quarter of 2001 to reach record levels of approximately $1.30 to $1.35 per share, compared to $0.42 per share reported for the same quarter of 2000. The anticipated higher earnings in the first quarter of 2001 are primarily due to the continued strong performance of our wholesale gas marketing business and increased wholesale electric sales. We also expect earnings for our independent energy business group to exceed our electric utility's earnings for the first quarter of 2001. A portion of the increased earnings is attributable to continued unusual conditions in western gas and electricity markets. We also expect that our communications business group will report continued losses in the first quarter due to capital costs and related financing costs. We expect to report our first quarter financial results on or about May 4, 2001. SETTLEMENT AGREEMENT In April 2001, we entered into a settlement agreement with PacifiCorp whereby ongoing litigation between the parties related to coal sales by our subsidiary, Wyodak Resources, for PacifiCorp's Wyodak power plant has been withdrawn. For a description of the litigation, see "Business--Legal Proceedings." A new coal supply contract for the Wyodak plant and other agreements were executed as a result of the settlement. The new coal supply contract for the Wyodak plant extends the term of the prior contract from 2013 to 2022. Wyodak Resources will receive a lump sum cash payment, while the coal sale price will be reduced and PacifiCorp's minimum annual coal purchase obligation will increase. Under the terms of a new coal sales agreement, Wyodak Resources will sell additional coal for delivery to other PacifiCorp power plants from late 2001 through 2003, and Wyodak Resources will also have an option to sell additional coal to PacifiCorp through 2010. FOUNTAIN VALLEY ACQUISITION In April 2001, we purchased from Enron Corporation 100% of an independent power project under construction near Colorado Springs, Colorado known as the "Fountain Valley" project. This site will initially house 240 megawatts of gas-fired peaking facilities. Upon completion of construction, the energy and capacity generated by the Fountain Valley project will be sold to Public Service Company of Colorado under a tolling contract expiring in July 2012 pursuant to which we assume no fuel cost risk. We expect the plant to be completed in phases beginning in June 2001 and ending in July 2001 with the total cost expected to approximate $175 million. In addition to the current project, we believe that the Fountain Valley site provides us with attractive expansion and integration opportunities and is well-situated to serve other markets in the Rocky Mountain and southwest regions. We plan to further develop this site, integrating our expanding gas-fired generation resources with our nearby fuel production and marketing activities and complementing our predominantly coal-fired generation facilities in Wyoming. LONG-TERM POWER SALES CONTRACTS In February 2001, we entered into long-term power sales agreements with Cheyenne Light, Fuel and Power Company and the Municipal Electric Agency of Nebraska to sell a total of 80 megawatts of capacity from the Wygen I facility, a mine-mouth coal-fired plant with a total capacity of 90 megawatts, which is expected to be completed by spring 2003. The agreements cover a period of 10 years from the date the plant becomes operational. In March 2001, we entered into a unit contingent tolling agreement with Cheyenne Light, Fuel and Power Company for a 10-year term commencing in September 2001 for all of the energy and capacity from the Black Hills Generation Gillette CT facility, a 40 megawatt gas-fired combustine turbine facility which is scheduled to be completed in May 2001. We plan to operate this facility as a merchant plant during the summer of 2001. LANGE PROJECT In March 2001, we placed an order for a 40 megawatt gas-fired turbine that will be located either adjacent to the Wygen I and Black Hills Generation Gillette CT plants near Gillette, Wyoming, or adjacent to our transmission system in Rapid City, South Dakota. We expect to complete construction of the related power plant, known as the "Lange project," in the first quarter of 2002. PURCHASE OF OIL AND GAS PROPERTIES In March 2001, we signed a definitive agreement to purchase certain operating and non-operating interests in 74 oil and gas wells located primarily in Colorado and Wyoming for approximately $10 million from Stewart Petroleum Corporation. These properties have proved reserves of approximately 8.7 billion cubic feet of natural gas and approximately 200,000 barrels of oil, representing an increase of over 20% in our December 31, 2000 proved reserves. We expect to operate 35% of the wells representing approximately 85% of the reserves acquired. This transaction is expected to close in April 2001. HOLDING COMPANY FORMATION At our annual meeting of shareholders on June 20, 2000, our shareholders approved the formation of a holding company structure through a "plan of exchange" between Black Hills Corporation and Black Hills Holding Corporation. The formation of our holding company allows us to pursue, through separate subsidiaries, business opportunities in markets that are both regulated and unregulated. The shares offered by this prospectus are shares of common stock of the new holding company, Black Hills Corporation. THE OFFERING <TABLE> <S> <C> Common stock offered by us................... 3,000,000 shares Common stock to be outstanding after the offering................................... 25,951,394 shares(1) Use of proceeds.............................. Approximately $40 million to partially fund the construction of the following independent power projects: Arapahoe CC5, Valmont Unit 8, Black Hills Generation Gillette CT and the Lange project; and approximately $108.6 million to repay a portion of indebtedness owed under our revolving credit facilities. Remaining proceeds will be used for general corporate purposes, including funding of capital expenditures and potential acquisitions, the development and construction of new facilities and additions to working capital. See "Use of Proceeds." New York Stock Exchange symbol............... "BKH" </TABLE> ------------------------ (1) Based on the number of shares outstanding as of February 28, 2001. This number excludes: - 450,000 shares that may be sold upon exercise of the underwriters' over-allotment option; and - 1,048,254 shares reserved for issuance pursuant to outstanding stock options and upon conversion of our outstanding convertible preferred stock. OUR EXECUTIVE OFFICES We are incorporated in South Dakota and our headquarters and principal executive offices are located at 625 Ninth Street, P.O. Box 1400, Rapid City, South Dakota 57709. Our telephone number is (605) 721-1700. SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents a summary of our pro forma and historical consolidated financial data derived from our pro forma and historical consolidated financial statements. The unaudited pro forma consolidated financial data give effect to the Indeck Capital and other related acquisitions pursuant to the purchase method of accounting for business combinations and were prepared based on the assumption that the purchases had been consummated as of January 1, 2000. You should read the unaudited pro forma consolidated financial data along with our pro forma and historical consolidated financial statements and related notes, and the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." The unaudited pro forma consolidated financial data are not necessarily indicative of the results of operations that would have occurred had the transactions described above been consummated on the date assumed, nor are they necessarily indicative of future results of operations. CONSOLIDATED INCOME STATEMENT DATA <TABLE> <CAPTION> PRO FORMA HISTORICAL ------------- --------------------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, --------------------------------------------------------- 2000 2000 1999 1998 1997 1996 ------------- ---------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> Revenues: Electric..................... $ 173,308 $ 173,308 $133,222 $129,236 $126,497 $118,718 Coal production.............. 30,530 30,530 31,095 31,413 31,080 31,315 Fuel marketing............... 1,366,970 1,366,970 614,228 506,043 142,790 -- Oil and gas production....... 20,328 20,328 13,052 12,562 13,295 12,555 Independent power............ 84,675 39,660 -- -- -- -- Communications............... 11,371 11,371 3,423 -- -- -- Intersegment eliminations.... (18,331) (18,331) (3,145) -- -- -- ---------- ---------- -------- -------- -------- -------- Total revenues............. 1,668,851 1,623,836 791,875 679,254 313,662 162,588 Depreciation, depletion and amortization................. 35,012 32,864 25,067 24,037 22,311 22,794 Operating income............... 139,053 114,750 61,891 49,233 58,439 54,305 Other income and minority interest..................... (11,022) (8,277) 2,614 (44) 45 1,744 Interest expense............... 40,292 30,342 15,460 14,707 14,123 13,942 Income tax expense............. 34,258 30,358 15,789 11,708 14,326 13,578 Net income available for common stock........................ 57,542 52,770 37,067 25,808 32,359 30,252 Earnings per share--basic...... $ 2.47 $ 2.39 $ 1.73 $ 1.60(1) $ 1.49 $ 1.40 Earnings per share--diluted.... $ 2.45 $ 2.37 $ 1.73 $ 1.60(1) $ 1.49 $ 1.40 Weighted average shares of common stock outstanding: Basic........................ 23,293 22,118 21,445 21,623 21,692 21,660 Diluted...................... 23,543 22,281 21,482 21,665 21,706 21,660 Dividends paid per share of common stock................. $ 1.08 $ 1.08 $ 1.04 $ 1.00 $ 0.95 $ 0.92 </TABLE> CONSOLIDATED BALANCE SHEET DATA <TABLE> <CAPTION> AS OF DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Current assets........................... $ 419,010 $186,357 $140,480 $ 84,009 $ 50,997 Net property, plant and equipment........ 794,281 453,745 389,607 401,127 400,434 Total assets............................. 1,320,320 668,492 559,417 508,741 467,354 Current liabilities...................... 588,856 210,510 102,582 53,807 28,115 Deferred credits and other liabilities... 104,065 80,676 88,139 86,171 81,373 Long-term recourse debt(2)............... 158,687 160,700 162,030 163,360 164,691 Long-term non-recourse debt(2)........... 148,405 -- -- -- -- Stockholders' equity..................... 282,346 216,606 206,666 205,403 193,175 Total liabilities and capitalization..... 1,320,320 668,492 559,417 508,741 467,354 </TABLE> CONSOLIDATED STATEMENT OF CASH FLOWS DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Cash flows from operating activities..... $ 74,470 $ 73,743 $ 54,730 $ 56,049 $ 55,397 Cash flows used by investing activities............................. (167,029) (136,057) (35,931) (30,830) (29,093) Cash flows from (used by) financing activities............................. 100,990 64,032 (20,809) (21,785) (21,143) -------- -------- -------- --------- --------- Increase (decrease) in cash and cash equivalents............................ $ 8,431 $ 1,718 $ (2,010) $ 3,434 $ 5,161 ======== ======== ======== ========= ========= </TABLE> OTHER FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> EBITDA(3)................................ $139,337 $89,572 $86,726 (1) $80,795 $78,843 Return on common stock equity............ 19.0% 17.1% 16.7%(1) 15.8% 15.7% </TABLE> ------------------------ (1) Excludes $13.5 million pre-tax, $8.8 million after tax, or $0.41 per share, non-cash write-down of oil and gas properties due to historically low crude oil prices, lower natural gas prices and a decline in the value of unevaluated properties. (2) Excluding current maturities of long-term debt. (3) EBITDA represents earnings before interest, income taxes, depreciation and amortization and any non-recurring or non-cash items. EBITDA is used by management and some investors as an indicator of a company's historical ability to service debt. Management believes that an increase in EBITDA is an indicator of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to either operating income, as determined by generally accepted accounting principles, or as an indicator of operating performance or cash flows from operating, investing and financing activities, as determined by generally accepted accounting principles, and is thus susceptible to varying calculations. EBITDA as presented may not be comparable to other similarly titled measures of other companies.

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+ SUMMARY The summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that you should consider before buying notes in this offering. You should read the entire prospectus carefully, including our consolidated financial statements and the related notes beginning at page F-1. TRUSERV TruServ is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint products. TruServ is one of the largest member-owned wholesaler of these items in the United States. RECENT FINANCIAL RESULTS As of December 31, 2000, TruServ Corporation had net earnings of $34,117,000 compared to a loss of $130,803,000 at December 31, 1999. In 2000, TruServ experienced one-time gains in the aggregate amount of approximately $34,000,000, resulting from the settlement of certain pension claims and the sale of its lumber and building materials division. As of September 29, 2001, TruServ had a loss of $13,840,000 compared to income of $12,446,000 as of September 30, 2000. DEBT COVENANT VIOLATION Under certain senior notes and the revolving credit facility TruServ is required to meet certain restrictive financial ratios and covenants relating to minimum EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), minimum fixed charge coverage, minimum borrowing base to debt ratio, maximum capital expenditures and maximum asset sales, as well as other customary covenants, representations and warranties, funding conditions and events of default. As of December 31, 2000, TruServ was in compliance with the covenant requirements. However, as of February 24, 2001, TruServ failed to comply with a covenant under the revolving credit facility and the senior note agreements which requires TruServ to achieve a minimum monthly borrowing base ratio. As a result, either the senior note holders or the participants in the revolving credit facility could declare this failure to comply with the covenant as an "event of default," in which case the senior notes and the amounts outstanding under the credit facility would become callable as immediately payable. See "Risk Factors--Debt Covenant Default." On March 30, 2001 the participants in the revolving credit facility issued to TruServ a "reservation of rights" letter under which the participants effectively stated their intention to not call as immediately payable TruServ's outstanding debt obligations until May 1, 2001, although they were not precluded from doing so. All other rights of the participants were preserved. Additional letters were issued on April 30, 2001, July 3, 2001 and August 30, 2001, which extended the reservation of rights until July 30, 2001, September 30, 2001 and February 28, 2002, respectively. The senior note holders also issued letters reserving their right to accelerate the maturity of the notes although agreeing not to do so at this time. The reservation of rights letters provided by the participants in the revolving credit facility permanently reduced the credit limit under this facility on May 11, 2001 from $275,000,000 to $250,000,000 and on September 4, 2001 from $250,000,000 to $200,000,000. Additionally, the interest rate on the amounts outstanding under the revolving credit facility was increased by approximately 2%; this increased interest rate also applies to the outstanding senior notes. As a result of this increased interest rate, TruServ will incur additional interest expense in fiscal year 2001. If this increased interest rate continues through December 31, 2001, the additional interest expense would aggregate approximately $6.5 million. On September 28, 2001, TruServ signed a $350,000,000 fully underwritten revolving credit facility commitment from Bank of America for borrowings against TruServ's accounts receivable and inventory. However, TruServ is still in discussions with the current lenders to amend the existing agreements and with other potential lenders regarding refinancing the existing agreements and could replace the existing agreements with an asset-based lending agreement with a new lending group in the fourth quarter of 2001. However, no assurances can be given as to the outcome. TruServ's failure to successfully refinance or amend its current borrowing arrangements could cause the current lending group to call as immediately payable TruServ's currently outstanding debt obligations. TruServ's resulting inability to satisfy its debt obligations would force TruServ to pursue other alternatives to improve liquidity, possibly including among other things, restructuring actions, sales of assets and seeking additional sources of funds or liquidity. In particular, TruServ has engaged an investment banking firm to assist us in exploring the sale of the paint manufacturing business. No assurances can be given that TruServ would be successful in pursuing such possible alternatives or, even if successful, that such undertakings would not have a material adverse impact on TruServ. Accordingly, the balances outstanding under the senior note agreements and the revolving credit facility have been classified as current liabilities as of December 31, 2000 and September 29, 2001. However, the financial statements do not include any other adjustments that might result from the outcome of this uncertainty. THE NOTES We are offering the notes exclusively to current TruServ members who own Class A common stock and to current holders of other TruServ notes. We will issue notes each calendar quarter in two, three, and four-year terms. You must pay for the notes with U.S. funds or through the delivery (by rollover or transfer) of other TruServ notes. You will have the option of receiving your semi-annual interest payments, or you may have the interest payments added to your account balance. The notes will be subordinated as to payment to TruServ's senior notes, bank debt, capital leases (collectively, the "Senior Debt") and amounts due trade creditors. In the event that TruServ defaults on its Senior Debt, we may not be able to make any principal payments on the notes when due, unless the principal payment is consented to by the Senior Debt creditors. Therefore, if the default is not cured under the Senior Debt before the first interest payment is due on the notes, we may not be able to pay you interest when due until the default is cured. Interest would continue to accrue and be paid on the unpaid principal amount outstanding. Upon the cure or other resolution of the default to the satisfaction of the Senior Debt creditors, any delayed principal payments and accrued interest related thereto would be remitted to the subordinated noteholders. At the time of this offering, TruServ is in default on certain of its Senior Debt. See "Risk Factors--The notes are subordinated to TruServ's substantial Senior Debt and in the event of a default under the Senior Debt the notes may not be repaid."

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+ PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that you should consider before investing in the common stock. You should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements. We are an integrated retailer and marketer of flowers, plants, and complementary gifts and decorative accessories. We currently operate the largest company-owned network of floral specialty retail stores in the United States, with over 300 retail locations across the country. We believe we are transforming the retail floral industry by integrating our operations throughout the floral supply chain, from product sourcing to delivery, and by managing every interaction with the customer, from order generation to order fulfillment. We ultimately intend to provide all of our retail customers with a unique and enhanced shopping experience. We believe our execution of this integrated operating model will make our stores synonymous with superior service, quality and value. Our order generation division permits us, through multiple marketing channels, including the Internet, dial-up numbers and direct mail, to serve customers who do not visit or phone our retail stores. This division includes National Flora, the largest yellow page advertiser of floral products; Calyx & Corolla, the largest direct marketer of flowers; The Flower Club, a leading corporate affinity marketer; and three primary websites. To ensure superior customer service and efficient order processing, we operate three call centers. To distribute orders in markets where we do not have our own stores, we use several floral wire services, including our own Florafax floral wire service, which has approximately 6,000 member florists covering all 50 states. We operate a leading floral importer and wholesaler, AGA Flowers, which has long-term supply agreements and other relationships to purchase cut flowers with many of the finest growers in the United States, Central America and South America. These supply arrangements help us to eliminate several steps in the floral distribution chain and ensure a reliable source of high-quality products at favorable prices. Gerald Stevens was incorporated in Delaware in 1970, and reincorporated in Florida in 2000. Our principal executive offices are located at 1800 Eller Drive, Fort Lauderdale, Florida 33316, and our telephone number is (954) 627-1000. RECENT DEVELOPMENTS On December 4, 2000, our common stock was delisted from the Nasdaq National Market because we did not meet the listing requirements. Our common stock initiated quotation on the NASD OTC Bulletin Board on that date. <PAGE> 5 THE OFFERING Common Stock Offered.......... 1,107,387 shares(1) Use of Proceeds............... We will not receive any proceeds from the sale of common stock by the selling shareholders listed in this prospectus. Over-the-Counter Bulletin Board symbol.................. "GIFT" --------------- (1) Includes 1,098,560 shares of common stock issuable upon the exercise of warrants that were issued in connection with the amendment of our credit facility on November 6, 2000. 2 <PAGE> 6

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+ PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION, FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THE PROSPECTUS ASSUMES THAT ANY OUTSTANDING OPTIONS TO PURCHASE SHARES OF COMMON STOCK HAVE NOT BEEN EXERCISED. OUR COMPANY We are a leading designer, manufacturer and marketer of custom designed electronic components that are used to control the frequency or timing of electronic signals in communications equipment and to provide timing references for equipment used by the communications industry. Our products, which are commonly called frequency control devices, crystals or oscillators, are incorporated into, among other things, telecommunications infrastructure equipment such as cellular base stations, microwave radios, transceivers and telephone network switches, as well as computer network switches and ethernet and fiber optic systems. We sell our products to communications original equipment manufacturers, contract manufacturers and distributors. Original equipment manufacturers who incorporate our products in their equipment include: Adtran, Inc.; Cirrus Logic Incorporated; Lucent Technologies; Newbridge Networks Corporation, a subsidiary of Alcatel, and Nortel Networks Corporation. Our contract manufacturer customers include: Flextronics International Limited; SCI Systems Incorporated and Solectron Corporation. Our distributor customers include: All American Semiconductor Incorporated; Avnet Incorporated, and Pioneer Standard Electronics Incorporated. In addition, we sell frequency control devices that are used outside the communications industry. We expect this portion of our business to decline over time, as a percentage of our total business, as we increase our emphasis on the growing communications equipment market. We are a Delaware corporation. Our principal executive offices are located at 100 South Douglas Street, Yankton, South Dakota 57078 and our telephone number is (800) 762-8800. Our World Wide Web site is www.mtron.com. The information in the Web site is not incorporated into, and is not intended to be a part of, this prospectus. OUR RELATIONSHIP WITH LYNCH We are currently an indirect wholly-owned subsidiary of Lynch. After the completion of this offering, and assuming that all subscription rights are exercised, Lynch will own 100% of the outstanding shares of our Class B common stock representing 97% of the voting power of our capital stock. Lynch has advised us that it may consider various alternatives with respect to its ownership of our Class B common stock, including a possible distribution of such Class B common stock to its own stockholders. Any shares of Class B common stock that are distributed by Lynch to the holders of its common stock will convert into an equal number of shares of Class A common stock, which has one vote per share, five years after the date of such distribution unless Lynch, in its sole discretion, accelerates the date of such conversion. Any shares of Class B common stock that are transferred by Lynch to an unaffiliated person will convert into an equal number of shares of Class A common stock having one vote per share immediately upon the transfer of such shares to such person. As described in more detail under "Our Separation From Lynch," we are the successor to a South Dakota corporation that transferred all of its assets and liabilities to us, other than its investment in another corporation that is engaged in a different line of business than ours, in connection with a reorganization of some of the subsidiaries and affiliates of Lynch. The agreements regarding our separation from Lynch are described more fully in the sections entitled "Our Separation From Lynch" and "Arrangements Between Us and Lynch" included elsewhere in this prospectus. See "Risk Factors--Risks Related To Our Relationship With Lynch." THE OFFERING <TABLE> <S> <C> Description of the rights offering..... We are distributing the rights in this offering to Lynch stockholders. Each holder of shares of Lynch common stock on the record date of [immediately before the effective date of the registration statement], 2001 will receive one right for every share of Lynch common stock owned on that date. Description of rights.................. The holders of rights have a basic subscription privilege which entitles the holder to purchase one share of our Class A common stock for every 1.5 rights held, as well as an over-subscription privilege to purchase additional shares of our Class A common stock that are not purchased by other stockholders. You are entitled to exercise your over-subscription privilege only if you exercise your basic subscription privilege in full. We are offering up to 1,006,790 shares. We will not issue fractional shares. Subscription price..................... The subscription price for our Class A common stock is $5.00 per share. Exercise period........................ The rights will only be exercisable, in whole or in part, from the period beginning on [the effective date of the registration statement], 2001 and ending on [30 days after the effective date of the registration statement], 2001, at 5:00 p.m., Eastern Standard Time, unless extended by us in our sole discretion. In no event will we extend the exercise period beyond 5:00 p.m., Eastern Standard Time, [90 days after the effective date of the registration statement], 2001. Once rights are exercised, you may not revoke the exercise or request a refund of monies paid. How rights will be evidenced........... Each rights holder will receive a subscription certificate representing such holder's rights. Transferability of rights.............. The rights are transferable, but we do not know if a formal trading market will develop since we do not anticipate that the rights will be listed for trading on any exchange. Common stock outstanding after the 1,006,790 shares of Class A common stock, assuming that offering............................. all subscription rights are exercised, and 6,500,000 shares of Class B common stock. Voting rights of common stock.......... One vote per share of Class A common stock; five votes per share of Class B common stock. After the offering, and assuming that all subscription rights are exercised, the outstanding Class B common stock that is owned by Lynch will constitute 97% of the voting power of our capital stock. Use of proceeds........................ For capital expenditures at our Yankton, South Dakota facility ($1,000,000), payment of obligations to two of our officers ($108,000) and potential acquisitions of complementary products, technologies or businesses ($3,425,950). See "Use of Proceeds." </TABLE> Unless we specifically state otherwise, the information in this prospectus assumes that all subscription rights are exercised. The information that is set forth above excludes options under our 2000 Stock Option Plan to purchase 1,125,000 shares of Class A common stock which we have granted effective upon the closing of the sale of our Class A common stock pursuant to this offering. SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS) In the table below, we provide you with our summary combined financial data. We have prepared this information using our financial statements for the five years ended December 31, 1999 and the nine-month periods ended September 30, 1999 and 2000. The combined financial statements for the five years ended December 31, 1999 have been audited. The combined financial statements for the nine-month periods ended September 30, 1999 and 2000 have not been audited. The data should be read in conjunction with the financial statements, related notes and other combined financial information included herein. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> COMBINED STATEMENT OF INCOME DATA: Net sales........................... $20,118 $18,433 $22,828 $22,798 $26,467 $19,457 $29,383 Gross profit........................ 5,452 5,189 5,966 5,982 7,129 5,400 8,848 Operating income.................... 1,477 1,213 1,610 1,428 1,783 1,435 2,878 Net income.......................... 847 677 1,006 817 1,058 874 1,883 Pro forma basic and diluted earnings per share(1)...................... $ .15 $ .27 COMBINED BALANCE SHEET DATA: Cash................................ $ 158 $ 36 $ 81 $ 3 $ 125 $ 225 Working capital..................... 1,013 1,275 1,875 2,469 3,361 3,454 Total assets........................ 7,375 6,389 8,858 8,898 10,940 15,443 Demand note due to parent(2)........ 0 0 0 0 0 1,500 Due to parent....................... 0 0 0 0 118 118 Long-term notes payable to related parties, less current portion..... 342 95 0 0 199 99 Net asset(2)........................ 2,495 3,172 3,927 4,745 5,387 5,770 </TABLE> ------------------------ (1) See Note 13 to our Combined Financial Statements, contained in this Prospectus. (2) Includes our obligation to pay Lynch $1.5 million with respect to a dividend which we declared in November, 2000. Such dividend was paid in the form of a non-interest bearing demand promissory note in the principal amount of $1.5 million. In January, 2001 the demand note was paid off using funds borrowed under our short-term line of credit. The effect of this dividend has been reflected retroactively in the combined financial statements as of and for the nine months ended September 30, 2000.

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+ SUMMARY This summary highlights information contained elsewhere in this prospectus. This prospectus includes information about the notes, as well as information regarding our business. You should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes thereto. Unless otherwise indicated or the context otherwise requires, all references in this prospectus to "we," "us," "our" and similar terms refer to Better Minerals & Aggregates Company and its direct and indirect subsidiaries, and all references to the "issuer" refer to Better Minerals & Aggregates Company only and not to any of its subsidiaries. Better Minerals & Aggregates Company We mine, process and market industrial minerals, principally industrial silica, in the eastern and midwestern United States. We also mine, process and market aggregates and produce and market hot mixed asphalt in certain parts of Pennsylvania and New Jersey. We are the second leading producer of industrial silica in the United States, accounting for approximately 24% of industry volume in 2000, and believe that we have leading positions in most of our key end use markets for our silica products, typically occupying the number one or two position by sales. These end use markets include container glass, fiberglass, specialty glass, flat glass, fillers and extenders, chemicals and ceramics. We also supply our silica products to the foundry, building materials and other end use markets. Our customers use our aggregates, which consist of high quality crushed stone, construction sand and gravel, for road construction and maintenance, other infrastructure projects and residential and commercial construction and to produce hot mixed asphalt and concrete products. We also use our aggregates to produce hot mixed asphalt. We operate a network of 26 production facilities in 14 states. Many of our production facilities are located near major modes of transportation and our significant customers, which reduces transportation costs and enhances customer service. Our principal industrial minerals and aggregates properties each have deposits that we believe will support production in excess of 15 years. Our industrial minerals business (substantially all the sales of which consist of silica products) and our aggregates business accounted for 64% and 36% of our sales, respectively, for the year ended December 31, 2000. The issuer is incorporated in Delaware with principal executive offices located at Route 522 North, P.O. Box 187, Berkeley Springs, West Virginia 25411. Its telephone number is (304) 258-2500. Summary of the Terms of the Notes The following summary contains basic information about the notes. It does not contain all the information that may be important to you. For a more complete description of the notes, please refer to the section of this prospectus entitled "Description of the Notes." <TABLE> <CAPTION> <S> <C> Issuer.................................... Better Minerals & Aggregates Company. Notes Outstanding......................... $150,000,000 aggregate principal amount of 13% Senior Subordinated Notes due 2009. Maturity.................................. September 15, 2009. Interest.................................. Annual rate: 13%. Payment frequency: every six months on March 15 and September 15. Optional Redemption....................... After September 15, 2004, the issuer may redeem some or all of the notes at the redemption prices listed in the "Description of the Notes" section of this prospectus under the heading "Optional Redemption." Prior to that date, the issuer may not redeem the notes, except as described in the following paragraph. At any time prior to September 15, 2002, the issuer may redeem up to 35% of the original aggregate principal amount of the notes with the net cash proceeds of </TABLE> o litigation affecting us and our customers; o changes in the demand for our products due to the availability of substitutes for products of our customers; and o labor unrest. Except for our obligations under the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, our future performance may differ materially from that expressed or implied by the forward-looking statements discussed in this prospectus. INDUSTRY DATA Information contained in this prospectus concerning the industrial minerals and aggregates industries, our general expectations concerning these industries and our market position and market share within these industries and the end use markets we serve are based on estimates prepared by us using data from various sources (primarily the U.S. Geological Survey, including its web site at www.usgs.gov, the Committee on Environment and Public Works of the United States Senate and data from our internal research) and on assumptions made by us, based on that data and our knowledge of these industries, which we believe to be reasonable. We believe data regarding the industrial minerals and aggregates industries and our market position and market share within those industries and the end use markets we serve are inherently imprecise, but are generally indicative of their size and our market position and market share within those industries and end use markets. While we are not aware of any misstatements regarding any industry data presented in this prospectus, our estimates, particularly as they relate to our general expectations concerning the industrial minerals and aggregates industries, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption "Risk Factors" and elsewhere in this prospectus. Information contained in this prospectus relating to the Transportation Equity Act for the 21st Century ("TEA-21") comes primarily from the United States Department of Transportation's web site located at www.fhwa.dot.gov. The information contained in, or linked to, the web sites referenced in this paragraph does not constitute part of this prospectus. MEASUREMENTS When used in this prospectus: o data in tons or tonnage is measured in "short" tons (2,000 pounds); o mesh refers to size measured in sieve openings per square inch and thus as mesh size increases, particle size decreases; and o microns refer to size (one micron is equal to 0.00004 of an inch). <TABLE> <CAPTION> <S> <C> certain equity offerings at a redemption price equal to 113% of the principal amount thereof plus accrued and unpaid interest, so long as (a) at least 65% of the original aggregate amount of the notes remains outstanding after each such redemption and (b) any such redemption by the issuer is made within 90 days of that equity offering. See "Description of the Notes--Optional Redemption." Change of Control......................... Upon the occurrence of a transaction meeting the definition of a change of control, unless the issuer has exercised its right to redeem all of the notes as described above, you will have the right to require the issuer to purchase all or a portion of your notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase. See "Description of the Notes--Change of Control." Note Guarantees........................... The notes will be fully and unconditionally guaranteed by an unsecured note guarantee made by each of the issuer's existing and future Domestic Subsidiaries (as defined in "Description of the Notes--Certain Definitions"). The notes will also be fully and unconditionally guaranteed by an unsecured note guarantee made by each existing and future Foreign Subsidiary (as defined in "Description of the Notes--Certain Definitions") that guarantees any debt (other than debt of a Restricted Subsidiary (as defined in "Description of the Notes--Certain Definitions") that is not a note guarantor) (collectively, the "note guarantors"). The notes are currently guaranteed by all of the issuer's subsidiaries except its Canadian subsidiary, which has an immaterial amount of assets and liabilities. The note guarantees are subordinated to the guarantees of senior debt of the issuer issued by the note guarantors under the senior secured credit agreement. See "Description of the Notes--Note Guarantees." Ranking................................... The notes are unsecured and: o are subordinated in right of payment to all of the existing and future senior debt of the issuer; o rank equally in right of payment with any of the issuer's existing and future senior subordinated debt; o rank senior in right of payment to any of the issuer's existing and future subordinated debt; o are effectively subordinated to any secured debt of the issuer and its subsidiaries to the extent of the value of the assets securing that debt; and o are effectively subordinated to all liabilities (including trade payables) and preferred stock of each subsidiary of the issuer that is not a note guarantor. The issuer is a holding company that derives all of its operating income and cash flow from its subsidiaries. Similarly, the note guarantees of each note guarantor are unsecured and: o are subordinated in right of payment to all of that note guarantor's existing and future senior debt; o rank equally in right of payment with any of that note guarantor's existing and future senior subordinated debt; o rank senior in right of payment to any of that note guarantor's existing and future subordinated debt; and </TABLE> <TABLE> <CAPTION> <S> <C> o are effectively subordinated to any secured debt of that note guarantor and its subsidiaries to the extent of the value of the assets securing that debt. See "Description of the Notes--Ranking." As of December 31, 2000: o the issuer had $138.1 million of senior debt (excluding unused commitments under the senior secured credit agreement), all of which was secured debt; o the issuer did not have any senior subordinated debt other than the notes or any debt that was subordinate in right of payment to the notes; o the note guarantors had $1.35 million of senior debt (excluding their guarantees of the issuer's debt under the senior secured credit agreement); o the note guarantors did not have any senior subordinated debt other than their note guarantees or any debt that was subordinate in right of payment to the note guarantees; and o the issuer's Canadian subsidiary had an immaterial amount of liabilities. The indenture governing the notes permits us to incur a significant amount of additional senior debt. Certain Covenants......................... The indenture, among other things, restricts the issuer's ability and the ability of its Restricted Subsidiaries to: o incur debt; o guarantee other debt; o make distributions, redeem equity interests or redeem subordinated debt; o make investments; o sell assets; o enter into agreements that restrict dividends from subsidiaries; o merge or consolidate; o enter into transactions with affiliates; and o sell capital stock of subsidiaries. These covenants are subject to a number of important exceptions and qualifications. See "Description of the Notes--Certain Covenants" and "Description of the Notes--Merger and Consolidation."

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+ PROSPECTUS SUMMARY The following information summarizes the detailed information and financial statements included elsewhere in this prospectus. We encourage you to read this entire prospectus carefully. Unless otherwise indicated or the context otherwise requires, dates in this prospectus that refer to a particular fiscal year (e.g. fiscal 2001) refer to the fiscal year ended on the Saturday closest to February 28 of that year. The fiscal year ended March 3, 2001 included 53 weeks. The fiscal years ended February 26, 2000, February 27, 1999 and February 28, 1998 included 52 weeks. Rite Aid Corporation Our Business We are the second largest retail drugstore chain in the United States, based on number of stores, and the third largest based on revenues. As of June 2, 2001, we operated 3,631 drugstores in 30 states across the country and in the District of Columbia. We have a first or second place market position, based on revenues, in 34 of the 65 major U.S. metropolitan markets in which we operate. During fiscal 2001, we generated $14.5 billion in revenues and we generated $3.7 billion in revenues in our first quarter of fiscal 2002. Since the beginning of fiscal 1997, we have purchased 1,554 stores, relocated 949 stores, opened 469 new stores and remodeled 410 stores. As a result, we believe we have one of the most modern store bases in the industry. In our stores, we sell prescription drugs and a wide assortment of other merchandise, which we call "front-end" products. In fiscal 2001, our pharmacists filled more than 204 million prescriptions, which accounted for 59.5% of our total revenues. In the first quarter of fiscal 2002, pharmacy sales accounted for 61.6% of our total revenues. We believe that our pharmacy operations will continue to represent a significant part of our business due to favorable industry trends, including an aging population, increased life expectancy and the discovery of new and better drug therapies. We offer approximately 24,600 front-end products, including over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, photo processing, seasonal merchandise and numerous other everyday and convenience products, which accounted for the remaining 40.5% of our total revenues in fiscal 2001. We distinguish our stores from other national chain drugstores, in part, through our private label brands and our strategic alliance with General Nutrition Companies, Inc. ("GNC"), a leading retailer of vitamin and mineral supplements. We offer over 1,500 products under the Rite Aid private label brand, which contributed approximately 10% of our front-end sales in fiscal 2001. Background Under prior management, we were engaged in an aggressive expansion program from 1997 until 1999. During that period, we purchased 1,554 stores, relocated 866 stores, opened 445 new stores, remodeled 308 stores and acquired PCS Health Systems, Inc. These activities had a significant negative impact on our operating results and financial condition, severely strained our liquidity and increased our indebtedness to $6.6 billion as of February 26, 2000, which contributed to our inability to access the financial markets. A resulting decrease in revenue due to inventory shortages, reduction in advertising and uncompetitive prices on front-end products led to a decline in customer traffic, which had a negative impact on our store operations. In October 1999, we announced that we had identified accounting irregularities and our former chairman and chief executive officer resigned. In November 1999, our former auditors resigned and withdrew their previously issued opinions on our financial statements for fiscal 1998 and fiscal 1999. We needed to restate our financial statements and develop accounting systems and controls that would allow us to manage our business and accurately report the results of our operations. In December 1999, a new management team was hired, and since that time we have been addressing our business, operational and financial challenges. In response to our situation, new management has: o Reduced our indebtedness from $6.6 billion as of February 26, 2000 to $3.7 billion as of June 30, 2001, after giving effect to the Refinancing (described below); o Improved front-end same store sales growth from a negative 2.2% in fiscal 2000 to a positive 6.5% in fiscal 2001 by improving store conditions and product pricing and launching a competitive marketing program; o Improved same store sales growth from 6.2% in the first quarter of fiscal 2001 to 10.0% in the first quarter of fiscal 2002 and front-end same store sales growth from 1.4% in the first quarter of 2001 to 5.9% in the first quarter of 2002; o Restated our financial statements for fiscal 1998 and fiscal 1999, as well as engaged Deloitte & Touche LLP as our new auditors to audit our fiscal years beginning with fiscal 1998; o Continued developing and implementing a comprehensive plan, which is ongoing, to address problems with our accounting systems and controls, and also resumed normal financial reporting; o Significantly reduced the amount of our indebtedness maturing prior to March 2005; and o Addressed out-of-stock inventory levels and strengthened our vendor relationships. Refinancing Transactions On June 27, 2001, we completed a comprehensive $3.2 billion refinancing package (the "Refinancing") that includes a new $1.9 billion senior secured credit facility underwritten by Citicorp North America, Inc., The Chase Manhattan Bank, Credit Suisse First Boston and Fleet Retail Finance, Inc. As a result of the Refinancing, we have significantly reduced our debt and the amount of our debt maturing prior to March 2005. Simultaneously with or prior to the closing of the new credit facility, we completed the following transactions, which also form part of the Refinancing: o $552.0 million in private placements of our common stock. o An exchange with a financial institution of $152.025 million of our 10.5% senior secured notes due 2002 for $152.025 million of new 12.5% senior secured notes due 2006. The 12.5% senior secured notes due 2006 are secured by a second lien on the collateral securing the new credit facility. o Private exchanges of common stock for $303.5 million of our bank debt and 10.5% senior secured notes due 2002. o A synthetic lease transaction with respect to two of our distribution centers in the amount of approximately $106.9 million. o $150 million in a private placement of new 11.25% senior notes due 2008. o The reclassification of $848.8 million of capital leases as operating leases. o An operating lease that we entered into with respect to our aircraft for approximately $25.6 million. o A tender offer whereby we accepted for payment $174.5 million of our 10.5% senior secured notes due 2002 at 103.25% of their principal amount. With the proceeds of the Refinancing, we repaid our previous senior secured credit facility, our PCS and RCF credit facilities and our secured exchange debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Credit Facilities and Refinancing". As a result of the Refinancing, our remaining debt due before March 2005 consists of $152.0 million of our 5.25% convertible subordinated notes due 2002, $107.8 million of our 6.00% dealer remarketable securities due 2003, $21.9 million of our 10.5% senior secured notes due 2002 and amortization of the new credit facility. We expect to use internally generated funds to retire both the 5.25% notes and the dealer remarketable securities at maturity and to meet the amortization payments under the new credit facility. Risk Factors Prospective purchasers of our common stock should carefully consider the information set forth under the heading "Risk Factors", together with all other information in this prospectus, before making an investment in the common stock offered by this prospectus. Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, and our telephone number is (717) 761-2633. The address of our Web site is www.riteaid.com. The information on our Web site is not part of this prospectus. Our common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the trading symbol "RAD". We were incorporated in 1968 and are a Delaware corporation. The Offering <TABLE> <CAPTION> <S> <C> Common stock offered by selling stockholders ..................... 130,516,017 shares Use of proceeds .................... We will not receive any proceeds from the sale of shares by selling stockholders New York Stock Exchange/ Pacific Stock Exchange Symbol ...... RAD </TABLE> Balance Sheet Data (at end of period): Working capital (deficit) ......... $ 1,955,877 $ 752,657 $ (892,115) $ 1,258,580 $ 1,408,325 Property, plant and equipment (net) ... 3,041,008 3,445,828 3,328,499 2,460,513 2,992,891 Total assets........ 7,913,911 9,845,566 9,778,451 7,392,147 7,401,512 Total debt and capital lease obligations(3) .... 5,894,548 6,612,868 5,922,504 3,132,894 4,971,928 Redeemable preferred stock ............. 19,457 19,457 23,559 -- 19,457 Stockholders' equity (deficit) ......... (354,435) 432,509 1,339,617 1,898,203 (101,741) Other Data: Cash dividends declared per common share ...... $ 0 $ .3450 $ .4375 $ .4075 $ 0 0 Basic weighted average shares 314,189,000 259,139,000 258,516,000 250,659,000 386,996,000 260,076,000 Number of retail drugstores ........ 3,648 3,802 3,870 3,975 3,631 3,779 </TABLE> (1) PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS. See "Business--PBM Segment." Accordingly, our PBM segment is reported as a discontinued operation for all periods presented. See note 24 of the notes to the audited consolidated financial statements. (2) K&B, Incorporated and Harco, Inc. were acquired in August 1997. (3) Total debt includes capital lease obligations of $1.1 billion, as of March 3, 2001, February 26, 2000, February 27, 1999 and June 2, 2001 and $622 million as of February 28, 1998.

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+ PROSPECTUS SUMMARY Because this is a summary, it does not contain all the information that may be important to you. You should read the entire document before making your investment decision. Southern States Cooperative, Incorporated's fiscal year ends on June 30. Southern States Cooperative, Incorporated Southern States is a regional farmers' supply and marketing cooperative. Southern States was originally incorporated in the State of Virginia on March 14, 1923, under the name "Virginia Seed Service." It subsequently changed its name to Southern States Cooperative, Incorporated. It has operated continuously since 1923. . As a supply cooperative, Southern States provides agricultural supplies and services to its members and others through its crops, feed, petroleum, retail farm supply, and farm and home divisions. . As a marketing cooperative, Southern States provides marketing services for its members through its grain marketing division. For many years, Southern States has served a wide range of rural and urban customers in its traditional Mid-Atlantic territory of Delaware, Maryland, Virginia, West Virginia, Kentucky and North Carolina. As a result of acquisitions in 1998 and 2000, Southern States also now operates in Alabama, Arkansas, Connecticut, Florida, Georgia, Louisiana, Maine, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, South Carolina and Vermont. Southern States is owned by over 300,000 farmer and local cooperative members. It is the principal cooperative in a cooperative distribution system that encompassed over 1,300 retail locations as of September 30, 2001. Southern States operates through several divisions: . Crops division -- procures, manufactures, processes and distributes fertilizer, seed and crop protectants to members and other customers. . Feed division -- procures, manufactures and distributes a wide range of dairy, livestock, equine, poultry, pet and aquaculture feeds. . Petroleum division -- sells petroleum products, including all grades of gasoline, kerosene, fuel oil, diesel fuel and propane, as well as petroleum equipment. . Retail Farm Supply division -- operates company-owned and managed local cooperative retail farm supply locations throughout the Mid-Atlantic, Southeast and South Central regions of the United States. . Farm and Home division -- distributes farm and home products at wholesale to retail farm supply locations and at retail through urban and suburban retail locations. . Marketing division -- operates a year-round market for produced grains, primarily corn, soybeans, wheat and barley. Southern States recently entered into a new credit facility with its lenders, replacing its former $200 million revolving credit facility. The terms of the new $470 million credit facility, which consolidates previous separate facilities for Southern States and its affiliates, Statesman Financial Corporation and Michigan Livestock Credit Corporation, are significantly more restrictive than those prevailing under the former credit facility. See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources at June 30, 2001." Southern States terminated its livestock marketing activities in early March 2001, and announced a company-wide restructuring during the fourth quarter of 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments." Southern States implemented significant changes in management in September 2001, and will continue to evaluate additional opportunities for the company to reduce its borrowing requirements, improve its financial position and enhance its operations, including the probable reconfiguration of its lines of business for management and financial reporting purposes. The Offering We are offering $50 million of Senior Unsecured Notes, to be issued in various series as specified in the table below. Maturities and Minimum Denominations...................... The Senior Unsecured Notes will be available for the maturities and in the minimum denominations as shown below. On the date of this prospectus, the interest rates for the Senior Unsecured Notes are as follows: <TABLE> <CAPTION> Minimum Initial Series Initial Investment Interest Rate --------------------------------------------------------------- ----------------------- ----------------- <S> <C> <C> Six month maturity, Series A (Standard Certificate) $ 1,000 % Six month maturity, Series B (Large Certificate) 10,000 % Six month maturity, Series C (Jumbo Certificate) 100,000 % One year maturity, Series D (Standard Certificate) 1,000 % One year maturity, Series E (Large Certificate) 10,000 % Two year maturity, Series F (Standard Certificate) 1,000 % Two year maturity, Series G (Large Certificate) 10,000 % Five year maturity, Series H (Standard Certificate) 1,000 % Five year maturity, Series I (Large Certificate) 10,000 % Seven year maturity, Series J (Standard Certificate) 1,000 % Seven year maturity, Series K (Large Certificate) 10,000 % </TABLE> Whenever the interest rates on the Senior Unsecured Notes are changed, we will amend this prospectus to specify the interest rate in effect for Senior Unsecured Notes issued after the change. A current prospectus can be obtained by calling toll free: 1-866-246- 6837, or by writing to Southern States Cooperative, Inc., Attn: Agri-Money(TM), 7th Floor, P.O. Box 26306, Richmond, Virginia 23260. Manner of Offering......................... We are not using an underwriter to offer the Senior Unsecured Notes. Instead, designated employees of Southern States will be selling the Senior Unsecured Notes on our behalf. Our employees will not receive any commission or remuneration based on sales of the Senior Unsecured Notes. Ranking.................................... The Senior Unsecured Notes will rank equally with all of our unsecured and unsubordinated debt obligations, which aggregated approximately $6.7 million as of September 30, 2001. The Senior Unsecured Notes will be effectively subordinated in liquidation to our collateralized indebtedness, which aggregated approximately $423 million at September 30, 2001. The Indenture under which the Senior Unsecured Notes will be issued contains no restrictions on additional indebtedness that we may incur. However, the most restrictive debt limitation covenant in any of our current loan agreements limited our aggregate indebtedness to approximately $534.1 million at September 30, 2001, based on our capitalization at that date. Interest Rates............................. We will determine the interest rate on each of the Senior Unsecured Notes as described in "Description of the Senior Unsecured Notes-- Interest Rates." In summary, we will pay interest on Senior Unsecured Notes of each series at fixed rates which we will establish as of the first business day of the month for all of the Senior Unsecured Notes issued during that month. Interest Payment Dates..................... We will pay interest on the six month Senior Unsecured Notes at their maturity. We will pay interest on all other Senior Unsecured Notes on January 1, April 1, July 1 and October 1 of each year, to holders of record on the 15th day of the preceding month. Each Senior Unsecured Note will accrue interest from the date of its original issuance. Redemption at Your Option.................. We will redeem the Senior Unsecured Notes held by any person upon the holder's request. Early redemption will be subject to an early redemption penalty, except in the case of the holder's death or pursuant to mandatory IRA withdrawals. In the case of six month and one year Senior Unsecured Notes, the penalty will be equal to three months' interest. In the case of Senior Unsecured Notes with a maturity of more than one year, the interest penalty will be equal to six months' interest. Redemption at the Option of Southern States ................. We may elect to redeem the five and seven year Senior Unsecured Notes before their maturities at our option. We may redeem a five year or seven year Senior Unsecured Note anytime after two years from the date of its issuance. The price we will pay on redemption will be the face amount of the particular Senior Unsecured Note plus accrued interest to the date of redemption. Use of Proceeds............................ We will use the net proceeds from the sale of the Senior Unsecured Notes to repay other senior indebtedness and for other general corporate purposes. Default.................................... The Indenture under which the Senior Unsecured Notes will be issued defines the circumstances which will constitute an "event of default" with respect to Senior Unsecured Notes. These events include our failure to pay the principal on the Senior Unsecured Notes when due, or our failure to pay any interest on the Senior Unsecured Notes within 60 days of becoming due. The holders of a majority in principal amount of the outstanding Senior Unsecured Notes of any series may waive a default for that series, except a default in the payment of principal or interest on the Senior Unsecured Notes, or a default with respect to a covenant or provision that cannot be amended or modified without the consent of the holder of each outstanding Senior Unsecured Note of the series affected. Holders of 75% in aggregate principal amount of the Senior Unsecured Notes of any affected series may, on behalf of the holders of all Senior Unsecured Notes of that series, consent to the postponement of overdue interest payments for up to three years from the interest due date. Modification of the Indenture.................................. We may amend the Indenture under which the Senior Unsecured Notes will be issued without the consent of the holders of the Senior Unsecured Notes in limited circumstances. We may amend the Indenture to change the rights of holders of any series of Senior Unsecured Notes only with the consent of a majority in aggregate principal amount of Senior Unsecured Notes of that series. Except with respect to the postponement of overdue interest payments, no amendment of the principal or interest payment terms of the Senior Unsecured Notes will be effective against a holder without that holder's consent. Covenants ................................. For as long as any of the Senior Unsecured Notes are outstanding, we are obligated to: . pay the principal and interest on the Senior Unsecured Notes when due; . maintain an office for transfer, exchange, redemption and payment of the Senior Unsecured Notes; . keep a trustee appointed; . deliver a certificate to the trustee at the end of each year confirming our compliance with our obligations under the Indenture; and . set aside, or deposit with any third-party paying agent, sufficient funds for the payment of principal and interest on the Senior Unsecured Notes when due. Anticipated Trading Market................. We do not expect there to be any trading market for the Senior Unsecured Notes. We will not make application to list the Senior Unsecured Notes on any securities exchange or to include them in any automated quotation system. We urge you to carefully read the "Risk Factors" section beginning on page 6, where we describe specific risks associated with the offering, along with the rest of this prospectus, before you make your investment decision.

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+ SUMMARY This summary highlights information contained elsewhere in this prospectus, but does not contain all the information that may be important to you. Therefore, you should read the entire prospectus, including the financial statements and related notes included elsewhere in this prospectus, before making a decision to invest in the trust preferred securities. National Commerce Financial Corporation National Commerce Financial Corporation, referred to as "NCF" in this prospectus, is a regional bank holding company operating commercial banking offices in approximately 390 locations in Tennessee, North Carolina, South Carolina, Georgia, Virginia, West Virginia, Mississippi and Arkansas. NCF also provides trust and asset management, transaction processing, retail banking consulting and securities services. As of September 30, 2001, NCF had consolidated assets of $18.5 billion, consolidated loans of $11.5 billion and consolidated deposits of $11.9 billion. In July 2000 NCF engaged in a merger-of-equals transaction with CCB Financial Corporation, called "CCB" in this prospectus, headquartered in Durham, North Carolina. In the merger NCF combined the retail and supermarket banking strength of its principal banking subsidiary, National Bank of Commerce, referred to as "NBC" in this prospectus, in the Tennessee, Virginia, West Virginia and Georgia markets with the commercial banking strength of Central Carolina Bank and Trust Company, which we call "Central Carolina Bank" in this prospectus, in North and South Carolina. Since the merger, NCF has maintained the NBC and Central Carolina Bank brand names in its historical markets but has consolidated operations and executive functions, achieving significant cost savings in the process. NCF has announced that, effective December 31, 2001, Central Carolina Bank will merge into NBC, and NCF will thereafter conduct substantially all of its banking operations through a single national bank subsidiary. NCF believes this merger will provide for more efficient delivery of banking services. However, NCF will continue to operate under the NBC brand name in Tennessee, Georgia, Virginia, West Virginia, Mississippi and Arkansas and the Central Carolina Bank brand name in North and South Carolina. NCF owns a 49% interest in First Market Bank, FSB, a federal savings bank located in Richmond, Virginia. The remaining 51% is owned by the Ukrop family, which controls Ukrop Supermarkets, a Richmond-based supermarket chain. First Market Bank operates six traditional branch offices and 18 in-store branches in Ukrop Supermarket stores in the Richmond area. On November 19, 2001, NCF expanded its franchise in South Carolina through its acquisition of SouthBanc Shares, Inc., a savings and loan holding company which operates in 11 branches in the Anderson, South Carolina area through its primary operating subsidiary SouthBank, a federally chartered savings bank. In addition, NCF has agreed to acquire 37 bank branches and related ATMs in North Carolina, South Carolina, Georgia and Virginia from First Union National Bank and Wachovia Bank N.A. These branches and ATMs were required by the United States Department of Justice to be divested by First Union and Wachovia to meet antitrust guidelines as a condition to the merger of First Union Corporation and Wachovia Corporation. In connection with NCF's purchase of these branches, NCF will acquire the bank properties and related furniture and fixtures, loans and deposits. NCF intends to close this transaction on or about February 15, 2002. NCF believes that the addition of the SouthBank and First Union/Wachovia locations through these acquisitions further strengthens its brand name and banking franchise in the Carolinas, Virginia and Georgia. Over 90% of NCF's deposits are concentrated in high-growth Southeastern metropolitan statistical areas. These markets include: . Greensboro/Winston Salem/High Point, North Carolina . Raleigh/Durham/Chapel Hill, North Carolina . Charlotte, North Carolina . Greenville/Spartanburg/Anderson, South Carolina . Nashville, Tennessee . Memphis, Tennessee . Knoxville, Tennessee . Roanoke, Virginia . Richmond, Virginia . Charleston, West Virginia In addition to its traditional banking business, NCF operates several non- banking businesses through several subsidiaries. These businesses generate predominately fee-based revenue. Through NCF's subsidiary TransPlatinum Service Corporation, NCF provides financial services, including transaction processing, to the trucking and petroleum industries and bankcard services to merchants. Through NCF's banks and its subsidiaries First Mercantile Trust Company, First Mercantile Capital Management, Inc. and Salem Trust Company, NCF provides trust and investment management services to individuals, businesses, endowment funds, non-profit organizations, governmental bodies and other institutions. Professional asset management and administration for retirement plans, as well as investment management services for employee benefit plans, are provided by First Mercantile through a nationwide network of brokers and agents. Through its banks and broker/dealer subsidiaries, NCF offers retail and institutional securities brokerage services, insurance, annuity and mutual fund products, as well as underwriting of government and corporate debt securities. Leveraging its historical success and expertise in supermarket banking, NCF offers retail banking consulting services to other financial institutions through its subsidiary National Commerce Bank Services. NCF's principal executive offices are located at One Commerce Square, Memphis, Tennessee 38150. Its main telephone number is (901) 523-3434. The trust's principal offices will have the same address and telephone number. National Commerce Capital Trust II National Commerce Capital Trust II, referred to in this prospectus as the "trust," is a business trust organized under the laws of the State of Delaware. The trust was formed for the limited purposes of: . issuing the trust preferred securities and trust common securities; . acquiring junior subordinated debentures with the proceeds it receives from the issuance of the trust preferred securities and the trust common securities; and . engaging in activities related to the foregoing. The trust preferred securities will be offered for sale by the trust to the public. NCF will purchase all the trust common securities to be issued by the trust. The trust common securities will represent an aggregate liquidation amount equal to at least 3% of the total capital of the trust. The junior subordinated debentures will be the only assets of the trust. Payments on the junior subordinated debentures will be the only source of payment of dividends on and liquidation or redemption payments with respect to the trust preferred securities. The Bank of New York will be the property trustee of the trust. The Bank of New York (Delaware) will be the Delaware trustee of the trust. Charles A. Neale and Sheldon M. Fox, the General Counsel and Chief Financial Officer, respectively, of NCF, will be the administrative trustees of the trust. The trust will be governed by a trust agreement among the trustees named above and NCF, as depositor. The Trust Preferred Securities Offering Issuer.................... The issuer of the trust preferred securities is National Commerce Capital Trust II, a single- purpose Delaware statutory business trust and a subsidiary of NCF. The trust was formed by NCF solely for the purposes of issuing the trust preferred securities and trust common securities; acquiring junior subordinated debentures with the proceeds it receives from the issuance of the trust preferred securities and the trust common securities; and engaging in activities related to the foregoing. The Trust Preferred Securities................ The trust will sell its trust preferred securities to the public and its trust common securities to NCF. Each trust preferred security and trust common security will represent an undivided beneficial ownership interest in the assets of the trust. The trust will use the proceeds from the sale of the trust preferred securities to purchase $200,000,000 aggregate principal amount of NCF's % junior subordinated debentures due . NCF will pay interest on the junior subordinated debentures at the same rates and on the same dates as the trust makes payments on the trust preferred securities. The trust will use payments it receives on the junior subordinated debentures to make the corresponding payments on the trust preferred securities. Distributions ............ If you purchase trust preferred securities, you will be entitled to receive cumulative cash distributions at the annual rate of % of the stated liquidation amount of $25 per trust preferred security, which we refer to as the "liquidation amount". Distributions will accumulate from December , 2001. The trust will make distribution payments on the trust preferred securities quarterly in arrears, on , , , and of each year, beginning , 2002, unless those payments are deferred as described below. Deferral of Distributions. NCF may elect, on one or more occasions, to defer the quarterly interest payments on the junior subordinated debentures for a period of up to 20 consecutive quarterly periods. In other words, NCF can declare one or more interest payment moratoriums on the junior subordinated debentures, each of which may last for up to five years. However, no interest deferral may (1) extend beyond the stated maturity date of the junior subordinated debentures or (2) begin during the existence of an event of default with respect to the junior subordinated debentures. If NCF exercises its right to defer interest payments on the junior subordinated debentures, the trust will also defer distribution payments on the trust preferred securities. Although you will not receive distribution payments on the trust preferred securities if interest payments are deferred, interest will continue to accrue, compounded quarterly, on the junior subordinated debentures, and deferred interest payments will accrue additional interest. As a result, distributions on the trust preferred securities will continue to accumulate on the liquidation amount and the deferred distributions at the annual rate of %, compounded quarterly. If NCF defers payments of interest on the junior subordinated debentures, the junior subordinated debentures will be treated as being issued with original issue discount for United States federal income tax purposes. This means that you must include in gross income for United States federal income tax purposes interest income with respect to the deferred distributions on your trust preferred securities prior to receiving any cash distributions. See "Material Federal Income Tax Consequences--Interest Income and Original Issue Discount." Redemption of Trust Preferred Securities...... The trust will redeem the trust preferred securities and the trust common securities on , the stated maturity date of the junior subordinated debentures. If NCF redeems or repays any junior subordinated debenture prior to its stated maturity date, the trust will use the cash it receives to redeem, on a proportionate basis, an equal amount of trust preferred securities and trust common securities. The redemption terms of the junior subordinated debentures are summarized below under "Summary-- Redemption of Junior Subordinated Debentures." Upon any redemption of your trust preferred securities, you will be entitled to receive a redemption price equal to the liquidation amount of the trust preferred securities redeemed, plus any accumulated and unpaid distributions to the date of redemption. Exchange of Trust Preferred Securities...... NCF and any of its affiliates will have the right to exchange any trust preferred securities that they hold or own beneficially for a Like Amount (as defined herein) of junior subordinated debentures on any distribution date for the trust preferred securities. If any trust preferred securities are so exchanged, the trust will on the same day exchange a proportionate amount of trust common securities held by NCF for junior subordinated debentures having a principal amount equal to such proportionate amount of trust common securities. All trust preferred and trust common securities exchanged as described above will then be canceled and no longer be deemed to be outstanding. See "Description of the Trust Preferred Securities-- Exchange Procedures." Liquidation of Trust and Distribution of Junior Subordinated Debentures... NCF may dissolve the trust at any time, subject to its receipt of any required prior approval by the Board of Governors of the Federal Reserve System, which is referred to in this prospectus as the "Federal Reserve." If NCF dissolves the trust, after the trust satisfies all of its liabilities as required by law the trustees will: . distribute the junior subordinated debentures to the holders of the trust preferred securities and the trust common securities; or . if the property trustee determines that a distribution of the junior subordinated debentures is not practical, pay out of the assets of the trust available for distribution to the holders of the trust preferred securities the liquidation amount of the trust preferred securities, plus any accumulated and unpaid distributions to the payment date, in cash. For more information concerning distribution of the junior subordinated debentures, see "Description of the Trust Preferred Securities--Redemption or Exchange--Optional Liquidation of the Trust and Distribution of Junior Subordinated Debentures." Guarantee by NCF ......... NCF will fully and unconditionally guarantee payment of amounts due under the trust preferred securities on a subordinated basis and only to the extent the trust has funds available for payment of those amounts. We refer to this obligation as the "Guarantee." However, the Guarantee does not cover payments if the trust does not have sufficient funds to make the distribution payments, including, for example, if NCF has failed to pay to the trust amounts due under the junior subordinated debentures. NCF, as issuer of the junior subordinated debentures, is also obligated to pay the expenses and other obligations of the trust, other than its obligations to make payments on the trust preferred securities. For more information concerning NCF's guarantee of the trust preferred securities, see "Risk Factors-- Risks Related to an Investment in the Trust Preferred Securities " and "Description of the Guarantee." Ranking .................. NCF's obligations under the Guarantee and the junior subordinated debentures are unsecured and rank junior and are subordinate in right of payment to all of NCF's existing and future Senior Debt. For a definition of "Senior Debt," see page 100. As of September 30, 2001, NCF had $39 million in aggregate principal amount of Senior Debt and $43 million in aggregate principal amount of debt pari passu with the junior subordinated debentures and the Guarantee, consisting of NCF's floating rate junior subordinated deferred interest debentures due 2027, which are referred to as the "1997 Debentures" in this prospectus, and NCF's guarantee of floating rate capital trust pass-through securities, which are referred to as the "1997 Trust Preferred Securities" in this prospectus. In addition, because NCF is a holding company that relies on dividends from its subsidiaries for virtually all of its income, all existing and future borrowings and other liabilities of its subsidiaries will effectively rank senior to the Guarantee and the junior subordinated debentures. As of September 30, 2001, NCF's subsidiaries had approximately $15.3 billion of total liabilities (including trade payables), of which deposits comprise $11.9 billion. See "Risk Factors--Risks Related to an Investment in the Trust Preferred Securities" and the financial statements included elsewhere in this prospectus. The Indenture pursuant to which the junior subordinated debentures are to be issued, which we refer to as the "Indenture," the Guarantee and the Amended and Restated Trust Agreement governing administration of the trust, which we refer to as the "Trust Agreement," do not limit NCF's ability to incur additional secured or unsecured debt, including Senior Debt. Voting Rights ............ As a holder of trust preferred securities, you will have very limited voting rights. See "Risk Factors--Risks Related to an Investment in the Trust Preferred Securities" and "Description of the Trust Preferred Securities--Voting Rights; Amendment of the Trust Agreement." Book Entry ............... You will not receive a certificate for your trust preferred securities. Instead, the trust preferred securities will be represented by a global security that will be deposited with The Depository Trust Company, or "DTC," or its custodian and registered in the name of DTC or its nominee. Listing of the Trust Preferred Securities...... The trust preferred securities have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the trading symbol "NCF Pr." The Junior Subordinated Debentures Maturity and Interest..... The junior subordinated debentures will mature on . They will bear interest at the annual rate of % of their principal amount. Interest on the junior subordinated debentures will accrue from December , 2001. NCF will pay interest quarterly in arrears on , , , and , of each year beginning , 2002. Certain Payment Restrictions Applicable to NCF.................... During any period in which NCF has elected to defer interest payments on the junior subordinated debentures, NCF generally may not make payments on its capital stock, debt securities or guarantees, subject to certain limited exceptions. Redemption of Junior Subordinated Debentures... NCF may elect to redeem any or all of the junior subordinated debentures at one or more times on or after . In addition, if certain changes occur relating to the tax or capital treatment of the trust preferred securities, NCF may elect to redeem all, but not less than all, of the junior subordinated debentures. For a description of the changes that would permit such a redemption, see "Description of the Junior Subordinated Debentures--Conditional Right to Redeem Upon a Tax Event or Capital Treatment Event." If required under the capital rules of the Federal Reserve, NCF will obtain the approval of the Federal Reserve prior to exercising the redemption rights described above. The trust will use the proceeds of any redemption of the junior subordinated debentures to redeem the trust preferred securities and trust common securities. The redemption price for any redemption of the junior subordinated debentures will be equal to the principal amount of the junior subordinated debentures being redeemed, plus accrued and unpaid interest on those junior subordinated debentures to the date of redemption. Events of Default Under the Indenture............. The following events, which are referred to as "debenture events of default," are events of default with respect to the junior subordinated debentures: . NCF fails to pay interest within 30 days after the due date; . NCF fails to pay principal or premium when due; . NCF materially breaches a covenant in the Indenture and the breach continues for 90 days after notice from the trustee under the Indenture or from holders of at least 25% in aggregate outstanding principal amount of the junior subordinated debentures; or . Certain events involving the bankruptcy, insolvency or reorganization of NCF. Upon a debenture event of default, the trustee under the Indenture may declare all principal and interest on the junior subordinated debentures immediately due and payable. Under certain limited circumstances, the holders of a majority of the aggregate liquidation amount of trust preferred securities may make that declaration or directly exercise certain rights and remedies under the Indenture. Trustees ................. The trust will have four trustees. Two of the trustees are officers of NCF and will act as "administrative trustees" for the trust. The Bank of New York will act as "property trustee" for the trust, "debenture trustee" for the junior subordinated debentures and "guarantee trustee" for the Guarantee. Its offices are located at 101 Barclay Street 21W, New York, New York 10286 Attention: Corporate Trust Administration. The Bank of New York (Delaware) will act as the "Delaware trustee." Its offices in Delaware are located at 700 White Clay Center, Route 273, Newark, Delaware 19711 Attention: Delaware Trustee. The property trustee, the Delaware trustee and the administrative trustees are collectively referred to in this prospectus as the "trustees." Use of proceeds .......... NCF will use the proceeds from the sale of the junior subordinated debentures for general corporate purposes, including capital investments in NCF's subsidiaries and to finance further expansion of existing product lines and potential acquisitions. See "Use of Proceeds" and "Capitalization." Listing of Junior Subordinated Debentures Upon Distribution ........ If the trustees distribute junior subordinated debentures to holders of the trust preferred securities upon liquidation of the trust, NCF will use its best efforts to have the junior subordinated debentures so distributed listed or quoted on any stock exchange or quotation system on which the trust preferred securities were listed at the time of the trust's termination. See "Risk Factors--Risks Related to an Investment in the Trust Preferred Securities" and "Underwriting." Summary Historical Consolidated Financial Information Of NCF The following table sets forth NCF's summary historical consolidated financial information. The historical consolidated financial information as of December 31, 2000 and December 31, 1999 and for the years ended December 31, 2000, 1999 and 1998 have been derived from, and should be read together with, NCF's audited consolidated financial statements and the related notes included elsewhere in this prospectus. The historical consolidated financial information as of December 31, 1998, December 31, 1997 and December 31, 1996 and for the years ended December 31, 1997 and 1996 have been derived from NCF's audited consolidated financial statements and the related notes, which have not been included in this prospectus. NCF's historical consolidated financial information as of and for the nine months ended September 30, 2001 and September 30, 2000 have been derived from, and should be read together with, NCF's unaudited historical financial statements and the related notes included elsewhere in this prospectus. In the opinion of NCF's management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of NCF's financial position, the results of NCF's operations and cash flows, have been made. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the operating results to be expected for the full fiscal year. On July 5, 2000, NCF consummated a merger of equals transaction with CCB which was accounted for as a purchase. The merger with CCB had a material effect on NCF's consolidated financial data as of and for the year ended December 31, 2000, and for the interim periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of NCF" and "Unaudited Pro Forma Condensed Combined Financial Statements." <TABLE> <CAPTION> Nine Months Ended September 30, Years Ended December 31, ----------------------- --------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ----------- ---------- ---------- --------- --------- --------- --------- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Summary of Operations(1) Interest income......... $ 935,603 603,903 937,976 455,974 379,730 336,993 286,567 Interest expense........ 454,858 331,170 513,403 226,098 189,652 174,172 151,101 ----------- ---------- ---------- --------- --------- --------- --------- Net interest income..... 480,745 272,733 424,573 229,876 190,078 162,821 135,466 Provision for loan losses................. 22,307 11,139 16,456 16,921 10,710 17,013 14,134 ----------- ---------- ---------- --------- --------- --------- --------- Net interest income after provision........ 458,438 261,594 408,117 212,955 179,368 145,808 121,332 Other income(2)......... 232,227 120,245 189,491 87,227 82,784 82,405 69,635 Losses (gains) on interest rate swaps.... 672 20,006 77,227 (1,499) -- -- -- Merger-related expense.. 3,122 44,765 70,657 -- -- -- -- Other expenses(3)....... 422,154 226,077 369,814 161,841 142,716 123,460 103,875 ----------- ---------- ---------- --------- --------- --------- --------- Income before income taxes.................. 264,717 90,991 79,910 139,840 119,436 104,753 87,092 Income taxes............ 99,281 37,269 34,600 47,208 40,569 34,973 29,579 ----------- ---------- ---------- --------- --------- --------- --------- Net income.............. $ 165,436 53,722 45,310 92,632 78,867 69,780 57,513 =========== ========== ========== ========= ========= ========= ========= Average Balances Assets.................. $17,696,543 10,666,900 12,401,982 6,358,828 5,383,017 4,404,852 3,812,114 Loans................... 11,183,586 6,252,886 7,427,320 3,489,625 3,040,662 2,513,327 2,130,810 Earning assets.......... 15,471,233 9,569,993 11,033,301 5,905,404 4,983,531 4,148,590 3,611,580 Deposits................ 11,884,268 6,919,469 8,158,282 4,120,703 3,675,427 2,954,813 2,652,559 Interest-bearing liabilities............ 13,434,871 8,411,882 9,658,886 5,195,698 4,363,458 3,633,713 3,160,897 Stockholders' equity.... 2,410,397 1,227,228 1,522,217 542,259 419,437 333,528 295,826 Selected Period End Balances Assets.................. $18,481,554 17,665,793 17,745,792 6,913,786 5,811,054 4,692,011 4,200,409 Loans................... 11,516,651 10,866,301 11,008,419 3,985,789 3,197,673 2,608,967 2,347,973 Allowance for loan losses................. 150,487 143,510 143,614 59,597 49,122 43,297 35,514 Deposits................ 11,945,208 11,703,489 11,979,631 4,495,900 3,947,275 3,251,242 2,976,430 Stockholders' equity.... 2,414,864 2,389,157 2,364,838 649,241 408,549 352,148 313,329 Ratios Return on average assets................. 1.25% .67 .37 1.46 1.47 1.58 1.51 Return on average equity................. 9.18 5.85 2.98 17.08 18.80 20.92 19.44 Net interest margin, taxable equivalent..... 4.34 4.03 4.06 4.12 4.20 4.04 3.89 Net loan losses to average loans.......... .20 .20 .20 .24 .26 .39 .35 Average equity to average assets......... 13.62 11.51 12.27 8.53 7.79 7.57 7.76 Tier 1 capital.......... 9.72 9.93 9.52 12.15 11.79 12.61 11.05 Total capital........... 10.97 11.13 10.79 13.40 13.04 13.86 12.30 Earnings to combined fixed charges and preference distributions(4) Including interest on deposits.............. 1.57x 1.26x 1.15x 1.59x 1.59x 1.57x 1.57x Excluding interest on deposits.............. 3.22x 1.80x 1.48x 2.70x 2.82x 2.68x 2.89x Pro forma earnings to combined fixed charges and preference distributions(4)(5) Including interest on deposits.............. Excluding interest on deposits.............. </TABLE> (footnotes on next page) -------- (1) The financial results of the acquired companies are included in the historical financial statements for all periods subsequent to the business combinations, including NCF's merger-of-equals with CCB on July 5, 2000. For information regarding other business combinations, see "Information about National Commerce Financial Corporation."

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. To understand Ceres and this offering fully, you should read the entire prospectus carefully, including the risk factors beginning on page 9 and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Except where indicated, the information in this prospectus assumes no exercise of the underwriters' option to purchase additional shares from us. Unless the context indicates otherwise, "we," "our" and "us" refers to Ceres Group, Inc. and its subsidiaries on a consolidated basis. CERES GROUP, INC. OVERVIEW Ceres provides a wide array of health and life insurance products to approximately 560,000 insureds through two primary business segments. Our senior segment includes senior health, life and annuity products for Americans age 55 and over. The medical segment includes catastrophic and major medical health insurance for individuals, associations and small businesses. To help control medical costs, we also provide medical cost management services to our insureds. Our nationwide distribution channels include approximately 48,000 independent and exclusive agents and QQLink.com, our proprietary, patent pending electronic distribution system. In 1998, a new management team led by Peter W. Nauert took control of Ceres and its then only insurance subsidiary, Central Reserve Life Insurance Company. The management team implemented a complete restructuring of the company and its operations by initiating a series of remedial actions designed to stabilize our operating performance, including repricing and eliminating unprofitable products, improving underwriting and reducing administrative expenses. Throughout the restructuring, we added experienced management personnel to our financial, actuarial, underwriting, claims, marketing and operations areas. We also initiated a growth strategy that included expanded distribution channels and product offerings and a series of strategic acquisitions, which included our entry into the senior market. We acquired Continental General Insurance Company, Provident American Life & Health Insurance Company and United Benefit Life Insurance Company to supplement our major medical platform at Central Reserve Life. In addition, we acquired selected major medical insureds of Central Benefits Mutual Insurance Company and a block of individual and small group health insurance written by American Chambers Life Insurance Company. We entered into the senior market by acquiring Continental General, with its significant senior health insurance business, and Pyramid Life Insurance Company, a company primarily in the senior market. The strategic acquisitions completed since 1998 have given us sufficient size and scope to compete in our markets. Since 1998, we increased our distribution channels from one to six, expanded our agent force from 16,000 to approximately 48,000 and increased our product offerings from five to approximately 40 in our major medical and senior markets. Assets increased from $135.8 million at December 31, 1997 to $906.3 million at September 30, 2001, and our gross premiums increased from $253.0 million for 1997 to $625.3 million for the first nine months of 2001. Our operating results have been negatively impacted by the results of United Benefit Life and Provident American Life. These companies have not met our expectations due to significantly higher than anticipated claims and benefit utilization and losses from unanticipated litigation. However, we limited our losses by reinsuring portions of these businesses under various reinsurance agreements and by halting new sales in these subsidiaries in July 2000. In addition, in July 2001, we implemented a program to mitigate future losses of these subsidiaries by notifying policyholders that their policies would be terminated or replaced. We expect the business in these two subsidiaries to substantially wind down by the early part of 2002. In addition, our operating results have been adversely impacted by industry-wide and historically high medical inflation. This environment has caused us to enhance and accelerate a number of programs to lessen the inflationary impact, including: - premium rate increases; - modified product lines for new sales; - target marketing; - proactive medical cost management; and - lowered administrative and sales expenses. Our senior segment continued to produce increasing profits for the first nine months of 2001, totaling $17.3 million in pre-tax segment profits for the first nine months of 2001. Our medical segment improved from the first half of 2001 and returned to profitability in the third quarter following the implementation of the above programs earlier in the year. However, our acquisitions and internal growth have strained our capital levels. We have shifted our focus to achieving internal growth while controlling our costs, although we will still be open to selected strategic acquisitions. Additional capital from this offering will allow us to take advantage of internal growth opportunities. This offering will significantly strengthen our balance sheet. We believe our focus on internal growth, along with increased capital, will lead to more predictable earnings, enhanced profitability and higher financial agency ratings of our insurance subsidiaries, which in turn will support greater internal growth capacity and enable us to enter into more favorable reinsurance agreements. BUSINESS STRATEGY We continue to develop and expand our senior products to take advantage of the growing senior population and to allow us to market our senior products to our major medical insureds as they age. We also believe that we can successfully compete in the major medical insurance business by continuing to concentrate on the initiatives we implemented since 1998. With increasingly stringent federal and state restrictions on small group insurance, we now emphasize the sale of individual and association products, which offer greater flexibility in both underwriting and design compared to small group products. Principal elements of our strategy include: INCREASING SENIOR MARKET FOCUS -- Because of favorable demographics and higher profit potential in the senior segment, we are focusing more of our capital and sales efforts on this part of our business. Our senior health products, as well as life insurance and annuity products, are designed with higher profit margins and premium payments that produce a longer-term flow of premiums and are not as subject to medical inflation as major medical products. ENHANCING MEDICAL COST MANAGEMENT -- Our approach is to manage the cost of healthcare. With historically high medical inflation and utilization rates, we focus on reducing medical costs for our insureds by actively managing these costs through a variety of techniques, including favorable preferred provider contracts, per diem provider arrangements, multi-level pharmacy coverage, and earlier case management screening techniques. IMPROVING UNDERWRITING AND PRODUCT DESIGN -- We improve our underwriting through consistent and rigorous risk evaluation that reflects current medical practices and treatment patterns. To anticipate and respond to regulatory changes and actual market and profitability experience, we closely monitor and manage premium rate adjustments and provide our policyholders opportunities to adjust their co-insurance and deductible provisions. We actively pursue product redesign and curtailment of unprofitable product offerings in selected markets. REDUCING ADMINISTRATIVE COSTS -- We benefit from efficiencies obtained through our growth by streamlining management and consolidating administrative operations and services. Our areas of focus include reductions in facility management costs, printing and supply costs and consolidation of corporate activities, including accounting, marketing and distribution. EXPANDING DISTRIBUTION CHANNELS -- We have six distribution channels, including independent agents, exclusive agents and electronic distribution. Through compensation incentives, we encourage our agents to cross-sell our complementary, supplemental and non-insurance products that typically have higher profit margins. INCREASING FEE REVENUE -- We enhance our revenue by charging fees for medical care coordination, claims processing and other administrative services. PRODUCTS AND SERVICES We market the following products and services: - CATASTROPHIC AND MAJOR MEDICAL -- Catastrophic, comprehensive and basic coverage options from preferred provider organization (PPO) benefit plans to traditional indemnity plans - SHORT-TERM MAJOR MEDICAL -- Major medical coverage for people who are between jobs or are recent graduates - SMALL GROUP PRODUCTS -- Major medical plans for small businesses with 2-100 employees, including employer self-funded plans in which we share a portion of the medical cost risk with the employer - LIFE AND ANNUITY -- Life insurance and annuity plans offered as supplements to major medical coverage - SENIOR HEALTH INSURANCE PRODUCTS -- Wide range of comprehensive and supplemental medical benefit products, including Medicare supplement, long-term care, home healthcare, extended convalescent care, cancer coverage and acute recovery care - SENIOR LIFE INSURANCE AND ANNUITIES -- Life insurance policies for individuals over age 55 with smaller face amount coverage of up to $50,000 and annuity plans with first-year bonus interest or interest rate guarantees - SPECIALTY AND SUPPLEMENTAL INSURANCE PRODUCTS -- Complementary products, such as dental, critical illness coverage, first diagnosis cancer coverage, accidental injury coverage and accidental death benefit - SERVICES AND NON-INSURANCE PRODUCTS -- A non-insurance benefit package that provides discounts on travel, extended care/home healthcare services, prescription medicine, hearing aids and other health-related products and services; and a program designed to lower medical costs for our insureds, including case management, 24-hour access to medical information and out-of-network fee reductions. ------------------------------------ Our principal executive offices are located at 17800 Royalton Road, Cleveland, Ohio 44136, and our telephone number is (440) 572-2400.

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+ 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. You should carefully read the entire Prospectus and should consider, among other things, the matters set forth under "Risk Factors." We have a June 30 fiscal year-end. Pro forma information in this Prospectus reflects our cafeteria business and gives effect to our sale of Ralph & Kacoo's seafood restaurants in March 1999 as if that transaction had occurred on July 1, 1995. THE COMPANY OVERVIEW Piccadilly Cafeterias, Inc., founded in 1944, is the largest cafeteria chain in the United States with 236 cafeterias in 16 states. We are the dominant cafeteria chain in the Southeastern and Mid-Atlantic regions. We serve a diverse and extremely loyal customer base consisting of families, groups of friends and co-workers, senior citizens, couples and students. Our patrons enjoy a wide selection of convenient, healthy, freshly prepared "home cooked" meals at value-oriented prices for lunch and dinner. We have generated consistent EBITDA over the past five years, with our EBITDA increasing from $24.0 million in fiscal 1996 to $27.9 million in the twelve months ended September 30, 2000. After giving effect to the Original Offerings and the incurrence of indebtedness under our new Term Loan Credit Facility, our Total debt-to-EBITDA ratio at September 30, 2000 was 2.9x and our EBITDA-to-Interest ratio for the twelve months ended September 30, 2000 was 2.9x. We expect to achieve significant annual cost savings through outsourcing certain food preparation activities and expanding our centralized purchasing. We have successfully implemented outsourcing at 54 of our cafeterias and we intend to roll out this program to our remaining cafeterias during the next two years. We expect this program will result in approximately $2.5 million of cost savings for fiscal 2001. When our outsourcing program is fully implemented, we expect to reduce annual operating expenses by approximately $8 to $10 million. We also expect to save approximately $3 million of annual operating expenses by expanding our centralized purchasing program to include certain food items, such as poultry, that are currently being purchased by the individual cafeteria managers. In addition, we expect to generate significant incremental EBITDA through our acquisition of 142 Morrison cafeterias. Although Morrison cafeterias were experiencing declines in same-store sales prior to the acquisition, we acquired the Morrison cafeterias in May 1998 as a long-term growth strategy. Specifically, the acquisition more than doubled Piccadilly's size, eliminated a major competitor and provided significant upside potential through the improvement of the Morrison operations. We have addressed the declining trends in same-store sales at the Morrison cafeterias during fiscal 1999 and 2000 by (i) closing 27 unprofitable cafeterias, (ii) converting 112 Morrison cafeterias to Piccadilly-style cafeterias and (iii) implementing new marketing programs. BUSINESS STRENGTHS Dominant Market Share in Core Markets. We are the largest cafeteria chain in the United States with 236 cafeterias, and we are the dominant cafeteria chain in the Southeastern and Mid-Atlantic regions. The next largest cafeteria chain in these regions operates 32 cafeterias. Although the family dining industry is very competitive and has grown significantly through the introduction of new restaurant concepts and new restaurant openings, the cafeteria segment has had few new entrants. In addition, the existing major cafeteria chains have generally focused on their existing regional markets. As a result, we have experienced limited competition in our markets for customers seeking a cafeteria-style dining experience. Diverse and Extremely Loyal Customer Base. We have developed substantial brand equity and customer loyalty during our 56-year operating history. In addition, we have developed a diverse customer THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JANUARY 25, 2001 PROSPECTUS [PICCADILLY LOGO] PICCADILLY CAFETERIAS, INC. COMMON STOCK WARRANTS TO PURCHASE COMMON STOCK --------------------- THE OFFERING - This prospectus relates to the resale of up to 81,000 warrants to purchase shares of our common stock by the holders named under the heading "Warrantholders" in this prospectus or in an accompanying supplement to this prospectus. - This prospectus also relates to the offer and sale of up to 851,310 shares of our common stock which are issuable upon the exercise of the warrants. - All of the warrants and shares of our common stock being registered may be offered and sold from time to time by the named holders. TRADING MARKET - There is no public market for the warrants. We do not intend to apply, and are not obligated to apply, for listing of the warrants on any securities exchange or automated quotation system. - Our common stock is traded on the New York Stock Exchange under the symbol "PIC." On January 23, 2001, the last reported sale price of our common stock was $2.25. See "Market Price of and Dividends on Common Stock." INVESTING IN THE WARRANTS AND COMMON STOCK INVOLVES RISKS THAT WE DESCRIBE IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 8. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS AND ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is , 2001. FORWARD LOOKING STATEMENTS We make "forward-looking statements" throughout this prospectus (this "Prospectus"). Whenever you read a statement that is not solely a statement of historical fact (such as when we describe what we "believe," "expect" or "anticipate" will occur, and other similar statements), you should understand that our expectations may not be correct, although we believe they are reasonable. We do not guarantee that the transactions and events described in this Prospectus will happen as described or that any positive trends noted in the Prospectus will continue. The forward-looking information contained in this Prospectus is generally located under the headings "Summary," "Risk Factors," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," but may be found in other locations as well. These forward-looking statements generally relate to our strategies, plans and objectives for future operations and are based upon management's reasonable beliefs or estimates of future results or trends. Forward-looking statements regarding management's present plans or expectations for new cafeteria openings, remodels, other capital expenditures, sales-building and cost-saving strategies, advertising expenditures, or disposition of impaired cafeterias, involve risks and uncertainties relative to return expectations and related allocation of resources, and changing economic or competitive conditions, as well as the negotiation of agreements with third parties, which could cause actual results to differ from present plans or expectations, and such differences could be material. Similarly, forward-looking statements regarding management's present expectations for operating results involve risks and uncertainties relative to these and other factors, such as advertising effectiveness and the ability to achieve cost reductions (and other factors discussed under "Risk Factors" or elsewhere in this Prospectus), which also would cause actual results to differ from present plans. Such differences could be material. You should read this Prospectus completely and with the understanding that actual future results may be materially different from what we expect. We will not update these forward-looking statements, even if our situation changes in the future. base consisting of families, groups of friends and co-workers, senior citizens, couples and students. We believe cafeteria dining meets changing lifestyle needs by providing convenient, healthy, freshly prepared and reasonably-priced meals that combine the ease of fast food with the quality of home cooking. We attribute our broad market appeal and customer loyalty to the consistent quality of our meals, our varying menu selection, convenient cafeteria format, value pricing and well-recognized brand name. High Quality Food Offering. Our food quality, service and atmosphere were all voted #1 among cafeterias and buffet-style chains by consumers in Restaurants and Institutions' "Choice in Chains" 2000 survey. All of our cafeterias offer a wide variety of quality, reasonably-priced meals. Our standard menu offering includes soups, salads, seafood, meat, chicken, vegetables, breads, desserts and beverages. Each of our cafeteria managers has the ability to vary their menu to include local and seasonal favorites from our extensive proprietary recipe files. Our typical cafeteria lines offer a wide food selection including up to 18 entrees, 2 soups, 20 salads, 18 vegetables, 7 breads and 22 desserts. Customers make their meal selections by combining these items according to their individual preferences. Solid Market Position. Since 1990, eating places revenues have increased at a compound annual growth rate of 5.0% to $241.1 billion in 1999. This increase was initially accompanied by the introduction of a significant number of new restaurant concepts and rapid new-restaurant expansion. As a result, the restaurant market has become oversaturated and recently the pace of new-restaurant openings has slowed. Many restaurant chains are now focused on improving sales and profitability at their existing restaurants. During this highly competitive period, we have sustained our operations and maintained a consistent level of EBITDA. Furthermore, with our 236 cafeterias we are well positioned to increase our sales in the current environment of slower new-restaurant growth and continued increases in consumer demand for restaurant dining. Proven Management with Significant Equity Stake. Our executive officers average over 22 years of experience at Piccadilly. In addition, our district and cafeteria managers have an average of 23 and 17 years of experience at Piccadilly, respectively. As a result, our management team is extremely familiar with our existing markets and customer base. Mr. Ronald A. LaBorde, our Chief Executive Officer, has served us for over 18 years, and has been our chief executive officer since 1995. Our management team currently beneficially owns approximately 7.4% of the outstanding shares of our company, including shares subject to exercisable options, and our founders and their beneficiaries beneficially own approximately 19.2% of the outstanding shares of our company. Solid Credit Profile. After issuing the Notes and incurring indebtedness under our Term Loan Credit Facility, we have a strong balance sheet. If the Notes had been issued and such indebtedness incurred at September 30, 2000, our ratio of Total debt-to-Total capitalization would have been 51.0% and our Total debt-to-EBITDA ratio would have been 2.9x at September 30, 2000. If the Notes had been issued and such indebtedness incurred on October 1, 1999, our EBITDA-to Interest ratio would have been 2.9x for the twelve months ended September 30, 2000. In addition, as of September 30, 2000 our ratio of Net property, plant and equipment-to-Total debt would have been 2.0x. BUSINESS STRATEGY Capitalize on the Morrison Acquisition. In May 1998, Piccadilly acquired 142 Morrison cafeterias, at that time the largest cafeteria chain in the Southeastern and Mid-Atlantic regions of the United States. While the Morrison cafeteria operations had been experiencing declining operations for two years prior to the acquisition, we believed that the acquisition would ultimately be accretive to our operations. Specifically, the acquisition allowed us to eliminate our only major competitor in our markets, more than double the size of our operations, enhance purchasing power, eliminate redundant costs and potentially increase sales at Morrison cafeterias to Piccadilly levels. In fiscal 2000, the Morrison cafeterias contributed only $0.9 million of EBITDA. During that same time period, Morrison cafeterias on average generated only $1.6 million of sales per cafeteria compared to $2.2 million of sales at our traditional Piccadilly cafeterias. We believe that we can substantially increase Morrison EBITDA based on our experience with the traditional Piccadilly cafeterias. Implement Sales-Building Initiatives. In fiscal 2000, same-store sales declined by 5.2%. Approximately 73% of the decline in same-store sales was attributable to the Morrison cafeterias. During fiscal 1999 and 2000, we were focused on the integration of the Morrison cafeterias. Specifically, during fiscal 1999 and the first quarter of fiscal 2000, we closed 27 unprofitable Morrison cafeterias and converted 112 Morrison cafeterias to Piccadilly-style cafeterias. During the balance of fiscal 2000, we tested several sales-building initiatives at 16 cafeteria locations in order to attract and retain new customers and to increase sales to existing customers. These sales-building initiatives include simplified menu pricing, neighborhood marketing and sponsorship of employee contests. These initiatives have been well received by our customers. Due to favorable results achieved at the test cafeterias, we implemented these initiatives on a company-wide basis in September 2000. Certain of these strategies, including customer coupons and discounted meal alternatives, designed to attract new customers, are expected to have a negative impact on margins during the second quarter of fiscal 2001. Implement Outsourcing Program. We have historically prepared almost all of our meals from scratch at each cafeteria location. We have initiated an outsourcing program at 54 of our cafeterias, in which outside vendors prepare and provide selected components of our recipes. For example, the cafeterias will receive certain pre-cut vegetables for salads and entrees, pre-mixed ingredients for certain desserts and side items based on our proprietary recipes and pre-mixed dough for selected bakery products. The outsourcing program has been implemented carefully in order to maintain consistently high levels of food freshness and quality. Based on our experience at these 54 cafeterias, we expect to reduce annual operating expenses by between approximately $8 and $10 million when the outsourcing program is fully implemented. These savings are the result of significantly reduced kitchen labor hours. We intend to roll out the outsourcing program to our remaining cafeterias over the next two years. We expect to achieve $2.5 million of cost savings in fiscal 2001 from our outsourcing program. Expand Centralized Purchasing Program. Currently, the managers at each of our cafeterias have purchasing responsibility for approximately one-third of the food ingredients used in the meals we serve. We implemented a new program in September 2000 that eliminated over 100 poultry suppliers by centralizing the purchasing function for poultry. Over the next 12 months, we expect to centralize the purchasing of other food items. Through centralized purchasing, we expect to achieve significant volume purchase discounts, resulting in approximately $3 million of annual cost savings ($1.5 million in fiscal 2001 from poultry alone). In addition, centralized purchasing will allow our cafeteria managers to spend more of their time increasing sales and enhancing customer service. RECENT ACQUISITIONS AND DISPOSITIONS In May 1998, we acquired Morrison for $57.3 million of total consideration. At that time, Morrison was the largest cafeteria chain in the Southeastern and Mid-Atlantic regions with 142 cafeterias in operation. Morrison cafeterias were similar to our traditional Piccadilly cafeterias in terms of size and markets served. In March 1999, we sold six Ralph & Kacoo's seafood restaurants for $21.3 million in cash. Ralph & Kacoo's generated approximately $24.3 million of sales and $3.9 million of EBITDA in the twelve-month period prior to the sale. Net proceeds from the sale were used to reduce bank debt. We sold Ralph & Kacoo's in order to focus on our traditional cafeteria operations. --------------------- Our principal offices are located at 3232 Sherwood Forest Boulevard, Baton Rouge, Louisiana 70816, telephone number (225) 293-9440. Our New York Stock Exchange ticker symbol is PIC. THE ORIGINAL OFFERINGS 75,500 of the Warrants were issued on December 21, 2000 as part of a private offering of Units, with each Unit consisting of one Note in the principal amount of $1,000 and one Warrant to purchase 10.51 shares of our Common Stock. The Units were sold to Jefferies & Company, Inc., as initial purchaser (the "Initial Purchaser"). The Initial Purchaser sold the Units to qualified institutional buyers in reliance on Rule 144A under the Securities Act. The remaining 5,500 Warrants were issued concurrently with the Original Offerings to the lenders under our Term Loan Credit Facility. TERMS OF THE WARRANTS Issuer..................... Piccadilly Cafeterias, Inc. Warrants Offered........... 81,000 Warrants originally issued pursuant to a warrant agreement dated December 21, 2000 ("Warrant Agreement") between the Company and the Bank of New York. Each Warrant entitles the holder thereof to acquire 10.51 shares of our Common Stock. Exercise Price............. $1.16875 per share, subject to adjustment. Exercise, Expiration....... The holders of the Warrants are entitled to exercise all or a portion of their Warrants at any time prior to 5:00 p.m., New York City time, on November 1, 2007. Warrants not exercised prior to that time will expire. Voting Rights.............. The holders of the Warrants have no voting rights. For more information about the Warrants, see "Description of the Warrants."

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+Prospectus Summary ........................................................... 3
+Risk Factors ................................................................. 7
+Cautionary Note Regarding Forward-Looking Statements ........................ 12
+Price Range For Common Stock ................................................ 13
+Common Stock And Holders..................................................... 13
+Dividend Policy ............................................................. 14
+Transfer Agent And Registrar ................................................ 14
+Use Of Proceeds ............................................................. 14
+Selected Historical And Pro Forma Consolidated Financial Data ............... 14
+Management's Discussion And Analysis Of Financial Condition And
+Results Of Operations........................................................ 15
+Changes In And Disagreements With Accountants On Accounting And
+Financial Disclosures........................................................ 23
+Quantitative And Qualitative Disclosure About Market Risk ................... 23
+Our Business ................................................................ 24
+Management .................................................................. 32
+Executive Compensation ...................................................... 33
+Security Ownership Of Certain Beneficial Owners And Management............... 36
+Certain Relationships And Related Transactions .............................. 38
+Description Of Securities ................................................... 38
+Selling Stockholders ........................................................ 40
+Plan Of Distribution ........................................................ 41
+Legal Matters ............................................................... 43
+Experts ..................................................................... 44
+Where You Can Find More Information ......................................... 44
+ PROSPECTUS SUMMARY
+THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND
+DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD
+READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND OUR CONSOLIDATED
+FINANCIAL STATEMENTS, CAREFULLY BEFORE MAKING AN INVESTMENT DECISION.
+OUR CORPORATE NAME
+We are incorporated in the state of Colorado under the name CDX.Com
+Incorporated. We do business under the name DataStream Global Communications.
+Our common stock is quoted on the Pink Sheets under the symbol "CDXX".
+CDX.Com Incorporated ("CDX" and/or the "Company") is headquartered at 7920
+Norfolk Avenue 11th Floor, Bethesda, Maryland 20817.
+ 3
+BACKGROUND
+We are a facilities-based international telecommunications company focused
+primarily on the international long distance telecommunications market. We
+provide competitively priced long distance telecommunication services to other
+telecommunications carriers. We provide international long distance service to a
+number of foreign countries through a flexible network of foreign termination
+relationships, international gateway switches, leased transmission facilities
+and resale arrangements with other long distance providers.
+CDX was incorporated in June, 1978. The original business was to engage in the
+manufacture and sale of computerized pulmonary diagnostic equipment used in the
+medical profession.
+On November 18, 2000, Tampa Bay Financial, Inc., a Florida Corporation ("TBF"),
+entered into an agreement (the "Agreement") with certain of the Company's
+shareholders. Pursuant to the Agreement, TBF and persons affiliated with TBF
+acquired control of the Company. TBF changed the Company's business plan from
+the manufacture and sale of computerized pulmonary diagnostic equipment to
+international communications and began doing business as DataStream Global
+Communications.
+RECENT DEVELOPMENTS
+We have had a number of recent developments that have materially affected our
+business and operations, including the following:
+On January 5, 2001 the CDX Board of Directors declared a two and one third (2
+1/3) to one common stock split, effected in the form of a stock dividend, with a
+record date of January 23, 2001 and a payment date of January 24, 2001.
+On January 12, 2001, CDX entered in an Agreement and Plan of Merger with Pensat
+International Communications, Inc. a Delaware Corporation ("Pensat"). Pursuant
+to this Agreement, Pensat merged with and into Pensat Inc., a newly formed
+subsidiary of CDX, such that Pensat Inc. is the surviving corporation. Pensat
+stockholders effectively acquired control and retain majority interest in CDX.
+The merger became effective on February 9, 2001. In the merger, Pensat ceased to
+exist as a Delaware corporation. To date, the Company has been unable to file the
+Certificate of Merger formally terminating Pensat's existence in Delaware because
+of a dispute between Pensat and the State of Delaware over the computation and payment
+of franchise tax. The Company and the State of Delaware have agreed upon the amount
+due, and upon completion of negotiation of acceptable payment terms, the Company
+will file the Certificate of Merger.
+In February 2001, the Company's Pensat subsidiary purchased three new enhanced
+services platforms for installation in its pre-paid calling card operations in
+Syria. The switches are installed in Damascus, Aleppo and Lattakia.
+In March 2001, the Company's Pensat subsidiary signed a four-year exclusive
+joint services agreement with an Argentinean telecommunications provider. Under
+the terms of the agreement, Pensat will provide Internet, data and international
+telecommunications services to Argentinean subscribers over its international
+VoIP network.
+In April, 2001, the Company's Pensat subsidiary implemented a new route between
+the USA and Mexico continuing the expansion of our international network,
+focusing on Latin American countries. We added this route into Mexico through an
+agreement with a strategic partner.
+During 2000 and 2001 the Company has taken a number of steps to reduce its Cost
+of Services and improve profitability through the (1) elimination of underused
+circuits, (2) acquisition of lower cost termination agreements, (3) negotiation
+of lower termination costs, (4) acquisition of lower cost fixed cost circuits
+and (5) implementation of routes with higher margins, and (6) elimination of
+services and programs that were not producing positive results.
+Current Financial Situation
+We are currently in arrears on approximately $37,000,000 of our liabilities,
+including approximately $27,000,000 of promissory notes and capital leases. A
+significant amount of our past due liabilities is owed to certain vendors who
+are critical to our on-going operations and to our ability to provide
+revenue-generating services to our customers. In addition, we have certain
+unpaid tax liabilities. In order to maximize the utilization of available cash
+resources, we have curtailed certain operations that were not generating
+positive cash flow and may curtail other operations in the future. Further,
+certain vendors have declined to provide further credit to the Company and
+certain vendors have withheld services. While we have been able to continue to
+operate despite these restrictions, there is no assurance we will be able to
+continue to do so in the future.
+ 4
+We are currently in discussions with the note holders and vendors regarding
+possible restructuring or deferral of these liabilities and while we have made
+progress along these lines, there is no assurance that these discussions will be
+successful. Failure to restructure or defer these overdue liabilities will have
+a material adverse effect on the business and the financial condition of the
+Company. Further, the Company is currently incurring operating losses .
+Accordingly, the Company will need additional financing to fund ongoing
+operations and that funding, if available, may be dilutive or on terms that are
+unacceptable to the Company. There is no assurance that the Company will be able
+to obtain such funding in adequate amounts or on a timely basis. Failure to
+acquire adequate funds on a timely basis will require the Company to further
+reduce its headcount, reduce the scope of operations, sell assets to acquire
+additional cash, seek protection for our US or overseas operations from
+creditors under applicable bankruptcy codes, and/or a complete cessation of
+operations by the Company and some or all of its subsidiaries.
+The Company continues to restructure its business and financial status with a
+focus on achieving profitability in its operations and making the Company more
+financable. In its move toward profitability, the Company has taken steps to cut
+expenses and costs. Reductions in the work force have been implemented as well
+as the elimination of certain business units that were not strategically
+important to the Company's central business plan and were not generating
+profits. The Company plans to focus on its core business units and direct its
+efforts on building revenues and profits from these operations.
+The consolidated financial statements contained in this prospectus have been
+prepared assuming that we will continue as a going concern. However our
+independent public accountants have determined that due to recurring operating
+losses, our working capital deficiency, significant short-term cash commitments
+and a lack of firm financial commitments raise substantial doubt about our
+ability to continue as a going concern.
+THE OFFERING
+The shares of our common stock, $.01 par value per share, covered by this
+prospectus are offered in connection with the resale of shares issued by us in
+connection with the conversion of certain debts of its subsidiaries as more
+fully described in the section titled "Principal and Selling Stockholders" in
+this prospectus.
+Common stock offered by the selling stockholders............ 3,177,716 shares
+Common stock outstanding after the offering................. 156,243,503 shares
+Use of proceeds............................................. We will not receive any proceeds
+ from the offering. All proceeds
+ will be received by the selling
+ stockholders.
+Pink Sheets symbol.......................................... CDXX
+We have agreed to maintain the effectiveness of this prospectus for one hundred
+eighty (180) days. No sales may be made pursuant to this prospectus after that
+time unless we amend or supplement this prospectus.
+SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
+The results of operations of CDX for the periods presented herein prior to its
+merger with Pensat International Communications, Inc. are not material to the
+results of operations of the Company. Additionally since all of CDX's former
+operating activities were divested, they are not indicative of the ongoing
+operations of the merged companies. Accordingly, unless otherwise noted, the
+summary consolidated financial data and associated description of events are of
+Pensat International Communications, Inc. for pre-merger periods and of the
+surviving consolidated entity for post merger periods.
+This is a summary of the selected historical and pro forma consolidated
+financial data for the periods ended and as of the dates indicated. Effective
+with the period ended June 30, 2000, we converted to from a December 31 fiscal
+year end to a June 30 fiscal year end. Therefore, the period ended June 30, 2000
+represents a twelve-month period as compared to the twelve-month fiscal years
+ended December 31, 1999 and 1998.
+In the following summary financial data, the statement of operations data for
+the years ended December 31, 1997, 1998, 1999 and June 30, 2000 are derived from
+and qualified in their entirety by reference to our audited consolidated
+financial statements and the notes to those statements that are included
+elsewhere in this prospectus. You should read those sections and the section
+ 5
+entitled "Management's Discussion and Analysis of Financial Condition and
+Results of Operations" for a further explanation of the financial data
+summarized here. The statement of operations data and the balance sheet data for
+the nine months ended March 31, 2001 are derived from our unaudited consolidated
+financial statements included elsewhere in this prospectus. The historical
+information may not be indicative of our future performance.
+ Year ended June Nine months
+ Years ended December 31, 30, ended March 31,
+ (Audited) (Audited) (Unaudited)
+ 1997 1998 1999 2000 2001
+CONSOLIDATED STATEMENT OF OPERATIONS DATA:
+Revenues........................................ $ 200,237 $ 971,989 $ 13,514,258 $ 19,523,322 $ 22,032,656
+Income (loss) from operations................... (1,537,385) (5,854,566) (17,022,279) (19,288,867) (7,264,870)
+Interest income (expense), net.................. (102,237) (238,685) (1,735,074) (3,577,810) (3,025,761)
+Accretion (charges)............................. - - (5,702,551) (4,940,180) (2,472,407)
+Net income (loss)............................... $(1,590,340) $(6,066,752) $(24,441,563) $(31,415,469) $ (13,130,399)
+Weighted average number of shares outstanding
+(pro forma)..................................... 150,000,000 150,000,000 150,000,000 150,000,000 150,970,301
+Pro forma Basic earnings (loss) per share (1)... $ (0.01) $ (0.04) $ (0.16) $ (0.21) $ (0.09)
+Dividends per Common Share...................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
+ As of
+ December 31, As of June 30, As of March 31,
+ (Audited) (Audited) (Unaudited)
+ 1998 1999 2000 2001
+BALANCE SHEET DATA :
+Working capital (deficit)............................. (3,260,881) (33,939,065) (41,153,148) (40,932,730)
+Total assets.......................................... 1,931,534 18,770,641 14,307,056 22,457,723
+Total long-term liabilities, net of current portion... 519,728 668,206 392,095 777,321
+Accumulated deficit................................... (9,003,975) (33,445,538) (48,850,593) (61,980,994)
+Deficiency in stockholders' equity.................... (2,465,313) (21,750,232) (32,182,263) (24,168,284)
+Redeemable convertible preferred stock................ 1,780,000 2,060,000 2,060,000 -
+ Year ended June Nine months
+ Years ended December 31, 30, ended March 31,
+ (Audited) (Audited) (Unaudited)
+ 1997 1998 1999 2000 2001
+OTHER FINANCIAL DATA:
+EBITDA from continuing operations (2).... $ (1,520,669) $ (5,806,549) $(16,526,760) $ (18,308,544) $ (6,008,873)
+(1) Pro forma basic loss per share of common stock is based on the
+weighted-average number of common shares outstanding after adjustment for
+preferred stock dividend requirements. For periods prior to Pensat's merger with
+CDX, the outstanding shares are shown as 150,000,000, the amount outstanding
+immediately after the merger. Diluted loss per share is not presented because
+the effect of convertible securities or common stock equivalents would be
+antidilutive. Dilutive securities that would be applicable in computing diluted
+earnings per share consist of convertible preferred stock, warrants and stock
+options.
+(2) EBITDA from continuing operations as used in this prospectus is earnings
+(loss) before net interest expense (income), income taxes, foreign exchange
+gains or losses, depreciation and amortization and is presented because we
+believe that such information is commonly used in the telecommunications
+industry as one measure of a company's operating performance and historical
+ability to service debt. EBITDA from continuing operations is not determined in
+accordance with generally accepted accounting principles, is not indicative of
+cash provided by operating activities, should not be used as a measure of
+operating income and cash flows from operations as determined under generally
+accepted accounting principles and should not be considered in isolation or as
+an alternative to, or to be more meaningful than, measures of performance
+ 6
+determined in accordance with generally accepted accounting principles. EBITDA,
+as calculated by us, may not be comparable to similarly titled measures reported
+by other companies, and comparisons could be misleading unless all companies and
+analysts calculated EBITDA in the same manner.
+The following table reconciles our net income (loss) from continuing operations
+to EBITDA from continuing operations:
+ Year ended June Nine months
+ Years ended December 31, 30, ended March 31,
+ (Audited) (Audited) (Unaudited)
+ 1997 1998 1999 2000 2001
+Net income (loss) from continuing operations $ (1,590,340) $ (6,066,752) $(24,441,563) $ (31,415,469) $ (13,130,399)
+Net interest expense (income)............... (102,237) (238,685) (1,735,074) (3,577,810) (3,025,761)
+Income tax expense (benefit)................ - - - - -
+Accretion charges........................... - - (5,702,551) (4,940,180) (2,472,407)
+Other (expense) ............................ 49,282 26,499 18,341 (3,608,612) (367,361)
+Depreciation and amortization............... (16,716) (48,017) (495,519) (980,323) (1,255,997)
+EBITDA from continuing operations........... $ (1,520,669) $ (5,806,549) $(16,526,760) $ (18,308,544) $ (6,008,873)
+ ============= ============== ============= ============== ===============
+ RISK FACTORS
+YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND OTHER INFORMATION IN THIS
+PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF
+THE FOLLOWING RISKS AND UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
+CONDITION OR OPERATING RESULTS WILL MOST LIKELY BE MATERIALLY AND ADVERSELY
+AFFECTED. IN THIS EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE,
+AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
+RISK FACTORS CONCERNING THE BUSINESS OPERATIONS OF THE COMPANY
+COMPANY HAS LIMITED OPERATING HISTORY AND IS INCURRING LOSSES.
+The Company has a limited operating history upon which an evaluation of it and
+its prospects can be based. Further, the Company is currently experiencing
+operating losses. There can be no assurance that we will be able to continue the
+revenue growth rates achieved in the past and that we will be able to generate
+positive cash flows from operations sufficient to support our business without
+additional financing.
+CONTINUED GROWTH WILL PLACE STRAINS ON COMPANY RESOURCES.
+The Company plans to continue its growth, and expansion will place strains on
+its management and staff personnel in the management, sales, support, technical
+and finance areas to support and manage the additional business. The Company is
+highly dependent on the skills of its key employees and on its ability to
+identify, hire and retain additional personnel. There can be no assurance that
+the Company will be able to retain existing personnel or identify and hire
+additional qualified personnel on a timely basis or at expense levels comparable
+with current operations.
+INTERNATIONAL LICENSES MAY BE DIFFICULT TO ACQUIRE.
+The Company's expansion plans involve new international locations and new
+services. Although the Company intends to operate in newly deregulated
+environments, there can be no assurance that any permits and operating licenses
+that may be required in such environments will be available on a timely basis or
+at all.
+CUSTOMER DEMAND IS UNCERTAIN.
+As the Company implements new locations and services, there can be no assurance
+that there will be sufficient demand from its target customers for its services,
+and if such demand exists, there can be no assurance that the Company will be
+able to service successfully its target market on a profitable basis.
+ 7
+CAPACITY AND EQUIPMENT REQUIRED MAY NOT BE AVAILABLE.
+In order to maintain its customer base and achieve its expansion plans, the
+Company will require additional network capacity and supporting technical
+equipment. There can be no assurance that such capacity or equipment will be
+available to the Company or available at prices that will enable the Company to
+achieve adequate margins on its services.
+CHANGES IN VOLUMES AND MIX OF CALLS MAY AFFECT MARGINS.
+Fluctuations in call volumes from our customers, particularly those involving
+high per-minute rate terminations, may cause variances in our monthly and
+quarterly operating results.
+VARIABLE COSTS FOR TRANSMISSION CAPACITY MAY CAUSE FLUCTUATIONS IN OUR MARGINS.
+A substantial portion of our transmission capacity will be obtained on a
+variable, per minute and short-term basis, subjecting us to the possibility of
+unanticipated price increases and service cancellations. We will not generally
+have long-term arrangements for the purchase or resale of international long
+distance services. Since rates may fluctuate over short periods of time and we
+may not be able to pass any cost increases along to our customers, our gross
+margins are subject to significant fluctuations. Decreased gross margins may
+decrease our profitability and cause a loss of customers.
+GROWTH IN FIXED COSTS WILL INCREASE OUR RISKS.
+As we expand our network and the volume of our network traffic, our cost of
+revenues will increasingly consist of fixed costs arising from the ownership and
+maintenance of switches and fiber optic cables. These costs may increase, and
+our operating margins may decrease. If our traffic volume were to decrease, or
+fail to increase to the extent expected or necessary to make efficient use of
+our network, our costs as a percentage of revenues would increase significantly,
+which could significantly decrease the results of our business operations.
+RISK FACTORS CONCERNING TECHNICAL OPERATIONS OF THE COMPANY
+IMPLEMENTATION OF NEW LOCATIONS AND SERVICES WILL INVOLVE TECHNICAL AND LOGISTICAL RISKS.
+The Company's markets involve rapidly changing technology, evolving industry
+standards, emerging competition and frequent new service and product
+introductions. The implementation and management of new domestic and
+international locations and services may involve technological and logistical
+challenges that the Company will have to overcome in order to provide timely and
+cost effective services to its current and added customers. There can be no
+assurance that the Company will be able to overcome any such challenges on a
+timely and cost-effective basis.
+THE COMPANY IS DEPENDENT ON THIRD-PARTY SUPPLIERS.
+The Company is dependent on third party suppliers of hardware and network
+connectivity for many of its products; and certain of these suppliers are or may
+become competitors of the Company. A failure by a supplier to deliver quality
+services or products on a timely basis, or the inability to develop alternative
+sources if and as required, could result in delays that could have a material
+adverse effect on the Company.
+SYSTEM FAILURES OR THIRD-PARTY BREAK-INS WILL ADVERSELY AFFECT THE COMPANY.
+The success of the Company is largely dependent upon its ability to deliver high
+quality, uninterrupted access to telecommunication services. Any system failure
+that causes interruptions in the Company's operations could have a material
+adverse effect on the Company. Computer viruses, break-ins or other problems
+caused by third parties to the Company's operating network or internal
+administrative network could lead to interruption, delays or cessation in
+service to the Company's customers. Alleviating such problems may require
+significant expenditures of capital and resources by the Company, which could
+have a material adverse effect on the Company.
+ 8
+TECHNICAL PROBLEMS COULD DISRUPT OUR BILLING FOR OUR SERVICES.
+Technical difficulties with the network could cause the loss of call detail
+record information, which is the basis of our ability to process and
+substantiate customer billings. Such failures or other technical difficulties
+may occur in the future, which could result in the loss of customers and
+revenue.
+NATURAL OR MAN-MADE DISASTERS COULD DISRUPT OUR OPERATIONS.
+Our operations depend on our ability to protect our hardware and other
+equipment, and on our suppliers to protect their networks, from damage from
+natural disasters such as fires, floods, hurricanes and earthquakes, other
+catastrophic events such as civil unrest, terrorism and war and other sources of
+power loss and telecommunications failures. Our network could become disabled in
+the event of an earthquake, power outage or otherwise. A network failure or a
+significant decrease in telephone traffic as a result of a natural or man-made
+disaster could damage our relationships with our customers and decrease our
+revenues and our operating results and result in a decrease in our stock price.
+RISK FACTORS CONCERNING FINANCIAL OPERATIONS OF THE COMPANY
+THE COMPANY IS IN ARREARS ON SIGNIFICANT AMOUNTS OF LIABILITIES.
+We are currently in arrears on approximately $37,000,000 of our liabilities,
+including approximately $27,000,000 of promissory notes and capital leases. A
+significant amount of our past due liabilities is owed to certain vendors who
+are critical to our on-going operations and to our ability to provide
+revenue-generating services to our customers. In addition, we have certain
+unpaid tax liabilities. In order to maximize the utilization of available cash
+resources, we have curtailed certain operations that were not generating
+positive cash flow and may curtail other operations in the future. Further,
+certain vendors have declined to provide further credit to the Company and
+certain vendors have withheld services. While we have been able to continue to
+operate despite these restrictions, there is no assurance we will be able to
+continue to do so in the future.
+We are currently in discussions with the note holders and vendors regarding
+possible restructuring or deferral of these liabilities and while we have made
+progress along these lines, there is no assurance that these discussions will be
+successful. Failure to restructure or defer these overdue liabilities will have
+a material adverse effect on the business and the financial condition of the
+Company. Further, the Company is currently incurring operating losses.
+Accordingly, the Company will need additional financing to fund ongoing
+operations and that funding may be dilutive or on terms that are unreasonable to
+the Company. There is no assurance that the Company will be able to obtain such
+funding in adequate amounts or on a timely basis. Failure to acquire adequate
+funds on a timely basis will require the Company to further reduce its
+headcount, reduce the scope of operations, sell assets to acquire additional
+cash, seek protection for our US or overseas operations from creditors under
+applicable bankruptcy codes, and/or a complete cessation of operations by the
+Company and some or all of its subsidiaries.
+The Company continues to restructure its business and financial status with a
+focus on achieving profitability in its operations and making the Company more
+financable. In its move toward profitability, the Company has taken steps to cut
+expenses and costs. Reductions in the work force have been implemented as well
+as the elimination of certain business units that were not strategically
+important to the Company's central business plan and were not generating
+profits. The Company plans to focus on its core business units and direct its
+efforts on building revenues and profits from these operations.
+COMPANY WILL REQUIRE ADDITIONAL CAPITAL TO CONTINUE TO GROW.
+In order to maintain its competitive position and grow, the Company will need to
+raise additional capital from equity or debt sources to fund ongoing operations
+and the enhancement and expansion of its network. There can be no assurance that
+the Company will be able to raise such capital on favorable terms or at all. If
+the Company is unable to obtain such additional capital, the Company may be
+required to curtail its current operations and reduce the scope of its
+anticipated expansion which could have a material adverse effect on the
+Company's business, financial condition or results of operations and its ability
+to compete.
+ 9
+LOSS OF A KEY CUSTOMER WOULD ADVERSELY AFFECT COMPANY.
+The Company depends on a limited number of customers for a significant portion
+of its revenues. The loss of a significant customer could cause a material
+reduction in revenues and operating results and a reduction in our stock price.
+Furthermore, if the Company experiences payment delays or credit losses from its
+customers, it could harm our business, financial condition and cause our stock
+price to drop.
+FAILURE TO PAY CARRIERS AND VENDORS MAY RESULT IN SUSPENSION OF SERVICES.
+A lack of cash flow could negatively impact our ability to maintain and increase
+our revenues. A significant portion of our international long distance revenues
+requires an initial up front cash investment in equipment, operating expenses
+and deposits. Failure to make timely payments to our carriers or vendors may
+result in their suspending services to us, which will curtail our ability to
+generate revenues. Should the carriers or vendors cease providing services to
+us, it would damage our relationships with our customers and decrease our
+revenues and our operating results.
+RISK FACTORS CONCERNING THE INDUSTRY IN WHICH THE COMPANY OPERATES
+CHANGES IN REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY IN THE US OR
+INTERNATIONALLY COULD ADVERSELY AFFECT THE COMPANY.
+The telecommunications industry is subject to extensive regulation by federal,
+state and local governmental agencies, including governmental authorities in
+certain foreign countries. Any adverse rulings by regulatory agencies affecting
+the Company's operations or services could negatively impact the Company's
+results and its stock price.
+THE COMPANY'S INTERNATIONAL OPERATIONS ARE SUBJECT TO POLITICAL AND ECONOMIC
+VOLATILITY IN THE COUNTRIES IN WHICH IT OPERATES.
+The Company conducts a significant part of its business in international
+environments or by interconnecting to international destinations. Any economic
+or political volatility in these environments could adversely affect the
+Company's operations, its operating results or stock price.
+THE COMPANY FACES SIGNIFICANT COMPETITION IN ITS MARKETS.
+The international telecommunications industry is intensely competitive and
+subject to rapid change. International wholesale switched-service providers
+compete on the basis of price, customer service, transmission quality, breadth
+of service offerings and value-added services. Additionally, the
+telecommunications industry is in a period of rapid technological evolution,
+marked by the introduction of competitive product and service offerings, such as
+the utilization of the Internet for international voice and data communications.
+The Company has many competitors in the segments in which it operates, several
+of which are much larger and better financed than the Company. Our competitors
+in the international wholesale switched long distance market include large,
+facilities-based multinational corporations and smaller facilities-based
+providers in the U.S. and overseas that have emerged as a result of
+deregulation, new companies that provide voice services via the Internet,
+switch-based resellers of international long distance services and international
+joint ventures and alliances among such companies. We also compete abroad with a
+number of dominant telecommunications operators that previously held various
+monopolies established by law over the telecommunications traffic in their
+countries. We believe that competition will continue to increase, placing
+downward pressure on prices. This competition may create pricing pressures on
+the Company and/or may create the need for the Company to enhance its services
+to meet the competition's offerings.
+FOREIGN GOVERNMENT INTERESTS IN LOCAL TELECOMMUNICATIONS MARKETS MAY CREATE DIFFICULTIES
+FOR THE COMPANY.
+Foreign governments may attempt to prevent us from conducting our business and
+from expanding into their respective countries. Governments of many countries
+exercise substantial influence over various aspects of the telecommunications
+market. In some cases, the government owns or controls companies that are or may
+become our competitors or on which we may depend for required interconnections
+to local telephone networks and other services. Accordingly, government actions
+in the future could block or impede the operation of our business.
+FUTURE CHANGES IN SETTLEMENT RATES OR PROCESS BY THE US GOVERNMENT MAY ADVERSELY
+AFFECT OUR MARGINS.
+ 10
+Federal Communications Commission intervention regarding the settlement rates
+charged by foreign carriers may disrupt our transmission arrangements to certain
+countries and decrease our revenues. The Federal Communications Commission is
+attempting to reduce the foreign routing costs of U.S. international carriers by
+prescribing maximum or benchmark settlement rates which foreign carriers may
+charge U.S. carriers for routing telecommunications traffic. The Federal
+Communications Commission's action may reduce our settlement costs, although the
+costs of other U.S. international carriers also may be reduced in a similar
+fashion. Any future Federal Communications Commission intervention to enforce
+the new settlement benchmarks if U.S. carriers are unsuccessful in negotiating
+settlement rates at or below the prescribed benchmarks could disrupt our
+transmission arrangements to certain countries or require us to modify our
+existing arrangements, which could decrease our revenues.
+RISK FACTORS CONCERNING OWNERSHIP OF THE COMPANY'S COMMON STOCK
+OUR STOCK CURRENTLY HAS LIMITED TRADING VOLUMES.
+Our stock is currently traded in the "Pink Sheets" and the daily trading volume
+is relatively small. Accordingly, the sale of a substantial number of shares of
+our common stock may cause the market price of our common stock to decline.
+Further, since our stock is categorized as "penny shares" it is covered by
+special trading rules that may limit trading in the secondary market.
+Lack of Prior Market for Securities of the Company; No NASDAQ Listing.
+We have submitted an application to be listed on the OTC Bulletin Board.
+However, there can be no assurance that the application will be approved or that
+in the event it is approved that an active trading market will develop.
+SHARES BEING SOLD IN THIS OFFERING MAY REDUCE OUR STOCK PRICE.
+The sale of a substantial number of shares of our common stock in connection
+with the offering may cause the market price of our common stock to decline. If
+our current stockholders sell shares of common stock in the public market
+following the offering, or if the market perceives that such sales could occur,
+the market price of our common stock could decline. These sales also might make
+it more difficult for us to sell equity or equity-related securities in the
+future at a time and price that we deem appropriate, or to use equity as
+consideration for future acquisitions.
+FLUCTUATIONS IN OUR STOCK PRICE MAY RESULT IN LITIGATION AGAINST THE COMPANY.
+Significant fluctuations in the market price of our common stock could result in
+securities class action claims against us, which could seriously harm our
+business. Securities class action claims have been brought against companies in
+the past where volatility in the market price of that company's securities has
+taken place. This kind of litigation could be very costly and divert our
+management's attention and resources, and any adverse determination in this
+litigation could also subject us to significant liabilities, any or all of which
+could seriously harm our business.
+SHARES ELIGIBLE FOR FUTURE SALE
+Sales of a substantial number of shares in the public market during and
+following this offering, or the perception that sales could occur, could
+adversely affect the prevailing market price for our shares. There are
+156,243,503 shares of our stock outstanding. Of these shares, upon completion of
+this offering, approximately 43,177,716 shares will be freely tradable without
+restriction or further registration under the Securities Act, other than shares
+that are purchased by affiliates of CDX as defined in Rule 144 under the
+Securities Act. The remaining shares are restricted securities as defined in
+Rule 144 under the Securities Act or shares held by affiliates of CDX.
+Restricted securities and shares held by affiliates may be sold in the public
+market only if registered or if they qualify for an exemption from registration
+under Rule 144 under the Securities Act, which rules are summarized below.
+Securities Act Rules
+In general, under Rule 144 as currently in effect, a person (or persons whose
+shares are required to be aggregated) who has beneficially owned restricted
+shares for at least one year, or any affiliate, is entitled to sell, within any
+three-month period a number of shares that does not exceed 1% of the then
+outstanding shares (approximately 1,562,000 shares).
+ 11
+Sales under Rule 144 are also subject to certain manner of sale provisions and
+notice requirements and to the availability of current public information about
+us.
+In addition, under Rule 144(k), a person who is not one of our affiliates at any
+time during the 90 days preceding a sale and who has beneficially owned the
+restricted shares proposed to be sold for at least two years (including the
+holding period of any prior owner other than an affiliate) is entitled to sell
+the shares without complying with the manner of sale, public information, volume
+limitation or notice provisions of Rule 144. Therefore, unless otherwise
+restricted, such shares may be sold at any time.
+FACTORS AFFECTING FUTURE OPERATING RESULTS
+FUTURE OPERATING RESULTS MAY FLUCTUATE WHICH WILL AFFECT OUR STOCK PRICE.
+Our quarterly operating results are difficult to forecast with any degree of
+accuracy because a number of factors subject these results to significant
+fluctuations. Our revenues, costs and expenses have fluctuated significantly in
+the past and are likely to continue to fluctuate significantly in the future as
+a result of numerous factors. As a result, we believe that period-to-period
+comparisons of our operating results are not necessarily meaningful and should
+not be relied upon as indications of future performance.
+Our revenues in any given period can vary due to factors such as:
+o call volume fluctuations, particularly in regions with relatively high
+ per-minute rates;
+o the addition or loss of a major customer, whether through competition, merger,
+ consolidation, financial difficulty of such customer or otherwise;
+o the loss of economically beneficial routing options for the termination of our
+ traffic;
+o discontinuation of money-losing operations;
+o pricing pressure resulting from increased competition; and
+o technical difficulties with or failures of portions of our network that impact
+ our ability to provide service to, or bill, our customers.
+Our operating expenses in any given period can vary due to factors such as:
+o fluctuations in rates charged by other carriers to terminate our traffic;
+o increases or reductions in personnel levels and the costs of implementing such
+ changes;
+o increases in bad debt expense and reserves; and
+o the timing of capital expenditures, and other costs associated with acquiring
+ or obtaining other rights to switching and other transmission facilities.
+In addition, our operating results can vary due to factors such as:
+o changes in routing due to variations in the quality of vendor transmission
+ capability;
+o loss of favorable routing options;
+o changes in international settlement agreements including proportional return
+ traffic provisions;
+o actions by domestic or foreign regulatory entities;
+o the level, timing and pace of our expansion in international and commercial
+ market; and
+o general domestic and international economic and political conditions.
+Further, a substantial portion of the communications services we use is obtained
+on a variable per-minute basis with short term notice periods for price changes
+and service changes, subjecting us to the possibility of unanticipated price
+increases and service cancellations. Since we do not generally have long-term
+arrangements for the purchase or resale of long distance services, and since
+rates fluctuate significantly over short periods of time, our operating results
+can be subject to significant fluctuations over short periods of time. Our
+operating results also may be negatively impacted in the longer term by
+competitive pricing pressures.

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+ SUMMARY Because this is a summary, it does not contain all of the information that may be important. Read the entire Prospectus before deciding to invest. The Contracts provide for investment on a tax-deferred basis and annuity benefits. This Prospectus describes both Non-Qualified Plan and Qualified Plan Contracts. A Contract may not be issued to you on or after your 91st birthday. The minimum initial Purchase Payment is $10,000, and the minimum subsequent Purchase Payment will vary depending on whether the Contract is issued as a Qualified or Non-Qualified Plan Contract, and the method of payment. In either case, our prior approval is required for total Purchase Payments over $1,000,000. (See "The Contracts," page 24.) An initial allocation to a Subaccount or Fixed Account must be at least $500. A subsequent allocation to a Subaccount or Fixed Account must be at least $50. Any allocation to a Guarantee Period must be at least $500. Variable accumulations and benefits are provided by crediting Purchase Payments to one or more Subaccounts that you select. Each Subaccount invests in one of the following corresponding Portfolios or Funds: . Alger American Balanced . Alger American Leveraged AllCap . Credit Suisse Warburg Pincus Trust-Emerging Markets . Credit Suisse Warburg Pincus Trust-Global Post-Venture Capital . Dreyfus I.P. MidCap Stock (Initial Share Class) . The Dreyfus Socially Responsible Growth Fund, Inc. (Initial Share Class) . INVESCO VIF-Utilities Fund . Scudder 21/st/ Century Growth . Scudder Capital Growth . Scudder Global Discovery . Scudder Growth and Income . Scudder Health Sciences . Scudder International . Scudder Aggressive Growth . Scudder Blue Chip . Scudder Contrarian Value . Scudder Global Blue Chip . Scudder Government Securities . Scudder Growth . Scudder High Yield . Scudder International Research . Scudder Investment Grade Bond . Scudder Money Market . Scudder New Europe . Scudder Small Cap Growth . Scudder Small Cap Value . Scudder Strategic Income . Scudder Technology Growth . Scudder Total Return . SVS Dreman Financial Services . SVS Dreman High Return Equity <TABLE> <S> <C> /8/4 (o) Form of Disability Rider. /8/4 (p) Form of Nursing Care Rider. /8/4 (q) Form of ERISA Loan Rider. /8/4 (r) Form of Employee/Broker Bonus Credit Program. 5 Opinion and Consent of Counsel regarding legality 8 Not Applicable. 9 Not Applicable. 10 Not Applicable. 11 Not Applicable. 12 Not Applicable. 13 Not Applicable. 15 Not Applicable. 16 Not Applicable. /6/21 Organizational Chart. 23 Consents of Independent Accountants 24 Not Applicable. 25 Not Applicable. 26 Not Applicable. /3/99(a) Schedule III: Supplementary Insurance Information (years ended December 31, 2000 and 1999) /3/99(b) Schedule IV: Reinsurance (year ended December 31, 2000) /4/99(c) Schedule IV: Reinsurance (year ended December 31, 1999) /5/99(d) Schedule IV: Reinsurance (year ended December 31, 1998) /3/99(e) Schedule V: Valuation and qualifying accounts (year ended December 31, 2000) /4/99(f) Schedule V: Valuation and qualifying accounts (year ended December 31, 1999) /5/99(g) Schedule V: Valuation and qualifying accounts (year ended December 31, 1998) </TABLE> --------------------- . SVS Dynamic Growth . SVS Focus Value+Growth . SVS Focused Large Cap Growth . SVS Growth And Income . SVS Growth Opportunities . SVS Index 500 . SVS Mid-Cap Growth . SVS Strategic Equity . SVS Venture Value The Fixed Account provides fixed accumulations and benefits. We guarantee that Purchase Payments allocated to the Fixed Account earn a minimum fixed interest rate of 3%. In our discretion, we may credit interest in excess of 3%. (See "Fixed Account Option," page 22) The MVA Option also provides fixed accumulations. The MVA Option may not be available in all states. The MVA Option is only available during the Accumulation Period. You may allocate amounts to one or more initial Guarantee Periods available under the Contract. We may offer additional Guarantee Periods at our discretion. For new contracts, we may limit the number of Guarantee Period options available to three. We calculate the interest credited to the Guarantee Period Value by compounding daily at daily interest rates which would produce at the end of 12 months a result identical to the one produced by applying an annual interest rate. We declare the rate at our sole discretion. We guarantee amounts allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee Periods you select. These guaranteed amounts are subject to any applicable withdrawal charge, Market Value Adjustment or records maintenance charge. We will not change a Guaranteed Interest Rate for the duration of the Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee Periods are set at our discretion. At the end of a Guarantee Period, a new Guarantee Period for the same duration starts, unless you timely elect another Guarantee Period. The offering of interests under the Contract relating to the MVA Option is registered under the Securities Act of 1933 ("1933 Act"), but the separate account holding our assets in connection with those interests is not registered under the Investment Company Act of 1940 ("1940 Act"). (See "The MVA Option," page 21) You bear the investment risk under the Contracts, unless you allocate your Contract Values to: . the MVA Option and are guaranteed to receive the Guaranteed Interest Rate, subject to any market value adjustment, or . the Fixed Option and are guaranteed to earn at least 3% interest. Transfers among Subaccounts are permitted before and after annuitization, subject to certain limitations. A transfer from a Guarantee Period is subject to a Market Value Adjustment unless the transfer is effected within 30 days after the end of the applicable Guarantee Period. (See "Transfers During Accumulation Period" and "Transfers During the Annuity Period," pages 28 and 44 respectively.) You may withdraw Contract Value subject to withdrawal charges, any applicable Market Value Adjustment, and other specified conditions. If you do not elect the Value Credit rider, the withdrawal charge ranges from 7% of each Purchase Payment during the first Contribution Year to 0% after seven Contribution Years, and after seven Contribution Years no withdrawal charge applies to withdrawal of that Purchase Payment. If the Value Credit rider is elected, the withdrawal charge ranges from 8.5% during the first Contribution Year to 0% after nine Contribution Years, and no withdrawal charge applies after nine Contribution Years. As explained below, certain amounts may be withdrawn free of withdrawal charge. In determining withdrawal charges and free withdrawal amounts, we treat withdrawals as coming from earnings (if any) first, and then from the oldest Purchase Payments first (i.e., first-in, first-out). We will charge all amounts withdrawn and any applicable withdrawal charge against Purchase Payments in the chronological order in which we received them beginning with the initial Purchase Payment. (See "Withdrawals During the Accumulation Period," page 31.) Withdrawals may be subject to income tax, a 10% penalty tax, and other tax consequences. Withdrawals from Qualified Plan Contracts may be limited by the terms of the plan or the Internal Revenue Code, as amended (the "Code"). (See "Federal Income Taxes," page 47.) <TABLE> <S> <C> 1 Incorporated herein by reference to the Registration Statement on Form S-1 (File No. 333-02491) filed on or about April 12, 1996. 2 Incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-02491) filed on or about April 23, 1997. 3 Incorporated herein by reference to Form 10-K for Kemper Investors Life Insurance Company for fiscal year ended December 31, 2000 filed on or about March 28, 2001. 4 Incorporated herein by reference to Form 10-K for Kemper Investors Life Insurance Company for fiscal year ended December 31, 1999 filed on or about March 29, 2000. 5 Incorporated herein by reference to Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-02491) filed on or about April 20, 1999. 6 Incorporated herein by reference to Post-Effective Amendment No. 29 to the Registration Statement on Form N-4 (File No. 2- 72671) filed on or about April 26, 2000. 7. Incorporated herein by reference to this Initial Registration Statement on Form S-1 (File No. 333-61204) filed on or about May 18, 2001. 8. Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4 (File No.333-61194) filed on or about October 12, 2001. </TABLE> (b) Financial Statements Financial Statements included in Prospectus Kemper Investors Life Insurance Company ("KILICO") and Subsidiaries We do not deduct sales charges from Purchase Payments. Each Contract Year, you may make a partial or total withdrawal of the Contract, without withdrawal charge, up to the greatest of: . Purchase Payments that are no longer subject to withdrawal charges, minus withdrawals attributable to those Purchase Payments; . Your Contract Value, minus any Purchase Payment paid within the prior seven years (nine years for Contracts with the Value Credit rider), plus any withdrawals from Purchase Payments subject to withdrawal charges, including any withdrawal charge; and . 10% of Purchase Payments that are subject to withdrawal charges, minus any Purchase Payments subject to a withdrawal charge previously withdrawn, including any withdrawal charges. The Contract may be purchased in connection with retirement plans qualifying under Sections 401, 403, 408, 408A and 457 of the Code including the following types of Qualified Plans: IRA's, SEP-IRA's, SIMPLE IRA's, Roth IRA's, HR-10 and Keogh Plans, Pension and Profit-Sharing Plans, Tax-Sheltered Annuities, and Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations. The Contract is also available in connection with non-qualified deferred compensation plans. (See "Taxation of Annuities in General," page 48 and "Qualified Plans," page 51.) Loans against your Contract may be taken any time prior to the Annuity Date if your Contract was issued under Sections 401(a) or 403(b) of the Code and your plan permits loans. (See "Contract Loans," page 32.) You may examine a Contract and return it to us for a refund during the "free look" period. The length of the free look period will depend on the state in which the Contract is issued. However, it will be at least ten days from the date you receive the Contract. (See "The Contracts," page 23.) In addition, a special free look period applies in some circumstances to Contracts issued as an Individual Retirement Annuity ("IRA"), a Roth IRA or a Simplified Employee Pension. KILICO and Subsidiaries Consolidated Balance Sheet, as of June 30, 2001 (unaudited) and December 31, 2000. KILICO and Subsidiaries Consolidated Statements of Operations, for the six month periods ended June 30, 2001 and 2000 (unaudited). KILICO and Subsidiaries Consolidated Statements of Comprehensive Income (Loss), for the six month periods ended June 30, 2001 and 2000 (unaudited). KILICO and Subsidiaries Consolidated Statements of Cash Flows, for the six month periods ended June 30, 2001 and 2000 (unaudited). Notes to Consolidated Financial Statements (unaudited) Report of Independent Accountants KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31, 2000 and 1999. KILICO and Subsidiaries Consolidated Statements of Operations, years ended December 31, 2000, 1999 and 1998. KILICO and Subsidiaries Consolidated Statements of Comprehensive Income, years ended December 31, 2000, 1999 and 1998. KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity, years ended December 31, 2000, 1999 and 1998. KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. ITEM 17. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the determining of any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

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+ Prospectus Summary..............................1 Security Ownership of Management and The Offering....................................5 Certain Beneficial Owners ...................49 Risk Factors....................................6 Certain Relationships And Related The Recapitalization...........................14 Transactions ................................54 Use of Proceeds................................16 Description of Capital Stock...................58 Dividend Policy................................16 Description of Our Indebtedness................62 Determination of Offering Price................16 Plan of Distribution...........................66 Capitalization.................................17 Legal Matters..................................67 Selling Stockholders...........................19 Experts........................................67 Pro Forma Financial Data.......................20 Where You Can Find Additional Information......67 Selected Historical Financial Data.............23 Index to Financial Statements.................F-1 Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................24 Business.......................................32 </TABLE> -------------------- FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about: o our business and acquisition strategies; o our liquidity and capital expenditures; o our debt levels and ability to obtain financing and service debt; o competitive pressures and trends in the automotive supply industry; o cyclicality and economic condition of the industries we currently serve; o uncertainty regarding our future operating results; o prevailing levels of interest rates; and o plans, objectives, expectations and intentions contained in this prospectus that are not historical. All statements, other than statements of historical fact included in this prospectus, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this prospectus, the words "will," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this prospectus. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this prospectus are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this prospectus. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. specialty fasteners and other metal-formed products used in a variety of industrial applications. We believe the Metal Forming group has the leading North American market share in several of its key products, including hot forgings, powder metal connecting rods, and forged shafts and is the second largest independent "machining and assembly" supplier. We have added strong capabilities in machining and sub-assembly and light metals through the acquisition of Simpson Industries, Inc. ("Simpson") in December 2000 and a strategic relationship with Global Metal Technologies, Inc. ("GMTI"), which was acquired by Heartland in January 2001. As a result of the Simpson acquisition, we add world class machining and assembly capabilities and can offer OEM customers an integrated solution for their needs by combining design, engineering, metal forming, machining and sub-assembly capabilities. Through our strategic relationship with GMTI, which is a leading provider of precision aluminum die castings, we have added forming capabilities in aluminum, which is experiencing strong growth due to its lightweight characteristics. The Simpson acquisition and the GMTI relationship will provide us with opportunities to reduce costs in certain sales, marketing, administration and overhead functions and to improve operational efficiency. Diversified Industrial Product Group. Our Diversified Industrial Products Group manufactures towing and related accessories as well as a broad range of products used in industrial applications. The Diversified Industrial Product Group's towing and accessories products include trailer hitches, hitch mounted accessories, jacks, couplers and winches, roof racks and related electrical products. These products are sold to customers such as Wal-Mart, K-Mart and U-Haul and independent hitch installers. Specialty industrial products include closures and dispensing products, gaskets, insulation products and precision cutting tools for a wide variety of customers in the chemical, refining, container, construction and other industries. Key customers include Dow, BASF, Bayer, Pepsi, Sherwin Williams, Exxon Mobil, Lyondell and Chevron. Our Business Strategies Our goal in the Metal Forming Group is to become the leading supplier of high quality, low cost metal formed components, assemblies and modules to the global transportation industry. As a result of the competitive pressures on automotive manufacturers to improve quality and reduce costs, time to market, overhead and inventory, several trends have emerged which are important to our strategy, including: (i) the desire of OEMs and certain Tier 1 suppliers to outsource the design and manufacture of metal parts in engine, transmission and driveline applications, (ii) increasing demand for fully integrated modular assemblies, and (iii) the globalization and consolidation of the supply base. Our strategy to capitalize on these trends includes the following elements: o Capitalize on Full-Service, Integrated Supply Opportunities. We intend to leverage our strengths in forged steel and powder metal components by adding metal capabilities in ductile iron foundry, aluminum foundry and aluminum and magnesium die casting. By offering a full complement of metal solutions we believe we will be able to offer OEMs "one-stop" shopping to optimize weight, cost, stress, durability, fatigue resistance and other metal component attributes. With the largest North American market shares in certain engineered forging and powder metal application, and the second largest non-captive machining and assembly capability, we believe we have a competitive advantage in becoming a fully integrated supplier. Our capabilities in engineering, design, machining and assembly, position us to capture a greater share of the "value chain" and deliver customers finished sub-assemblies and modules rather than independent parts. Recently we have had opportunities to pursue new business opportunities utilizing our integrated capabilities to supply a larger percentage of the value added content of certain applications which could result in significant increases in content per vehicle on related programs. 10.14 Employment, Release and Consulting Agreement with Timothy Wadhams, dated November 2000. (7) 10.15* Stock Purchase Agreement by and between MascoTech, Inc. (now known as Metaldyne Corporation) and Citicorp Venture Capital, Ltd., dated as of August 1, 2000 (incorporated by reference to Annex D to the Proxy Statement dated October 26, 2000, Commission File No. 001-12068). 10.16 Corporate Services Agreement and Annex dated as of January 1, 1987 between Masco Industries, Inc. (now known as Metaldyne Corporation) and Masco Corporation; and Amendment No. 1 dated January 22, 1998 and June 17, 1998. (4) 10.17 Corporate Opportunities Agreement dated as of May 1, 1984 between Masco Corporation and Masco Industries, Inc. (now known as Metaldyne Corporation) and Amendment No. 1 dated as of October 31, 1996. (4) 10.18* Amendment No. 2 to the Corporate Services Agreement between Masco Industries (now known as Metaldyne Corporation) and Masco Corporation. 10.19* Amendment No. 2 to Corporate Opportunities Agreement between Masco Industries, Inc. (now known as Metaldyne Corporation) and Masco Corporation. 10.20* Shareholders Agreement by and among MascoTech, Inc. (now known as Metaldyne Corporation), Masco Corporation, Richard Manoogian, certain of their respective affiliates and other co-investors a party thereto, dated as of November 28, 2000. 10.21 Strategic Cooperation Agreement dated as of January 23, 2001 among Metalync Company LLC (now known as Metaldyne Company LLC), Metaldyne Corporation and Global Technologies, Inc. (7) 10.22 MascoTech, Inc. (now known as Metaldyne Corporation) 1991 Long Term Stock Incentive Plan (Restated July 15, 1998). (3) 10.23 MascoTech, Inc. (now known as Metaldyne Corporation) Supplemental Executive Retirement and Disability Plan. 10.24 Description of the MascoTech, Inc. (now known as Metaldyne Corporation) program for Estate, Financial Planning and Tax Assistance. (2) 21.1 Subsidiaries of the registrant. (7) 23.1 Consent of Cahill Gordon & Reindel (included in their opinion filed as Exhibit 5.1). 23.2 Consent of PricewaterhouseCoopers LLP. 23.3 Consent of KPMG LLP. 24.1 Power of attorney for new directors (included on signature page II-8 to this amendment no. 1 to the registration statement). --------------- * Previously filed. (1) Incorporated by reference to the Exhibits filed with MascoTech, Inc.'s (now known as Metaldyne Corporation) Current Report on Form 8-K filed November 14, 1996. (2) Incorporated by reference to the Exhibits filed with MascoTech, Inc.'s (now known as Metaldyne Corporation) Annual Report on Form 10-K for the year ended December 31, 1997. (3) Incorporated by reference to the Exhibits filed with MascoTech, Inc.'s (now known as Metaldyne Corporation) Annual Report on Form 10-K for the year ended December 31, 1998. (4) Incorporated by reference to the Exhibits filed with MascoTech, Inc.'s (now known as Metaldyne Corporation) Annual Report on Form 10-K for the year ended December 31, 1999. (5) Incorporated by reference to the Exhibits filed with MascoTech, Inc.'s (now known as Metaldyne Corporation) Current Report on Form 8-K filed August 7, 2000. o Invest in Engineering, Design and Information Technology. We plan to continue investing in technology and design capability to support our products. We believe that in order to effectively develop total metal component and assembly solutions it is necessary to integrate research, development, and design elements with product fabrication, machining, finishing and assembly. We believe that our larger scale and broader product line relative to several of our competitors will enable us to more efficiently invest in engineering, design and information technology and develop a significant competitive advantage. In addition, we plan to implement advanced information technology systems to enable us to reduce overhead and administrative expenses. o Pursue Global Expansion Opportunities. Global expansion is an important component of our growth strategy. A significant portion of the global market for engineered metal parts is outside of North America. Further, as OEMs continue to consolidate their supply base, they are looking for global suppliers that can provide seamless product delivery across geographic production regions. We believe our size, strong market shares in North America and customer relationships uniquely position us to capitalize on this trend. o Capture Benefits from Economies of Scale and Operating Synergies. As we grow our businesses, we will seek to improve our sourcing costs for key commodity inputs, such as primary and secondary scrap, hot bar and rod and other key raw material components for our Metal Forming Group. In addition, as a larger company we will be able to spread our engineering and product development costs over a larger sales base. Furthermore, acquisitions and strategic relationships typically present opportunities for cost reductions through operational efficiency. Through the Simpson acquisition and the GMTI relationship, we have already developed customer-based marketing teams, identified overhead that can be shared and targeted opportunities for restructuring and coordination of design, engineering, administrative and raw material purchasing functions. Our strategy in the Diversified Industrial Group is to aggressively pursue internal growth opportunities and selected strategic acquisitions to create a significant portfolio of industrial businesses that share common and complementary characteristics, including proprietary technologies, market leadership in niche industrial markets, strong brand names, high operating margins, strong free cash flow generation and above average growth opportunities. Several of our businesses have significant growth opportunities related to new product development and expansion into new markets. In addition, we believe there are significant opportunities to reduce overhead and administrative costs across these businesses through the use of information technology and shared services. We also believe we can reduce operating costs by combining and rationalizing certain operations. Recent Developments The Recapitalization. On November 28, 2000, we completed a recapitalization transaction which resulted in an investor group led by Heartland and CSFB acquiring control of us. Pursuant to the recapitalization, our publicly traded common stock was converted into the right to receive $16.90 in cash plus additional cash amounts, if any, based upon the net proceeds from any future disposition of the stock of Saturn Electronics & Engineering Inc. owned by us. Only holders of our common stock at the time of the recapitalization will be entitled to proceeds from any disposition of our Saturn stock. Investors in the common stock offered hereby will not be entitled to receive any Saturn proceeds. In connection with the recapitalization, certain of our stockholders, primarily Masco Corporation and Richard A. Manoogian and the related Richard and Jane Manoogian Foundation, agreed to roll over a portion of their investment in us and consequently remain as stockholders in Metaldyne. (6) Incorporated by reference to the Exhibits filed with MascoTech, Inc.'s (now known as Metaldyne Corporation) Quarterly Report on Form 10-Q for the period ended December 31, 2000. (7) Incorporated by reference to the Exhibits filed with MascoTech, Inc.'s (now known as Metaldyne Corporation) Annual Report on Form 10-K for the year ended December 31, 2000. The recapitalization, the repayment of certain of our existing indebtedness and the payment of fees and expenses in connection with the recapitalization was financed through approximately (1) $435 million in equity financing provided by Heartland and its affiliates, investment funds associated with CSFB, and other equity co-investors, (2) $123.8 million of proceeds from the sale of certain equity investments owned by us, (3) $1,016 million from borrowings under our credit facility and (4) $118.5 million of proceeds from the sale of accounts receivable pursuant to a new accounts receivable facility. Simpson Acquisition. On December 15, 2000, we acquired Simpson, for total consideration of approximately $365 million, including fees and expenses and the assumption of indebtedness. Simpson is a designer and manufacturer of precision-engineered automotive components and modular systems for passenger and sport utility vehicles, light- and heavy-duty trucks and diesel engines. We believe that Simpson will further enhance our vertical integration in the metal forming industry. The acquisition of Simpson, the repayment of certain indebtedness of Simpson and the payment of fees and expenses in connection with the acquisition of Simpson was funded with approximately (1) $126 million in additional common equity financing provided by Heartland and other equity co-investors, (2) $203 million from borrowings under our credit facility ($200 million in term loans and $3 million in revolving credit borrowings) and (3) $36 million from the sale of accounts receivable pursuant to our accounts receivable facility. Subsequent to the acquisition of Simpson we repaid approximately $50.0 million of term loans with the proceeds of certain sale-leaseback transactions. Strategic Relationship with Global Metals Technologies, Inc. In January 2001, Heartland acquired GMTI, a leading supplier of aluminum die cast components to the automotive industry. We intend to explore a range of opportunities for realizing benefits from our affiliation with GMTI, including a possible merger of GMTI into our operations in the future. The timing and terms of any such transaction are uncertain and we reserve the right not to pursue it. To achieve the strategic value of our affiliation with GMTI, we entered into a strategic services agreement with GMTI. Under this agreement, we and GMTI provide one another with extensive support and services at cost and are coordinating raw material and energy purchases. Our arrangements include joint sales and marketing programs and initiatives. --------------- Investors in our common stock are cautioned that we may announce material transactions after the date of this prospectus. We reserve the right to refuse to effect a transfer of shares of common stock offered hereby if, at the time that shares are presented to us for transfer, we determine that this prospectus contained a material misstatement or omission. We intend to notify the selling stockholders of any such circumstance and to request that they immediately cease to use this prospectus until we are in a position and are able to correct any potential misstatement or omission. We were incorporated in Delaware in 1984. Our principal executive offices are located at 47603 Halyard Drive, Plymouth, Michigan 48170. Our telephone number is (734) 207-6200. Our Internet address is www.metaldyne.com. This Internet address is provided for informational purposes only and is not intended to be used as a hyperlink. Information on our web site does not constitute part of this prospectus.

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+ PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. EARTH SEARCH SCIENCES, INC. This is a registration of 36,847,372 shares of our common stock. Approximately 32,000,000 shares will be registered under the terms of the Common Stock Purchase Agreement between Alpha Venture Capital, Inc. (Alpha) and ourselves. The terms of the Common Stock Purchase Agreement offer us the opportunity to sell monthly amounts of our common stock to Alpha at volumes and discounted prices based on prior trading prices and stock trading volumes. The one year commitment of Alpha under this agreement is for a maximum of $10,000,000 and will be extended for an additional year if at least $2,000,000 of the commitment is used during the first twelve (12) months from the effective date of the registration statement to which this prospectus relates. Approximately 4,847,372 shares of our common stock will be registered under piggy back registration rights for certain warrants and convertible preferred stock and for certain shares held by the former holders of Space Technology Development Corp. or STDC, our employees and consultants. The Offering ------------ In order to provide a possible source of funding for our current activities and for the continued development of our current and planned products, and markets for our products, on May 23, 2001, we entered into a Common Stock Purchase Agreement, commonly referred to as an equity financing agreement, with Alpha. Under the Purchase Agreement, Alpha has agreed to provide us with up to $10,000,000 of funding during the twelve-month period following the effective date of the registration statement to which this prospectus relates. The commitment period will be extended automatically for an additional twelve (12) months if at least twenty percent (20%) (i.e. $2,000,000) of the commitment amount is purchased during the first twelve (12) months from the effective date. During this commitment period, we may request a draw down under the Purchase Agreement by selling shares of our common stock to Alpha, and Alpha will be obligated to purchase the shares. The minimum amount we can draw down at any one time is the lesser of (i) $150,000 or (ii) 300% of the average daily trading volume over the twenty (20) trading days preceding the date of the draw down request. The maximum amount we can draw down at any one time is the lesser of (i) $1,500,000 or (ii) 300% of the average daily trading volume over the twenty (20) trading days preceding the date of the draw down request. Subject to the satisfaction of certain conditions, we may request a draw down once every fifteen (15) trading days, although we are under no obligation to request any draw down under the Purchase Agreement. The purchase price shall be based on eighty-eight percent (88%) of the average of the five (5) lowest reported daily weighted average market prices during the ten (10) trading days preceding

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements and related notes appearing elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in those forward-looking statements as a result of the factors described under the heading "Risk Factors" and elsewhere in this prospectus. All references to "we," "us," and/or "our" in this prospectus refer to Measurement Specialties, Inc. and its direct and indirect subsidiaries. OUR COMPANY We are a leading designer and manufacturer of sensors and sensor-based consumer products. We produce a wide variety of sensors that use advanced technologies to measure precise ranges of physical characteristics, including pressure, motion, force, displacement, angle, flow, and distance. We have two businesses, a Sensor business and a Consumer Products business. Our Sensor business designs and manufactures sensors for leading original equipment manufacturers such as Alaris Medical, Allison Transmission, Badger Meter, Graco, and Texas Instruments. Our Sensor business products include pressure sensors, custom microstructures, and accelerometers for electronic, automotive, medical, military, and industrial applications. Our Consumer Products business designs and manufactures sensor-based consumer products which are sold to leading retailers such as Bed Bath & Beyond, Linens `n Things, Sam's Club, and Sears; European resellers such as Korona and Laica; and Sunbeam, a consumer products manufacturer. Our consumer products include bathroom and kitchen scales, tire pressure gauges, and distance estimators. According to INTECHNO Consulting, the worldwide sensor market is expected to grow to $42.2 billion in 2003. Sales of sensors using modern technologies such as micro-electromechanical systems (MEMS) and silicon micromachining are leading the growth of the sensor market. For example, industry experts estimate worldwide shipments of micro-electromechanical systems (MEMS) are expected to grow at an annual rate of over 20%. Our sensors and sensor-based consumer products use multiple advanced technologies, including piezoresistive applications, application specific integrated circuits (ASICs), micro-electromechanical systems (MEMS), piezopolymers, and strain gages. These technologies enable our sensors to operate precisely and cost effectively. Through internal growth and a series of acquisitions, we expanded our distribution network, introduced new product lines, increased our core technologies, and extended our global presence. By functioning globally we have been able to enhance our engineering capabilities and increase our geographic proximity to our customers. OUR COMPETITIVE ADVANTAGES We believe that we are poised for continued growth in both the markets for sensors and sensor-based consumer products because we: o are a leader in the development and commercialization of advanced sensor technology; o develop and produce a broad range of sensors and sensor-based consumer products; o produce high quality, reliable products; o have established channels of distribution that allow us to efficiently introduce new products into the global marketplace; o specialize in high volume, low cost manufacturing; and o work directly with customers to develop sensors for customized applications. OUR STRATEGY Our objective is to build on our core sensor technologies to enhance our position as a leader in the development, manufacture, and sale of sensors and sensor-based consumer products. Key elements of our strategy include: o utilizing our expertise in sensor technologies to develop new products and applications, expanding the number of our products; o leveraging our existing original equipment manufacturer relationships; o aggressively pursuing international growth opportunities; o leveraging our low cost production techniques and engineering resources; and o pursuing strategic acquisitions. RECENT EVENTS On June 7, 2001, we signed an agreement to purchase all of the outstanding shares of Terraillon Holdings Limited, a European manufacturer and distributor of branded consumer bathroom and kitchen scales. On July 11, 2001, we signed an amendment to the Terraillon purchase agreement to, among other things, (i) extend the target closing date to August 6, 2001, (ii) provide that the shares of common stock to be issued in the acquisition will be issued at the public offering price of the offering, (iii) provide for an additional payment of $120,000, and (iv) provide for additional payments of $10,000 per day if we elect to close after August 6, but not later than August 30, 2001. We expect to consummate this acquisition shortly after the closing date of this offering. We will pay a total of $17.0 million to acquire Terraillon. The purchase price will be paid as follows: (i) $4.96 million in cash and (ii) $6.8 million in shares of our common stock. Shares of our common stock will be issued at a price equal to the public offering price for this offering. In addition, we will pay the majority stockholder of Terraillon $5.24 million to forgive an equal amount of indebtedness owed to it by Terraillon and we will assume up to $4.0 million of Terraillon's existing debt. Any party may terminate the acquisition agreement if the closing has not occurred on or before the close of business in Ireland on August 30, 2001. We intend to use a portion of the proceeds of this offering to fund the cash payments described above. (See "Recent Developments" for more information about the Terraillon acquisition.) On July 3, 2001, we announced that our first quarter of the fiscal year was estimated to be weaker than management's previous expectations. Management expects this weakness to continue through the second quarter. On July 30, 2001, management reported that net sales for the first quarter were $25.9 million, a first quarter record, compared with $16.3 million for the same period of the prior fiscal year. Approximately 60% of net sales for the quarter were generated by our Consumer Products, microfused pressure sensors, and piezosensors businesses. The remaining 40% of net sales were generated by our more recently acquired IC Sensors and Schaevitz Sensors businesses which we are still in the process of integrating and did not contribute significantly to profitability. Total sales grew 59%, with organic growth of 17%. Consumer Products sales increased 24% to $10.9 million. Sensor sales of $15.0 million doubled from $7.5 million in the prior year. Excluding the contribution of Schaevitz Sensors, Sensor revenue increased 9% for that period. Gross margins were 41.4%, compared with 43.5% in the first quarter last year. Margins were negatively impacted by costs associated with integrating the Schaevitz acquisition. Net income, also a record for the first quarter, was $1.4 million or $0.15 diluted per share, compared with $1.2 million or $0.14 diluted per share for the prior year's first quarter. Net income was negatively affected by costs associated with integrating the Schaevitz acquisition, margins at Schaevitz which are lower than our other fully integrated Sensor businesses, and customer funded research and development which was lower than the prior year, partially offset by the adoption of FAS 142 related to accounting for acquisitions (resulting in the elimination of goodwill amortization which would have impacted the first quarter by $0.01 per diluted share) and lower incentive compensation accruals. We are actively pursuing cost reduction programs, including possible reductions in workforce, and additional savings are anticipated when we fully integrate Schaevitz Sensors with our low-cost Asian facility. Selling, general, and administrative expenses increased to $7.1 million (27.4% of net sales) from $4.9 million (29.8% of net sales) in the prior year's first quarter. The increase in absolute amount is due to the Schaevitz acquisition, offset by no goodwill amortization in the current year and lower bonus accruals. Customer funded research and development was lower in the first quarter compared to the same period last year. This reduced funding was partially due to economic conditions and timing of customer programs. Accounts receivable days improved to 54 days at June 30, 2001 compared to 55 days at March 31, 2001. Inventory increased during the quarter from $31.9 million to $35.6 million. Inventories were higher to support the integration process. We have a concentrated program with the objective of lowering our inventory levels and improving cashflow. Our debt to equity ratio improved to 1.42 from 1.44 at April 1, 2001. Our historical financing model has been to utilize cashflow generated by our fully integrated businesses, our revolving credit facility and long term debt to finance acquisitions and growth. We anticipate a significant reduction in our debt to equity ratio as a result of this offering. Additionally, reductions in inventory and costs could yield additional cashflow. Except as otherwise noted, the information in this prospectus does not reflect our proposed acquisition of Terraillon. ----------------- Our principal executive offices are located at 80 Little Falls Road, Fairfield, NJ 07004 and our telephone number is (973) 808-1819. We are a New Jersey corporation and were organized in 1981. Information contained on our website is not part of this prospectus. THE OFFERING Except as described in the financial statements or as otherwise specified in the prospectus, all information in the prospectus assumes no exercise of the underwriters' over-allotment option and reflects our two-for-one stock split effected on October 20, 2000. <TABLE> <S> <C> Common Stock offered by Measurement Specialties .......................... 2,200,000 shares Common Stock to be outstanding after this offering ........................ 10,647,594 shares Use of proceeds ........................ We intend to use the net proceeds to repay debt, for general corporate purposes, and to finance potential acquisitions of complementary products, technologies, and businesses, including the acquisition of Terraillon. See "Use of Proceeds." American Stock Exchange symbol ......... MSS </TABLE> The common stock outstanding after the offering is based on the number of shares outstanding as of July 10, 2001, and excludes: o 203,380 shares issuable upon exercise of outstanding options under our 1995 Stock Option Plan and its predecessor plan at a weighted average exercise price of $2.14 per share and 841,392 shares issuable upon exercise of outstanding options under our 1998 Stock Option Plan at a weighted average exercise price of $12.23 per share; o a total of 658,608 shares available for future issuance under our 1998 Stock Option Plan; and o a total of 552,846 shares to be issued in connection with our proposed acquisition of Terraillon based on an assumed offering price of $12.30 per share. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) We derived the summary financial information below, as of and for each of the fiscal years ended March 31, 1999, 2000, and 2001 from our audited financial statements included elsewhere in this prospectus. We derived the summary financial information below for the fiscal years ended March 31, 1997 and 1998 from our audited financial statements, which are not included in this prospectus. Consolidated statements of income data set forth in the table below include results of operations of the PiezoSensors division of AMP acquired in August 1998, IC Sensors acquired in February 2000, and the Schaevitz Sensors divisions of TRW acquired in August 2000, in each case from the date that we owned such operations. <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, --------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF INCOME DATA: Net sales ................................................ $ 25,004 $ 29,278 $ 37,596 $ 59,997 $ 103,095 Gross profit ............................................. 8,275 9,909 14,292 25,473 44,313 Operating income ......................................... 808 905 2,624 7,592 14,131 Net income ............................................... $ 1,175 $ 777 $ 1,729 $ 5,531 $ 8,961 ========= ========= ========= ========= ========= Earnings per common share: Basic .................................................. $ 0.17 $ 0.11 $ 0.24 $ 0.73 $ 1.10 ========= ========= ========= ========= ========= Diluted ................................................ $ 0.16 $ 0.11 $ 0.23 $ 0.64 $ 0.99 ========= ========= ========= ========= ========= Shares used in per share calculations: Basic .................................................. 7,064 7,122 7,202 7,612 8,144 Diluted ................................................ 7,218 7,298 7,476 8,696 9,045 </TABLE> SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following unaudited pro forma combined statement of income data reflects the acquisitions of Schaevitz Sensors and Terraillon as if each had occurred as of April 1, 2000, for the year ended March 31, 2001 and the effect of the offering. The financial information of Terraillon is for the year ended December 31, 2000 (Terraillon's fiscal year-end) and is translated into United States dollars from the Euro at the average exchange rate for the year. <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, 2001 AS ADJUSTED ------------------ <S> <C> CONSOLIDATED STATEMENTS OF INCOME DATA: Net sales ............................ $ 146,628 Gross profit ......................... 59,405 Operating income ..................... 13,314 Net income ........................... $ 8,484 ========= Earnings per share: Basic ............................... $ 0.78 ========= Diluted ............................. $ 0.72 ========= Shares used in per share calculations: Basic ............................... 10,897 Diluted ............................. 11,798 </TABLE> The unaudited consolidated balance sheet data, under the as adjusted column at March 31, 2001 set forth in the table below, reflects the sale by us of 2,200,000 shares of our common stock in this offering at an assumed offering price of $12.30 per share after deducting underwriters' discount and commissions and estimated offering expenses payable by us, and reflects the application of a portion of the net proceeds from this equity offering to repay debt and the acquisition of Terraillon based on its December 31, 2000 balance sheet (translated into United States dollars from the Euro at the December 31, 2000 exchange rate) as if it occurred as of March 31, 2001. CONSOLIDATED BALANCE SHEET DATA: <TABLE> <CAPTION> AS OF MARCH 31, 2001 ----------------------- AS AS REPORTED ADJUSTED ---------- ---------- <S> <C> <C> Cash and cash equivalents ......... $ 593 $ 985 Working capital ................... 23,596 27,211 Total assets ...................... 86,337 119,707 Total debt ........................ 36,736 26,250 Shareholders' equity .............. 25,481 56,967 </TABLE>

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+ PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully before deciding to acquire shares of our common stock. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our 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. All references to "we," "our," "us," "our company," or "e-MedSoft" in this prospectus refer to e-MedSoft.com and its predecessors, subsidiaries, and operating divisions. e-MedSoft.com We are a healthcare solutions company that uses the Internet and Internet technologies in combination with a range of traditional management services to automate or outsource the daily workflow processes of and the exchange of information among physicians, payors, suppliers, providers, and patients. We also sell and service computer hardware and software to businesses located primarily in the United Kingdom. Our strategy focuses on these six core business lines: - Pharmacy Services - Medical Business Services - Financial Services - Multi-Media Services - e-Commerce Services - Professional Services We have developed a number of strategic alliances with several well-known companies in the health care and information technology (IT) industries, such as Sun Microsystems, Oracle Corporation, National Century Financial Services or NCFE, University Affiliates IPA, Allscripts and Metropolitan Health Networks. These relationships are designed to accelerate our market penetration. In addition, we are acquiring access to a well-developed client base, additional products and services, and intellectual capital through these strategic relationships. We believe these relationships and others we are pursuing will allow us to accelerate our market penetration. We believe the health care industry is particularly well-suited to benefit from greater use of the Internet because of its size, fragmentation, and extreme dependence on information exchange. Many of the inefficiencies in the health care system result from poor information exchange among participants, which include providers, patients, payors, and other trading partners. Today's health care system is largely dependent upon manual processes that rely heavily on paper, mail, phone, and fax. We believe the health care system in the future will be one in which information flows more quickly, accurately, and cost-effectively through electronic networks. We believe that we are in a unique position to capitalize on this trend. OUR LOCATION We are a Nevada corporation with executive offices located at 1300 Marsh Landing Parkway, Suite 106, Jacksonville, Florida 32250 and our telephone number is (904) 543-1001. Our Web site is located at www.e-MedSoft.com. Information contained on that Web site and any Web site, or any web site links in our network does not constitute a part of this prospectus. 4 <PAGE> 5 THE OFFERING Common stock offered ............................ up to 16,248,112 shares Common stock to be outstanding after the offering..................................... up to 90,638,533 shares (1) American Stock Exchange Symbol................... "MED" (1) Excludes 2,256,826 shares issuable upon exercise of options outstanding as of March 7, 2001 under our 1999 and 2000 stock option plans, 3,757,751 shares of common stock issued upon exercise of the stock purchase warrants issued to Hoskin International and Cappello Capital under the common stock purchase agreement and 5,129,000 warrants issued under previous financing transactions and acquisitions. On February 20, 2001, we entered into a common stock purchase agreement with Hoskin International Ltd., a British Virgin Islands corporation, for the future issuance and purchase of shares of our common stock. This common stock purchase agreement establishes what is sometimes termed an equity line of credit or an equity drawdown facility. In general, the equity drawdown facility operates like this: the investor, Hoskin International, has committed to provide us up to $50 million as we request it over a 36-month period, in return for common stock we issue to Hoskin International. Once every 25 trading days, we may request a draw. The amount that we can drawdown upon each request must be at least $250,000. The maximum amount we can actually drawdown for each request is also limited to 8% of the weighted average price of our common stock for the sixty days prior to the date of our request multiplied by the total trading volume of our common stock for the sixty days prior to our request. We are under no obligation to request a draw for any period. Each 20 trading day period following a drawdown request is divided into two 10 trading day settlement periods. After each 10 trading day settlement period, the final drawdown amount for that settlement period is determined. The funds are received on the 12th day and the 22nd day following the delivery of a drawdown notice, two days after the end of each settlement period. The final drawdown amount will be reduced by 1/20 for each day during the 20 trading day period that the volume-weighted average stock price falls below a threshold set by us. We then use the formulas in the common stock purchase agreement to determine the number of shares that we will issue to Hoskin in return for that money. The formulas for determining the actual drawdown amounts, the number of shares that we issue to Hoskin and the price per share paid by Hoskin are described in detail beginning on page 64. The aggregate total of all drawdowns under the equity drawdown facility cannot exceed $50 million. We are under no obligation to request a drawdown during any period. Because our common stock is listed on the American Stock Exchange, we are required to comply with the American Stock Exchange's listing rules. One of those rules provides that we must get shareholder approval if we issue common stock or securities convertible into common stock which (a) is at price less than the greater of book or market value which together with sales by officers, directors or principal shareholders of the company equals 20% or more of presently outstanding common stock; or (b) is equal to 20% or more of presently outstanding stock for less than the greater of book or market value of the stock. We will be required to obtain shareholder approval if we issue shares of common stock pursuant to the common stock purchase agreement in excess of 19.99% of the number of shares of common stock outstanding on February 20, 2001.

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+ SUMMARY THE FOLLOWING SUMMARIZES INFORMATION IN OTHER SECTIONS OF OUR PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS, THE NOTES TO THOSE FINANCIAL STATEMENTS AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. OUR BUSINESS We are a leading national provider of outsourced diagnostic imaging services, with 91% of our 2000 revenues and 90% of our revenues for the first quarter of 2001 derived from magnetic resonance imaging, or MRI. We provide imaging and therapeutic services primarily to hospitals and other healthcare providers on a mobile, shared-service basis. Our mobile, shared-service systems are located in trailers which we move among our clients' locations. We also provide systems that are located full-time at particular hospitals and clinics. Our services normally include the use of our imaging or therapeutic systems, technologists to operate the systems, equipment maintenance and upgrades and management of day-to-day operations. We had 392 diagnostic imaging and therapeutic systems, including 325 MRI systems, and 1,218 clients in 43 states at March 31, 2001. Our typical contract is a three-to-five year arrangement with a hospital or other healthcare provider, under which fees are payable to us regardless of reimbursement by health insurers or other third-party payors. Our clients contract with us to use our outsourced imaging services in order to: - avoid the capital investment and financial risk associated with the purchase of their own systems; - provide access to MRI and other services for their patients when the demand for these services does not justify the purchase of a system; - make use of our ancillary services which include marketing support, education and training and billing assistance; and - gain access to imaging services under our regulatory and licensing approvals when they do not have these approvals. Our MRI systems are among the most advanced in the industry. Our advanced systems are able to perform high quality scans more rapidly and can be used for a wider variety of imaging applications than less advanced systems. We are able to upgrade most of our MRI systems through software and hardware enhancements, which we believe reduces the potential for technological obsolescence. OUR INDUSTRY MRI services constituted $6.7 billion of the approximately $66 billion diagnostic imaging industry in 1999. MRI's growth has been driven by its recognition as a cost-effective, noninvasive diagnostic tool, increasing physician acceptance and growth in the number of MRI applications. As a result, we believe MRI will continue to capture a larger portion of the diagnostic imaging market. The number of MRI scans grew at a compound annual rate of 10.5% from 1990 to 2000 and is projected to grow at approximately this rate through 2006. OUR COMPETITIVE STRENGTHS We believe we benefit from the following competitive strengths: - our position as the largest national provider of outsourced MRI services; - exclusive, long-term contracts with limited customer concentration; - reduced reimbursement risk because we generate 90% of our revenues by billing hospitals and clinics rather than health insurers or other third-party payors; - our ability to provide comprehensive outsourcing solutions; and - our experienced executive management team. OUR GROWTH STRATEGY We intend to capitalize upon these competitive strengths and grow our business by: - increasing the number of scans we perform for our existing clients; - establishing new client relationships; - improving efficiency by increasing the number of scans we perform each day with our existing MRI systems; - offering new MRI applications; - offering new imaging services; and - pursuing selected strategic acquisitions. Despite the competitive strengths discussed above, we face a number of challenges in growing our business. We currently have a substantial amount of indebtedness, which places financial and other limitations on our business. Our business is also subject to a number of other risks described in "Risk Factors." KKR ACQUISITION On November 2, 1999, Viewer Holdings L.L.C. acquired approximately 92% of Alliance in a recapitalization merger. Because Viewer is owned by two investment funds sponsored by Kohlberg Kravis Roberts & Co., L.P., or KKR, we refer to this recapitalization merger as the "KKR acquisition." In connection with the KKR acquisition, we incurred a significant amount of debt. As of June 13, 2001, we had $769.2 million of outstanding debt, $466.0 million of which we incurred in the KKR acquisition. Prior to this offering, KKR owns approximately 78% of our common equity after giving effect to outstanding stock options. Following this offering, KKR will own approximately 65% of our common equity after giving effect to outstanding stock options. Accordingly, KKR will be able to elect our entire board of directors, control our management and policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval. ------------------------ We are a Delaware corporation with our principal executive offices located at 1065 PacifiCenter Drive, Suite 200, Anaheim, CA 92806. Our telephone number at that location is (714) 688-7100. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 9,375,000 shares Common stock to be outstanding after this offering................................... 47,437,180 shares Use of proceeds.............................. We plan to use the aggregate proceeds of this offering to repay indebtedness under our credit agreement and for general corporate purposes, including the repayment of other indebtedness. Proposed New York Stock Exchange symbol...... AIQ </TABLE> Unless otherwise noted, all information in this prospectus: - assumes no exercise of the underwriters' option to purchase up to 1,406,250 additional shares of our common stock to cover over-allotments; - reflects a 10-for-1 split of our common stock to be effected prior to completion of this offering; and - assumes the filing of our amended and restated certificate of incorporation concurrently with the completion of this offering. The number of shares of common stock to be outstanding immediately after this offering: - is based upon 38,062,180 shares of common stock outstanding as of June 13, 2001; - does not take into account 6,953,840 shares of common stock issuable upon the exercise of options outstanding as of June 13, 2001 at a weighted average exercise price of $4.25 per share; and - does not take into account 1,642,200 shares of common stock reserved for future issuance under our 1999 Equity Plan as of June 13, 2001. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following summary historical consolidated financial information with respect to each year in the three-year period ended December 31, 2000 is derived from our consolidated financial statements, which have been audited by Ernst & Young LLP, with respect to the year ended December 31, 1998, and Deloitte & Touche LLP, with respect to the years ended December 31, 1999 and 2000. The consolidated statements of operations data for the three months ended March 31, 2000 and 2001 and the consolidated balance sheet data as of March 31, 2001 are derived from our unaudited consolidated financial statements. The summary historical consolidated financial information provided below should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, -------------------------------- ------------------------- 1998 1999 2000 2000 2001 --------- --------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues............................................... $ 243,297 $ 318,106 $345,287 $ 84,322 $ 91,257 Costs and expenses: Operating expenses, excluding depreciation........... 111,875 143,238 151,722 36,647 39,853 Depreciation expense................................. 33,493 47,055 54,924 12,721 15,406 Selling, general and administrative expenses......... 24,446 31,097 38,338 9,240 11,068 Amortization expense, primarily goodwill............. 11,289 14,565 14,390 3,598 3,607 Separation and related costs......................... -- -- 4,573 -- -- Recapitalization, merger integration, and regulatory costs.............................................. 2,818 52,581 4,523 336 -- Interest expense, net................................ 41,772 51,958 77,051 18,933 18,849 --------- --------- -------- --------- --------- Total costs and expenses............................. 225,693 340,494 345,521 81,475 88,783 --------- --------- -------- --------- --------- Income (loss) before income taxes and extraordinary loss................................................. 17,604 (22,388) (234) 2,847 2,474 Provision for income taxes............................. 8,736 3,297 1,969 1,423 1,237 --------- --------- -------- --------- --------- Income (loss) before extraordinary loss................ 8,868 (25,685) (2,203) 1,424 1,237 Extraordinary loss, net of taxes....................... (2,271) (17,766) -- -- -- --------- --------- -------- --------- --------- Net income (loss)...................................... 6,597 (43,451) (2,203) 1,424 1,237 Less: Preferred stock dividends and financing fee accretion............................................ (2,186) (2,081) -- -- -- Less: Excess of consideration paid over carrying amount of preferred stock repurchased....................... -- (2,796) -- -- -- --------- --------- -------- --------- --------- Net income (loss) applicable to common stock........... $ 4,411 $ (48,328) $ (2,203) $ 1,424 $ 1,237 ========= ========= ======== ========= ========= Earnings (loss) per common share--assuming dilution: Income (loss) before extraordinary loss.............. $ 0.11 $ (0.56) $ (0.06) $ 0.04 $ 0.03 Extraordinary loss, net of taxes..................... (0.04) (0.33) -- -- -- --------- --------- -------- --------- --------- Net income (loss) per common share--assuming dilution........................................... $ 0.07 $ (0.89) $ (0.06) $ 0.04 $ 0.03 ========= ========= ======== ========= ========= OTHER DATA: Adjusted EBITDA(1)..................................... $ 107,076 $ 143,771 $155,560 $ 38,435 $ 40,465 Adjusted EBITDA margin(2).............................. 44.0% 45.2% 45.1% 45.6% 44.3% Cash flows provided by (used in): Operating activities................................. 46,855 38,197 92,044 21,263 8,284 Investing activities................................. (245,104) (104,072) (90,995) (25,897) (18,836) Financing activities................................. 189,077 67,596 7,118 4,323 7,215 Capital expenditures................................... 72,321 95,914 101,554 34,010 21,152 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 2001 ----------------- AS ACTUAL PRO FORMA(3) ADJUSTED(4) ------------ ------------ ------------ (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 9,634 $ 9,634 $ 9,634 Total assets................................................ 654,785 660,051 660,051 Long-term debt, including current maturities................ 774,124 783,124 646,124 Stockholders' deficit....................................... (202,443) (204,683) (67,683) </TABLE> ------------------------------ (1) EBITDA represents earnings before interest expense, net, income taxes, depreciation and amortization expense. Adjusted EBITDA represents EBITDA adjusted for recapitalization costs, merger integration costs, regulatory costs, separation and related costs, stock-based compensation, and extraordinary items. EBITDA and adjusted EBITDA are not presentations made in accordance with generally accepted accounting principles. EBITDA and adjusted EBITDA should not be considered in isolation or as substitutes for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as measures of profitability or liquidity. EBITDA and adjusted EBITDA are included in this prospectus to provide additional information with respect to our ability to satisfy our debt service, capital expenditure and working capital requirements and because certain covenants in our debt instruments are based on similar measures. While EBITDA and adjusted EBITDA are used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculations. The calculations of EBITDA and adjusted EBITDA are shown below: <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------------- 1998 1999 2000 2000 2001 -------- -------- -------- ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Net income (loss)..................................... $ 6,597 $(43,451) $ (2,203) $ 1,424 $ 1,237 Depreciation expense................................ 33,493 47,055 54,924 12,721 15,406 Amortization expense, primarily goodwill............ 11,289 14,565 14,390 3,598 3,607 Interest expense, net............................... 41,772 51,958 77,051 18,933 18,849 Provision for income taxes.......................... 8,736 3,297 1,969 1,423 1,237 -------- -------- -------- ------- ------- EBITDA................................................ 101,887 73,424 146,131 38,099 40,336 Separation and related costs(a)..................... -- -- 4,573 -- -- Recapitalization, merger integration, and regulatory costs(b).......................................... 2,818 52,581 4,523 336 -- Stock-based compensation(c)......................... 100 -- 333 -- 129 Extraordinary loss, net of taxes.................... 2,271 17,766 -- -- -- -------- -------- -------- ------- ------- Adjusted EBITDA....................................... $107,076 $143,771 $155,560 $38,435 $40,465 ======== ======== ======== ======= ======= </TABLE> ---------------------------------- (a) Separation and related costs for the year ended December 31, 2000 represent $4,232 associated with separation costs and the cash-out of stock options for an executive officer who resigned his management duties due to health-related issues and $341 associated with the recruitment of his replacement. (b) Recapitalization, merger integration and regulatory costs for the year ended December 31, 2000, represent $704 of professional fees paid in connection with the KKR acquisition, $570 of compensatory costs related to stock option buy-backs and severance payments resulting from change in control provisions triggered by the KKR acquisition, $154 related to additional severance for employees of SMT, $123 of integration costs to migrate acquired entities to a common systems platform for direct patient billing, and $850 for assessments and $2,122 for costs and related professional fees to settle regulatory matters associated with the direct patient billing process of one of our acquired entities. Recapitalization, merger integration and regulatory costs for the year ended December 31, 1999, represent $19,640 in professional fees paid in connection with the KKR acquisition, $17,082 related to the purchase of outstanding stock options in connection with the KKR acquisition, $6,003 in bonus payments paid in connection with the KKR acquisition, $1,088 in provisions to conform the accounting policies with respect to accounts receivable reserves, as well as employee vacation and sick pay reserves in connection with the SMT merger, $2,164 in employee severance costs in connection with the SMT merger, $3,075 in professional fees and other merger integration costs associated with the SMT merger and other acquired entities, and $3,529 for assessments to settle regulatory matters associated with the direct patient billing process of one of our acquired entities. Recapitalization, merger integration and regulatory costs for the year ended December 31, 1998, represents $1,846 in special non-recurring bonuses paid in connection with the MTI acquisition, $722 of professional fees associated with accounting and billing systems conversions of acquired companies, and a $250 provision for doubtful accounts conforming accounting adjustment made in connection with the American Shared acquisition. (c) Stock-based compensation of $333 for the year ended December 31, 2000, represents $55 for options issued to certain employees at exercise prices below the fair value of our common stock, $68 for shares of Phantom stock issued to four non-employee directors below fair market value, and $210 for common stock issued to one of our executive officers below fair market value. Stock-based compensation of $100 for the year ended December 31, 1998, represents options issued to certain employees at exercise prices below the fair value of the Company's common stock. (2) Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenues. (3) The Pro Forma balance sheet data gives effect to the offering of our 10 3/8% senior subordinated notes and the application of net proceeds from the offering. (4) The as adjusted balance sheet reflects the value of 9,375,000 shares of common stock in this offering at an assumed initial public offering price of $16.00, after deducting estimated underwriting discounts, commissions and offering expenses.

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+ PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock sold in this offering and our consolidated financial statements and notes to those statements appearing elsewhere in this prospectus. We urge you to read this entire prospectus carefully, including the "Risk Factors" section. VCA Antech, Inc. Our Business We are a leading animal health care services company and operate the largest networks of veterinary diagnostic laboratories and free-standing, full-service animal hospitals in the United States. Our veterinary diagnostic laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, provide pharmaceutical products and offer a variety of pet wellness programs, including routine vaccinations, health examinations, diagnostic testing, spaying, neutering and dental care. Diagnostic Laboratories We operate the only full-service, veterinary diagnostic laboratory network serving all 50 states and have a client base over two times that of our largest competitor. Our 15 state-of-the-art, automated diagnostic laboratories service a diverse customer base of over 13,000 animal hospitals, and non-affiliated animal hospitals generated approximately 95% of our laboratory revenue in 2000. We support our laboratories with what we believe is the industry's largest transportation network, which picks up an average of 20,000 to 25,000 samples daily. In the nine months ended September 30, 2001, we derived approximately 69.4% of our laboratory revenue from our customers in major metropolitan areas, where we offer twice-a-day pick-up service and same-day results. Outside of these areas, we typically provide test results to veterinarians before 8:00 a.m. the following day. Our diagnostic spectrum includes over 300 different tests in the areas of chemistry, pathology, serology, endocrinology, hematology and microbiology, as well as tests specific to particular diseases. In 2000, we handled approximately 6.4 million requisitions and performed approximately 19.8 million tests. Although modified to address the particular requirements of the species tested, the tests performed in our veterinary laboratories are similar to those performed in human clinical laboratories and utilize similar laboratory equipment and technologies. From 1998 through the twelve months ended September 30, 2001, our laboratory revenue, laboratory operating income before depreciation and amortization, and laboratory operating income increased at compounded annual growth rates of 14.5%, 23.8% and 27.2%, respectively. We will refer to operating income before depreciation and amortization as "EBITDA." In the twelve months ended September 30, 2001, our laboratory EBITDA was $43.6 million, or 33.5% of our laboratory revenue, and our laboratory operating income was $39.0 million, or 29.9% of our laboratory revenue. Animal Hospitals At September 30, 2001, we operated 214 animal hospitals in 33 states that were supported by over 750 veterinarians. In addition to general medical and surgical services, we offer specialized treatments for companion animals, including advanced diagnostic services, internal medicine, oncology, ophthalmology, dermatology and cardiology. We also provide pharmaceutical products for use in the delivery of treatments by our veterinarians and pet owners. Our facilities typically are located in high-traffic, densely populated areas and have an established reputation in the community with a stable customer base. Since 2000, our animal hospitals have been connected to an enterprise-wide management information system. This system provides us opportunities to manage our animal hospitals more effectively and to implement throughout our animal hospital network veterinarian practices and procedures which we have identified, tested and believe to provide a high level of customer care. From 1998 through the twelve months ended September 30, 2001, our animal hospital revenue, animal hospital EBITDA and our animal hospital operating income increased at compounded annual growth rates of 12.5%, 19.2% and 19.2%, respectively. In the twelve months ended September 30, 2001, our animal hospital EBITDA was $51.9 million, or 19.5% of our animal hospital revenue, and our animal hospital operating income was $38.0 million, or 14.3% of our animal hospital revenue. Our Opportunity We intend to continue to grow by capitalizing on the following market opportunities: . Large, Growing Market. According to the 2001-2002 American Pet Products Manufacturers Association Pet Owners Survey, the ownership of pets is widespread, with over 62% of U.S. households owning at least one pet, including companion and other animals. The U.S. population of companion animals is approximately 188 million, including about 141 million dogs and cats. According to the U.S. Pet Ownership & Demographics Sourcebook published by the American Veterinary Medical Association, over $11 billion was spent on companion animal health care services in 1996, with an annual growth rate of over 9.5% from 1991 through 1996 for spending on dogs and cats. We believe this growth has continued, primarily driven by an increased emphasis on pet health and wellness, continued technological developments driving new and previously unconsidered diagnostic tests, procedures and treatments, and favorable demographic trends supporting a growing pet population. . Rapidly Growing Veterinary Diagnostic Testing Services. We believe that outsourced diagnostic testing is among the fastest growing segments of the animal health care services industry. Reflecting this trend, our laboratory internal revenue growth has averaged 11.3% over the last three fiscal years. The growth in outsourced diagnostic testing resulted from an overall increase in the number of tests requisitioned by veterinarians and from veterinarians' increased reliance on outsourced diagnostic testing rather than in-house testing. The overall increase in the number of tests performed is primarily due to the growing focus by veterinarians on wellness and monitoring programs, the emphasis in veterinary education on utilizing diagnostic tests for more accurate diagnoses and continued technological developments in veterinary medicine leading to new and improved tests. The increased utilization of outsourced testing is primarily due to the relative low cost and high accuracy rates provided by outside laboratories and the diagnostic consulting provided by experts employed by the leading outside laboratories. . Attractive Customer Payment Dynamics. The animal health care services industry does not experience the problems of extended payment collection cycles or pricing pressures from third-party payors faced by human health care providers. Outsourced laboratory testing is a wholesale business that collects payments directly from animal hospitals, generally on terms requiring payment within 30 days of the date the charge is invoiced. Fees for animal hospital services are due and typically paid for at the time of the service. For example, over 95% of our animal hospital services are paid for in cash or by credit card at the time of the service. In addition, over the past three fiscal years, our bad debt expense has averaged only 1% of total revenue. Competitive Strengths We believe we are well positioned for profitable growth due to the following competitive strengths: . Market Leader. We are a market leader in each of the business segments in which we operate. We believe that it would be difficult, time consuming and expensive for new entrants or existing competitors to assemble a comparable nationwide laboratory or animal hospital network. It would be particularly difficult to replicate our team of specialists, transportation network, management and systems infrastructure, the size of our veterinarian group and our customer relationships. . Compelling Business Model. Our business is characterized by a stable, recurring and diversified revenue base, high operating margins and strong cash flow. The growth in our laboratory revenue, combined with greater utilization of our infrastructure, enabled us to improve our laboratory EBITDA margin from 26.9% in 1998 to 33.5% for the twelve months ended September 30, 2001, and our laboratory operating margin from 22.4% to 29.9% over the same period. Our animal hospitals have generated six consecutive years of positive annual same-facility revenue growth. Due to the operating leverage in our animal hospitals, the increase in animal hospital revenue enabled us to improve our animal hospital EBITDA margin from 16.7% in 1998 to 19.5% for the twelve months ended September 30, 2001, and our animal hospital operating margin from 12.2% to 14.3% over the same period. These high margins, combined with our modest working capital needs and low maintenance capital expenditures, provide cash that we can use for acquisitions or to reduce indebtedness. . Leading Team of Specialists. Our network of 85 veterinary medicine experts, which we refer to as specialists, provides us with a significant competitive advantage. Our specialists include veterinarians, chemists and other scientists with expertise in pathology, internal medicine, oncology, cardiology, dermatology, neurology and endocrinology. These specialists are available to consult with our laboratory customers, providing a compelling reason for them to use our laboratories rather than those of our competitors, most of whom offer no comparable service. Our team of specialists represents the largest interactive source for readily available diagnostic advice in the veterinary industry and interacts with animal health care professionals over 90,000 times a year. . High Quality Service Provider. We believe we have built a reputation as a valuable diagnostic resource for veterinarians and a trusted animal health brand among pet owners. In our laboratories, we maintain rigorous quality assurance programs to ensure the accuracy of the reported results. We calibrate our laboratory equipment several times daily, use only qualified personnel to perform testing and our specialists review all test results outside the range of established norms. As a result, we believe our diagnostic accuracy rate is over 99%. In our animal hospitals, we provide continuing education programs, promote the sharing of professional knowledge and expertise and have developed and implemented a program of best practices to promote quality medical care. . Shared Expertise Among Veterinarians. We believe the continued accumulation of veterinary medical knowledge and experience among our veterinarian group enables us to offer new services more rapidly than our competitors, offer higher quality services and remain the leading source of veterinary information for interested companies such as pharmaceutical and pet food companies. Business Strategy Our business strategy is to continue to expand our market leadership in animal health care services through our diagnostic laboratories and animal hospitals. Key elements of our strategy include: . Capitalizing on our Leading Market Position to Generate Revenue Growth. Our leading market position in each of our business segments positions us to take advantage of favorable growth trends in the animal health care services industry. In our laboratories, we seek to generate revenue growth by capitalizing on the growing number of outsourced diagnostic tests and by increasing our market share. In our animal hospitals, we seek to generate revenue growth by capitalizing on the growing emphasis on pet health and wellness and favorable demographic trends supporting a growing pet population. For example, in 2000 we implemented a senior pet wellness program. The program seeks to promote recurring visits and to increase the average amount spent per visit by bundling laboratory tests and animal hospital services. . Leveraging Established Infrastructure to Improve Margins. Due to our established networks and the fixed cost nature of our business model, we are able to realize higher margins on incremental revenue from both laboratory and animal hospital customers. For example, given that our nationwide transportation network servicing our laboratory customers is a relatively fixed cost, we are able to achieve significantly higher margins on most incremental tests ordered by the same customer when picked up by our couriers at the same time. We estimate that in most cases, we realize an operating and EBITDA margin between 60% and 75% on these incremental tests. . Utilizing Enterprise-Wide System to Improve Operating Efficiencies. We recently completed the migration of all animal hospital operations to an enterprise-wide management information system. We believe that this common system will enable us to more effectively manage the key operating metrics that drive our business. With the aid of this system, we seek to standardize pricing, expand the services our veterinarians provide, capture unbilled services, increase volume and implement targeted marketing programs. . Pursuing Selected Acquisitions. Although we have substantially completed our laboratory infrastructure, we may make selective, strategic laboratory acquisitions. Additionally, the fragmentation of the animal hospital industry provides us with significant expansion opportunities in our animal hospital segment. Depending upon the attractiveness of candidates and the strategic fit with our existing operations, we intend to acquire approximately 15-25 animal hospitals per year primarily utilizing internally generated cash. Business Risks Some of the key risks associated with our business strategy include: . Continued Growth. Our success depends in part on our ability to build on our position as a leading animal health care services company through a balanced program of internal growth initiatives and selective acquisitions of established animal hospitals and laboratories. We may be unable to successfully execute our growth strategy and, as a result, our business may be harmed. . Management of Growth. Our business and results of operations may be adversely affected if we are unable to manage our growth effectively, which may increase our costs of operations and hinder our ability to execute our business strategy. . Substantial Debt. Our substantial amount of debt could impair our ability to operate our business effectively and may limit our ability to take advantage of business opportunities. . Concentration of Ownership. Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions. These stockholders will be able to exercise control over all matters requiring stockholder approval and will have significant control over our management and policies. . Fixed Costs. A significant percentage of our expense, particularly rent and personnel costs, are fixed costs and are based in part on expectations of revenue. We may be unable to reduce spending in a timely manner to compensate for any significant fluctuations in our revenues. Our principal offices are located at 12401 West Olympic Boulevard, Los Angeles, California 90064. Our telephone number is (310) 571-6500. We recently changed our name from Veterinary Centers of America, Inc. <TABLE> <S> <C> The Offering Common stock offered............... 14,000,000 shares Common stock to be outstanding after this offering.............. 32,216,212 shares Use of proceeds.................... We intend to use the net proceeds from this offering and our concurrent note offering described below to redeem our outstanding shares of preferred stock and to repay indebtedness. Proposed Nasdaq Stock Market Symbol WOOF </TABLE> -------- Unless otherwise indicated, all share information in this prospectus is based on the number of shares outstanding as of September 30, 2001 and: . excludes 631,800 shares of common stock issuable upon exercise of outstanding options under our stock incentive plans, at an exercise price of $1.00 per share; . excludes 1,149,990 shares of common stock issuable upon exercise of outstanding warrants, at an exercise price of $0.0007 per share, which, if not exercised, terminate upon the closing of this offering; . excludes 2,000,000 shares available for future issuance under our stock incentive plans; and . assumes no exercise of the underwriters' over-allotment option. The Concurrent Note Offering Concurrently, we are separately offering $150,000,000 principal amount of senior subordinated notes due 2009. The closing of the concurrent note offering will occur simultaneously with the closing of this offering. The concurrent note offering is not being registered under the Securities Act, and the notes offered thereby may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Summary Consolidated Financial and Other Data The summary financial data for the years in the period ended December 31, 2000, 1999 and 1998 have been derived from our audited financial statements. The summary financial data for the nine months ended September 30, 2001 and 2000 and as of September 30, 2001 have been derived from our unaudited interim financial statements and include, in the opinion of management, all adjustments necessary for a fair presentation of our financial position and operating results for these periods and as of such date. Our results for interim periods are not necessarily indicative of our results for a full year's operations. The pro forma data adjusts the financial data to give effect to this offering, the concurrent note offering and the application of the net proceeds therefrom, the use of $12.0 million of cash on hand and the transactions associated with our September 20, 2000 recapitalization, as more fully described in note (2) below. You should read the following information together with "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> Nine Months Ended September 30, Year Ended December 31, ------------------ ---------------------------- 2001 2000 2000 1999 1998 -------- -------- -------- -------- -------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> <C> Statements of Operations Data: Laboratory revenue..................................... $101,855 $ 90,831 $119,300 $103,282 $ 89,896 Animal hospital revenue................................ 207,665 182,716 240,624 217,988 191,888 Total revenue (1)...................................... 305,365 269,281 354,687 320,560 281,039 Operating income....................................... 33,680 9,524 19,205 47,016 38,834 Net income (loss) available to common stockholders..... (22,368) (2,424) (13,802) $ 22,357 $ 16,268 Pro forma net loss available to common stockholders (2) (5,376) (20,686) Pro forma diluted net loss per share (2)............... $ (0.17) $ (0.66) Shares used for computing pro forma diluted net loss per share (2)........................ 31,643 31,524 Other Financial Data: Adjusted EBITDA (3)(4)................................. $ 71,017 $ 57,547 $ 73,526 $ 64,445 $ 51,966 Adjusted EBITDA margin (5)............................. 23.3% 21.4% 20.7% 20.1% 18.5% Laboratory EBITDA...................................... $ 35,264 $ 30,495 $ 38,827 $ 32,273 $ 24,215 Laboratory EBITDA margin (5)........................... 34.6% 33.6% 32.5% 31.2% 26.9% Animal hospital EBITDA................................. $ 43,159 $ 34,287 $ 42,985 $ 37,237 $ 31,975 Animal hospital EBITDA margin (5)...................... 20.8% 18.8% 17.9% 17.1% 16.7% Net cash provided by operating activities.............. $ 49,316 $ 46,975 $ 60,054 $ 38,467 $ 27,123 Capital expenditures................................... 10,604 13,686 22,555 21,803 11,678 Operating Data: Laboratory internal revenue growth (6)................. 11.5% 12.9% 12.6% 9.1% 12.2% Animal hospital same-facility revenue growth (7)............................................ 4.4% 7.7% 7.0% 2.6% 5.8% </TABLE> <TABLE> <CAPTION> As of September 30, 2001 ------------------------ Pro Forma Actual As Adjusted(2) -------- -------------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents..................... $ 23,631 $ 11,631 Total assets.................................. 501,227 487,448 Total debt.................................... 371,365 373,763 Total redeemable preferred stock.............. 170,205 -- Total stockholders' equity (deficit).......... (97,946) 61,671 </TABLE> -------- (1) Includes other revenue of $1.5 million and $425,000 for the nine months ended September 30, 2001 and 2000, and of $925,000, $5.1 million and $5.1 million for the years ended December 31, 2000, 1999 and 1998. Total revenue is net of intercompany eliminations of $5.7 million and $4.7 million for the nine months ended September 30, 2001 and 2000, and of $6.2 million, $5.8 million and $5.8 million for the years ended December 31, 2000, 1999 and 1998. (2) The pro forma statement of operations data for the nine months ended September 30, 2001 and the pro forma as adjusted balance sheet data are presented as if this offering, the concurrent note offering and the application of the net proceeds therefrom and the use of $12.0 million of cash on hand occurred on January 1, 2001 for such pro forma statement of operations data and at September 30, 2001 for the pro forma as adjusted balance sheet data. We calculated the shares used for computing pro forma diluted net loss per share for the nine months ended September 30, 2001 by using shares used for computing diluted earnings per share for the nine months ended September 30, 2001 and adding an assumed 14,000,000 shares to be issued in this offering. The pro forma statement of operations data for the year ended December 31, 2000 are presented as if (a) this offering, the concurrent note offering and the application of the net proceeds therefrom and the use of $12.0 million of our cash on hand and (b) the transactions associated with our September 20, 2000 recapitalization (as described in the notes to our consolidated financial statements) occurred on January 1, 2000. We calculated the shares used for computing pro forma diluted net loss per share for the year ended December 31, 2000 by using shares outstanding as of December 31, 2000, which represents the pro forma weighted average shares outstanding for the year ended December 31, 2000 had the transactions associated with our September 20, 2000 recapitalization occurred on January 1, 2000, and adding an assumed 14,000,000 shares to be issued in this offering. (3) EBITDA is operating income (loss) before depreciation and amortization. Adjusted EBITDA is EBITDA adjusted to exclude management fees, recapitalization costs, Year 2000 remediation expense and other non-cash operating items. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles, or GAAP. Although EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity, we understand that EBITDA and Adjusted EBITDA are widely used by financial analysts as a measure of financial performance. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. The calculation of EBITDA and Adjusted EBITDA are shown below (dollars in thousands): <TABLE> <CAPTION> Nine Months Ended September 30, Year Ended December 31, --------------- ------------------------ 2001 2000 2000 1999 1998 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Operating income..................... $33,680 $ 9,524 $19,205 $47,016 $38,834 Depreciation and amortization........ 19,121 13,200 18,878 16,463 13,132 ------- ------- ------- ------- ------- EBITDA............................ 52,801 22,724 38,083 63,479 51,966 Management fees (a).................. 1,860 -- 620 -- -- Recapitalization costs............... -- 34,268 34,268 -- -- Year 2000 remediation expense........ -- -- -- 2,839 -- Other non-cash operating items (b)... 16,356 555 555 (1,873) -- ------- ------- ------- ------- ------- Adjusted EBITDA (c)............... $71,017 $57,547 $73,526 $64,445 $51,966 ======= ======= ======= ======= ======= </TABLE> ----- (a) Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. (b)Other non-cash operating items include a write-down and loss on sale of assets of $8.7 million and stock-based compensation expense of $7.6 million for the nine months ended September 30, 2001; stock-based compensation expense of $555,000 for the nine months ended September 30, 2000 and for the year ended December 31, 2000; and a reversal of restructuring charges of $1.9 million for the year ended December 31, 1999. (c)Numbers may not add due to rounding. (4)Adjusted EBITDA is the sum of laboratory EBITDA, animal hospital EBITDA and other revenue, less corporate selling, general and administrative expense, excluding management fees, as shown below (dollars in thousands): <TABLE> <CAPTION> Nine Months Ended September 30, Year Ended December 31, ----------------- -------------------------- 2001 2000 2000 1999 1998 -------- ------- ------- -------- ------- <S> <C> <C> <C> <C> <C> Laboratory EBITDA............. $ 35,264 $30,495 $38,827 $ 32,273 $24,215 Animal hospital EBITDA........ 43,159 34,287 42,985 37,237 31,975 Other revenue................. 1,500 425 925 5,100 5,100 Corporate selling, general and administrative............... (10,766) (7,660) (9,831) (10,165) (9,324) Management fees (a)........... 1,860 -- 620 -- -- -------- ------- ------- -------- ------- Adjusted EBITDA............ $ 71,017 $57,547 $73,526 $ 64,445 $51,966 ======== ======= ======= ======== ======= </TABLE> ----- (a)Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. (5)Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by total revenue. Laboratory EBITDA margin is calculated by dividing laboratory EBITDA by laboratory revenue. Animal hospital EBITDA margin is calculated by dividing animal hospital EBITDA by animal hospital revenue. (6)Laboratory internal revenue growth is calculated using laboratory revenue as reported, adjusted to exclude, for those laboratories that we did not own for the entire period presented, an estimate of revenue generated by these newly acquired laboratories subsequent to the date of our purchase. We calculate this estimate of revenue for each newly acquired laboratory using an historical twelve-month revenue figure (in some cases on an annualized basis) provided to us by the seller of the acquired laboratory, which amount is increased by our laboratory revenue growth rate for the prior year. In calculating the laboratory revenue growth rate for the year in which the acquisition occurred, we exclude from our reported laboratory revenue the estimated annual revenue attributable to newly acquired laboratories multiplied by a fraction representing the portion of the year that we owned the related facility. In calculating the laboratory revenue growth rate for the year following the acquisition, we exclude from our reported laboratory revenue the estimated annual revenue attributable to newly acquired laboratories multiplied by a fraction representing the portion of the year that we did not own the facility. To determine our laboratory internal revenue growth rate for the applicable period, we compare our laboratory revenue, net of estimated laboratory revenue of newly acquired laboratories, to our laboratory revenue as reported for the prior comparable period. We believe this fairly presents our laboratory internal revenue growth for the periods presented, although our calculation may not be comparable to similarly titled measures reported by other companies. (7)Animal hospital same-facility revenue growth is calculated using the combined revenue of the animal hospitals we owned and managed for the entire periods presented.

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+ SUMMARY Because this is a summary, it does not contain all of the information that may be important to you as a prospective purchaser of shares of our common stock. You should read the entire prospectus carefully, including the risk factors and the consolidated financial statements and the notes to the consolidated financial statements of the company appearing elsewhere in this prospectus, before you decide to purchase any shares of common stock. As used in this prospectus the terms "we", "us" or "Company" mean North American DataCom, Inc. and its subsidiaries. ABOUT US We are in the business of providing communications and information technology services with an emphasis on wideband fiber optic and wireless telecommunications services that support enterprise data storage solutions. These services are intended to include Internet access services, on-line critical data storage and retrieval, and data and voice networking. Our business plan envisions offering a wideband fiber optics and wireless telecommunications network that will service primarily Tier 2 markets by supporting wideband data, voice and internet transmission. Tier 2 markets consist of those population centers that are not in the primary 100 largest areas but are uniquely located along railroad rights-of-way where fiber optic transmission facilities can be easily accessed. Our short-term focus is on providing such services to Tier 2 markets in the southeast, primarily from Atlanta to Memphis. We plan to engage in, and are currently in the process of developing, the following lines of business: - Enterprise Data Storage and Computing Facility - Fiber Optic and Broadband Wireless Network We are currently engaged in the following lines of business: - Internet Access Service Provider - Digital and Alpha Paging Services - Telecommunications Consulting Projects CORPORATE INFORMATION AND HISTORY We were organized in September 1998 as North American Software Associates, Limited, a Delaware corporation. Effective December 21, 1999, North American Software Associates, Limited was acquired by Pierce International, Inc., a Colorado corporation, in a share exchange transaction. In March 2000 we moved our state of incorporation to Delaware and changed our name to North American DataCom, Inc. Our executive offices are located at 751 County Road 989, Building 1000, Iuka, Mississippi 38852. Our telephone number is (662) 424-5050. Our fax number is (662) 424-5059. THE OFFERING Securities offered by the selling Stockholders 2,302,624 shares of common stock Common stock outstanding 98,655,678 shares as of December 8, 2000(1) Options outstanding Options for 14,484,216 shares as of December 8, 2000. Use of proceeds We will receive no proceeds from the sale of the common stock by the selling stockholders. Risk Factors An investment in the common stock offered hereby involves a great deal of risk. See "Risk Factors."

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+ PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS. BECAUSE IT IS A SUMMARY, IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION, INCLUDING ANY DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS. IN PARTICULAR, YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO THE 2-FOR-1 COMMON STOCK SPLIT EFFECTIVE OCTOBER 1, 1999 AND THE 3-FOR-1 COMMON STOCK SPLIT EFFECTIVE JULY 1, 2001. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES A PUBLIC OFFERING PRICE OF $17.00 PER SHARE AND DOES NOT REFLECT ANY EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. WE HAVE PROVIDED DEFINITIONS FOR SOME OF THE OIL AND NATURAL GAS INDUSTRY TERMS USED IN THIS PROSPECTUS IN THE "GLOSSARY" BEGINNING ON PAGE 72. IN THIS PROSPECTUS, WE REFER TO MATADOR PETROLEUM CORPORATION AND ITS SUBSIDIARIES AS "MATADOR," "WE," "US," OR "OUR." THE COMPANY Formed in 1987, Matador is a rapidly growing independent energy company engaged in oil and natural gas exploration, production, development and acquisition activities. We have grown proved reserves through both drilling and acquisition activities from 8.1 Bcfe at December 31, 1989 to 167.2 Bcfe at April 30, 2001, for an average annual growth rate of 31%. Of this growth, approximately 53% is attributable to our drilling activities and 47% is attributable to our acquisitions. For the five years ended December 31, 2000, our reserve replacement cost averaged $0.80 per Mcfe and our lease operating expenses, excluding production taxes, averaged $0.43 per Mcfe. Our history demonstrates our ability to find new reserves while, at the same time, expanding our inventory of properties and maintaining our low cost structure. For the year ended December 31, 2000, our average daily production was 32.1 Mmcfe/d, our revenues were approximately $48.8 million, our net income was approximately $14.5 million and our adjusted EBITDA was approximately $36.2 million. For the six months ended June 30, 2001, our average daily production was 42.1 Mmcfe/d, our revenues were approximately $39.0 million, our net income was approximately $12.2 million and our adjusted EBITDA was approximately $28.4 million. Adjusted EBITDA, as used in this prospectus, includes net income (loss) before interest expense, income taxes, depreciation, depletion and amortization and oil and natural gas property impairment. Our operations are located primarily in the East Texas Basin and the Permian Basin of West Texas and Southeastern New Mexico. As of April 30, 2001, our proved reserves of 167.2 Bcfe, 74% of which were classified as proved developed, had a PV-10 of $278.8 million based on prices of $27.71 per Bbl of oil and $4.71 per Mcf of natural gas. These reserves were 78% natural gas and had a reserve life index of 10.2 years. We operate properties that represent over 71% of our PV-10, which allows us to better manage operating expenses, capital expenditure timing and allocation and our exploration and development activities. The following table summarizes our total proved reserves, acreage position and production rate at April 30, 2001: <Table> <Caption> AS OF APRIL 30, 2001 -------------------------------------------------------------------------------------------- PROVED GROSS NET NET RESERVES PV-10 (IN % OF DEVELOPED DEVELOPED PRODUCTION % OF AREA (BCFE) % GAS MILLIONS) PV-10 ACREAGE ACREAGE (MMCFE/D) PRODUCTION ---- -------- -------- --------- -------- --------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> East Texas Basin............ 68.2 97.0% $107.0 38.4% 20,873 13,099 17.4 37.5% Permian Basin............... 91.6 63.0% 156.5 56.1% 61,717 31,440 27.8 59.7% Other....................... 7.4 82.0% 15.3 5.5% 11,895 4,094 1.3 2.8% ----- ------ ----- ------- ------ ---- ----- Total................... 167.2 78.0% $278.8 100.0% 94,485 48,633 46.5 100.0% ===== ====== ===== ======= ====== ==== ===== </Table> Our most significant recent acquisitions of acreage and additions to reserves have been in the Bossier trend in East Texas. We believe that this trend is one of the largest onshore gas discoveries in recent years. Production in this trend has increased by more than 352.0 Mmcfe/d since January 1, 1997. This trend covers an area of multiple producing horizons with primary focus given to the Bossier Sand. Secondary producing zones consist of the sub-Clarksville, Rodessa, Travis Peak, Cotton Valley Sand, Cotton Valley Lime and Smackover. As of June 30, 2001, we have accumulated in excess of 82,000 gross (37,500 net) acres in the Bossier trend, primarily located in Freestone, Leon and Robertson counties. We continue to pursue additions to our acreage position. As of April 30, 2001, we have, individually, as well as through joint operations, drilled 11 gross Bossier wells, all of which have been successfully completed. These wells have experienced an average initial production rate of 1.5 Mmcfe/d. We currently intend to develop our acreage based on 80-acre spacing, and are reviewing opportunities to develop portions of our acreage on 40-acre and 20-acre spacing. OUR STRENGTHS Our objective is to enhance shareholder value by continuing to increase reserves, production, cash flow, earnings and net asset value per share. To accomplish this objective, we intend to capitalize on our competitive strengths, which include: LONG HISTORY OF GROWTH THROUGH BOTH DRILLING AND ACQUISITIONS. Since 1989, our balanced growth strategy has resulted in annual average reserve growth of 31% per year, 53% of which is attributable to drilling activities and 47% to acquisitions. In addition to our drilling program, we pursue an acquisition program designed to complement our existing operations and to enhance our exploration and development activities. Since 1996, we have acquired a total of 53.6 Bcfe of proved reserves through six transactions at a reserve replacement cost of $0.62 per Mcfe. Following an acquisition, we seek to increase the value of acquired assets through identification of additional drilling opportunities, recompletions, improved marketing initiatives and other production enhancements. SUBSTANTIAL INVENTORY OF DRILLING OPPORTUNITIES. We believe that we have assembled a large and attractive inventory of drilling opportunities. As of April 30, 2001 we held leasehold interests in over 148,000 gross (65,000 net) undeveloped acres. We intend to drill 79 gross (41.4 net) wells in 2001 and 97 gross (53.3 net) wells in 2002. Our capital expenditure budget for drilling and completion is $48.5 million for 2001 and $65.8 million for 2002. The following table summarizes our 2001 and 2002 drilling plans by area: <Table> <Caption> WELLS DRILLED BUDGETED WELLS BUDGETED JANUARY 1, 2001 THROUGH MAY 1, 2001 THROUGH WELLS FOR APRIL 30, 2001 DECEMBER 31, 2001 2002 ------------------------------ ------------------- ------------------- SUCCESSFUL ------------------- GROSS GROSS NET GROSS NET GROSS NET -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> East Texas Basin............................ 6.0 6.0 3.6 30.0 14.6 63.0 31.5 Permian Basin............................... 18.0 17.0 6.1 24.0 16.5 27.0 19.7 Other Areas................................. -- -- -- 1.0 0.2 7.0 2.1 ---- ---- --- ---- ---- ---- ---- Total................................... 24.0 23.0 9.7 55.0 31.3 97.0 53.3 ==== ==== === ==== ==== ==== ==== </Table> LOW COST STRUCTURE AND OPERATIONAL CONTROL. For the five years ended December 31, 2000, our reserve replacement cost has averaged $0.80 per Mcfe and our lease operating expenses (excluding production taxes) have averaged $0.43 per Mcfe. By operating a significant portion of our properties and working closely with the operators of our non-operated interests, we believe we are well positioned to control the timing and expenses of our exploration and development activities, while maximizing production and reserves. As of April 30, 2001, we were the operator of properties representing over 71% of our PV-10. GEOGRAPHIC FOCUS AND MULTIPLE RESERVOIR OPPORTUNITIES. Our properties are located primarily in the Permian Basin, where we have operated since 1987, and in the East Texas Basin, where we began operations in 1997. These hydrocarbon-rich basins have long and well-established production histories. Our geographic focus has allowed us to gain substantial knowledge and expertise within these basins. We believe our growth record and our management team's experience in the Permian Basin served as the basis for Unocal's decision in 1998 to exchange most of its oil and natural gas properties and related assets in Southeastern New Mexico for approximately 35% of the stock of Matador. Similarly, our knowledge of the East Texas Basin enabled us to accumulate what we believe is one of the larger acreage positions in the Bossier trend in East Texas. We concentrate our exploration, development and acquisition efforts on what we believe to be lower and moderate risk activities with the opportunity for significant reserve potential and repeatability. We primarily target drilling locations that we believe, by virtue of our analysis of 2-D and 3-D seismic data, nearby wells and other geologic and geophysical data, to have the potential to produce in multiple producing horizons from single wellbores. INDUSTRY RELATIONSHIPS. We seek to work with other companies that have demonstrated technical expertise and success in our core areas. In the Bossier trend, our joint working interest owners include Anadarko, Apache, Texaco, Unocal and XTO Energy. In the Permian Basin, our joint working interest owners include Texaco, Phillips, ExxonMobil, Conoco, OXY USA, EOG, Ocean Energy and Chevron. Our activities with these companies include shared operating responsibilities, joint well and prospect ownership, joint ventures and cooperative oil and natural gas marketing arrangements. EXPERIENCED MANAGEMENT TEAM AND BOARD OF DIRECTORS. We have developed a management team and board of directors that possess strong operational and technical expertise and who work together effectively to devise and execute a common strategy for growth and profitability. Members of our senior management team possess an average of over 20 years of experience in the oil and natural gas industry, and members of our board of directors possess an average of over 35 years of experience within the industry. Our management team has demonstrated its ability to implement successful drilling programs, integrate acquisitions and maximize our performance through both favorable and unfavorable industry conditions. Almost all of our employees and all of our board members, or their employers, are shareholders of Matador and, on a combined basis, will own approximately 19% of our outstanding common stock after giving effect to this offering. This ownership illustrates the significant alignment of interests of our employees and board members with the other shareholders of Matador. FINANCIAL FLEXIBILITY. As of June 30, 2001, after giving effect to our use of the estimated net proceeds from this offering, we would have had total debt of approximately $4.0 million and unused borrowing capacity under our current credit facility of approximately $71.0 million. As a result, our financial flexibility will provide us with significant availability to reborrow under our credit facility to fund additional exploration, development and acquisition activities to continue our growth. We intend to maintain a substantial unused borrowing capacity under our credit facility by periodically refinancing our bank debt in the capital markets when conditions are favorable. RISKS Oil and natural gas exploration and production remains a volatile business involving substantial technical and economic risk. Our drilling activities may not successfully discover oil and natural gas in economically sufficient quantities and acquisition opportunities may not be available at economically attractive prices. Should our drilling activities be unsuccessful or our acquisition efforts unproductive, we may not acheive our historical levels of growth and profitability in the future. Please read "Risk Factors" beginning on Page 8 for additional risks related to this offering. OUR EXECUTIVE OFFICES Our executive offices and mailing address are 8340 Meadow Road, Suite 150, Dallas, Texas 75231-3751, and our telephone number at that address is (214) 987-3650. THE OFFERING <Table> <S> <C> Common stock offered: by Matador (1)............................. 3,600,000 shares by the selling shareholders................ 700,000 shares Total (1)................................ 4,300,000 shares Common stock outstanding after the offering 16,019,169 shares (1)(2)..................................... Use of proceeds by us........................ We intend to use the net proceeds of this offering to repay debt incurred under our existing revolving credit facility. We intend to reborrow under our credit facility from time to time as necessary to fund exploration, development and acquisition activities and other general corporate expenditures. We will not receive any proceeds from the sale of our common stock by the selling shareholders. Proposed Nasdaq National Market symbol....... MATA </Table> ------------------------ (1) Excludes a 30-day option granted by Matador to the underwriters to purchase up to a total 645,000 additional shares to cover over-allotments, if any. (2) Excludes 1,271,040 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $7.83 per share as of June 30, 2001. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table presents summary historical consolidated financial data. The financial data for the five years ended December 31, 2000 are derived from our audited consolidated financial statements. The financial data for the six-month periods ended June 30, 2000 and 2001 are derived from our unaudited consolidated financial statements. The unaudited consolidated financial statements include all adjustments consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and the results of operations for these periods. The financial data are not necessarily indicative of our future performance. You should read the following data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the "Consolidated Financial Statements" and the "Notes to Consolidated Financial Statements" included elsewhere in this prospectus. <Table> <Caption> SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 2000 2001 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Natural gas revenues................. $ 4,407 $ 6,110 $ 9,140 $13,074 $32,097 $11,431 $28,319 Oil revenues......................... 4,357 6,649 6,905 10,582 16,727 7,660 10,648 ------- ------- ------- ------- ------- ------- ------- Total revenues..................... 8,764 12,759 16,045 23,656 48,824 19,091 38,967 Operating costs and expenses: Lease operating expense (1).......... 1,470 2,291 3,555 4,034 5,019 2,323 4,248 Production taxes..................... 716 1,120 1,437 1,987 3,869 1,537 2,943 Depreciation, depletion and amortization....................... 2,788 3,978 7,526 7,758 10,179 4,871 7,661 Oil and natural gas property impairment (2)..................... -- -- 4,545 -- -- -- -- General and administrative (3)....... 1,937 2,317 3,049 3,233 3,875 1,676 3,453 ------- ------- ------- ------- ------- ------- ------- Total operating costs and expenses..... 6,911 9,706 20,112 17,012 22,942 10,407 18,305 Operating income....................... 1,853 3,053 (4,067) 6,644 25,882 8,684 20,662 Other income (expense): Interest expense, net................ (1,187) (1,414) (1,966) (2,646) (3,675) (1,629) (1,887) Interest and other income............ 4 22 22 28 101 54 57 ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes...... 670 1,661 (6,011) 4,026 22,308 7,109 18,832 Income tax (provision) benefit: Current.............................. -- -- -- -- (213) -- (807) Deferred............................. -- (246) 1,813 (1,521) (7,586) (2,486) (5,825) ------- ------- ------- ------- ------- ------- ------- Net income (loss)...................... $ 670 $ 1,415 $(4,198) $ 2,505 $14,509 $ 4,623 $12,200 Puttable common stock accretion and preferred stock dividends (4)........ 39 78 5,056 107 773 84 -- Net income (loss) available to common shareholders......................... $ 631 $ 1,337 $(9,254) $ 2,398 $13,736 $ 4,539 $12,200 ======= ======= ======= ======= ======= ======= ======= Cash dividends paid on common stock.... $ 163 $ 166 $ 271 $ 327 $ 410 $ 196 $ 269 Weighted average shares outstanding (5): Basic................................ 4,884 4,982 8,917 9,892 10,728 10,685 12,414 Diluted.............................. 7,268 7,347 8,917 12,257 13,178 13,174 13,352 Net income (loss) per common share: Basic................................ $ 0.13 $ 0.27 $ (1.04) $ 0.24 $ 1.28 $ 0.42 $ 0.98 Diluted.............................. $ 0.09 $ 0.19 $ (1.04) $ 0.20 $ 1.10 $ 0.35 $ 0.91 Pro forma net income per common share (6): Basic................................ -- -- -- -- $ 1.20 -- $ 0.83 Diluted.............................. -- -- -- -- $ 1.06 -- $ 0.78 </Table> <Table> <Caption> DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 2000 2001 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> OTHER FINANCIAL DATA: Adjusted EBITDA (7).............. $ 4,645 $ 7,053 $ 8,026 $ 14,430 $ 36,162 $ 13,609 $ 28,380 Net cash provided by operating activities..................... 2,932 6,406 7,316 11,189 30,650 10,555 26,856 Net cash used in investing activities..................... (8,777) (13,272) (24,126) (15,504) (44,762) (24,900) (28,908) Net cash provided by financing activities..................... 5,996 7,775 16,525 4,064 14,178 13,314 1,383 Capital expenditures............. 9,349 13,759 46,982 15,682 45,642 25,206 28,795 BALANCE SHEET DATA: Working capital.................. $ 85 $ 394 $ 463 $ 864 $ 2,427 $ 1,153 $ 1,290 Total assets..................... 31,342 41,457 77,129 87,220 127,798 107,850 152,266 Total debt....................... 15,170 23,080 39,880 37,770 58,380 51,380 59,980 Preferred stock.................. 6,616 6,616 6,616 6,616 -- 6,616 -- Puttable common stock............ -- -- 22,000 22,000 -- -- -- Total shareholders' equity....... 6,721 7,999 878 9,684 46,623 36,012 59,366 Total of preferred stock, puttable common stock and shareholders' equity........... 13,337 14,615 29,494 38,300 46,623 42,628 59,366 </Table> ------------------------ (1) Included in the six months ended June 30, 2001 was a remedial workover expense of approximately $681,000 associated with one dual-completion East Texas Cotton Valley producing gas well. (2) According to the full cost method of accounting, the results of operations for the year ended December 31, 1998 include an impairment of oil and natural gas properties of approximately $4.5 million. (3) Included in the six months ended June 30, 2001 was an approximate $761,000 non-cash expense for employee stock options granted during the period. (4) Please see Notes 10 and 11 to the Consolidated Financial Statements included elsewhere in this prospectus. (5) Includes for appropriate periods shares of common stock issuable upon conversion of our convertible preferred stock and stock options. (6) Assumes that we repaid our debt outstanding as of December 31, 1999 on January 1, 2000 and our debt outstanding as of December 31, 2000 on January 1, 2001, with the proceeds of the offering. Pro forma weighted average shares have been adjusted to reflect the number of shares required to generate sufficient proceeds to repay all outstanding debts as of each date. (7) Adjusted EBITDA, as used in this prospectus, is defined as net income (loss) before interest expense, income taxes, depreciation, depletion and amortization and oil and natural gas property impairment. While adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss), operating income (loss), cash flow provided by operating activities or other income or cash flow data prepared in accordance with generally accepted accounting principles or as an indicator of a company's financial performance, we believe that it provides additional information with respect to our ability to meet our future debt service, capital expenditures and working capital requirements. When evaluating adjusted EBITDA, investors should consider, among other factors, (1) increasing or decreasing trends in adjusted EBITDA, (2) whether adjusted EBITDA has remained at positive levels historically and (3) how adjusted EBITDA compares to levels of interest expense. Because adjusted EBITDA excludes some, but not all, items that affect net income and may vary among companies, the adjusted EBITDA presented above may not be comparable to similarly titled measures of other companies. While we believe that adjusted EBITDA may provide additional information with respect to our ability to meet our future debt service, capital expenditures and working capital requirements, certain functional or legal requirements of our business may require us to utilize our available funds for other purposes. SUMMARY OPERATING AND RESERVE DATA The following table presents summary operating and reserve data. The estimates of net proved oil and natural gas reserves are based on reports prepared by DeGolyer and MacNaughton, Inc., independent petroleum engineers. A summary of DeGolyer and MacNaughton's report on our proved reserves as of April 30, 2001 is attached to this prospectus as Appendix A. You should read the following data in conjunction with "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business and Properties" included elsewhere in this prospectus. <Table> <Caption> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 2000 2001 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Production: Natural gas (Mmcf)............................ 2,316 2,729 5,083 6,097 8,373 3,935 5,251 Oil (Mbbls)................................... 204 340 536 579 554 270 387 Total (Mmcfe)................................. 3,540 4,768 8,299 9,571 11,697 5,555 7,573 Average Daily Production: Natural gas (Mcf/d)........................... 6,345 7,478 13,926 16,704 22,941 21,861 29,172 Oil (Bbls/d).................................. 559 931 1,468 1,586 1,519 1,500 2,150 Total (Mcfe/d)................................ 9,699 13,064 22,734 26,220 32,055 30,861 42,072 Average Sales Price ($): Natural gas (per Mcf)......................... $1.91 $ 2.24 $ 1.80 $ 2.14 $ 3.83 $ 2.90 $ 5.39 Oil (per Bbl)................................. 21.36 19.57 12.88 18.28 30.19 28.37 27.51 Total (per Mcfe).............................. 2.48 2.68 1.94 2.47 4.17 3.44 5.15 Average Costs ($ per Mcfe): Lease operating expense (1)................... $0.42 $ 0.48 $ 0.43 $ 0.42 $ 0.43 $ 0.42 $ 0.56 Production taxes.............................. 0.20 0.23 0.17 0.21 0.33 0.28 0.39 Depreciation, depletion and amortization (2)............................ 0.79 0.83 0.91 0.81 0.87 0.88 1.01 General and administrative (3)................ 0.55 0.49 0.37 0.34 0.33 0.30 0.46 </Table> <Table> <Caption> AS OF DECEMBER 31, ---------------------------------------------------- AS OF 1996 1997 1998 1999 2000 APRIL 30, 2001 -------- -------- -------- -------- -------- -------------- <S> <C> <C> <C> <C> <C> <C> ESTIMATED PROVED RESERVE DATA: Natural gas (Mmcf).................. 22,842 24,064 64,671 69,049 111,898 129,805 Oil (Mbbl).......................... 2,698 3,950 5,034 5,698 5,713 6,225 Total (Mmcfe)....................... 39,029 47,764 94,872 103,239 146,178 167,154 Percent natural gas................. 58% 50% 68% 67% 77% 78% Estimated undiscounted future net cash flows before income taxes (in thousands)........................ $95,001 $84,479 $122,016 $207,064 $995,043 $576,801 PV-10 (in thousands)................ $55,685 $48,776 $ 66,315 $108,916 $496,713 $278,750 Standardized measure (in thousands)........................ $46,256 $43,347 $ 58,691 $ 89,301 $344,500 $200,708 Prices utilized: Natural gas (per Mcf)............. $ 2.87 $ 2.45 $ 2.07 $ 2.15 $ 9.53 $ 4.71 Oil (per Bbl)..................... $ 24.31 $ 17.91 $ 10.34 $ 24.93 $ 25.92 $ 27.71 Reserve life index (years).......... 11.0 10.0 11.4 10.8 12.5 10.2 Reserve replacement cost (per Mcfe)........................ $ 0.69 $ 0.96 $ 0.76 $ 0.87 $ 0.81 $ 0.69 </Table> -------------------------- (1) Included in the six months ended June 30, 2001 was a remedial workover expense of approximately $681,000, or $0.09 per Mcfe, associated with one dual-completion East Texas Cotton Valley producing gas well. (2) Excludes an impairment of oil and natural gas properties of approximately $4.5 million recorded for the year ended December 31, 1998. (3) Included in the six months ended June 30, 2001 was an approximate $761,000 non-cash expense for employee stock options granted during the period, totaling $0.10 per Mcfe.

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+ PROSPECTUS SUMMARY This summary outlines and highlights information contained elsewhere in this Prospectus. You should read the entire Prospectus carefully, including the "Risk Factors" section and the financial statements and related notes before you make an investment decision. Whenever we refer in this Prospectus to "Sunshine," "the Company," "we," "us," or "our," we mean Sunshine Mining and Refining Company, a Delaware corporation and its predecessors and subsidiaries. THE COMPANY Sunshine was originally incorporated in 1918 and is currently incorporated under the laws of the State of Delaware. The Company maintains its principal executive offices at 5956 Sherry Lane, Suite 1621, Dallas, Texas 75225. Sunshine has primarily engaged in mining silver and until recently, was one of the world's leading primary silver producers. Sunshine is a holding company whose material assets consists of the stock of subsidiaries. Sunshine Precious Metals, Inc. owns the Sunshine Mine located in the Coeur d'Alene mining district near Kellogg, Idaho. The Sunshine Mine produced 5.2 million and 3.9 million ounces of silver in 1999 and 2000, respectively; the primary smelter customer announced on February 2, 2001 that it was closing and would no longer accept deliveries. As a result, Sunshine notified its employees at the Sunshine Mine of a mass lay-off February 16, 2001, and placed the Sunshine Mine on a care and maintenance status. Upon initially closing the Sunshine Mine, the Company intended to hold it under a program of care and maintenance. Under such a program, major hoisting facilities and main underground haulage and ventilation levels would be regularly maintained, and pumping would maintain the water level below the 3700 level. Underground mining equipment which would be expected to deteriorate has been sold. During the second quarter, the Company determined not to maintain the property due to the costs of holding the mine under its original care and maintenance plan. New plans were made to secure the property, including closing off underground access after removal of certain equipment, including electrical transformers and substations. Pumps have been shut off, and it is anticipated that over the next two to four years the water level at the property will rise to about the 3100 level. The longer the mine remains closed, the higher the cost to reopen. Over time, the underground shafts and drifts will deteriorate without regular maintenance, and eventually may become unusable. The Company has recently sold an option to acquire its silver refinery, and/or its tailings impoundment, and/or its antimony plant, and may dispose of other real estate holdings at the Sunshine Mine. The Company will also consider a sale of the Sunshine Mine Complex in its entirety, but does not anticipate a separate sale of hoisting, mineral processing or other surface facilities necessary for the re-initiation of mining activity at the Complex. The terms of the option to acquire the refinery, tailings impoundment, and/or the antimony plant provide that, should the optionee acquire the tailings impoundment, upon any reopening of the Sunshine Mine, its then-operator will have the right to deposit waste from the Sunshine Mine into the tailings impoundment. Should silver prices ever rise to a level which might encourage a reopening of the Sunshine Mine, prior to undertaking the necessary exploration and development to establish if additional reserves exist in the mine, substantial repair and infrastructure replacement will be required. The longer the mine is closed, the more expensive and longer such a process would be. At this time, there is no estimate of the time and expense required, and it is not known what price of silver might justify such an effort. Sunshine's principal asset is the Pirquitas Mine which is owned by Sunshine Argentina, Inc. Pirquitas contains 129 million ounces of silver reserves, as well as significant tin and zinc by-products. The Pirquitas Mine is planned as an open-pit operation to produce 11 million ounces of silver, 3,200 tonnes (metric tons) of tin, and 16,300 tonnes of zinc per year. Present studies forecast pre-production capital costs of approximately $133 million to develop the Pirquitas Mine. On-going capital requirements are forecasted to total approximately $15 million, and initial working capital requirements are forecast to be approximately $6 million. The estimated net cash cost of production per ounce of silver (net of tin and zinc by-product credits) is $1.53. See "THE COMPANY." The Company's strategy is to attempt to maintain sufficient liquidity to allow it to hold Pirquitas pending a recovery in the silver market. Various studies in recent years have documented a significant shortfall of newly-produced silver relative to silver demand. These shortfalls have been made up by the liquidation of above-ground silver stocks. There are no good estimates of the size of the remaining silver stockpiles in the world, nor at what price they would be made available to the market. Therefore, the Company is not able to speculate on how much longer available inventory stockpiles can continue to hold down the price of silver. REORGANIZATION UNDER CHAPTER 11 On August 23, 2000, Sunshine and its wholly-owned subsidiaries, Sunshine Argentina, Inc., Sunshine Precious Metals, Inc. and Sunshine Exploration, Inc. all filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Third Amended and Restated Joint Chapter 11 Plan of Reorganization as modified December 5, 2000 was the subject of an Order of Confirmation which resulted in the Plan having an Effective Date of February 5, 2001. The Proceeding was filed due to our inability to pay our debts as they became due and low silver prices. The Plan of Reorganization was conceived as an alternative to the more drastic measures available for restructuring indebtedness of Sunshine such as a liquidation of all of Sunshine's assets. As a result of the Plan, all of the outstanding shares of "old common stock" were cancelled, retired and eliminated with no consideration paid therefor and Sunshine was deemed to have issued the "New Mining Stock," which is shares of common stock, par value $0.01 per share. At the Effective Date of the Plan, 50,000,000 shares of Common Stock were deemed to be issued as the New Mining Stock to those designated as recipients therefor under the Plan which generally were certain creditors of Sunshine and others who in turn gifted a portion (approximately 3.4%) of New Mining Stock to the former common stockholders on a pro-rata basis, but only to accounts holding in excess of 100 shares of "old common stock." By virtue of this redistribution, holders of Allowed Claims against Sunshine also received a portion of the New Mining Stock where the various creditor classes received the same proportion of New Mining Stock to its Allowed Claim as received by each holder in the respective creditor classes, and the "gifting" creditors (the Stonehill Group and the Elliott Group) obtained 89.99% of the New Mining Stock on a fully-diluted basis after taking into account all of the distributions afforded to the various holders. The result of the Plan was to eliminate all of the Company's funded indebtedness, and certain other obligations, which had been incurred prior to August 23, 2000. In addition, as a result of the Plan, Sunshine Precious Metals, Inc. and the United States on behalf of the United States Environmental Protection Agency, the United States Department of the Interior and the United States Department of Agriculture (the "Government"), as well as the Coeur d'Alene Indian Tribe (the "Tribe") settled all outstanding environmental litigation against Sunshine and Sunshine Precious Metals. As part of the settlement, a total of 4,975,000 warrants to acquire an equivalent number of shares were issued to the Government and the Tribe. In addition, 324,265 warrants were issued to Asarco to acquire an equivalent number of shares, and management has been issued options to acquire 2,500,000 shares. The exercise price for all the above described options and warrants is $0.66 per share. The New consent Decree also requires Sunshine Precious Metals, Inc. to provide a net smelter return royalty payable by it for production anywhere in the United States or by any Sunshine entity on all production from within one mile of the Sunshine Mine. The royalty adjusts on a sliding scale based upon the average price of silver. No royalty is payable until the average silver price exceeds $6 per ounce. The royalty varies from 1% of net smelter returns at a silver price of $6 per ounce to 7% at a price of $10 per ounce or more. CALL OPTION AGREEMENT Under the terms of the Plan and the Confirmation Order, on the Effective Date of Plan, the capital stock of Sunshine Argentina, Inc. was cancelled, and Sunshine Argentina, Inc. issued the "New Argentina Stock." Sunshine caused the incorporation and organization of Sunshine International Mining, Inc., a Delaware corporation, all of the issued and outstanding stock of which is owned by Sunshine. Sunshine contributed to the capital of Sunshine International, Inc. all of the New Argentina Stock such that Sunshine Argentina, Inc. became a wholly-owned subsidiary of Sunshine International, Inc. which, in turn, is a wholly-owned subsidiary of Sunshine. Simultaneously, Sunshine and the two subsidiaries entered into a Call Option Agreement dated February 5, 2001 with the Elliott Group and the Stonehill Group, pursuant to which those entities were granted o a Call Option to each holder within the Elliott Group and the Stonehill Group to purchase, collectively, up to 100% of the shares of New Argentina Stock, and o a first priority perfected security interest in the New Argentina Stock. The effect of the "call option" is to potentially allow the Elliott Group holders and Stonehill Group holders (and certain of their successors and assigns) upon the occurrence of any one or more of nine separate events, to acquire Sunshine Argentina, Inc., which in turn owns the Pirquitas Mine and other assets. See "PLAN OF REORGANIZATION - Argentina Transaction; Call Option Agreement" for a listing of the events. Should such an event occur, Sunshine's investment in the acquisition and the valuation of the Pirquitas Mine could no longer be an asset of Sunshine, nor would the assigned proven and probable in-ground reserves totaling 129.6 million ounces of silver, along with 59,000 tons of tin and 273,000 tons of zinc. OWNERSHIP; SELLING STOCKHOLDERS The principal stockholders of Sunshine are the Elliott Group (which owns 50.98% of the issued and outstanding stock) and the Stonehill Group (which owns 39.01% of the issued and outstanding common stock of Sunshine). The principal business of each of the entities within the Stonehill Group and the Elliott Group is investment in securities. The Elliott Group and the Stonehill Group are the Selling Stockholders. See "SELLING STOCKHOLDERS" and "PLAN OF DISTRIBUTION." PLAN OF DISTRIBUTION As of November 9, 2001, there were 50,000,000 shares of Sunshine Common Stock outstanding, of which 44,995,000 were held by the Elliott Group and the Stonehill Group together, all of which are covered by this Prospectus. This Prospectus relates to the shares of Sunshine Common Stock which are being registered under the Securities Act of 1933 on behalf of the Selling Stockholders in order to permit the public sale or other distribution of the Shares. See "Selling Stockholders" and "Plan of Distribution."

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+ Prospectus Summary This summary highlights information contained in this prospectus. Because this is a summary, it may not contain all of the information that is important to you. You should also read the more detailed information set forth in this prospectus, including our financial statements. Except as otherwise indicated or required by the context, references in this prospectus to we, our, us, or Commonwealth Bankshares refer to Commonwealth Bankshares, Inc. and its subsidiaries collectively. References in this prospectus to the Trust refer to Commonwealth Bankshares Capital Trust and references in this prospectus to the Bank refer to Bank of the Commonwealth. Commonwealth Bankshares, Inc. Commonwealth Bankshares, Inc., a Virginia corporation, is headquartered in Norfolk, Virginia. We own Bank of the Commonwealth, a Virginia-chartered commercial bank, and we conduct virtually all of our business through the Bank. The Bank was organized in 1970 and began operations in April 1971. It is the oldest independent bank in its market area. Commonwealth Bankshares was formed to become the bank holding company of the Bank. Our market area is concentrated in the cities of Norfolk, Virginia Beach, Portsmouth and Chesapeake, Virginia. The Bank is currently operating three branch offices in Norfolk, four branch offices in Virginia Beach, one branch office in Chesapeake and one branch office in Portsmouth, as well as six off- premise ATMs. On April 30, 2001 we opened our first office in Portsmouth, on July 29, 2000 we opened our first office in Chesapeake, and in August of 2000 we opened an office at Old Dominion University in Norfolk under a joint agreement with Old Dominion University and the second largest bank in the United States. At March 31, 2001, we had $221.9 million in assets, $167.7 million in loans, $202.3 million in deposits and $13.2 million in stockholders' equity. We provide a wide range of commercial banking services to individuals and small and medium-sized businesses, including the acceptance of checking and savings deposits, and the initiation of commercial, real estate, personal, home improvement, automobile and other installment and term loans. We also offer related services such as home banking, trust, travelers checks, safe deposit, lock box, depositor transfer, customer note payment, collections, notary public, escrow, and other customary banking services. We are conducting this offering because the convertible preferred securities will be treated as capital for bank regulatory purposes. This means that we will be able to grow our total assets faster than our anticipated retained earnings would permit. The cash proceeds from this offering are not needed for our operations or liquidity. Except for increasing our regulatory capital, we do not obtain any business advantage by creating Commonwealth Bankshares Capital Trust and selling to it the junior subordinated debt securities. If we sold our junior subordinated debt securities directly to the public, we would not be able to include any of the proceeds in our tier 1 regulatory capital. However, by creating the Trust and funding it with the proceeds of this offering followed by the Trust's purchase of our junior subordinated debt securities, we can include all of these funds in our regulatory capital. Based on our tier 1 capital at March 31, 2001, approximately $4.4 million of the convertible preferred securities would be initially included in our tier 1 capital. To the extent that the convertible preferred securities are not included in our tier 1 capital, they will be included in our tier 2 capital. We are a legal entity separate and distinct from the Bank. Our right, and thus your right, to receive any of the assets of the Bank is subject to the claims of the Bank's creditors. Our principal source of revenues is dividends from the Bank. Because we own the Bank, we are known as a bank holding company. As a bank holding company, we are registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956. We receive mail at our executive offices located at 403 Boush Street, Norfolk, VA 23510, and our telephone number is (757) 446-6900. This is also the address and telephone number for the Trust. Commonwealth Bankshares Capital Trust I We formed Commonwealth Bankshares Capital Trust as a financing subsidiary of Commonwealth Bankshares under Delaware law on November 15, 2000. We and the trustees of the Trust will sign an agreement, which will contain the terms and conditions under which the Trust will issue and sell its convertible preferred securities, as well as its common securities. This agreement is called the amended and restated declaration of trust and it also governs the duties of the trustees. Commonwealth Bankshares Capital Trust exists solely to: . sell the convertible preferred securities to the public and the common securities to us; . use the money it receives from the sale of the convertible preferred securities and common securities to purchase our junior subordinated debt securities, which will be the only assets of the Trust; and . engage in other activities that are necessary and incidental to these purposes, such as receiving payments on the junior subordinated debt securities, and making distributions to security holders, furnishing notices and other administrative tasks. We will purchase all of the common securities of the Trust. The common securities will entitle us to receive 3% of the Trust's cash distributions. The convertible preferred securities will entitle you and the other owners to the remaining 97% of the Trust's cash distributions. If we default on the junior subordinated debt securities, we will not receive cash distributions on the common securities until you have received your cash distributions on the convertible preferred securities. The Trust has a term of approximately 40 years, but may be dissolved earlier if the convertible preferred securities are paid off. We have appointed the following trustees to conduct the Trust's business and affairs: . Wilmington Trust Company is the property trustee and the Delaware trustee; and . Two individuals who are employees and officers of Commonwealth Bankshares, Edward J. Woodard, Jr. and John H. Gayle, will be the administrative trustees. As the sole holder of the common securities, we can replace or remove any of the trustees, unless we default on the junior subordinated debt securities. A default, for example, would include failing to make required payments on the junior subordinated debt securities. As owner of all of the Trust's common securities, only we can remove or replace the administrative trustees. If we default and do not cure our default, the property trustee and the Delaware trustee can only be replaced and removed by the holders of at least a majority of the convertible preferred securities. As a result of your purchase of a convertible preferred security, you are agreeing that Anderson & Strudwick shall have the right to select and direct the remedies to be pursued by the property trustee in the event of a default and our failure to cure the default. The Trust has no separate financial statements. The statements would not be meaningful to you because the Trust has no independent operations. It exists solely for the reasons summarized above. The Offering <TABLE> <S> <C> Securities Offered Commonwealth Bankshares Capital Trust is offering for sale up to 1,600,000 convertible preferred securities, which represent preferred undivided interests in the assets of the Trust. Those assets will consist solely of the junior subordinated debt securities and payments received on the junior subordinated debt securities. The Trust will sell the convertible preferred securities to the public for cash and will use that cash to buy the junior subordinated debt securities from us. Offering Price The offering price is $5.00 for each convertible preferred security. Conversion Holders of convertible preferred securities may, at their option, convert their convertible preferred securities into common stock of Commonwealth Bankshares at an initial conversion price of $ per share of common stock on or after 2001. The conversion price is subject to adjustment under certain conditions as described in this prospectus. Our common stock is traded on the Nasdaq National Market under the symbol "CWBS." The last reported sale price of our common stock on Nasdaq on July 3, 2001 was $6.99 per share. If you want to convert a convertible preferred security, the conversion agent will exchange your convertible preferred security for the appropriate principal amount of junior subordinated debt securities held by the Trust and immediately convert the junior subordinated debt securities into shares of our common stock. You will receive cash in lieu of fractional shares. However, you will not receive cash or additional shares of our common stock to compensate you for any accrued but unpaid distributions on the convertible preferred securities through the time of conversion. These accrued amounts will be forfeited. You will be permitted to elect to select a conversion date which will coincide with an interest payment date so that there will be no accrued amounts. Quarterly distributions are You will be entitled to receive cumulative cash distributions of $ per payable to you on the year on each convertible preferred security. Distributions will be payable convertible preferred quarterly on the 15th of January, April, July and October of each year, securities beginning on October 15, 2001. Your first cash distribution will be less than the regular quarterly amount because you are buying your convertible preferred securities after July 15, 2001. As long as the convertible preferred securities are represented by a global security, the record date for distributions on the convertible preferred securities will be the business day prior to the distribution date. We may defer the payment of cash distributions, as described below. We have the option to defer We have the right to defer all or part of the interest payments on the junior interest payments subordinated debt securities for up to 20 consecutive quarters. If we pay all deferred interest at the end of an interest deferral period, we can begin a new interest deferral period at any time. No interest deferral period may last beyond October 15, 2031. We may not defer interest payments if we have defaulted on the junior subordinated debt securities. However, electing to defer interest payments, by itself, is not a default. </TABLE> <TABLE> <S> <C> If we defer interest payments, If we defer interest payments on the junior subordinated debt securities, the cash distributions to you will Trust also will defer cash distributions on your convertible preferred be deferred securities. Any such deferral will not constitute a default. During any period when cash distributions are deferred, your right to receive cash distributions will accumulate. You also will accumulate the right to receive additional distributions at % per year, compounded quarterly, on any deferred distributions. The commencement of a deferral period would likely cause the market price of the convertible preferred securities and our common stock to decline. We have no current intention of exercising our right to defer payments of interest on the junior subordinated debt securities. You will have taxable income You will be required to pay income taxes on deferred distributions in advance even if we defer cash of receiving these amounts even if you are a cash basis taxpayer. distributions The Nature of Our Guarantee of Our obligations described in this prospectus, in the aggregate, constitute a Payment guarantee on a junior subordinated basis by us of the obligations of the Trust under the convertible preferred securities. Under the guarantee agreement, we guarantee the Trust will use its assets to pay the distributions on the convertible preferred securities and the liquidation amount upon liquidation of the Trust. However, the guarantee does not apply when the Trust does not have sufficient funds to make the payments. If we do not make payments on the junior subordinated debt securities, the Trust will not have sufficient funds to make payments on the convertible preferred securities. In this event, your remedy is to institute a legal proceeding directly against us for enforcement of payments under the junior subordinated debt securities. Ranking of Convertible If we default in the payments on our junior subordinated debt securities, Preferred Securities payments to you on the convertible preferred securities will be made, including all accumulated and unpaid distributions, before any payments to us on the common securities. This does not give you any significant protection, however, because the common securities only are entitled to 3% of the distributions by the Trust. As long as we are not in default, payments on the convertible preferred securities and common securities will be made proportionately. The junior subordinated debt The junior subordinated debt securities will be unsecured and subordinate to securities are unsecured and all our senior debt. This means that there will be no collateral for our subordinate to all our senior obligations to you. It also means that if we default, all of our senior debt debt will be paid before you are paid. At March 31, 2001, we had $479 thousand of senior debt outstanding. Any additional debts we incur in the future are likely to be senior debt. There is no limit on the amount of senior debt that we may incur. We will guarantee that you will receive cash distributions if the Trust has the funds to pay you. Our guarantee also will be unsecured and subordinate to all senior debt. In addition, the junior subordinated debt securities and the guarantee will be subordinate to all existing and future liabilities of our subsidiaries, including Bank of the Commonwealth's deposit liabilities as well as existing and future liabilities of our subsidiaries. The junior subordinated debt We have guaranteed on a junior subordinated basis that the Trust will pay you securities are scheduled to $5 per convertible preferred security, plus accrued distributions, when the mature on October 15, 2031 junior subordinated debt securities are redeemed at or before maturity. The stated maturity of the junior subordinated debt securities is October 15, 2031. </TABLE> <TABLE> <S> <C> We can terminate your We have certain rights to terminate your ability to convert convertible conversion rights under preferred securities into our common stock. We will have this termination certain conditions right at any time after October 15, 2006 if the closing price of our common stock on Nasdaq exceeds 115% of the conversion price for 20 of 30 consecutive trading days. To exercise our conversion termination rights, we first must cause the Trust to issue a press release and mail a written notice to all registered holders of the convertible preferred securities and to Anderson & Strudwick announcing the date on which the conversion rights will be terminated. The press release and notice must also state the conversion price that is then applicable and the closing price on the public markets at that time for the convertible preferred securities and our common stock. The date we elect to terminate your conversion rights cannot be less than 30 days or more than 60 days after the date that the Trust issues the press release and mails the notice. We can redeem the junior We have the right at any time on or after October 15, 2006 to redeem the junior subordinated debt securities subordinated debt securities at the liquidation amount of $5 per convertible any time after October 15, 2006 preferred security plus accrued and unpaid distributions, without the payment of any premium amount. We also have the right at any time before October 15, 2006 to redeem the junior subordinated debt securities if any of three things happen: . if tax law changes prevent us from deducting interest payments; . if changes in banking regulations prevent us from counting the Trust's assets as tier 1 capital; or . a change in the Investment Company Act of 1940 that requires the Trust to register under that law. We will not redeem the junior subordinated debt securities prior to maturity unless we have received the prior approval of the Board of Governors of the Federal Reserve, if required. Limited Voting Rights on the You will have no voting rights on the convertible preferred securities, except Convertible Preferred in limited circumstances. Securities No Rating We do not expect the convertible preferred securities to be rated by any rating service. None of the other securities that we issue are so rated. No Interest on Escrowed Funds You will not receive interest on any funds you deposit before this offering closes. ERISA Considerations Please carefully consider the information set forth in "ERISA Considerations," which begins on page 79. Use of Proceeds The Trust will use all of the proceeds from the sale of the common securities and convertible preferred securities to purchase the junior subordinated debt securities from us. We intend to use the net proceeds from the sale of the junior subordinated debt securities to increase our regulatory capital and support the growth of Bank of the Commonwealth. Pending any such application, we may invest the net proceeds in interest-bearing assets. </TABLE> <TABLE> <S> <C> Proposed Nasdaq National Market _____. Symbol We may distribute the junior We may, at any time, liquidate the Trust and distribute the junior subordinated subordinated debt securities debt securities to you, subject to the prior approval of the Federal Reserve, directly to you if required. If we liquidate the Trust, the junior subordinated debt securities will be convertible into our common stock on the same terms, and subject to the same conditions, that the convertible preferred securities are convertible into our common stock. If we distribute the junior subordinated debt securities, we will use our best efforts to list them on a national securities exchange or comparable automated quotation system, subject to any applicable listing requirements or limitations. Risk Factors An investment in the convertible preferred securities involves a number of risks. Some of these risks relate to the convertible preferred securities and other risks relate to us. We urge you to carefully consider the information contained in "Risk Factors" beginning on page 10 of this prospectus, as well as the other information contained in this prospectus, before you buy any convertible preferred securities. You will not receive The convertible preferred securities will be represented by a global security certificates that will be deposited with and registered in the name of The Depository Trust Company, New York, New York, or its nominee. This means that you will not receive a certificate for the convertible preferred securities, and your ownership interest will be recorded through the DTC book-entry system. </TABLE>

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+ SUMMARY This summary highlights selected information from this prospectus and may not contain all information that may be important to you. This prospectus includes information regarding our business and detailed financial data. We encourage you to read the detailed information and financial statements appearing elsewhere in this prospectus. WHO WE ARE We are a leading national manufacturer of a broad line of asphalt roofing products and accessories for the steep slope and low slope roofing markets (previously referred to as the residential and commercial roofing product lines). We also manufacture specialty building products and accessories for the professional and do-it-yourself remodeling and residential construction industries. We produce our products at 26 currently operating manufacturing facilities. In addition, we have four manufacturing facilities that are currently closed. We believe that we hold the number one or two market position in each of the asphalt roofing product lines in which we compete (based on unit sales), including leadership of the fast growing, premium laminated steep slope shingles market. We believe our Timberline(R) product is the leading brand in the steep slope roofing market, and our Ruberoid(R) product is the leading brand in the modified bitumen market in the low slope roofing industry. Through 2000, we have reported twelve out of thirteen years of increases in operating income, before non-recurring charges. During the five-year period ended December 31, 2000, our net sales and operating income, before non-recurring charges, have increased at average annual compound rates of approximately 11.9% and 7.7%, respectively. In 2000, net sales increased 5.9%. The operating income margin before non-recurring items, however, declined to 5.1% in 2000 from 7.5% in 1999, primarily due to the higher cost of energy and raw material purchases, principally the cost of asphalt due to high oil prices and increased demand for asphalt by the paving industry. We believe that our growth is primarily attributable to: - improvement in our product mix, driven by a business strategy which emphasizes our higher-margin products and systems; - vertical integration and our low cost manufacturing operations; - substantial capital spending programs for new property, plant and equipment that have enabled us to expand capacity and reduce manufacturing costs; - the strength of our national distribution system; and - broadening our product lines through niche-type acquisitions. INDUSTRY OVERVIEW The United States steep slope roofing industry comprises manufacturers of asphalt, tile, wood, slate and metal roofing materials, with asphalt roofing representing approximately 85% of industry steep slope roofing unit sales in 1999. Steep slope asphalt roofing materials consist of strip shingles and higher margin, premium laminated shingles, which represented approximately 54% and 46%, respectively, of industry asphalt roofing unit sales in 2000. While total asphalt steep slope roofing unit sales grew during the past five years (from January 1, 1996 through December 31, 2000) at an average annual compound rate of approximately 2%, unit sales of laminated shingles grew at an average annual compound rate of approximately 14%. During the same period, sales of strip shingles declined at a compound annual rate of approximately 4%. While we believe that the growth of laminated shingle sales will continue to exceed the growth of the overall steep slope asphalt roofing market, we have experienced increased competition in this product line. The United States low slope roofing industry comprises manufacturers of asphalt built-up roofing, modified bitumen, thermoplastic and elastomeric single-ply products and other roofing products. We believe approximately 70% of low slope roofing industry membrane unit sales utilize asphalt built-up ADDITIONAL REGISTRANTS <TABLE> <CAPTION> PRIMARY STATE OR OTHER STANDARD ADDRESS, INCLUDING ZIP CODE AND JURISDICTION OF INDUSTRIAL I.R.S. EMPLOYER TELEPHONE NUMBER, INCLUDING EXACT NAME OF REGISTRANT INCORPORATION OR CLASSIFICATION IDENTIFICATION AREA CODE, OF REGISTRANT'S AS SPECIFIED IN ITS CHARTER ORGANIZATION CODE NUMBER NUMBER PRINCIPAL EXECUTIVE OFFICE --------------------------- ---------------- -------------- --------------- ------------------------------- <S> <C> <C> <C> <C> Building Materials Delaware 2952 22-3626208 1361 Alps Road Manufacturing Corporation Wayne, New Jersey 07470 (973) 628-3000 Building Materials Delaware 6749 22-3626206 300 Delaware Avenue Investment Corporation Wilmington, Delaware 19801 (302) 427-5960 BMCA Insulation Products Delaware 5039 22-3275477 1361 Alps Road Inc. Wayne, New Jersey 07470 (973) 628-3000 Ductwork Manufacturing Delaware 3440 58-2507312 25 Central Industrial Row Corporation Purvis, MS 39475 (601) 794-5500 GAF Leatherback Corp. Delaware 2952 22-3497242 11 Hillcrest Road Hollister, CA 95024-5050 (408) 636-5050 GAF Premium Products Inc. Delaware 3272 22-3383680 1361 Alps Road Wayne, New Jersey 07470 (973) 628-3000 GAF Materials Corporation Delaware 2952 22-3563280 1361 Alps Road (Canada) Wayne, New Jersey 07470 (973) 628-3000 GAFTECH Corporation Delaware 8741 22-2811609 1361 Alps Road Wayne, New Jersey 07470 (973) 628-3000 LL Building Products Inc. Delaware 3444 58-2394554 4501 Circle 75 Parkway Atlanta, GA 30339 (770) 953-6366 Wind Gap Real Property Delaware 7010 22-3383681 1361 Alps Road Acquisition Corp. Wayne, New Jersey 07470 (973) 628-3000 <CAPTION> EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER REGISTRATION NO. --------------------------- ---------------- <S> <C> Building Materials 333- Manufacturing Corporation Building Materials 333- Investment Corporation BMCA Insulation Products 333- Inc. Ductwork Manufacturing 333- Corporation GAF Leatherback Corp. 333- GAF Premium Products Inc. 333- GAF Materials Corporation 333- (Canada) GAFTECH Corporation 333- LL Building Products Inc. 333- Wind Gap Real Property 333- Acquisition Corp. </TABLE> roofing, modified bitumen products and thermoplastic and elastomeric single-ply products, most of which we manufacture or market. Over the past five years, approximately 80% of industry sales, as well as our sales, of both steep slope and low slope roofing products were for re-roofing, as opposed to new construction. As a result, our exposure and the industry's exposure to cyclical downturns in the new construction market are lower than for other building material manufacturers which produce, for example, gypsum and wood. We expect that demand for steep slope re-roofing will continue to increase as the existing housing stock ages and as homeowners upgrade from standard strip roofing shingles to premium laminated shingles for enhanced aesthetics and durability. We also expect low slope roofing demand to rise as the construction of new commercial facilities increases and existing buildings age. STEEP SLOPE ROOFING We are a leading manufacturer of a complete line of premium steep slope roofing products. Steep slope roofing product sales represented approximately 67% of our net sales in 2000. We have improved our sales mix of steep slope roofing products in recent years by increasing our emphasis on laminated shingles and accessory products which generally are sold at higher prices with more attractive profit margins than our standard strip shingle products. We believe that we are the largest manufacturer of laminated steep slope roofing shingles and the second largest manufacturer of strip shingles in the United States. We produce two principal lines of shingles, the Timberline(R) series and the Sovereign(R) series, as well as certain specialty shingles. In addition to shingles, we supply all the components necessary to install a complete roofing system. LOW SLOPE ROOFING We manufacture a full line of asphalt built-up roofing, modified bitumen products, liquid-applied membrane systems and roofing accessories for use in the application of low slope roofing systems. We also market thermoplastic and elastomeric single-ply products, and in the first quarter of 2001, we began manufacturing thermoplastic polyolefin products at our new plant in Mount Vernon, Indiana. Low slope roofing represented approximately 26% of our net sales in 2000. We believe that we are the second largest manufacturer of asphalt built-up roofing products and the largest manufacturer of modified bitumen products in the United States. We also manufacture or market base sheets, flashings and other roofing accessories and perlite roofing insulation products, which consist of low thermal insulation products installed below the roofing membrane. We also market isocyanurate foam as roofing insulation, packaged asphalt and accessories such as vent stacks, roof insulation fasteners, cements and coating. SPECIALTY BUILDING PRODUCTS AND ACCESSORIES We manufacture and market a variety of specialty building products and accessories for the professional and do-it-yourself remodeling and residential construction industries. Specialty building products and accessories represented approximately 7% of our net sales in 2000. These products primarily consist of steep slope attic ventilation systems and metal and fiberglass air distribution products for the HVAC industry. BUSINESS STRATEGY The principal elements of our business strategy are the following: INCREASE EMPHASIS ON HIGHER MARGIN, PREMIUM PRODUCTS One of our strategies to grow net sales and profitability has been to improve our product mix, with an increasing emphasis on laminated shingles and longer-life, high performance premium strip and specialty shingles, which sell at higher prices and profit margins than standard strip shingles. From January 1, 1996 and through December 31, 2000, our net sales of these premium shingles have increased at an average THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL OR OFFER THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED APRIL 6, 2001 PROSPECTUS $35,000,000 BUILDING MATERIALS CORPORATION OF AMERICA 10 1/2% SENIOR NOTES DUE 2003 ------------------------ This prospectus relates to the offering for resale from time to time by the selling noteholder named in this prospectus of Building Materials Corporation of America's 10 1/2% Senior Notes due 2003 which have a principal amount at maturity of $35,000,000. We initially sold the notes to the selling noteholder in a private placement on July 5, 2000 in a transaction exempt from the registration requirements of the Securities Act of 1933. This prospectus has been made available to the selling noteholder pursuant to our obligations under a registration rights agreement. The selling noteholder will receive all of the net proceeds from the sale of these notes, although we will bear some of the expenses related to offering these notes. The selling noteholder may offer and sell the notes directly to purchasers or through underwriters, brokers, dealers or agents, who may receive compensation in the form of discounts, concessions or commissions. The notes may be sold in one or more transactions at fixed or negotiated prices or at prices based on prevailing market prices at the time of the sale. ------------------------ CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE DATE OF THIS PROSPECTUS IS , 2001 annual compound rate of approximately 14%. This growth has enabled us to increase our premium product mix of steep slope sales. We expect to continue this strategy to improve product mix by increasing sales of premium shingles. ENHANCE LOW COST MANUFACTURING OPERATIONS We believe that our plants are among the most modern in the industry. Since 1985 and through December 31, 2000, we have invested approximately $475 million in new property, plant and equipment, principally to increase capacity and implement process improvements to reduce manufacturing costs. This capital program included the construction of two manufacturing facilities in Shafter, California and Michigan City, Indiana in 2000. We also completed construction on a third manufacturing facility in Mount Vernon, Indiana and started production at that facility in the first quarter of 2001. This capital program also included the installation of efficient in-line lamination equipment in a number of our roofing plants, as well as the modernization of our glass mat facilities. We have reduced our manufacturing costs as a result of this capital program, along with the rigorous application of our process and quality control standards. CAPITALIZE ON OUR NATIONAL DISTRIBUTION SYSTEM We have one of the industry's largest sales forces, which is supported by a staff of technical professionals who work directly with architects, consultants, contractors and building owners. We market our roofing products through our own sales force of approximately 230 experienced, full-time employees and independent sales representatives who operate from six regional sales offices located across the United States. A major portion of our roofing product sales are to wholesale distributors who resell our products to roofing contractors and retailers. We believe that the wholesale distribution channel offers the most attractive margins of all roofing market distribution channels and represents the principal distribution channel for professionally installed asphalt roofing products, and that our nationwide coverage has contributed to certain of our roofing products being among the most recognized and requested brands in the industry. BROADEN PRODUCT LINES THROUGH NICHE-TYPE ACQUISITIONS Our acquisition strategy is focused on niche-type acquisitions, designed to either complement existing product lines, further the geographic reach of our business or increase our market share. We are primarily interested in acquiring businesses which can benefit from our strong national distribution network, manufacturing technology and marketing expertise. RECENT DEVELOPMENTS On January 5, 2001, G-I Holdings Inc., one of our parent corporations, filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey in Newark, New Jersey due to its asbestos-related bodily injury claims relating to the inhalation of asbestos fiber. We refer to these claims in this prospectus as "Asbestos Claims." G-I Holdings, the successor to GAF Corporation by merger, is a privately-held holding company, and we are its primary operating subsidiary and principal asset. We are not included in the bankruptcy filing. To facilitate administrative efficiency, effective October 31, 2000, GAF Corporation, the former indirect parent of BMCA, merged into its direct subsidiary, G-I Holdings Inc. G-I Holdings Inc. then merged into its direct subsidiary, G Industries Corp., which in turn merged into its direct subsidiary, GAF Fiberglass Corporation. In that merger, GAF Fiberglass Corporation changed its name to GAF Corporation. Effective November 13, 2000, GAF Corporation (formerly known as GAF Fiberglass Corporation) merged into its direct subsidiary, GAF Building Materials Corporation, whose name was changed in the merger to G-I Holdings Inc. G-I Holdings Inc. is now the parent of BMCA and of BMCA's direct parent, BMCA Holdings Corporation. We refer to G-I Holdings Inc. and any and all of its predecessor corporations, including GAF Corporation, G-I Holdings Inc., G Industries Corp., GAF Fiberglass Corporation and GAF Building Materials Corporation, in this prospectus as "G-I Holdings." On December 22, 2000, we completed a series of transactions that included (1) entering into a new $100 million secured credit facility with the lenders under our existing revolving credit facility; (2) amending and restating our existing $110 million revolving credit facility and (3) receiving consents from holders of our outstanding senior notes, including these notes, to certain amendments to the indentures under which those notes were issued. We refer to the new secured credit facility in this prospectus as the "New Credit Agreement" and the amended and restated existing revolving credit facility as the "Existing Credit Agreement." As a result of these transactions, all obligations under the New Credit Agreement and the Existing Credit Agreement, including the obligations under the subsidiary guarantees thereunder, and our obligations under a $7.0 million precious metal note and approximately $3.5 million of obligations under a standby letter of credit, which we refer to in this prospectus collectively as the "Other Indebtedness," are secured by a first-priority lien on substantially all of our assets and the assets of our subsidiaries. We refer to these assets in this prospectus as the "Collateral." The New Credit Agreement and the Existing Credit Agreement have been guaranteed by all of our current and future direct and indirect domestic subsidiaries, other than BMCA Receivables Corporation. In addition, our obligations under our outstanding senior notes, including these notes, are secured by a second-priority lien on the Collateral and have been guaranteed by the subsidiaries that guaranteed the New Credit Agreement and the Existing Credit Agreement. In connection with these transactions, we entered into a security agreement which grants a security interest in the Collateral in favor of the collateral agent on behalf of the lenders under the New Credit Agreement, the Existing Credit Agreement and the Other Indebtedness and the holders of our outstanding senior notes. We also entered into a collateral agent agreement which provides, among other things, for the sharing of proceeds with respect to any foreclosure or other remedy in respect of the Collateral. We refer to these transactions collectively in this prospectus as the "Transactions." For a more detailed description of these transactions, see "The Transactions." * * * Our executive offices are located at 1361 Alps Road, Wayne, New Jersey 07470 and our telephone number is (973) 628-3000. Industry information is based upon our estimates and data from the Asphalt Roofing Manufacturers Association. SUMMARY OF THE TERMS OF THE NOTES On July 5, 2000, we completed the private placement of $35,000,000 aggregate principal amount of our 10 1/2% Senior Notes due 2002. In connection with the private placement, we entered into a registration rights agreement with BNY Capital Markets, Inc., as the initial purchaser, in which we agreed, under certain circumstances, to file for the benefit of holders of the notes a shelf registration statement covering public resales of the notes. In connection with completing the Transactions, we amended that registration rights agreement, and the maturity of these notes was extended to September 18, 2003. See "The Transactions." This prospectus is part of that shelf registration statement, and the notes being offered hereby are those initially sold by us in the private placement. Issuer........................ Building Materials Corporation of America. Issue......................... $35,000,000 aggregate principal amount of Series A 10 1/2% Senior Notes due 2003. The notes are being offered by BNY Capital Markets, Inc., the selling noteholder. Maturity...................... September 18, 2003. Interest Payment Dates........ The notes will pay interest in cash at a rate of 10 1/2% per annum, payable on January 1, April 1, July 1 and October 1, commencing April 1, 2001. Original Issue Discount....... Each note was issued at a meaningful discount from its stated principal amount. You will be required to include amounts in gross income for federal income tax purposes in advance of the receipt of the cash to which the income is attributable. See "Material U.S. Federal Income Tax Consequences." Change of Control Put and Call.......................... Upon a change of control you will have the right to require us to purchase your notes at a purchase price equal to 101% of their aggregate principal amount on the date of repurchase, plus any accrued and unpaid interest. After the expiration of your right to require us to repurchase your notes, we will have the option to purchase all of the outstanding notes at a purchase price equal to 100% of their aggregate principal amount, plus the applicable premium, together with any accrued and unpaid interest to the purchase date. We cannot otherwise redeem the notes. See "Description of the Notes -- Certain Definitions" for the definitions of change of control and applicable premium. Guarantees.................... The notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis by all of our current and future direct and indirect domestic subsidiaries, other than BMCA Receivables Corporation. We refer to these subsidiaries in this prospectus as the "Guarantors." See "Description of the Notes -- Guarantees." Security...................... BMCA's obligations under the notes (and the guarantees thereunder) are secured by a second-priority lien on the Collateral. After the obligations under the Existing Credit Agreement, the New Credit Agreement and the Other Indebtedness (or any facilities used to refinance all or part of any of them) are paid in full, the Collateral will be released and the notes will no longer be secured by the Collateral, subject to limited exceptions. For a more detailed description of the security, see "Description of the Notes -- Security." Ranking....................... The notes are BMCA's senior obligations. The notes rank equally with BMCA's 7 3/4% Senior Notes due 2005, 8 5/8% Senior Notes due 2006, 8% Senior Notes due 2007 and 8% Senior Notes due 2008. We refer to these other senior notes in this prospectus as the "Other Senior Notes" and together with these notes, the "Senior Notes." The Senior Notes are subordinated to our obligations under the New Credit Agreement, the Existing Credit Agreement and the Other Indebtedness to the extent of the Collateral securing all of those obligations. As of December 31, 2000, the notes were subordinated to approximately $119.3 million of debt obligations under the New Credit Agreement, the Existing Credit Agreement and the Other Indebtedness. Certain Covenants............. Subject to some restrictions contained in the New Credit Agreement, the Existing Credit Agreement and the indentures governing the Senior Notes, we may incur additional debt, including secured debt. The restrictions on our ability to incur additional secured debt contained in the indentures governing the Other Senior Notes are substantially similar to those contained in the indenture governing these notes. The indentures governing our Senior Notes, including these notes, however, permit the incurrence of additional debt, including secured debt, that would otherwise be prohibited under the indentures if such debt would have been permitted to be incurred under the New Credit Agreement and the Existing Credit Agreement as each such agreement was in effect on December 22, 2000. The New Credit Agreement and the Existing Credit Agreement include financial covenants and a specific debt limitation covenant that, unlike the indentures, restrict our ability to incur debt regardless of our interest coverage ratio. In addition to the limitation on incurring indebtedness described above, the indenture governing the notes contains covenants which, among other things and subject to certain exceptions, restrict our ability to: - make certain payments and dividends; - issue capital stock of certain of our subsidiaries; - issue guarantees; - enter into transactions with stockholders and affiliates; - create liens; - sell assets; and - consolidate or merge with, or sell all or substantially all of our assets to, another person. Form of Notes................. The notes will be represented by one or more global securities deposited with The Bank of New York for the benefit of The Depository Trust Company. You will not receive notes in certificated form unless one of the events set forth under the heading "Description of the Notes -- Form of Notes" occurs. Instead, beneficial interests in the notes will be shown on, and transfer of these interests will be effected only through, records maintained in book-entry form by The Depository Trust Company with respect to its participants. Use of Proceeds............... We will not receive any cash proceeds from the resale by the selling noteholder of the notes. This prospectus fulfills our obligation under the registration rights agreement between BNY Capital Markets, Inc., as the initial purchaser of the notes, and us. SUMMARY FINANCIAL DATA We derived the summary consolidated financial data in the following table from our Consolidated Financial Statements beginning on page F-1. The results for the year ended December 31, 1998 include the results of the LL Building Products Inc. business from its date of acquisition (June 1, 1998), including net sales of $53.3 million, and the results for the year ended December 31, 2000 include the results of the LL Building Products Inc. security products business, certain assets of which we sold in September 2000, including net sales of $22.9 million. See Note 4 to Consolidated Financial Statements. The pro forma operating data is intended to give you a better picture of what our business would have looked like if the following transactions had each occurred on January 1, 2000: - the issuance of the notes; - the repayment of our $31.9 million bank term loan; and - the sale of certain assets of the security products business of LL Building Products Inc. The pro forma financial information does not project the financial position or the results of operations for any future period or represent what the financial position or results of operations would have been if the transactions described above had been completed at the date indicated. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------- 1998 1999 2000 -------- -------- -------- (MILLIONS) <S> <C> <C> <C> OPERATING DATA: Net sales.......................................... $1,088.0 $1,140.0 $1,207.8 Operating income(1)................................ 47.5 83.1 63.9 Interest expense................................... 50.0 48.3 53.5 Income (loss) before income taxes and extraordinary losses.......................................... 13.5 40.2 (17.2) Income (loss) before extraordinary losses.......... 8.4 25.3 (10.8) Net income (loss).................................. (9.8) 24.0 (11.2) </TABLE> <TABLE> <CAPTION> DECEMBER 31, 2000 ----------------- (MILLIONS) <S> <C> BALANCE SHEET DATA:(2) Cash and cash equivalents................................. $ 82.7 Total working capital..................................... 129.9 Total assets.............................................. 771.2 Long-term debt less current maturities.................... 674.7 Total stockholders' deficit............................... (77.9) </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------- 1998 1999 2000 ------- ------- ------- (MILLIONS, EXCEPT RATIO DATA) <S> <C> <C> <C> OTHER DATA: Depreciation........................................... $ 28.9 $ 33.0 $ 36.4 Goodwill amortization.................................. 2.1 2.0 2.0 Capital expenditures and acquisitions.................. 134.5 45.8 61.5 Cash flow from: Operating activities................................ 56.9 82.5 41.1 Investing activities................................ (30.6) 2.3 29.2 Financing activities................................ (14.2) (53.9) (43.4) EBITDA(3).............................................. 94.7 124.2 75.5 Ratio of earnings to fixed charges(4).................. 1.2x 1.7x 0.7x Ratio of EBITDA to interest expense(3)................. 1.9x 2.6x 1.4x </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2000 (UNAUDITED) -------------------- (MILLIONS, EXCEPT RATIO DATA) <S> <C> PRO FORMA OPERATING DATA:(5) Adjusted EBITDA(6)........................................ $ 58.0 Interest expense.......................................... 54.1 Loss before extraordinary losses.......................... (11.2) Ratio of earnings to fixed charges(4)..................... 0.7x Ratio of Adjusted EBITDA to interest expense(6)........... 1.1x </TABLE> --------------- (1) Operating income for the years ended December 31, 1998, 1999 and 2000 includes $27.6, $2.7 and $15.0 million, respectively, of one-time charges and a gain on sale of assets of $17.5 million in 2000. See Notes 4 and 5 to Consolidated Financial Statements. (2) See "Capitalization" and Note 11 to Consolidated Financial Statements. (3) EBITDA is calculated as income before income taxes and extraordinary items, increased by interest expense, depreciation, goodwill and other amortization. As an indicator of our operating performance, EBITDA should not be considered as an alternative to net income or any other measure of performance under generally accepted accounting principles. (4) For purposes of these computations, earnings consist of income before income taxes plus fixed charges and extraordinary items. Fixed charges consist of interest on indebtedness, including amortization of debt issuance costs, plus that portion of lease rental expense representative of interest, estimated to be one-third of lease rental expense. (5) The net effect of the pro forma adjustments was to increase our pro forma loss before income taxes and extraordinary losses by $0.7 million for the year 2000. As a result, our pro forma income tax benefit increased by $0.2 million for the year 2000 based on an effective marginal income tax rate of 37%. (6) The Adjusted EBITDA data are being presented because this information relates to debt covenants under the indentures governing our Senior Notes. You should refer to these indentures for further information. Excluded from the Adjusted EBITDA calculation is $0.3 million in extraordinary losses, net of related income tax benefits, related to the repayment of our $31.9 million bank term loan. The details of the calculations of Adjusted EBITDA are set forth below: <TABLE> <CAPTION> PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2000 2000 (UNAUDITED) ------------ ------------ (THOUSANDS) <S> <C> <C> Income (loss) before income taxes and extraordinary losses*.......................................... $(17,186) $(17,841) Add: Interest expense................................. 53,468 54,123 Goodwill and other amortization.................. 2,866 2,866 Depreciation..................................... 36,350 36,350 Gain on sale of assets........................... -- (17,505) -------- -------- Adjusted EBITDA.................................... $ 75,498 $ 57,993 ======== ======== </TABLE> --------------- * The adjustments to reconcile historical and pro forma income before income taxes and extraordinary losses reflect the adjustments to interest expense to reflect the issuance of the notes, the repayment of our $31.9 million term loan and the gain on sale of certain assets of the security products business of LL Building Products Inc. as if each of those transactions had occurred January 1, 2000. These adjustments are as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2000 (UNAUDITED) ------------ (THOUSANDS) <S> <C> Historical income (loss) before income taxes and extraordinary losses...................................... $(17,186) Pro Forma adjustments: Interest expense on the notes............................. (4,113) Reduction of interest expense recorded on the notes....... 2,167 Reduction of interest expense for $31.9 million bank term loan................................................... 1,291 -------- Pro Forma loss before income taxes and extraordinary losses.................................................... $(17,841) ======== </TABLE>

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+ PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus or incorporated in this prospectus by reference. You should read the entire prospectus carefully, including the "Risk Factors" section beginning on page 4 and our financial statements, before making an investment decision. We design, develop and market a variety of data and network security software products. These products use biometric technologies to more securely and conveniently identify and authenticate users on personal computers, workstations, the Internet and servers in networked computer systems. Biometric technologies identify computer users by electronically capturing a specific biological characteristic of an individual, such as a fingerprint, voice or facial shape, and creating a unique digital identifier from that characteristic. That identifier is then matched against users seeking access to information and transactions. We were organized on October 23, 1991 and were the surviving corporation following the completion of a merger on February 20, 1992 with Topsearch, Inc., a publicly traded company. Our principal executive office is located at 11911 N.E. 1st Street, Suite B-304, Bellevue, WA 98005-3032 and our telephone number is (425) 278-1100. List of Exhibits. <TABLE> <CAPTION> Exhibit No. Description ------- ----------- <C> <S> 3.1.1 Articles of Incorporation, as amended to date, of SAFLINK Corporation ("SAFLINK") (incorporated by reference to Exhibit 3.1 of SAFLINK's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). 3.1.2 Certificate of Amendment to Certificate of Incorporation of SAFLINK, dated as of July 2, 1996 (incorporated by reference to Exhibit 3.3 of SAFLINK's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 3.1.3 Certificate of Amendment to Certificate of Incorporation of SAFLINK, dated as of May 26, 1998 (incorporated by reference to Exhibit 3.4 of SAFLINK's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 3.1.4 Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 3.1.1 of SAFLINK's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 3.1.5 Certificate of Amendment to Certificate of Incorporation of SAFLINK, dated as of November 10, 1999 (incorporated by reference to Exhibit 3.1.1 of SAFLINK's Quarterly Report on Form 10-Q for the period ended September 30, 1999). 3.1.6 Certificate of Amendment to Certificate of Incorporation of SAFLINK, dated May 20 1999 (incorporated by reference to Exhibit 3.5 of SAFLINK's Registration Statement on Form S-3, filed on January 19, 2001). 3.1.7 Certificate of Amendment to Certificate of Incorporation of SAFLINK, dated as of March 16, 2001 (incorporated by reference to Exhibit 3.1.4 of SAFLINK's Annual Report on Form 10-K for the year ended December 31, 2000). 3.1.8 Certificate of Amendment to Certificate of Incorporation of SAFLINK, dated October 9, 2001.* 3.1.9 Certificate of Amendment to Certificate of Incorporation of SAFLINK, dated as of November 19, 2001. 3.2 By-laws of SAFLINK (incorporated by reference to Exhibit 3.3 of SAFLINK's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). 4.1 Certificate of the Voting Powers, Designations, Preferences, Rights Qualifications, Limitations and Restrictions of the Series A Preferred Stock of SAFLINK (incorporated by reference to Exhibit 4.1 of SAFLINK's Quarterly Report Form 10-Q for the period ended March 31, 1992). 4.2 Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional, and Other Special Rights and the Qualifications, Limitations, Restrictions, and Other Distinguishing Characteristics of Series B Preferred Stock (incorporated by reference to Exhibit 3 to SAFLINK's Current Report on Form 8-K, dated February 1, 1996). 4.3 Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional, and Other Special Rights and the Qualifications, Limitations, Restrictions, and Other Distinguishing Characteristics of Series C Preferred Stock (incorporated by reference to Exhibit 3 to SAFLINK's Current Report on Form 8-K, dated February 6, 1997). 4.4 Certificate of the Voting Powers, Designations, Preferences, Rights, Qualifications, Limitations and Restrictions of the Series A Preferred Stock of SAFLINK (incorporated by reference to Exhibit 4.1 of SAFLINK's Quarterly Report on Form 10-Q for the period ended March 31, 1997). 4.5 Certificate of Designation, Preferences and Rights of Series D Preferred Stock (incorporated by reference to Exhibit 4 of SAFLINK's Current Report Form 8-K, dated November 12, 1999). 4.6 Certificate of Designation, Preferences and Rights of Series E Preferred Stock, dated as of June 5, 2001 (incorporated by reference to Exhibit 4.3 of SAFLINK's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000). </TABLE> THE OFFERING <TABLE> <C> <S> Common stock to be offered by the selling stockholders.................. 15,943,512 shares Common stock outstanding as of December 3, 2001............................... 4,555,559 shares Common stock issuable upon conversion or exercise of outstanding convertible securities............................ 13,863,708 shares Use of proceeds........................ We will not receive any proceeds from the sale of common stock covered by this prospectus. We will receive approximately $13.2 million if the warrants are fully exercised, subject to changes in the exercise price of these warrants resulting from the anti-dilution provisions of the warrants or modifications in the exercise price of the warrants as authorized by us. Pink Sheets and OTC Electronic Bulletin Board symbol.......................... SFLK </TABLE> <TABLE> <CAPTION> Exhibit No. Description ------- ----------- <C> <S> 4.7 Subscription Agreement by and between SAFLINK and RMS Limited Partnership dated November 9, 1999 (incorporated by reference to Exhibit 10 of SAFLINK's Form 8-K filed on November 12, 1999). 4.8 Subscription Agreement by and between SAFLINK and Home Shopping Network Inc., dated April 28, 1992 (incorporated by reference to Exhibit 4.3 of SAFLINK's Registration Statement on Form S-3, filed on January 19, 2001). 4.9 Warrant issued to Carr Redmond Corporation, dated May 18, 2000 (incorporated by reference to Exhibit 4.5 of SAFLINK's Form S-3 (333- 54084)) 4.10 Warrant issued to Anovea, Inc., dated September 18, 2000 (incorporated by reference to Exhibit 4.6 of SAFLINK's Form S-3 (333-54084)) 4.11 Warrant issued to Solthree Software Corporation, dated July 25, 2000 (incorporated by reference to Exhibit 4.7 of SAFLINK's Form S-3 (333- 54084)) 4.12 Form of Warrant issued to Bridge Lenders, dated November 13, 2000.* 5 Opinion of Baker & McKenzie regarding legality of shares. 10.1 Stock Purchase Agreement, dated as of April 28, 1992, by and between Home Shopping Network and SAFLINK (incorporated by reference to Exhibit 10.2 of SAFLINK's Quarterly Report on Form 10-Q for the period ended March 31, 1992). 10.2 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 of the SAFLINK's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). 10.3 Option Agreement, dated as of July 17, 1993, by and between SAFLINK and J. Anthony Forstmann (incorporated by reference to Exhibit 10.9 of SAFLINK's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). 10.4 Stock Purchase Agreement, dated as of March 14, 1995, by and among SAFLINK, RMS Limited Partnership ("RMS") and Francis R. Santangelo (incorporated by reference from the Exhibits to SAFLINK's Report on Form 8-K, dated March 14, 1995). 10.5 Stock Option Agreement, dated as of March 14, 1995, by and between SAFLINK and RMS (incorporated by reference from the Exhibits to SAFLINK's Report on Form 8-K, dated March 14, 1995). 10.6 Stock Option Agreement, dated as of March 14, 1995, by and between SAFLINK and Francis R. Santangelo (incorporated by reference from the Exhibits to SAFLINK's Report on Form 8-K, dated March 14, 1995). 10.7 Stockholders' Voting Agreement, dated as of March 14, 1995, by and between J. Anthony Forstmann and RMS (incorporated by reference from the Exhibits to SAFLINK's Report on Form 8-K, dated March 14, 1995). 10.8 Agreement to Terminate Stock Option Agreement, dated as of March 14, 1995, by and between J. Anthony Forstmann and the Company (incorporated by reference to Exhibit 10.16 of SAFLINK's Amendment to the Annual Report on Form 10-K/A for the fiscal year ended December 31, 1995). 10.9 Convertible Preferred Stock Purchase Agreement, dated as of January 31, 1997, by and among SAFLINK, Clearwater Fund, IV, LLC and JNC Opportunity Fund Ltd. (incorporated by reference to Exhibit 10.1 of SAFLINK's Report on Form 8-K, dated February 6, 1997). 10.10 Form of Warrant, dated February 5, 1997* 10.11 Form of Warrant, dated July 23, 1999* </TABLE>

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+ PROSPECTUS SUMMARY This summary highlights information found in greater detail elsewhere in this prospectus and may not contain all information important to you. In addition to this summary, we urge you to read the entire prospectus carefully, especially the "Risk Factors" and our financial statements and accompanying notes appearing elsewhere in this prospectus. IN THIS PROSPECTUS, THE TERMS "THE PARTNERSHIP," "OUR PARTNERSHIP," "WE," "US," AND "OUR" REFER TO FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, A DELAWARE LIMITED PARTNERSHIP. THE TERM "YOU" AND "YOUR" REFER TO A HOLDER OF UNITS AS OF SEPTEMBER 30, 2001 (THE "RECORD DATE"). FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP We were formed on August 23, 1989 to acquire and operate 50 Fairfield Inn by Marriott properties ("inns") in 16 states, which compete in the economy segment of the lodging industry. We lease the land underlying 32 of our inns from Marriott International, Inc. ("Marriott International") and some of its affiliates. Our executive offices are located at 7 Bulfinch Place, Boston, MA 02114. The telephone number of our general partner is (617) 570-4600. RECENT DEVELOPMENTS As of August 16, 2001, holders of a majority of the units consented to the amendment of our partnership agreement as part of a restructuring plan. As part of the plan, on that date AP-Fairfield GP, LLC, a Delaware limited liability company, replaced our old general partner, FIBM One LLC. Upon the closing of this offering, our general partner will implement each of the following additional steps of the restructuring plan: o retain Sage Management Resources III, LLC ("Sage") as the new manager for our inns. Sage has extensive experience in managing limited service hotels similar to our inns (see "Business - New Manager for our Inns" and "- New Management Agreements"); o execute a new franchise agreement with Marriott International for each inn (see "Business - New Franchise Agreements"); and o amend the ground leases underlying 32 of our inns (see "Business - Ground Lease Modifications"). THE OFFERING Notes Offered....................... Subordinated Notes due 2007 in the aggregate principal amount of $23,000,000. Subscription........................ We will distribute to each limited partner of record as of September 30, 2001, a non-transferable subscription form to purchase The date of this Prospectus is October __, 2001 YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, NOTES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS TO THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE NOTES. notes in the principal amount of $275 for each unit owned. No Over-Subscription Right.......... You will not be entitled to subscribe for notes not purchased by other limited partners. Subscription Commitment............. An affiliate of our general partner has agreed to purchase all notes not purchased by limited partners in this offering. No fee will be paid to the affiliate for its agreement. Subscription Price.................. 100% of the principal amount of the notes. Expiration Date..................... November 20, 2001, at 5:00 p.m., New York City time. Procedure for Subscription.......... You must complete and return the subscription form accompanying this prospectus, together with payment for the notes for which you subscribe. Termination of Offering............. The general partner intends to use reasonable efforts to negotiate the new management agreement, franchise agreement and ground lease modification agreement, discussed under "Business", to incorporate the terms described in that section and such other terms which may be satisfactory to it so as to implement this offering. The general partner may not be successful in these negotiations. Furthermore, other factors affecting economic conditions, including the destruction of the World Trade Center on September 11, 2001, may prevent the implementation of these agreements and this offering. In such event, we may terminate this Offering and return to the limited partners the payments sent by them to us to subscribe for the notes. Use of Proceeds..................... We anticipate using the net proceeds from this offering for capital expenditures and working capital. Maturity Date....................... December 1, 2007; the maturity date may be extended at our request with the consent of the holders of at least a majority of the aggregate principal amount of the outstanding notes. Interest ........................... The initial interest rate will be 16.5% per annum. Such rate shall increase by 1% per annum on each January 1, commencing on January 1, 2003, if the notes are outstanding on each such date. Interest on the notes is payable on the first day of each month, commencing on January 1, 2002. If an interest payment is not made when due as a result of the subordination agreement discussed under "Risks of the Offering" below, the interest shall accrue, be compounded monthly and shall be due on the next interest payment date, subject to further deferral as a result of the subordination agreement. Principal........................... The principal amount of the notes shall be due on the maturity date; provided, however that our partnership shall be required to prepay the principal amount, pro rata, from funds otherwise distributable to the partners under TABLE OF CONTENTS Page PROSPECTUS SUMMARY...........................................................1 RISK FACTORS.................................................................6 NOTE REGARDING FORWARD-LOOKING STATEMENTS...................................13 USE OF PROCEEDS.............................................................14 DISTRIBUTIONS...............................................................14 SELECTED FINANCIAL DATA.....................................................15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................17 BUSINESS....................................................................23 MANAGEMENT..................................................................32 PRINCIPAL EQUITYHOLDERS.....................................................34 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................34 DESCRIPTION OF OFFERING.....................................................34 DESCRIPTION OF NOTES........................................................36 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS..............................40 LEGAL MATTERS...............................................................43 EXPERTS.....................................................................43 WHERE YOU CAN FIND MORE INFORMATION.........................................43 INDEX TO FINANCIAL STATEMENTS..............................................F-1 -------------------- our partnership agreement. The notes may be prepaid at any time without penalty or premium. Exit Fee ........................... Upon payment in full of the principal amount of the notes and accrued and unpaid interest thereon, an additional payment will be made to each holder of notes of his pro rata share of an amount equal to the product of (a) the greater of (i) $23,000,000 and (ii) the principal and accrued and unpaid interest outstanding at the time of such payment, and (b) the difference between (i) the interest rate on the notes when they are paid in full and (ii) the lesser of 30 day LIBOR and the 5 year United States treasury rate on the date of such payment, multiplied by the years or portion thereof that the principal amount has been outstanding. Subordination ...................... Principal and interest payments on the notes may be made only out of cash available to our partnership after the payment of ground rent, operating expenses, franchise fees, management fees, mortgage debt service, and the funding of capital expenditures and reserves. Security ........................... The notes are unsecured. However, if the notes are not paid in full on or before the maturity date, our partnership shall, at the request of the holders of a majority in outstanding principal amount of the notes, grant to the holders of all of the notes, a security interest in all of our inns, accounts receivable, cash accounts and certain other assets of our partnership. Such security interest shall be subordinate to our mortgage debt outstanding at the time. Form of Notes....................... The notes will be evidenced by a registered note payable to the order of and delivered to each subscriber. Events of Default................... The following will be events of default for the notes: o we fail to pay the outstanding principal of the notes on the maturity date; o we fail to pay accrued and unpaid interest on the notes when cash is available for such payment (see "Subordination" above) and the failure continues for 30 days; o we fail to pay accrued and unpaid interest on the notes on the maturity date; and o events of bankruptcy, insolvency or reorganization with respect to us. SUMMARY FINANCIAL DATA You should read the following financial data in conjunction with, and is qualified by reference to, our financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The following table presents selected historical financial data for each of the five years in the period ended December 31, 2000 and the twenty-four week periods ended June 15, 2001 and June 16, 2000. This data has been derived from our audited financial statements for each of the five years in the period ended December 31, 2000 and from our unaudited historical financial data for the twenty-four week periods ended June 15, 2001 and June 16, 2000. Summary Financial Data (in thousands, except per unit amounts) <TABLE> <CAPTION> Twenty-four Weeks Ended Fiscal Year ----------------------- ------------------------------------------------------------------------- June 15, June 16, 2001 2000 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- (unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: ---------------------- Revenues .................... $ 39,711 $ 42,040 $ 91,478 $ 93,084 $ 94,370 $ 95,721 $ 97,441 Operating profit (loss) ................... 1,658 1,493 (2,848) 3,885 (522) 11,963 17,316 Net income (loss) ........... (3,810) (4,096) 8,709(a)(b) (8,552)(b) (12,999)(b) (1,411) 1,420 Net income (loss) per limited partner unit (83,337 units) ............ (45) (49) 103 (102) (154) (17) 17 Balance Sheet Data: ------------------- Total assets ................ $ 142,968 $ 158,299 $ 147,082 $ 163,574 $ 173,064 $ 185,503 $ 184,992 Total liabilities ........... 160,107 184,434 160,411 185,612 186,550 185,990 183,226 </TABLE> ------------------------------- (a) Net income in fiscal year 2000 included the recognition of an extraordinary gain on the forgiveness of incentive management fees of $23.5 million. (b) Net income (loss) in fiscal years 2000, 1999 and 1998 included the recognition of impairment charges on the partnership's inns of $8.1 million, $2.8 million and $9.5 million, respectively.

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+ PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and may not contain all of the information that you should consider before investing in our common stock. You should read carefully this entire prospectus, including "Risk Factors" and our consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. In addition, we incorporate by reference important business and financial information in this prospectus. OUR COMPANY We are a supplier and formulator of branded natural health, herbal and nutritional supplements designed and formulated to address the dietary needs of the general public. Our products are produced primarily from natural ingredients and are formulated for the purposes of achieving specific dietary or nutritional goals. We develop and market natural remedies for weight loss, pain relief, cholesterol control and other specific health and nutrition needs. All of our products are natural nutritional supplements are subject to regulation under the Dietary Health Supplement & Education Act of 1994, or DHSEA. Our products are widely distributed through mass market retailers such as GNC, Wal-Mart, Rite-Aid, Costco, Eckerd and Walgreens, in over 7,500 health food stores either directly or through distributors, and internationally through distributors in over 20 countries. Our portfolio of branded products includes, but is not limited to, Nature's Secret, Diet System 6, PhenSafe, Harmony Formulas, Dr. Linus Pauling Vitamins and Inholtra Natural Pain Relief among others. We have registered numerous trademarks and have pending trademark applications domestically and worldwide relating to our branded products, including without limitation, Bar Bites , BurnMore , Candistroy , Cellulite Burner , Crave Less , Diet System 6 , Endurance Energy , Evening Multi , Fulfill , Ginkgo Smart , Ginza-Plus , Harmony Formulas and Design , Home Nutrition , Inholtra , Liver Support , Marital Arts Nutrition , Memory Sharp , Mind Energy , Morning Multi , Nature's Secret , Parastroy , PhenSafe , Redo , Rezyme , Super Cleanse , System-Six , The New Grapefruit Diet , Thinsolution , Ultimate Breakfast , Ultimate Cleanse , Veroxin-7 and Yohimbe-Plus . Omni Nutraceuticals, Inc. and our logo are also registered trademarks of Omni Nutraceuticals, Inc. The nutrition industry is primarily comprised of companies that manufacture, distribute and/or sell: - vitamins, minerals and meal supplements, or VMS; - herbals and botanicals; - sports nutrition; - natural personal care products; and - natural foods including organics. In the last several years, public awareness of the positive effects of vitamins and nutritional supplements on good health has been heightened by widely publicized reports of scientific findings supporting such claims. The rise and acceptance of alternative medicine has greatly contributed to increased sales of nutritional supplements. Because the market for these products represents a rapidly evolving industry, one that is growing at a nearly double-digit rate, it is anticipated that sales will increase for the foreseeable future. On June 11, 2001, we have filed a registration statement with respect to the 6,000,000 shares of common stock underlying the Series A Convertible Preferred stock based on the assumed conversion price of $0.50 per share, and an additional 650,000 shares of common stock underlying warrants issued in connection with the sale of the Series A Convertible Preferred stock. We may have to file additional registration statements with respect to the Series A Convertible Preferred stock in the event that the 6,000,000 shares of common stock are not sufficient to convert all of the related shares of Series A Convertible Preferred stock. On June 21, 2001, we issued 1,572,682 shares of our common stock in connection with the conversion of 200 shares of Series A Convertible Preferred stock. OTHER SECURITIES ISSUANCES COMMON STOCK Directors, Officers and Consultants. During the year ended December 31, 2000, we issued 1,780,500 shares of common stock at a weighted average exercise price of $2.38 per share, and options to purchase approximately 1,925,000 shares of common stock to certain of our directors, executive officers and consultants. 55,000 of these shares of our common stock were issued as compensation to officers and directors and one former director. In October 1999, a former Chief Executive Officer and shareholder of the Company returned 941,436 shares to the Company as a contribution to capital . Vendors and Trade Creditors. In separate agreements, several of the Company's trade creditors agreed to convert a portion of their debt in exchange for common stock of the Company and to accept a substantially reduced cash payment for the balance of the obligation of the Company. During the year ended December 31, 2000, $1,431,000 of accounts payable was converted in exchange for 599,905 shares of common stock at a weighted average conversion price of $2.38 per share. These conversions were performed at a rate consistent with the trading price of the Company's common stock at the date of the conversion. During the year ended December 31, 2000, the Company issued an additional 215,500 shares of common stock to various vendors for services rendered. The aggregate value recorded by the Company was approximately $378,000, which represents either the fair market value of the shares, or the services rendered, whichever was more readily determinable. These amounts were recognized as expenses as the services were performed. In October 1999, we issued 13,000 shares of common stock to its previous facility landlord in lieu of cash for one month's rent due. We recorded expense of $19,000 in connection with the issuance of these shares. Legal Settlements. During the year ended December 31, 2000, we issued 363,636 shares of common stock at a weighted average exercise price of $3.30 per share in connection with a legal settlement. During the year ended December 31, 1999, we entered into a Settlement Agreement and Mutual Release with a former consultant pursuant to which the parties released each other from their obligations set forth in his consulting agreement. In consideration for such release, we issued 10,000 shares of common stock and warrants to purchase 62,500 shares at a per share price of $4.00. The consultant was granted piggyback registration rights with respect to the shares and options issued to him. These securities are being registered in a registration statement of which this prospectus forms a part. Institutional Equity Corporation. On October 30, 2000, we entered into an agreement with Institutional Equity Corporation, or IEC, to serve as our financial consultant for the purpose of determining investor interest in a private offering of our securities for gross proceeds of up to $20,000,000. As compensation for entering into the agreement, the Company issued 150,000 shares of its common stock and recorded a charge to operations of $205,000. IEC is entitled to a minimum fee of $25,000, which is payable in 16,667 shares of our common stock. IEC will be entitled to a consulting fee equal to 10% of the gross proceeds of any monies it raises and a 2% non-accountable expense allowance to be paid in common stock. Additionally, IEC will be entitled to receive warrants equal to 10% of the securities sold in the offering, exercisable at 100% of the offering price. The aging of the "baby boom" generation, combined with consumers' tendency to purchase more dietary supplements as they age, has been an important source of growth for the VMS segment of the nutritional industry. There will be a significant expansion of the population segment of 40 years and over in the next decade, and this segment displays the highest usage of vitamins and other supplements. The nationwide trend toward preventive medicine in response to rising healthcare costs has been an underlying driver for this industry. There has been a heightened awareness and understanding of preventive medicine and the connection between vitamins and health amongst the general public, health care professionals, employers, government agencies, and managed care organizations. Issues regarding preventive care and the benefits of vitamins and dietary supplements have received widespread media coverage. Our point of sale advertising is designed to convey the effectiveness of our products. We have established our reputation with retailers through quality products, timely delivery and superior packaging. Through our ability to position products in the marketplace and our strong reputation, we have been able to secure favorable shelf spacing from many of our retail customers. Our sales, marketing and distribution infrastructure is designed to integrate new brands with minor incremental costs and synergistic potential. Recent limitations in capital, however, have limited the amount of advertising to point of sale displays. Historically, we have distributed our products though three main segments: mass-market retailers, which accounted for 48.1% of 2000 shipments, specialty health food stores and distributors, which accounted for 28.6% of 2000 shipments and international distribution, which accounted for 23.3% of 2000 shipments. With increased advertising in the future, we should be able to convey the effectiveness of our products. In certain instances, we enter into co-op advertising arrangements with our customers. Our principal executive offices are located at 5310 Beethoven Street, Los Angeles, California 90066. Our telephone number is (310) 306-3636. THE OFFERING Common stock offered by the selling stockholders 6,512,310 shares Common stock outstanding 36,067,061 shares Our common stock is quoted on the NASD Bulletin Board published by the National Quotation Bureau, Inc. under the symbol "ZONE." The above information is based on 36,067,061 shares outstanding as of June 25, 2001 and is based on: - the conversion of 200 shares of Series A Convertible Preferred Stock into 1,572,682 shares of common stock at an exercise price of $0.13 per share; and excludes - 3,037,500 shares of common stock underlying warrants, at an exercise price per share ranging from $0.96 to $6.00; and - 6,730,653 shares of common stock underlying options, at an exercise price per share ranging from $0.25 to $7.25. RISK FACTORS The securities offered hereby are highly speculative and involve a high degree of risk. These factors include, but are not limited to, risks related to our historical lack of profitability, the government regulation of our products, legislative and regulatory restrictions impacting our business operations and industry and the market for the securities offered hereby. Only investors who can afford the loss of their entire investment should make an investment in these securities. Liviakis Financial Communications, Inc. On March 12, 2000, the Company entered into a two year Consulting Agreement with Liviakis Financial Communications, Inc., or LFC and, in connection therewith, authorized the issuance of 1,200,000 restricted shares of Common stock to LFC in consideration of, and as a retainer and prepayment for, the consulting services to be rendered to the Company by LFC. Pursuant to the provisions of the Consulting Agreement, LFC will be entitled to receive a 2.5% finder's fee in connection with any debt or equity financing for the Company from a source introduced to the Company by LFC and a 2% finder's fee in connection with any acquisition by the Company, or its nominee, of a candidate introduced to the Company or its nominee by LFC. The Company also agreed to reimburse LFC for extraordinary expenses incurred by LFC on behalf of the Company with its permission. On March 27, 2000, the Company completed a private placement of its securities through investors provided by LFC whereby 700,000 shares of common stock were sold for an aggregate purchase price of $2,100,000. The original shares issued to LFC have been considered issued in connection with this placement, and the proceeds allocated to the aggregate shares issued. In accordance with the terms of the Consulting Agreement, LFC exercised their option not to continue beyond the first year and, accordingly, returned 400,000 of these shares to the Company in 2001. Consulting Agreement. On January 24, 2000 the Company executed a consulting agreement with a financial consulting firm to assist the Company in marketing its common stock in Europe. The agreement was a one-year agreement that called for the issuance of 560,000 shares of common stock. The fair value of the stock on the day the agreement was executed was approximately $960,000, which was charged to operations as consulting expense. These shares are being registered in a registration statement of which this prospectus forms a part. Spokesperson Agreement. In August 1999, we entered into a three-year agreement with an individual to be the spokesperson for its Inholtra product line. We issued 15,000 shares of common stock and recorded compensation of $36,000 in connection with the issuance of these shares. In addition, the Company granted this individual an option to purchase 75,000 shares of common stock. WARRANTS During the year ended December 31, 2000, we issued warrants with an aggregate value of $1,104,000 to consultants for services. The transactions pursuant to which these warrants were issued are described below. On or about October 2, 2000, we entered into a one year agreement with an investor relation services firm for the provision of certain investor relation services. As compensation, we granted warrants to purchase 100,000 shares of our common stock at an exercise price of $2.50. The value recorded in connection with this transaction amounts to $10,000. On June 28, 2000, we entered into a consulting agreement with an investment banking firm to perform certain financial consulting services. The agreement called for the issuance of 300,000 warrants to purchase our common stock at $4.00 per share and covered a term of six months. The warrants were valued at $747,000 and were amortized as consulting expense over the term of the agreement. On June 28, 2000, we entered into an agreement with an investment bank for the provision of certain investment banking services. In connection with this agreement, we issued seven year warrants to purchase 25,000 shares of our common stock at $4.00 per share. The agreement is for an indefinite term and is terminable upon 30 days prior written notice. On April 20, 2000, we entered into a one year consulting agreement with a financial advisor. The agreement calls for the issuance of warrants to purchase 30,000 shares of common stock at $3.86 per share. The options vest 7,500 at the end of each three months after the initiation of the contract. Related to the agreement, we recorded $78,000 of consulting fees, which is being amortized as consulting expense over the term the services are being provided.

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+ Summary We are a holding company conducting business through our two wholly-owned operating subsidiaries, Cell & Molecular Technologies and Sentigen Corp. Cell & Molecular Technologies is made up of a contract research organization that provides contract research and development services, and a research products organization that provides cell culture media and reagents and other research products to companies engaged in the drug discovery process. Sentigen Corp. is involved in scientific research to develop environmentally sound approaches to prevent insect crop damage and the spread of human diseases by impacting insect behavior. In November 2000, we consummated a private offering in which we sold 863,834 shares of our common stock at $6.00 per share, for aggregate gross proceeds of $5,183,004. This prospectus registers for resale the shares of common stock sold in the November 2000 offering. This prospectus also registers the shares of common stock issuable upon the exercise of a warrant issued in connection with our November 2000 offering. The warrant entitles the holder to purchase 44,810 shares of our common stock at an initial exercise price of $6.00 per share until November 21, 2005. If the warrants are exercised in full, we will receive $268,860 in proceeds. We will use any proceeds obtained from this exercise for working capital and general corporate purposes. In addition, this prospectus registers shares of common stock issued to The Trustees of Columbia University in the City of New York in connection with a license agreement we entered into in April 2000. We were incorporated under the laws of the State of Delaware in May 1990 and, after having engaged in the acquisition and operation of different business entities subsequent to our initial public offering in August 1990, we commenced our current business operations when we acquired Cell & Molecular Technologies by a reverse merger in May 1998. Cell & Molecular Technologies was incorporated on May 6, 1997 to acquire all of the outstanding stock of Specialty Media, Inc. and Molecular Cell Science, Inc., two entities operating in the biotechnology and pharmaceutical industries since 1987 and 1991, respectively. Sentigen Corp. was formed on February 16, 2000. We changed our name to Sentigen Holding Corp. on June 23, 2000. Our ticker symbol on the OTCBB also changed from PCEL to SGHL in June 2000. We maintain our principal executive offices and our laboratory, manufacturing and office/warehouse facilities at 580 Marshall Street, Phillipsburg, New Jersey 08865. Our telephone number is (908) 387-1673. We also maintain a laboratory at 3960 Broadway, New York, New York 10032 and at 418 Industrial Drive, North Wales, Pennsylvania 19454. We also maintain administrative offices at 434 East Cooper Street, Aspen, Colorado 81611.

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+ PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including the risks of purchasing our common stock discussed under the "Risk Factors" section and our financial statements and the related notes. Our Business We are a medical device company focused on developing, manufacturing and marketing screening products for the identification and monitoring of common medical disorders that may occur in the critical developmental period from conception to a baby's first birthday. Currently, we are selling our ALGO products for newborn hearing screening, and, in January 2001, we began commercially marketing our CO-Stat products for the evaluation of jaundice, a potentially toxic condition that can cause the skin to turn yellow. Both of our current product lines are comprised of hardware units and single-use disposable components and both product lines have been cleared for marketing by the United States Food and Drug Administration. We believe our products deliver accurate crib-side results in a rapid and reliable manner, and are simple to use and cost-effective. In addition, our products address policies and guidelines for standard medical practices, known as standard of care guidelines, adopted by the American Academy of Pediatrics, the largest physician group for pediatricians and neonatologists in the United States. Our ALGO products use automated auditory brainstem response technology to enable simple, non-invasive and accurate screening for hearing impairment in newborns. The ALGO screener delivers sound stimuli to a newborn's ears and analyzes brain wave responses to produce a "Pass" or "Refer" result. The screening can be performed within hours after birth. In addition, the ALGO meets the American Academy of Pediatrics' standard of care guidelines without requiring a trained audiologist to operate the equipment. We currently sell our ALGO products in the United States, Europe, Japan, Australia and New Zealand. We believe that there are more than 4,000 birthing and children's hospitals in the United States. Our ALGO products have been installed in at least 1,800 of these facilities. In 1999, we sold disposable supplies to conduct approximately 1.2 million tests, and in 2000, we sold disposable supplies to conduct approximately 1.7 million tests. In addition to ALGO products, we have developed the CO-Stat analyzer that, within hours after birth, enables clinicians to assess the likelihood that serious newborn jaundice will not occur. Jaundice may be a sign of an abnormally high rate of hemolysis, which is the process by which red blood cells in the human body are destroyed. Our CO-Stat analyzers accurately and non-invasively measure the rate of hemolysis by detecting the level of carbon monoxide in exhaled breath. In addition, we are currently investigating the use of the CO-Stat for other conditions, including pregnancy induced hypertension. Although we began commercially marketing our CO-Stat products in January 2001, to date, we have sold our CO-Stat system primarily for clinical research. Our Market Opportunity Early detection of disorders for which treatments are readily available maximizes the possibility of achieving the best outcome for a child and reduces the social impact and the financial cost of treatment and habilitation. Our products address hearing impairment and jaundice, which are among the more common disorders a baby may face after birth. Each year, there are approximately 3.8 million births in the United States, and approximately 10.5 million births in all industrialized countries. Impaired hearing affects up to five babies per 1,000 newborns in the United States. Undetected hearing impairment may result in the failure to learn, process spoken language or speak. The annual cost to society of profound newborn hearing impairment is estimated to be approximately $79 billion in the United States due to increased educational costs, lower lifetime income and higher unemployment. Early identification and habilitation can mitigate the effects of this disorder, regardless of its severity. Recent clinical evidence in support of early detection for hearing impairment combined with the introduction of new technologies has led health organizations, such as the American Academy of Pediatrics, and state governments to endorse universal newborn hearing screening programs. As a result, we estimate that 87% of births in the United States during 2000 occurred in states with mandates or pending mandates for universal newborn hearing screening. In addition, we estimate that hospitals in five other states without mandates screened more than half of newborns in those states. Although universal newborn hearing screening is less prevalent outside the United States, some foreign governments, such as those in Japan, the United Kingdom and regions of Belgium, have begun to implement newborn hearing screening initiatives. We believe a significant opportunity exists in international markets to increase the population of newborns screened for hearing impairment. Jaundice affects over half of all newborns and may be indicative of serious conditions that can result in irreversible brain damage or death. Due to the potentially serious implications of jaundice, the American Academy of Pediatrics recommends that every newborn be closely monitored for jaundice and that physicians should definitively determine the presence or absence of an abnormal rate of hemolysis to establish the appropriate treatment for babies with jaundice. However, since jaundice is most often detected visually more than three days after birth, the need for definitive evaluation is often not established before a newborn's discharge from the hospital. In a 1996 study we commissioned, the Churchill Madison Group estimated that annual inpatient hospital charges for treating neonatal jaundice were approximately $1.3 billion. ---------------- We were incorporated in California on May 26, 1987 under the name Medical Instruments, Inc. On July 10, 1987, we changed our name to ALGOTEK Instruments, Inc., and on September 29, 1988 we changed our name to Natus Medical Incorporated. We acquired the ALGO product line in 1987. We reincorporated in Delaware in August 2000. Our principal executive offices are located at 1501 Industrial Road, San Carlos, California 94070, and our telephone number is (650) 802-0400. Natus(R); 70-40(R); ALGO(R); ALGO 1e(R); ALGO 2(R); ALGO2e; ALGO 2e Color; ALGO Portable; ALGO Databook(R); ALGO DataBook NHS Data Tracking System; CO- Stat(R); CO-Stat End Tidal Breath Analyzer; Dri-Prep(R); Ear Couplers(R); Jelly Button(R); MiniMuffs(R); Duracoupler; AABR; and ALGO 3 are our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <C> <S> Common stock offered by Natus................. 4,500,000 shares Common stock outstanding after this offering.. 14,335,621 shares Use of proceeds............................... To fund international expansion, research and development, manufacturing and customer service activities, the commercial launch of our CO-Stat product, working capital, capital expenditures and potential acquisitions of complementary businesses, products and technologies. Nasdaq National Market symbol................. "BABY" </TABLE> Unless otherwise noted, all information in this prospectus: . assumes no exercise of the underwriters' option to purchase up to 675,000 additional shares of our common stock to cover over-allotments; . reflects a two-for-five reverse split of our common and preferred stock in August 2000; . reflects the conversion of each outstanding share of our convertible preferred stock into one share of common stock, or an aggregate of 8,931,534 shares, concurrently with the completion of this offering; . reflects our reincorporation into Delaware in August 2000; and . assumes the filing of our amended and restated certificate of incorporation authorizing a class of 10,000,000 shares of undesignated preferred stock concurrently with the completion of this offering. The number of shares of common stock to be outstanding immediately after this offering: . is based upon 9,835,621 shares of common stock outstanding as of March 31, 2001 assuming conversion of all convertible preferred stock; . does not take into account 1,623,487 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2001 at a weighted average exercise price of $2.75 per share; . does not take into account 1,500,000 shares of common stock available for future issuance under our 2000 stock option plan; . does not take into account 1,000,000 shares of common stock available for future issuance under our 2000 employee stock purchase plan; and . does not take into account 400,000 shares of common stock available for future issuance under our 2000 director option plan. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> Three Months Years Ended December 31, Ended March 31, ------------------------------------------- ----------------- 1996 1997 1998 1999 2000 2000 2001 ------- ------- ------- ------- ------- ------- -------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues................ $ 6,501 $10,031 $15,884 $19,783 $24,633 $ 4,912 $ 6,318 Cost of revenues*....... 2,567 3,612 5,577 6,624 8,745 1,766 2,428 ------- ------- ------- ------- ------- ------- -------- Gross profit........... 3,934 6,419 10,307 13,159 15,888 3,146 3,890 ------- ------- ------- ------- ------- ------- -------- Operating expenses: Marketing and selling.. 2,828 4,259 6,275 7,684 8,984 2,043 2,945 Research and development........... 962 1,602 2,711 2,457 3,458 743 1,011 General and administrative........ 829 1,231 1,638 2,384 2,586 563 782 Amortization of deferred stock compensation*......... -- -- -- -- 611 27 288 ------- ------- ------- ------- ------- ------- -------- Total operating expenses............. 4,619 7,092 10,624 12,525 15,639 3,376 5,026 ------- ------- ------- ------- ------- ------- -------- Income (loss) from operations............. (685) (673) (317) 634 249 (230) (1,136) Other income, net....... 21 97 118 20 32 19 13 ------- ------- ------- ------- ------- ------- -------- Income (loss) before taxes.................. (664) (576) (199) 654 281 (211) (1,123) Income tax expense...... -- -- -- 10 46 -- 1 ------- ------- ------- ------- ------- ------- -------- Net income (loss)....... (664) (576) (199) 644 235 (211) (1,124) Accretion of redeemable convertible preferred stock.................. 1,079 1,292 1,389 2,085 1,384 346 346 ------- ------- ------- ------- ------- ------- -------- Net loss available to common stockholders.... $(1,743) $(1,868) $(1,588) $(1,441) $(1,149) $ (557) $ (1,470) ======= ======= ======= ======= ======= ======= ======== Basic and diluted net loss per share......... $(16.29) $ (7.62) $ (3.63) $ (2.56) $ (1.62) $ (0.93) $ (1.64) ======= ======= ======= ======= ======= ======= ======== Shares used in computing basic and diluted net loss per share......... 107 245 438 562 710 599 897 Pro forma basic and diluted net loss per share.................. $ (0.12) $ (0.15) ======= ======== Shares used in computing pro forma basic and diluted net loss per share.................. 9,642 9,829 * Amortization of deferred stock compensation included in: Cost of revenues...... $ -- $ -- $ -- $ -- $ 184 $ 10 $ 44 ======= ======= ======= ======= ======= ======= ======== Marketing and selling.............. $ -- $ -- $ -- $ -- $ 157 $ 9 $ 149 Research and development.......... -- -- -- -- 105 6 32 General and administrative....... -- -- -- -- 349 12 107 ------- ------- ------- ------- ------- ------- -------- Operating expenses... $ -- $ -- $ -- $ -- $ 611 $ 27 $ 288 ======= ======= ======= ======= ======= ======= ======== </TABLE> Pro forma basic and diluted net loss per share for the year ended December 31, 2000 and the three months ended March 31, 2001 have been calculated assuming the conversion of all outstanding shares of our convertible preferred stock as of December 31, 2000 and March 31, 2001 into 8,931,534 shares of common stock as if the stock had been converted at the beginning of the respective period. <TABLE> <CAPTION> March 31, 2001 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash equivalents and short-term investments.... $ 940 $ 940 $45,025 Working capital................................ 2,715 2,715 46,800 Total assets................................... 10,842 10,842 54,927 Convertible preferred stock.................... 25,572 -- -- Total stockholders' equity (deficit)........... (19,425) 6,147 50,232 </TABLE> The pro forma balance sheet data reflects the conversion of all outstanding shares of convertible preferred stock as of March 31, 2001 into 8,931,534 shares of common stock upon the closing of this offering. The pro forma as adjusted balance sheet data further reflects the sale of 4,500,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 after deducting estimated underwriting discounts, commissions and offering expenses.

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+ ITEM 3. SUMMARY This summary highlights selected information from this prospectus. It does not contain all of the information that may be important to you. You should carefully read the entire document and the other documents to which we refer for a more complete description of the proposed offering. -------------------------------------------------------------------------------- The Company We are one of the largest chains of double drive-thru restaurants in the United States and we operate under the brands "Checkers(R)" and "Rally's Hamburgers(R)" ("Rally's"). On August 9, 1999, Checkers merged with Rally's. The merger was accounted for as a reverse acquisition whereby Rally's was treated as the acquirer and Checkers as the acquiree, as the former shareholders of Rally's owned a majority of the outstanding common stock of Checkers subsequent to the merger. The 1998, 1997 and 1996 financial information presented herein represents the financial results of Rally's only. The 1999 financial information includes the results of Rally's for the entire year and the financial results of Checkers for the period from August 9, 1999 to January 3, 2000. The 2000 financial information includes both Rally's and Checkers for the full year. On March 26, 2001, there were 424 Rally's restaurants operating in 18 different states and 421 Checkers restaurants operating in 22 different states, the District of Columbia, Puerto Rico and the West Bank in the Middle East. Of the 845 total restaurants, 207 are owned by us, and 638 are owned by franchisees. Three of our restaurants are owned by joint venture partnerships in which we have a 50% to 75% ownership interest. Our restaurants offer high quality food, serving primarily the drive-thru and take-out segments of the quick-service restaurant industry. Checkers commenced operations in April 1986 and began offering franchises in January 1987. Rally's opened its first restaurant in January 1985 and began offering franchises in November 1986. The Offering We issued warrants to purchase 5,100,000 shares or our common stock on May 30, 1997 in connection with the settlement of a lawsuit entitled Richard Lopez, et al., v. Checkers Drive-In Restaurants, Inc., et al. in the U.S. District Court for the Middle District of Florida, Tampa Division, Case No. 94-282-CIV-T-17C. The warrants are immediately exercisable as of the date of this prospectus and expire 30 days thereafter. The shares covered by this prospectus are the shares issuable upon exercise of these warrants, after adjustment for a one-for-twelve reverse stock split which occurred on August 9, 1999. Use of Proceeds We intend to use any net proceeds from the exercise of the warrants for general working capital purposes. Risk Factors An investment in our common stock has significant risks. See "Risk Factors" commencing at page 7. -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA The following table shows our summary financial data. You should read the following summary financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and accompanying notes included elsewhere in this prospectus. Consolidated Statements of Operations (In thousands, except per share amounts) <TABLE> <CAPTION> For the years ended (1) ------------------------------------------------------------------------------- January 1, January 3, December 28, December 28, December 29, 2001 2000 1998 1997 1996 --------------- --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> <C> Total revenues $ 181,190 $ 201,835 $ 144,952 $ 144,930 $ 162,752 Income (loss) from operations (2) 8,051 (17,184) 1,401 3,343 4,041 Income (loss) before extraordinary item 2,571 (26,737) (7,535) (4,516) (3,292) Extraordinary item (3) (229) 849 -- -- 5,280 --------------- --------------- --------------- --------------- --------------- Net income (loss) $ 2,342 $ (25,888) $ (7,535) $ (4,516) $ 1,988 =============== =============== =============== =============== =============== Basic earnings (loss) per share: Income (loss) before extraordinary item $ 0.27 $ (4.02) $ (1.67) $ (1.32) $ (1.17) Extraordinary item (0.02) 0.13 -- -- 1.87 --------------- --------------- --------------- --------------- --------------- Net income (loss) $ 0.25 $ (3.89) $ (1.67) $ (1.32) $ 0.70 =============== =============== =============== =============== =============== Diluted earnings (loss) per share: Income (loss) before extraordinary item $ 0.25 $ (4.02) $ (1.67) $ (1.32) $ (1.17) Extraordinary item (0.02) 0.13 -- -- 1.87 --------------- --------------- --------------- --------------- --------------- Net income (loss) $ 0.23 $ (3.89) $ (1.67) $ (1.32) $ 0.70 =============== =============== =============== =============== =============== Weighted average shares outstanding: Basic 9,419 6,657 4,506 3,434 2,820 =============== =============== =============== =============== =============== Diluted 10,194 6,657 4,506 3,434 2,820 =============== =============== =============== =============== =============== <CAPTION> For the quarter ended -------------------------------- March 26, March 27, 2001 2000 -------------- -------------- <S> <C> <C> Total revenues $ 35,295 $ 52,187 Income (loss) from operations (2) 1,691 1,153 Income (loss) before extraordinary item 843 (534) Extraordinary item (3) - 109 -------------- -------------- Net income (loss) $ 843 $ (425) ============== ============== Basic earnings (loss) per share: Income (loss) before extraordinary item $ 0.09 $ (0.06) Extraordinary item $ - 0.01 -------------- --------------- Net income (loss) $ 0.09 $ (0.05) ============== ============== Diluted earnings (loss) per share: Income (loss) before extraordinary item $ 0.07 $ (0.06) Extraordinary item - 0.01 -------------- --------------- Net income (loss) $ 0.07 $ (0.05) ============== ============== Weighted average shares outstanding: Basic $ 9,744 $ 9,388 ============== ============== Diluted 11,381 9,388 ============== ============== </TABLE> Selected Operating Data (In thousands, except statistical data) <TABLE> <CAPTION> (As of and for the years ended) January 1, January 3, December 28, December 28, December 29, 2001 2000 1998 1997 1996 ------------- -------------- -------------- --------------- ---------------- <S> <C> <C> <C> <C> <C> Systemwide sales (4) $536,511 $ 401,964 $ 286,876 $ 290,133 $ 316,670 ============= ============== ============== =============== ================ Restaurants open at end of period: Company 195 367 226 229 209 Franchised 659 540 249 248 258 ------------- -------------- -------------- --------------- ---------------- Total 854 907 475 477 467 ============= ============== ============== =============== ================ <CAPTION> (As of and for the quarter ended) March 26, March 27, 2001 2000 ------------- ------------- <S> <C> <C> Systemwide sales (4) $ 125,752 $ 141,329 ============= ============= Restaurants open at end of period: Company 207 367 Franchised 638 537 ------------- ------------- Total 845 904 ============= ============= </TABLE> <TABLE> <CAPTION> Consolidated Balance Sheet Data (5) (In thousands) January 1, January 3, December 28, December 28, December 29, 2001 2000 1998 1997 1996 ---------- ---------- ----------- ---------- ----------- <S> <C> <C> <C> <C> <C> Working capital $ (8,990) $ (27,451) $ (4,129) $ (9,825) $ (9,552) Total assets $ 125,998 $ 165,653 $ 123,306 $ 134,297 $ 112,258 Long-term debt and obligations under capital leases, including current portion $ 40,538 $ 80,767 $ 70,307 $ 68,444 $ 69,654 Total stockholders' equity $ 50,934 $ 46,663 $ 34,519 $ 41,513 $ 19,365 <CAPTION> March 26, March 27, 2001 2000 --------- --------- <S> <C> <C> Working capital $ (4,108) $ (30,299) Total assets $ 126,770 $ 157,178 Long-term debt and obligations under capital leases, including current portion $ 41,996 $ 75,481 Total stockholders' equity $ 52,022 $ 46,238 </TABLE> (1) The information presented for the period ending January 3, 2000 (fiscal 1999) reflects the results for Rally's for the full year and only the post merger period from August 10, 1999 to January 3, 2000 for Checkers. Fiscal 1998, 1997 and 1996 includes Rally's only. Fiscal 2000 includes the results of the merged companies. (2) Includes asset impairment charges of approximately $0.6 million, $22.3 million, $3.4 million and $0.8 million for fiscal 2000, 1999, 1998, and 1996, respectively. (3) The extraordinary item for fiscal 2000 represents a loss on early retirement of debt, net of tax expense of $0. The extraordinary items for fiscal 1999 and 1996 represents a gain on the early retirement of debt, net of tax expense of $0 and $1,350, respectively. (4) Systemwide sales consist of aggregate revenues of Company-owned and franchised restaurants (including CKE-operated restaurants). Our consolidated financial statements appearing elsewhere in this prospectus exclude franchised store sales, but include royalties and fees received from our franchisees. (5) The balance sheet presented as of January 1, 2001, January 3, 2000, March 26, 2001 and March 27, 2000 represents the combined balance sheet of the merged entity. All prior periods reflect Rally's only.

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+ SUMMARY The following summary contains information about our company, the offering and the terms of the 2001 Series A Bonds that we believe is important. You should read this entire prospectus, including the financial statements and the accompanying notes, for a complete understanding of our company, the offering and the bonds. This prospectus contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our business and industry. These forward-looking statements involve risks and uncertainties. Actual events or results could differ materially from those described in these forward-looking statements as a result of a variety of factors, some of which are more fully described elsewhere in this prospectus. We undertake no obligation to update any forward-looking statements, even if new information becomes available or other events occur in the future, except as required by law. The Offering Old Dominion................ We are a not-for-profit power supply cooperative based in Glen Allen, Virginia, principally engaged in the business of providing wholesale electric services to our members. Our members include twelve customer-owned electric distribution cooperatives that sell electric services to customers in portions of Virginia, Maryland, Delaware and West Virginia. We have one other member, ODEC Power Trading, Inc. ("ODEC Power Trading"). In this prospectus, the words "we," "us" and "our" refer to Old Dominion Electric Cooperative unless the context indicates otherwise. Securities Offered.......... $220,000,000 principal amount of 2001 Series A Bonds due June 1, 2011 Interest Payment Dates...... June 1 and December 1, commencing December 1, 2001 Redemption.................. We may redeem the 2001 Series A Bonds, in whole or in part, prior to their stated maturity, at our option. The redemption price for the bonds will be equal to the greater of: . 100% of the principal amount of the bonds being redeemed plus accrued interest to the redemption date; and . the sum of the present values of the remaining principal and interest payments on the bonds being redeemed, discounted at a rate equal to the sum of (1) the yield to maturity on the U.S. Treasury security having a life equal to, or the average yield to maturity on two U.S. Treasury securities closely corresponding to, the remaining life of the 2001 Series A Bonds and trading in the secondary market at the price closest to par and (2) twenty basis points; plus, in either case, without duplication, interest due and payable but unpaid on the bonds being redeemed. We may not otherwise optionally or mandatorily redeem the 2001 Series A Bonds. See "DESCRIPTION OF THE BONDS--Make Whole Redemption." Indenture................... We will issue the 2001 Series A Bonds under the Indenture of Mortgage and Deed of Trust, dated May 1, 1992, as amended, with Crestar Bank (predecessor to SunTrust Bank), as trustee (the "Existing Indenture"). We have entered into a supplemental indenture to the Existing Indenture which, when some provisions of it become effective, will amend several provisions of the Existing Indenture. The amendments include: . modification of our rate covenant and restrictions on the issuance of additional bonds and distributions to members; and . elimination of restrictions on investments and short-term indebtedness and the obligation to make depreciation deposits. See "DESCRIPTION OF THE BONDS." These provisions of the supplemental indenture will become effective when the holders of a majority of the obligations outstanding under the Existing Indenture consent to the amendments (the "Amendment Date"). In this prospectus, the Existing Indenture as amended by these provisions of the supplemental indenture on the Amendment Date is referred to as the "Amended Indenture." We also have entered into an Amended and Restated Indenture which, when it becomes effective, will amend and restate the Existing Indenture or the Amended Indenture, as the case may be (the "Restated Indenture"). The Restated Indenture includes all of the amendments set forth in the Amended Indenture and releases the lien of the Existing Indenture or the Amended Indenture, as the case may be. The Restated Indenture will become effective when all obligations under the Existing Indenture issued prior to the 2001 Series A Bonds cease to be outstanding or when the holders of those obligations consent to the release of the lien of the Existing Indenture or the Amended Indenture, as the case may be (the "Release Date"). The Release Date may occur before the Amendment Date and, in that case, the Amended Indenture will not become effective because the Restated Indenture includes all of the amendments set forth in the Amended Indenture. See "DESCRIPTION OF THE BONDS--Release and Substitution of Property Prior to Release Date; Negative Pledge After Release Date." When we refer to the "Indenture" in this prospectus, we mean the Existing Indenture, the Amended Indenture or the Restated Indenture, whichever is in effect. Security for the Bonds...... The 2001 Series A Bonds initially will be secured by a first lien on substantially all of our tangible and some of our intangible properties, including our generating facilities, equally and ratably with all other obligations issued under the Existing Indenture, subject to permitted liens and encumbrances. The first lien will be released on the Release Date. We do not anticipate that the Release Date will occur prior to December, 2003. On the Release Date, the 2001 Series A Bonds will become unsecured general obligations and will rank equally and ratably with all of our other unsecured and unsubordinated obligations, subject to some exceptions described below. See "DESCRIPTION OF THE BONDS-- Security for Payment of the Obligations Prior to Release Date; Conversion to Unsecured Obligations on Release Date." Under the Restated Indenture, we may not create any lien or encumbrance securing borrowed money or the deferred purchase price of property or services on specified properties unless we equally and ratably secure the 2001 Series A Bonds and all other obligations issued under the Restated Indenture. These specified properties consist of substantially all of our real estate, fixtures and tangible personal property primarily used in connection with our generating facilities. We may grant liens or other encumbrances on these specified properties securing borrowed money or the deferred purchase price of property or services in an amount not to exceed at any time the greater of 2% of our total assets and $10 million. The restrictions in the Restated Indenture on the creation of a lien or encumbrance do not apply to our three existing, or to any future, sale and leaseback, lease and leaseback or similar transactions or to liens or encumbrances relating to commodities trading agreements entered into in the ordinary course of business. See "POWER SUPPLY RESOURCES--Clover" and "DESCRIPTION OF THE BONDS--Release and Substitution of Property Prior to Release Date; Negative Pledge After Release Date." Bond Insurance.............. The timely payments of the scheduled principal of and interest on each of the 2001 Series A Bonds will be insured by a financial guaranty insurance policy issued by Ambac Assurance Corporation, which will be issued at the same time the bonds are delivered. As the insurer of the 2001 Series A Bonds, Ambac Assurance Corporation (and not the holders of 2001 Series A Bonds) will be considered the holder of the 2001 Series A Bonds for the following purposes: . approving supplemental indentures or other amendments to the Indenture; . giving any other approval, consent or notice to effect any waiver; . exercising any remedies; and . taking any other action that can be taken by the holders of the 2001 Series A Bonds. See "BOND INSURANCE" and "DESCRIPTION OF THE BONDS--Rights of Insurer." Use of Proceeds............. We expect the net proceeds of this offering to be $ after the payment of underwriting discounts and offering expenses. We will use the net proceeds of this offering to: . make loans to our three wholly owned subsidiaries that are developing three combustion turbine facilities in Virginia and Maryland to finance a portion of the development and construction costs of the facilities; and . repay short-term borrowings under construction-related lines of credit if we use those lines of credit to finance previous loans to the subsidiaries. To the extent that we or the subsidiaries obtain other funds to finance the development and construction costs of the facilities, we will apply the net proceeds of this offering to repay existing indebtedness and, until so applied, to fund other working capital needs. See "PLAN OF FINANCE AND USE OF PROCEEDS." Rate Covenant............... The Existing Indenture obligates us to establish and collect rates that, subject to any necessary regulatory approvals, are reasonably expected to yield margins for interest equal to at least 1.20 times our total interest charges. Under the Amended Indenture and the Restated Indenture, the margins for interest requirement will change to 1.10 times total interest charges. In addition, the calculations of margins for interest and interest charges under the Amended Indenture and the Restated Indenture differ in several respects from the calculations under the Existing Indenture. See "DESCRIPTION OF THE BONDS--Rate Covenant." Additional Obligations...... Prior to the Release Date, as long as we are in compliance with financial tests relating to margins for interest, we may issue additional indebtedness or other obligations under the Existing Indenture or the Amended Indenture. The financial tests under the Amended Indenture are different from the financial tests under the Existing Indenture. The amount of obligations we may issue is based on the cost of specified property acquisitions we have made, the principal amount of Indenture obligations we have retired or defeased, and deposits of cash we have made with the trustee. After the Release Date, we may issue additional indebtedness or other obligations without restriction. See "DESCRIPTION OF THE BONDS--Additional Obligations." Limitations on Distributions to Members................ The Existing Indenture prohibits us from making any distribution, including any dividend or payment or retirement of patronage capital, to our members if we are in default under the Existing Indenture. Otherwise, we are permitted to make a distribution to our members if, after the distribution: . our aggregate margins and equities as of the end of the most recent fiscal quarter would be equal to or greater than 20% of our total long-term debt and equities and the aggregate amount of all distributions after the date on which our aggregate margins and equities first reached 20% of our total long-term debt and equities does not exceed 35% of our aggregate net margins earned after that date; or . our aggregate margins and equities as of the end of the most recent fiscal quarter would be equal to or greater than 30% of our total long-term debt and equities. At June 30, 2001, we could have distributed $29.8 million to our members under this formula. We have not made any distributions to our members since that date. After the Amendment Date or the Release Date, we may not make any distribution, including a dividend or payment or retirement of patronage capital, to our members if we are in default under the Indenture. Otherwise, we will be permitted to make a distribution if: . after the distribution, our patronage capital as of the end of the immediately preceding fiscal quarter would be equal to or greater than 20% of our total long-term debt and patronage capital; or . all of our distributions for the year in which the distribution is to be made do not exceed 5% of our patronage capital as of the end of the immediately preceding fiscal year. See "DESCRIPTION OF THE BONDS--Limitation on Distributions to Members." Reporting Obligations....... We do not intend to register the 2001 Series A Bonds under the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"). We will, however, initially be subject to the reporting requirements of Section 15(d) of the Securities Exchange Act. The Indenture obligates us to continue reporting under the Securities Exchange Act so long as any of the 2001 Series A Bonds are outstanding, even if we are not required by law to do so. Market for 2001 Series A Bonds.................... We do not intend to list the 2001 Series A Bonds on any securities exchange or have them quoted on the National Association of Securities Dealers Automated Quotation System. As a result, there may not be a secondary market for the 2001 Series A Bonds. The underwriters intend, but are not obligated, to make a market in the 2001 Series A Bonds. See "UNDERWRITING." Old Dominion Electric Cooperative Our Company................. We were formed in 1948 as a not-for-profit power supply cooperative. We provide wholesale electric services to our members. Through our member distribution cooperatives, we provide retail electric services to more than 436,000 electric customers (meters) representing approximately 1.1 million people in portions of Virginia, Maryland, Delaware and West Virginia. See "BACKGROUND" and "BUSINESS." We are exempt from federal income taxation because we are an organization meeting the requirements of Section 501(c)(12) of the Internal Revenue Code of 1986, as amended. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Factors Affecting Results--Tax Status" and "FEDERAL INCOME TAX MATTERS." Our principal office is located at 4201 Dominion Boulevard, Glen Allen, Virginia 23060. Our telephone number is (804) 747-0592. Power Supply Resources...... We supply power to our members through two geographically divided power supply systems--a mainland Virginia system and a Delmarva Peninsula system. Our power supply resources consist of our generating facilities, power purchase contracts and forward, short-term and spot market purchases. See "BACKGROUND" and "POWER SUPPLY RESOURCES." Our existing generating facilities consist of: . an 11.6% interest in the North Anna Nuclear Power Station, a two unit, 1,842 megawatt (net capacity rating) nuclear power facility in Louisa County, Virginia; and . a 50% interest in the Clover Power Station, a two unit, 882 megawatt (net capacity rating) coal-fired generating facility located near Clover, Virginia. North Anna and Clover are operated by the co-owner of the facilities, Virginia Electric Power Company, a subsidiary of Dominion Resources, Inc. We also own diesel generators which we are installing primarily to support the reliability of power delivery to the member distribution cooperatives. We currently are restructuring our portfolio of power supply resources to address changes in the market and to meet our member distribution cooperatives' growing power requirements. In addition to amending several existing power purchase contracts with third parties and allowing others to expire, we have formed three wholly owned subsidiaries to develop and own three combustion turbine facilities in Cecil County, Maryland and Louisa County and Fauquier County, Virginia. The facilities are known as "Rock Springs," "Louisa" and "Marsh Run," respectively. When the facilities become fully operational, we anticipate that we will obtain 336, 504 and 672 megawatts of capacity from Rock Springs, Louisa and Marsh Run, respectively. See "BACKGROUND" and "POWER SUPPLY RESOURCES--Combustion Turbine Facilities." Members..................... We are owned by our members. We have two classes of members. Our Class A members are twelve customer-owned, electric distribution cooperatives. The sole Class B member is ODEC Power Trading. See "BUSINESS--Member Distribution Cooperatives" and "--ODEC Power Trading." Our member distribution cooperatives provide electric services on a retail basis to residential, commercial and industrial customers in portions of Virginia, Maryland, Delaware and West Virginia. The customers are located predominately in suburban, rural and recreational areas which require primarily residential service. Approximately 50% of the member distribution cooperatives' power sales are made in the high growth, increasingly suburban area between Washington, D.C. and Richmond, Virginia. See "BUSINESS--Member Distribution Cooperatives" and "--Members' Service Territories and Customers." As a result of recently enacted state electric restructuring legislation, approximately 20% of the customers of the member distribution cooperatives currently can choose an alternate power supplier. By 2004, virtually all customers of the member distribution cooperatives will be allowed to choose an alternate power supplier. The member distribution cooperatives will remain the exclusive providers of distribution services and, at least initially, the default power supplier to their customers within their service territories. See "BUSINESS--Retail Competition." Our only member that is not a member distribution cooperative is ODEC Power Trading. Formed in 2001, ODEC Power Trading is a corporation owned by our member distribution cooperatives to sell power in the market, manage the member distribution cooperatives' exposure to changes in fuel prices and take advantage of other power-related trading opportunities which may become available in the market. Wholesale Power Contracts... The member distribution cooperatives are the primary purchasers of the power we supply. The member distribution cooperatives purchase power from us pursuant to "all-requirements" wholesale power contracts which extend at least through 2028. The contracts require the member distribution cooperatives to buy all of their power requirements from us, to the extent that we have the power to supply to them, with limited exceptions. We also will enter into a wholesale power contract with ODEC Power Trading whereby ODEC Power Trading will purchase power from us for resale in the market. See "BUSINESS--Member Distribution Cooperatives--Wholesale Power Contracts" and "--ODEC Power Trading."

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+ Prospectus summary This summary highlights important information about our company and this offering. Because it is only a summary, however, it does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under Risk factors and the financial statements and related notes, before making an investment decision. OUR COMPANY We are a leading nationwide provider of movable medical equipment outsourcing services (excluding bed outsourcing) to the healthcare industry, based on revenues. Our diverse customer base includes more than 2,500 of the 5,800 acute care hospitals nationwide and approximately 2,700 alternate site providers, such as home care providers, nursing homes, surgery centers, subacute care facilities and outpatient centers. We offer our customers a wide range of programs to help them increase productivity while reducing costs. Our principal program is the innovative Pay-Per-UseTM program where we charge our customers a per use fee based on daily use of equipment per patient. We also offer other programs where we charge customers an equipment fee on a daily, weekly or monthly basis. Through our Asset Management Partnership Program, or AMPP, we enable customers to outsource substantially all, or a significant portion of, their movable medical equipment needs by providing, maintaining, managing, documenting and tracking that equipment for them. As of June 30, 2001, we had 19 AMPP customers. Our fees are paid directly by our customers rather than through reimbursement from government or other third-party payors. Our outsourcing programs differ from traditional purchase or lease alternatives for obtaining movable medical equipment. Under our outsourcing programs, customers are able to use our equipment and to rely on us to upgrade, maintain and manage that equipment. All of our outsourcing programs include a comprehensive range of support services, including equipment delivery, training, technical and educational support, inspection, maintenance and comprehensive documentation. We seek to maintain high utilization of our equipment by pooling and redeploying that equipment among a diverse customer base and adjusting pricing on a customer-by-customer basis to compensate for their varying usage rates. We also sell disposable medical supplies to customers in conjunction with our outsourcing programs. In addition, we offer repair, inspection, preventive maintenance and logistic services for the movable medical equipment that our customers own. Our movable medical equipment outsourcing programs enable healthcare providers to replace the fixed costs of owning and/or leasing medical equipment with variable costs that are more closely related to current needs and utilization rates. The increased flexibility and services associated with our programs are designed to lower overall operating costs for our customers by enabling them to: o Increase equipment productivity rates. Our outsourcing programs enable healthcare providers to increase the productivity of their movable medical equipment by accurately tracking their utilization rates and matching equipment availability with actual need. o Outsource support services. We believe that our movable medical equipment support services substantially reduce the operating cost and administrative burden associated with equipment ownership or lease. We also believe our services reduce the time that nurses and other medical staff devote to the management of movable medical equipment rather than direct patient care, thereby increasing job satisfaction, productivity and performance and reducing staff turnover. Table of Contents o Eliminate equipment obsolescence risk. Healthcare providers can effectively eliminate the risk of equipment obsolescence through our short-term and Pay-Per-UseTM outsourcing programs. OUR 1998 RECAPITALIZATION Our common stock was publicly traded and listed on the Nasdaq National Market from 1992 until our recapitalization in February 1998, at which time we delisted our common stock from Nasdaq. Our prior board of directors approved and recommended the recapitalization and concurrent Nasdaq delisting because it determined that it was in the best interests of our then current shareholders to realize the value of their shares. This was due to factors that adversely affected the market price for our common stock in the years preceding the recapitalization, including a limited public float and low trading volumes for our stock and our failure to meet earnings expectations on several occasions under prior management. In connection with the recapitalization, our officers and directors and our principal stockholder received the following benefits: o our management team and employees retained 1,307,432 shares of our common stock and options to purchase 710,654 shares of our common stock; as of the date of this prospectus based on an assumed public offering price per share of $14.50, these shares would be valued at $19.0 million and $9.5 million (net of option exercise price), respectively; o members of our management team entered into employment agreements with us that provided for new option grants and severance benefits; o two of our officers received an aggregate of $120,000 in loans from us to purchase shares of our common stock; o one non-management director received a cash payment of $73,125 when his options were cashed out; o an affiliate of J.W. Childs Equity Partners, L.P. entered into a management agreement with us, which it intends to terminate upon the completion of this offering, under which it received $240,000 per year in consideration for consulting and management advisory services; and o J.W. Childs and its affiliates made an aggregate equity contribution of $20.7 million in cash for 9,369,681 shares of common stock and management investors made an equity contribution of $0.6 million in cash for 260,012 shares of common stock, all at a price per share of approximately $2.21 (adjusted for stock splits); as of the date of this prospectus based on an assumed public offering price per share of $14.50, those shares would be valued at approximately $135.9 million for the shares held by J.W. Childs and affiliates and $3.8 million for the shares held by management investors. DEVELOPMENTS SINCE OUR 1998 RECAPITALIZATION Since the recapitalization, we implemented a number of significant changes, including: o installing a new senior management team comprised of experienced senior operating managers from within our company and other key individuals with broad healthcare experience; o acquiring five companies in strategic locations to expand our national network of district offices; o entering into key national contracts with group purchasing organizations, or GPOs, including Premier Technology Management, L.L.C., Novation, LLC and AmeriNet, Inc.; and SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents o placing a renewed emphasis on our AMPP total outsourcing program, increasing the number of our AMPP customers from 9 to 19. These changes have significantly improved our operating revenues and adjusted EBITDA over the last several years. We believe that this offering will improve our financial position and provide us with additional financing flexibility. We believe that, as a result of the other developments in our business described above, we are better positioned for growth than we were at the time of our recapitalization. Prior to this offering, J.W. Childs Equity Partners, L.P. owned approximately 77% of our common stock. Following this offering, J.W. Childs Equity Partners, L.P. will own approximately 53% of our common stock. Accordingly, J.W. Childs Equity Partners, L.P. will be able to elect our entire board of directors, control our management and policies and determine, without the consent of our other shareholders, the outcome of any corporate transaction or other matter submitted to our shareholders for approval. INDUSTRY BACKGROUND In recent years, particularly following the enactment of the Balanced Budget Act of 1997, acute care hospitals and alternate site providers have faced increasing pressure due to a reduction in resources and the increased complexity in delivering healthcare services. Reimbursement pressure from government payors, such as Medicare and Medicaid, and private insurers are forcing healthcare providers to contain costs. The national shortage of medical support staff, including nurses, has placed greater constraints on such individuals, requiring them to perform more tasks in less time. As a result of these pressures, acute care hospitals and alternate site providers have increasingly turned to equipment outsourcing. We believe the market potential for movable medical equipment outsourcing is greater than $1.5 billion. This estimate is based on our average monthly AMPP revenue per bed of $200 (or $2,400 annually) and our estimate of a 65% occupancy rate at the 990,000 total registered hospital beds in the United States as estimated by the American Hospital Association. Our average monthly AMPP revenue is derived from our 18 acute care hospital accounts consisting of approximately 4,200 census beds in the aggregate and a diverse group of hospitals. We believe the demand for outsourcing movable medical equipment will continue to expand as acute care hospitals and alternate site providers continue to try to reduce costs and increase medical staff satisfaction while providing high quality, patient-specific medical care. OUR STRENGTHS We attribute our historical revenue growth to, and believe that our potential for future growth comes from, the following strengths: o superior service and strong customer relationships, as evidenced by the growth in revenues from existing customers and the value-added, full-service features of our outsourcing programs; o national scope and leading market position, stemming from our national network of 61 district offices and 12 regional service centers and from our position as one of only two national providers of movable medical equipment outsourcing programs; o reduced reimbursement risk, resulting from the payment of fees to us directly by our acute care hospital and alternate site customers rather than through third party payors; o depth and breadth of our equipment pool, including approximately 107,000 pieces of movable medical equipment purchased from approximately 90 leading manufacturers; Amendment No. 5 To Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents o attractive return on our movable medical equipment, achieved through our pricing strategy designed to generate a payback period that is substantially shorter than the useful life of a particular piece of equipment; o sophisticated use of information technology, allowing our customers to meet their equipment documentation needs under applicable industry standards and regulations and to track the location, productivity and availability of all of their movable medical equipment; o experienced and committed management team, comprised of experienced senior operating managers promoted from within our company and other key individuals with broad healthcare experience who joined us through acquisitions or strategic hiring; and o large and diversified customer base, consisting of more than 2,500 acute care hospitals and approximately 2,700 alternate site providers including homecare providers, nursing homes, surgery centers, subacute care facilities and outpatient centers throughout the United States. OUR GROWTH STRATEGY We believe that the aging population, increased life expectancy, advancements in medical technology and greater emphasis on managed care will provide us significant growth opportunities for movable medical equipment outsourcing in both acute care hospital and alternate site settings. Our strategy is to achieve continued growth by: o continuing to increase business with our existing customers; o providing comprehensive equipment management and outsourcing programs through our AMPP total outsourcing program; o developing business with new customers by further penetrating the acute care hospital and alternate site markets and through relationships with GPOs; o expanding geographic coverage through new office openings; and o continuing to pursue strategic acquisitions. Despite our strengths and opportunities for growth, discussed above, we face a number of challenges and risks in growing our business, including the following: o We have a history of net losses and may not be profitable in the future. o We will continue to have a substantial amount of debt after this offering, which will continue to place financial and other limitations on our business. o We will continue to have a significant amount of goodwill recorded on our balance sheet. o Our customers are generally not obligated to outsource our equipment under long-term commitments and many of our customers do not sign written agreements with us. Our business is also subject to a number of other risks described in the Risk factors which follow this summary. Universal Hospital Services, Inc. is a Delaware corporation originally incorporated in 1954 in Minnesota. Our principal executive office is located at 1250 Northland Plaza, 3800 West 80th Street, Bloomington, Minnesota 55431-4442. Our telephone number is (952) 893-3200. We maintain a Web site on the Internet at www.uhs.com. Our Web site, and the information contained therein, is not a part of this prospectus. Universal Hospital Services, Inc. (Exact name of registrant as specified in its charter) Minnesota (prior to the proposed reincorporation in Delaware) (State or other jurisdiction of incorporation or organization) 7352 (Primary Standard Industrial Classification Code Number) 41-0760940 (I.R.S. Employer Identification Number) 1250 Northland Plaza 3800 West 80th Street Bloomington, Minnesota 55431-4442 (952) 893-3200 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Except as otherwise noted, all information in this prospectus: o assumes no exercise of the underwriters over-allotment option; o reflects our reincorporation in Delaware prior to completion of this offering; o reflects the 10-for-1 stock split of our common stock effected on February 25, 1998; and o reflects the 0.70-for-1 reverse stock split of our common stock effected on October 5, 2001. DAVID E. DOVENBERG Universal Hospital Services, Inc. 1250 Northland Plaza 3800 West 80th Street Bloomington, Minnesota 55431-4442 (952) 893-3200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Net loss per share applicable to common shareholders: Basic $ (.21 ) $ (.09 ) $ (.48 ) $ (.29 ) Diluted (.21 ) (.09 ) (.48 ) (.29 ) Weighted average common shares outstanding: Basic 11,265 11,275 11,260 11,266 Diluted 11,265 11,275 11,260 11,266 Additional information EBITDA $ 10,218 $ 12,026 $ 31,057 $ 35,872 EBITDA as percentage of total revenue 39.1% 40.0% 39.8% 39.4% Adjusted EBITDA $ 10,291 $ 12,082 $ 31,276 $ 37,630 Adjusted EBITDA as a percentage of total revenue 39.4% 40.1% 40.1% 41.4% Movable medical equipment (units at end of period) 99,000 110,000 Offices (at end of period) 57 61 Number of hospital customers (at end of period) 2,500 2,520 Number of total customers (at end of period) 5,210 5,265 Number of AMPP accounts (at end of period) 18 24 Copies to: ELIZABETH C. HINCK, ESQ. Dorsey Whitney LLP 220 South Sixth Street Minneapolis, Minnesota 55402-1498 (612) 340-8877 FREDERICK W. KANNER, ESQ. Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 (212) 259-8000 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Equipment outsourcing revenues were $26.9 million for the three months ended September 30, 2001, representing a $3.7 million, or 16.3%, increase from equipment outsourcing revenues of $23.2 million for the same period of 2000. For the nine months ended September 30, 2001, equipment outsourcing revenues were $81.7 million, representing an $12.7 million, or 18.4%, increase from equipment outsourcing revenues of $69.0 million for the same period of 2000. Total revenues were $30.1 million for the three months ended September 30, 2001, representing a $4.0 million, or 15.3%, increase from total revenues of $26.1 million for the same period of 2000. For the nine months ended September 30, 2001, total revenues were $91.0 million, representing a $13.0 million, or 16.6%, increase from total revenues of $78.0 million for the same period of 2000. We believe earnings before interest, taxes, depreciation, and amortization, or EBITDA, to be useful in analyzing our operating performance and our ability to service our debt. EBITDA for the three months ended September 30, 2001 was $12.0 million, representing a $1.8 million, or 17.7%, increase from $10.2 million for the same period of 2000. For the nine months ended September 30, 2001, EBITDA Table of Contents was $35.9 million, representing a $4.8 million, or 15.5%, increase from $31.1 million for the same period of 2000. For the three months ended September 30, 2001, EBITDA as a percentage of total revenue increased to 40.0% from 39.1% for the same period of 2000. For the nine months ended September 30, 2001, EBITDA as a percentage of total revenue decreased to 39.4% from 39.8% for the same period of 2000. EBITDA decreased as a percentage of total revenue for the nine months ended September 30, 2001 due to an expense related to additional retirement benefits of $1.6 million consisting primarily of non-cash charges due to the reissuance of stock options to a retiring employee at exercise prices below the anticipated offering price. We believe adjusted EBITDA to be a better indicator of our operating performance and our ability to service our debt than EBITDA since it excludes one-time non-recurring expenses or gains. Adjusted EBITDA for the three months ended September 30, 2001 was $12.1 million, representing a $1.8 million, or 17.4%, increase from $10.3 million for the same period in 2000. Adjusted EBITDA for such period excludes management fees paid to J.W. Childs Associates, L.P. Adjusted EBITDA for the nine months ended September 30, 2001 was $37.6 million, representing a $6.3 million, or 20.3%, increase from $31.3 million for the same period of 2000. Adjusted EBITDA for such period excludes management fees paid to J.W. Childs Associates, L.P. and the additional retirement benefits discussed above. For the three months ended September 30, 2001, adjusted EBITDA as a percentage of total revenue increased to 40.1% from 39.4% for the same period of 2000. For the nine months ended September 30, 2001, adjusted EBITDA as a percentage of total revenue increased to 41.4% from 40.1% for the same period of 2000. We experienced continued growth in our core outsourcing revenue during the three months ended September 30, 2001, which was aided by the partial implementation of five AMPP contracts executed earlier this year. We recently announced that, in November of this year, we plan to open our 62nd full service district office in Birmingham, Alabama. Recent acquisition On October 25, 2001, we consummated our acquisition of all of the outstanding stock of Narco Medical Services, Inc. for a purchase price of $8.1 million in cash. Narco Medical Services, Inc. outsources medical equipment and services, primarily to rural, acute care healthcare providers from seven locations in the Midwest. Amendment to our revolving credit facility In connection with our acquisition of Narco Medical Services, Inc., we amended our credit agreement, on October 12, 2001, to increase the size of our revolving credit facility from $77.5 million to $87.5 million. Upon the closing of this offering, we expect to use the proceeds of this offering to repay $53.9 million of the outstanding balance on our revolving credit facility and the revolving credit facility will be reduced to approximately $48 million. Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Price Per Aggregate Amount of Securities to be Registered Registered(1) Share(2) Offering Price(2) Registration Fee Common stock, par value $.01 per share 5,750,000 shares $15.00 $86,250,000 $21,563(3) (1) Represents loss on disposal of movable medical equipment that did not meet outsourcing demand expectations. (2) Reflects expenses consisting primarily of legal, investment banking and severance payments incurred by us related to the recapitalization. (3) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management understands that some industry analysts and investors consider EBITDA to be useful in analyzing the operating performance of a company and its ability to service debt. EBITDA, however, is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities or as a measure of liquidity. Since EBITDA is not a measure determined in accordance with generally accepted accounting principles and is thus susceptible to varying interpretations and calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. EBITDA does not represent an amount of funds that is available for management s discretionary use. (4) Adjusted EBITDA reflects EBITDA, adjusted to exclude: the loss on equipment disposal of $2.9 million for the year ended December 31, 1998; management fees to J. W. Childs Associates, L.P. of $207,000, $294,000, $286,000, $146,000 and $149,000 for years ended December 31, 1998, 1999 and 2000 and for the six months ended June 30, 2000 and 2001, respectively; recapitalization and transaction costs of $5.1 million for the year ended December 31, 1998; the primarily non-cash charges due to the reissuance of stock options to a retiring employee at exercise prices below the anticipated offering price for the six months ended June 30, 2001 of $1.6 million; and legal fees related to an employee settlement of $414,000 for the year ended December 31, 2000. Adjusted EBITDA also excludes an $846,000 gain from the one time sale of equipment in the year ended December 31, 1999. Management understands that some industry analysts and investors Table of Contents consider adjusted EBITDA to be a better indicator of our operating performance and our ability to service debt than EBITDA since it excludes one-time non-recurring expenses or gains. Adjusted EBITDA, however, is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities or as a measure of liquidity. Since adjusted EBITDA is not a measure determined in accordance with generally accepted accounting principles and is thus susceptible to varying interpretations and calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA does not represent an amount of funds that is available for management s discretionary use. (5) Represents total current assets (excluding cash and cash equivalents) less total current liabilities, excluding current portion of long-term debt. (6) Pro forma financial data is presented to give effect to the use of a portion of the proceeds from this offering to pay off a portion of the amount outstanding on the revolving credit facility as if such event had occurred at the beginning of such applicable periods. Pro forma financial data are provided for informational purposes only and are not necessarily indicative of the actual results that would have been achieved had the offering occurred on the date indicated or that may be achieved in the future. (7) The pro forma as adjusted balance sheet data gives effect to receipt of the net proceeds from the sale in this offering of shares of common stock at an assumed initial public offering price of $14.50 per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, and the application of the net proceeds as described under Use of proceeds, as if each had occurred on June 30, 2001. In addition it reflects the termination of certain put provisions of the stockholders agreement upon completion of this offering. (1) Includes 750,000 shares that the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(a). (3) $25,875 of this fee was previously paid with the original filing and $1,438 was previously paid with the filing of Amendment No. 1. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS October 26, 2001 Subject to completion 5,000,000 Shares UNIVERSAL HOSPITAL SERVICES, INC. Common Stock This is our initial public offering of shares of our common stock. No public market currently exists for our common stock. We currently anticipate the initial public offering price to be between $14.00 and $15.00 per share. The Nasdaq National Market has approved our common shares for quotation under the symbol UHOS. Before buying any shares, you should read the discussion of material risks of investing in our common stock in Risk factors beginning on page 14. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. Per share Total Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds, before expenses, to us $ $ The underwriters may also purchase up to 750,000 shares of common stock from certain of our shareholders identified under Principal and selling shareholders at the public offering price, less the underwriting discounts and commissions, to cover over-allotments, if any, within 30 days of the date of this prospectus. If the underwriters exercise the option in full, the total underwriting discounts and commissions will be $ . Except to the extent the shareholders referred to above sell shares to cover over-allotments, if any, all shares offered by this prospectus will be sold by us. We will not receive any proceeds from the sale of any common stock sold by the shareholders referred to above. The underwriters are offering the common stock as set forth under Underwriting. Delivery of the shares will be on or about October , 2001. Sole Book-Runner and Co-Lead Manager Co-Lead Manager UBS Warburg U.S. Bancorp Piper Jaffray CIBC World Markets Table of Contents TABLE OF CONTENTS Prospectus summary

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+ PROSPECTUS SUMMARY The following summary highlights selected information from this prospectus and may not contain all of the information that is important to you. For a more complete understanding of this offering, you are encouraged to read this entire prospectus. Unilab Corporation We are the largest independent clinical laboratory testing company in California and one of the largest in the nation. We provide efficient and competitively-priced laboratory testing services to physicians, managed care groups, hospitals and other healthcare providers. We offer over 1,000 different tests which help physicians diagnose, evaluate, monitor and treat disease by measuring the presence, concentrations or composition of chemical and cellular components in human body fluids and tissues. These tests range from routine tests, such as glucose monitoring and complete blood count, to highly specialized tests, such as those designed to measure HIV infection and hepatitis C. In 2000, we performed approximately 30 million tests. We believe that our revenues in 2000 represented approximately 25% of the California independent clinical laboratory testing market and approximately twice the annual sales of the next largest independent clinical laboratory in California. Our ability to serve our clients effectively is based on our collection, transportation, testing and reporting infrastructure, which we believe to be the most extensive in California. We have built our support network through internal growth and a series of strategic acquisitions, resulting in statewide geographic coverage and a strong presence in population centers that generate a high volume of test requisitions. We operate three large, full-service laboratories located in Los Angeles, San Jose and Sacramento, and 42 strategically located short turnaround time laboratories where we perform an abbreviated line of routine tests on an emergency or time-sensitive basis. Our network also includes 386 patient service centers, where technicians procure specimens and route them to the appropriate testing site. Our 400 courier routes and 27 courier hubs provide rapid collection, processing and distribution services to our clients. We offer our fully-integrated testing services 365 days a year, 24 hours a day. From 1998 to 2000, our revenue increased at a compounded annual rate of approximately 25%. This increase is the result of strategic acquisitions and organic growth resulting from both market share growth and price increases. Over the same period, our operating income, before merger/recapitalization expenses and legal charges, increased at a compounded annual rate of approximately 45% and as a percentage of revenue from 11.2% to 15.0%. Our increased profitability is due to synergies realized from our acquisitions, efforts to improve operating efficiencies, enhanced operating leverage through organic growth and price increases. Recent Developments Our revenue for the three months ended September 30, 2001 was $99.0 million, an increase of 13% from revenue of $87.6 million for the same period last year. Net income, before the extraordinary loss discussed below, was $6.8 million, or $0.19 per diluted share for the third quarter of 2001, compared to $2.8 million, or $0.11 per diluted share for the same period last year. EBITDA before the extraordinary loss was $21.0 million for the three months ended September 30, 2001, or 21.2% of revenue, compared to $17.6 million, or 20.1% of revenue for the same period last year. With the proceeds from our initial public offering in June 2001, we repaid a portion of our senior subordinated notes on July 9, 2001 and reported an extraordinary loss, net of taxes, of $5.8 million for the third quarter of 2001. For the nine months ended September 30, 2001, our revenue totaled $293.3 million, an increase of 16.8% compared to $251.2 million for the same period last year. EBITDA, EBITDA margin, net income and net income per diluted share, excluding the extraordinary loss discussed above and other non-recurring items were $61.3 million, 20.9%, $15.9 million and $0.54, respectively, for the nine months ended September 30, 2001, versus $48.5 million, 19.3%, $6.4 million and $0.25, respectively, for the same period last year. Including the non-recurring items, EBITDA, EBITDA margin, net income and net income per diluted share were $43.7 million, 14.9%, $5.5 million and $0.19, respectively, for the nine months ended September 30, 2001. Testing volumes increased 9.5% and 14.1% in the three months ended September 30, 2001 and nine months ended September 30, 2001, respectively, compared to the same periods in the prior year. Excluding the revenue generated from acquired businesses, core testing volumes grew by 8% in the three months ended September 30, 2001 and 11.3% in the nine months ended September 30, 2001 compared to the same periods last year, while pricing improved by 2.5% and 1.7% compared to the same periods in the prior year. Days sales outstanding--a measure of billing and collection efficiency--was 63 days at September 30, 2001, compared to 67 days at December 31, 2000. Revenue and EBITDA for the quarter continued to be favorably affected by, among other things, conversion to higher revenue Thin Prep Pap Smear technology. We currently anticipate that the Thin Prep Pap Smear test will account for approximately one-half of all Pap Smear tests performed by us by the end of 2001. See "--Recent Financial Results." On July 21, 2001, we completed the acquisition of Medical Arts Clinical Laboratories, Inc., or MACL, an independent clinical laboratory based in Santa Barbara, California. We expect the acquisition to add approximately $5.0 million of annualized revenue and to be accretive to earnings immediately. We continue to evaluate and pursue selective acquisitions, both within and outside of California. We are currently engaged in three separate and unrelated discussions concerning possible acquisitions. We are in negotiations with these three entities but have not entered into any agreement in principle with respect to any of these possible acquisitions. Competitive Strengths We believe we are well-positioned for continued profitable growth due to the following competitive strengths: . Market Leader in California. We are the largest independent clinical laboratory testing company in California, serving approximately 45,000 clients, and have approximately 150 managed care contracts, covering approximately 4.8 million managed care lives. We believe that it would be difficult and expensive for new entrants or existing competitors in the California market to achieve our degree of geographic penetration, assemble a clinical laboratory network comparable to ours or obtain the number of contracts we have. . Superior Regional Infrastructure. Our fully integrated and extensive field-service network gives us a key competitive advantage in California's clinical laboratory testing market by enabling us to offer our clients and their patients greater geographic coverage and convenience than our competitors. We operate more client-support facilities in California than any of our competitors. . Low-Cost Provider. We have created a fully-integrated collection, testing and distribution network with significant operating leverage, which allows us to expand testing capacity at low incremental cost and minimal additional capital expenditures. We believe that our economies of scale, integrated network and efficient processes have resulted in our cost per specimen being among the lowest, and our margins being among the highest, of any large clinical laboratory company nationwide. . Comprehensive Testing Services. We offer a full range of routine and esoteric testing services. Esoteric tests generally require more complex techniques, a higher degree of technical skill and knowledge and more sophisticated equipment than routine tests require. We perform approximately 99% of the tests requested by our clients, with the remaining 1% performed by third-party specialty laboratories. It is our policy to outsource low volume, high cost, esoteric tests until the volume and related revenue make it commercially viable for the test to be performed in-house. . Positioned as a Preferred Vendor. We believe that our strong statewide presence, including a focus on regional population centers, comprehensive testing services and our commitment to superior customer service and support make us one of the few providers of laboratory testing services with the ability to provide one-stop shopping to local and regional clients. . Reputation for Quality. We maintain a comprehensive quality assurance program to ensure the effectiveness and accuracy of clinical laboratory services for our clients and their patients. Our accuracy rate on the 2000 annual proficiency testing by the College of American Pathologists was 99.3%. . Selective and Disciplined Acquisition Record. Our management team has significant experience in identifying, completing and integrating acquisitions of clinical laboratories in the California market. Since November 1998, we have successfully integrated five businesses into our operations that we acquired for a total purchase price of $78.9 million. We estimate that annualized total revenue for these acquired companies was approximately $97.0 million. Through these acquisitions, we have significantly expanded our annual specimen levels and revenues and have benefited from substantial operating synergies through the consolidation of redundant operations, laboratories and patient service centers. Our Opportunity According to Lab Industry Strategic Outlook 2000, published by Washington G-2 Reports, the U.S. clinical laboratory testing market accounted for approximately $31.8 billion in revenue in 1999. Independent clinical laboratories represented approximately 26% of this national market. California is the largest state clinical laboratory testing market in the United States, which we estimate accounted for approximately $4.0 billion in revenues in 1999. According to the March 2001 Laboratory Industry Report, population growth is a key factor in determining the growth in demand for clinical laboratory services. According to U.S. Census Bureau data, California's population increased 13.8% from 1990 to 2000, from 29.8 million to 33.9 million. We expect the demand for clinical laboratory testing services to increase as a result of several trends, in addition to overall population growth, including the aging of the population, an increase in the number and diagnostic capabilities of tests, improved availability of tests, increased awareness of cost-effective early disease detection and prevention, and growing demand for screening for high-risk diseases and gender-specific health concerns such as human papilloma virus and prostate cancer. According to Lab Industry Strategic Outlook 2000, pricing for laboratory testing services declined sharply in the mid-1990s and began to improve in 1997. We believe that we have benefited from this upward trend and expect it to continue. During 2000, a number of independent physician associations in California went through bankruptcy. If this trend continues, we believe that we may have an opportunity in the future to replace some independent physician association agreements, which generally have low capitation rates, and contract directly with managed care companies to better align prices with the level of service we provide. We believe that trends in managed care are also positive for our business prospects. According to the Inter-Study Competitive Edge: HMO Industry Report, total enrollment in health maintenance organizations, or HMOs, declined by 0.5% nationwide in 2000 compared to 1999, the first decline in growth in 27 years. We anticipate that the slowdown in HMO enrollment will continue. We believe that lives that were previously covered by HMOs may increasingly move to fee-for-service plans. Our Strategy Our business strategy is to continue to expand our market leadership in the California independent clinical laboratory testing market and to consider selected opportunities in other U.S. markets. Key elements of our strategy are to: . Leverage Our Extensive Infrastructure. We expect to benefit from anticipated growth in testing volume through both organic growth and acquisitions and as a result of favorable trends in diagnostic testing, demographics and managed care. We believe that we can leverage our extensive infrastructure to take advantage of increased testing volume to increase revenues at low incremental cost and thus improve margins. . Improve Terms of Our Payor Contracts. We will continue to negotiate with managed care plans and other third party payors in an effort to improve the terms of our contracts and better align pricing with the level of service we provide. . Pursue Selected Acquisitions in California and Other Strategic Markets. California's size and population density, as well as the fragmentation of its clinical laboratory testing market and the industry's consolidation trend, provide us with significant expansion opportunities. In evaluating potential acquisition targets, we will continue to focus on financially-sound businesses that have a history of strong regulatory compliance. These targets may include fold-in type acquisitions, which can extend or strengthen our current market presence. . Strengthen Our Sales and Marketing Efforts. We have redirected the efforts of some of our sales professionals to focus primarily on developing new business. Our sales teams are focusing their efforts on the hospital management and hospital reference testing markets, which we have not penetrated to date. . Increase Operating Margins Through Improved Operating Efficiency. We continually evaluate our business for potential operating improvements. We are focusing our efforts on achieving further cost reduction in areas such as test menu consolidation and process and workflow improvements. We are also targeting reductions in expenses for lab subcontracting, overtime, supplies, telecommunications, bad debt and write-offs for incorrect billing information. . Enhance Client Satisfaction Through Superior Customer Service. We provide a high level of customer satisfaction through superior service and are making improvements that we believe will enhance our service. The Offering <TABLE> <S> <C> Common stock offered by the selling stockholders.. 9,000,000 shares Common stock to be outstanding after this offering 33,407,082 shares Use of proceeds................................... We will not receive any of the proceeds from the sale of shares by the selling stockholders. Nasdaq National Market Symbol..................... ULAB </TABLE> Unless otherwise indicated, all share information in this prospectus is based on the number of shares outstanding as of September 30, 2001, and: . excludes 3,825,866 shares of common stock issuable upon exercise of outstanding options as of September 30, 2001 under our stock option plans. These options include 2,036,074 options that are subject to achieving performance targets that have not yet been met. See "Management--Stock Option Plans"; . excludes 587,158 shares of common stock available for future issuance under our option plans; . assumes no exercise by the underwriters of the over-allotment option; and . reflects a 1 for 0.986312 reverse stock split of our common stock, effected on May 16, 2001. The number of shares of common stock to be outstanding after this offering as indicated above does give effect, however, to the issuance of 197,782 shares of common stock upon exercise of outstanding stock options. These shares will be sold in this offering by some of the selling stockholders. See "Principal and Selling Stockholders." Recent Financial Results The following tables set forth unaudited summary statement of operations data for the three and nine months ended September 30, 2000 and 2001 and summary balance sheet data as of September 30, 2001. The financial data as of September 30, 2001 and for the three and nine months ended September 30, 2001 are derived from our unaudited internal financial records. The financial data for the three and nine months ended September 30, 2000 are derived from our unaudited financial statements not included in this prospectus. See "--Recent Developments." <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ------------------- ----------------- 2000 2001 2000 2001 ------- ------- -------- -------- (in thousands, except per share data) <S> <C> <C> <C> <C> Statement of Operations Data: Revenue............................................................. $87,596 $99,018 $251,156 $293,258 Direct laboratory and field expenses: Salaries, wages and benefits..................................... 25,912 28,931 74,015 86,379 Supplies......................................................... 12,367 14,273 36,133 41,821 Other operating expenses......................................... 20,410 22,258 59,633 66,146 ------- ------- -------- -------- 58,689 65,462 169,781 194,346 Selling, general and administrative expenses........................ 11,280 12,550 32,890 37,582 Legal and other non-recurring charges............................... -- -- -- 5,450 Stock-based compensation charges.................................... -- -- -- 1,505 Amortization and depreciation....................................... 3,302 3,965 9,363 11,293 ------- ------- -------- -------- Total operating expenses............................................ 73,271 81,977 212,034 250,176 ------- ------- -------- -------- Operating income.................................................... 14,325 17,041 39,122 43,082 Interest expense, net............................................... 9,441 5,367 28,116 22,617 ------- ------- -------- -------- Income before income taxes and extraordinary item................... 4,884 11,674 11,006 20,465 Tax provision....................................................... 2,051 4,903 4,622 8,595 ------- ------- -------- -------- Income before extraordinary item.................................... 2,833 6,771 6,384 11,870 Extraordinary item--loss on early extinguishment of debt (net of tax benefit of $4,000 for the three months ended September 30, 2001 and $4,400 for the nine months ended September 30, 2001).......... -- 5,763 -- 6,345 ------- ------- -------- -------- Net income.......................................................... $ 2,833 $ 1,008 $ 6,384 $ 5,525 ======= ======= ======== ======== Basic Net Income Per Share (1): Income before extraordinary item.................................... $ 0.11 $ 0.20 $ 0.25 $ 0.41 Net income.......................................................... $ 0.11 $ 0.03 $ 0.25 $ 0.19 Income before extraordinary item and legal, stock-based compensation and other non-recurring charges...................... $ 0.11 $ 0.20 $ 0.25 $ 0.55 Diluted Net Income Per Share (1): Income before extraordinary item.................................... $ 0.11 $ 0.19 $ 0.25 $ 0.40 Net income.......................................................... $ 0.11 $ 0.03 $ 0.25 $ 0.19 Income before extraordinary item and legal, stock-based compensation and other non-recurring charges $ 0.11 $ 0.19 $ 0.25 $ 0.54 Weighted Average Shares Outstanding (1): Basic............................................................... 25,491 33,209 25,434 28,806 Diluted............................................................. 25,569 34,750 25,512 29,639 Other Financial Data: EBITDA, excluding extraordinary item and legal and other non- recurring charges and stock-based compensation charges (2).......... $17,627 $21,006 $ 48,485 $ 61,330 </TABLE> -------- (1)All periods presented have been adjusted to reflect a 1 for 0.986312 reverse stock split of our common stock, effected on May 16, 2001. (2)See note 2 to "Summary Financial Data" for the definition and discussion of EBITDA. <TABLE> <CAPTION> As of September 30, 2001 Balance Sheet Data: -------------- (in thousands) <S> <C> Cash and cash equivalents................. $ 17,991 Accounts receivable, net.................. 67,642 Deferred tax assets....................... 12,658 Other current assets...................... 7,160 -------- Total current assets................... 105,451 Fixed assets, net......................... 13,497 Deferred tax assets....................... 34,375 Goodwill and other intangible assets...... 93,234 Other assets.............................. 6,492 -------- Total assets.............................. $253,049 ======== Current portion of long-term debt......... $ 6,381 Other current liabilities................. 36,121 -------- Total current liabilities................. 42,502 Long-term debt, net of current portion.... 197,817 Other liabilities......................... 5,401 Total shareholders' equity................ 7,329 -------- Total liabilities and shareholders' equity $253,049 ======== </TABLE> Summary Financial Data The summary financial data for each of the fiscal years in the three-year period ended December 31, 2000 have been derived from our audited financial statements. The financial data for the six months ended June 30, 2000 and 2001 have been derived from our unaudited interim financial statements. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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+ PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because this is a summary, it may not contain all of the information that may be important to you. Therefore, you should read this entire prospectus carefully before making a decision to invest in our common stock, including the risks of purchasing our common stock discussed under the "Risk Factors" section and our financial statements and the related notes. Unless we indicate otherwise, the information in this prospectus assumes that the underwriters will not exercise their option to purchase additional shares to cover over-allotments. GENERAL Southern Financial Bancorp, Inc. is the bank holding company for Southern Financial Bank, the fifth largest commercial bank headquartered in Virginia. We focus on providing a full range of financial services to small to medium-sized businesses, including commercial loans, Small Business Administration loans, cash flow management tools and leasing programs. Our financial performance has been characterized by steady asset growth, consistent core earnings and sound asset quality. We have paid dividends every quarter since 1992. As of June 30, 2001, we had total assets of $727.9 million, total loans, net of deferred fees, of $359.3 million, total deposits of $574.8 million and total stockholders' equity of $43.7 million. We have grown through a combination of internal growth, the opening of de novo branches and the acquisition of community banks in our market. Starting with one location in 1986, we have opened 14 branches in the last 16 years. In October 1999 we acquired The Horizon Bank of Virginia and in September 2000 we acquired First Savings Bank of Virginia. Those acquisitions added $205.0 million in assets, provided us with six branch locations and enhanced our core deposit base. We currently operate 20 full-service banking locations, 19 of which are located in the northern Virginia cities of Warrenton, Herndon, Middleburg, Winchester, Leesburg, Fairfax, Sterling, Woodbridge, Manassas and Fredericksburg. In August 2001 we opened our twentieth branch in Georgetown in the District of Columbia and announced our intention to open a branch in Charlottesville, Virginia in the fourth quarter of 2001. MARKET We have expanded from our roots in Fairfax County, where we maintain eight branches and 61% of our transactional deposits, to encompass a market area extending from Winchester in northwest Virginia to Fredericksburg, approximately 100 miles to the southeast. We have historically established our branches based on where we have our loan volume, and believe that the high population growth and general affluence in our existing and target markets provide the lending opportunities to serve as the basis for future expansion. According to U.S. Census Bureau data, from 1990 to 2000, four of the six Virginia counties in which we maintain branches experienced a population growth of 30% or more, with Fairfax County growing 19% and the remainder of the counties in which our branches are located expanding at 44%, compared with a national population growth rate of 13% during this same time frame. In addition, per capita income during 1999 was $47 thousand for Fairfax County and an average of $31 thousand for the remainder of the counties in which our branches are located, compared with a national per capita income of $29 thousand. As its economy has diversified away from a concentration in government and government-related employment, northern Virginia has developed into a major center for technology and telecommunications activities and has a high concentration of small to medium-sized businesses representing a diverse array of industries. In the process, Reston, Herndon, Tysons Corner and Fairfax have become important stand alone employment centers similar to Stamford, Connecticut and White Plains, New York, which have flourished outside of New York City. As a result, the "bedroom communities" supporting business clusters have pushed west to Loudoun and Fauquier Counties and south and west to Stafford, Spotsylvania and Prince William Counties. We also believe that the high growth and general affluence in certain of the areas adjoining our current market area provide attractive expansion opportunities. In addition to the District of Columbia, we believe that Montgomery County, Maryland and the Richmond, Virginia area are also attractive areas for future expansion. Upon the opening of our proposed branch in Charlottesville, our market area will expand to include Albemarle, Greene and Fluvanna Counties, all of which experienced rapid population growth in the last decade. MANAGEMENT We seek to capitalize on the experience and expertise of our management team, which is diverse, talented and deep. Our cohesive and complementary senior management team has an average of 22 years of banking-related experience and includes four officers who worked previously at Chemical Bank in New York. Our management team provides us with a depth of knowledge and expertise in areas such as funds management and investment strategy not normally found in a community banking organization of our size. Our senior management and board members are strongly committed to our franchise and currently own 22.05% of our outstanding shares of common stock. To manage and develop our new Georgetown branch and our proposed Charlottesville branch, we have hired experienced local bankers to supplement our existing management team. We believe that by hiring local bankers who have an existing in-market customer base, these new branches can more readily and prudently achieve the desired critical mass. We believe that our seasoned, experienced management team provides us with a platform to grow substantially without requiring significant additional personnel expenditures. STRATEGY Our objective is to become the premier provider of financial services to small to medium-sized businesses in our market while maintaining steady asset growth, consistent core earnings and sound asset quality. To achieve this objective, we have focused on the following business strategies: - We emphasize personal relationships in our customer driven service approach to commercial customers. As a customer driven organization, our board of directors, business advisory board members, key relationship managers, branch managers and lenders all actively help us develop full-service commercial banking relationships. In serving our commercial customers, we employ a relationship approach that draws on our collective expertise to structure a range of financial services that meets the customer's needs while being a prudent investment for us. Each customer deals with a relationship manager who specializes in one or more types of financial services. In order to fully address the customer's needs, the relationship manager may call upon other of our financial services specialists. We strive to be the customer's exclusive commercial banking relationship. While we encourage customers to contact us directly, we also use technology to complement and enhance our personalized service. We believe that in addition to the attractive growth profile of our primary markets, the consolidation of middle-market financial institutions in Virginia has created an unmet demand for personalized business services which offers us significant growth potential. - We plan to continue to supplement our internal growth through de novo branches and acquisitions while maintaining our consistent historical profitability. We plan to continue our aggressive pursuit of growth opportunities by opening de novo branches and making acquisitions. We have established a successful track record of opening de novo branches. Similarly, the seamless operational and cultural integration of Horizon and First Savings Bank gives us a track record of successful integration on which to build. We believe that the additional capital provided by this offering will enable us to enhance our franchise value by positioning us to take advantage of the attractive expansion opportunities provided by our existing and targeted market areas. In spite of our growth, we have been profitable in every quarter of operation since 1986, other than quarters affected by the one-time federal deposit insurance recapitalization charge in the third quarter of 1996 and non-recurring merger-related charges in the third and fourth quarters of 1999. - We manage our cost of funding in a sophisticated manner while we seek to grow our core deposit base. While we continue to seek a lower cost of funds in the form of core deposits, we actively manage our "non-core" funding. The funds management expertise of our senior management enables us to manage our cost of funding with a degree of sophistication unusual for a community bank of our size. In managing our cost of funds, we look first to gauge the direction of interest rates. If rates are decreasing, we seek to fund with liabilities that reprice in the near future. If rates are rising, we attempt to do the opposite. Once we have taken a view regarding interest rates, we attempt to achieve the desired funding target by using funding sources in the following order of preference: customer transaction accounts; customer CDs; principal amortizations and interest payments on our loans and investments; institutional CDs (with or without "swaps"); Federal Home Loan Bank borrowings; and reverse repurchase agreements with approved securities dealers. - We actively manage our investment portfolio to enhance earnings and maintain flexibility. While we continue to grow our loan portfolio, we use our investment securities portfolio to generate net interest income. In order to provide us with more flexibility in the management of our securities, in December 2000 we reclassified the held-to-maturity portion of our securities portfolio so that now all of our investment securities must be classified as available-for-sale for the foreseeable future. We have recently increased our level of collateralized mortgage obligations to enhance our investment earnings and potential for more cash liquidity. - We have a strong credit culture, which has resulted in sound asset quality. Our experienced credit administration team has developed comprehensive policies and procedures for credit underwriting and funding that have enabled us to maintain sound credit quality in spite of our rapid growth. With the addition of an experienced credit administrator to our senior management team in 1999, we have streamlined our internal loan review and approval process. Combined with our significant lending experience, these procedures and controls enable us to provide responsive, customized service to our business customers. At June 30, 2001, our ratio of nonaccrual loans to total loans was 0.47% and our ratio of nonperforming assets to total loans and other real estate owned was 0.48%. - We prudently manage our capital. Our goal is to operate at a capital level that supports our growth but does not unduly hamper our achievement of an attractive return on equity. In order to strike this balance, we deploy the capital management expertise of our management team to prudently manage our capital resources. In the past, we have initiated repurchases of our common stock when we believed that it was a prudent investment. During 2000, we issued through subsidiary trusts an aggregate of $13.0 million in trust preferred securities because we believed it to be the lowest cost, non-dilutive source of capital available to accommodate our growth. We believe that this common stock offering will not only provide us capital to support future growth and expansion, but will provide more liquidity for our shareholders and give us a more attractive currency to use in potential acquisitions. THE OFFERING Common stock offered.......... 750,000 shares Common stock to be outstanding after the offering............ 3,785,462 shares Use of proceeds............... We intend to initially invest the estimated net proceeds of the offering (approximately $ million) in the bank to support its growth, including, among other things, the opening of our de novo branches in Georgetown and Charlottesville, Virginia. In addition, we intend to use a portion of the proceeds to support any further expansion and potential acquisitions. Risk Factors.................. See "Risk Factors" and "Dilution" for a discussion of certain factors that you consider before investing in the common stock. Nasdaq National Market Symbol........................ "SFFB" The number of shares of common stock described as being outstanding after this offering excludes up to: - 374,250 shares that we may issue upon the exercise of stock options outstanding as of June 30, 2001 at a weighted average exercise price of $16.29 per share; - 106,250 additional shares at June 30, 2001 that we may issue under our stock option plan; - 21,975 shares that we may issue upon conversion of all shares of our Series A 6% cumulative convertible preferred stock outstanding as of June 30, 2001 into common stock; and - 112,500 additional shares that we may issue upon exercise of the underwriters' over-allotment option. --------------------- Our principal executive offices are located at 37 E. Main Street, Warrenton, Virginia 20186 and our telephone number is (540) 349-3900. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA You should read the summary historical consolidated financial data presented below in conjunction with our audited consolidated financial statements, including the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 19. The summary historical financial data as of December 31, 2000 and 1999 and for each of the three years ended December 31, 2000 is derived from our audited consolidated financial statements and related notes included in this prospectus. The financial statements for the year ended December 31, 1998 include the financial statements of The Horizon Bank of Virginia audited by Horizon's auditors. The summary historical financial data as of December 31, 1998, 1997 and 1996 and for each of the two years ended December 31, 1997 is derived from our audited consolidated financial statements which are not included in this prospectus. The summary historical financial data as of and for the six months ended June 30, 2001 and 2000 is derived from our unaudited interim consolidated financial statements included in this prospectus. These unaudited interim financial statements include all adjustments (consisting only of normal recurring accruals) that we consider necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods indicated. Information for any interim period is not necessarily indicative of results that may be anticipated for the full year. The financial data presented in the table as of and for the years ended December 31, 1999 and 1996 does not include one-time charges and expenses incurred during those periods. The financial data including these one-time charges and expenses is presented in the corresponding footnotes. <Table> <Caption> AS OF AND FOR THE SIX MONTHS ENDED AS OF AND FOR THE JUNE 30, YEARS ENDED DECEMBER 31, ----------------------- --------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Interest income............. $ 25,404 $ 16,608 $ 37,810 $ 29,756 $ 27,857 $ 25,536 $ 22,295 Interest expense............ 14,024 8,008 20,009 14,308 14,220 12,626 11,343 Net interest income......... 11,380 8,600 17,801 15,448 13,637 12,910 10,952 Provision for loan losses... 1,270 675 1,335 1,374(1) 1,301 1,265 906 Net interest income after provision for loan losses.................... 10,110 7,925 16,466 14,074(1) 12,336 11,645 10,046 Other income................ 3,733 1,978 4,553 3,615(1) 3,145 2,257 1,593 Other expense............... 8,389 6,249 13,440 12,152(1) 10,687 9,762 8,769(2) Income before income taxes..................... 5,454 3,653 7,579 5,537(1) 4,794 4,140 2,870(2) Income taxes................ 1,699 1,205 2,429 1,705(1) 1,442 1,332 954(2) Net income (excluding non- recurring items).......... 3,755 2,448 5,150 3,832(1) 3,352 2,808 1,916(2) Net income.................. 3,755 2,448 5,150 961 3,352 2,808 1,360 PER SHARE DATA: Earnings per share, basic... $ 1.24 $ 0.92 $ 1.84 $ 1.45(3) $ 1.28 $ 1.10 $ 0.76(4) Earnings per share, diluted (excluding non-recurring items).................... 1.21 0.90 1.82 1.41 1.22 1.06 0.73 Earnings per share, diluted................... 1.21 0.90 1.82 0.35 1.22 1.06 0.52 Cash basis diluted earnings per share................. 1.27 0.91 1.87 1.42(3) 1.22 1.06 0.73(4) Cash dividends.............. 0.24 0.24 0.48 0.33 0.22 0.17 0.14 Book value per share(5)..... 14.38 11.38 13.07 10.78 11.52 10.60 9.64 Tangible book value per share(5)(6)........... 13.20 11.24 11.87 10.67 11.52 10.60 9.64 Weighted average shares outstanding (basic)....... 3,014,743 2,662,297 2,786,589 2,648,643 2,618,930 2,558,622 2,530,260 Weighted average shares outstanding (diluted)..... 3,101,627 2,717,050 2,836,386 2,722,251 2,747,726 2,647,717 2,607,881 Shares outstanding at end of period.................... 3,015,210 2,671,743 3,014,720 2,656,196 2,636,249 2,573,079 2,545,547 </Table> <Table> <Caption> AS OF AND FOR THE SIX MONTHS ENDED AS OF AND FOR THE JUNE 30, YEARS ENDED DECEMBER 31, ----------------------- --------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> PERIOD-END BALANCE SHEET DATA: Total assets................ $ 727,869 $ 427,118 $ 609,936 $ 406,222 $ 404,254 $ 354,016 $ 310,169 Total loans (net of deferred fees)............ 359,301 245,189 318,912 237,980 209,417 207,303 180,636 Allowance for loan losses... 5,574 4,064 4,921 3,452 3,062 2,743 2,374 Total securities............ 279,539 148,767 233,407 136,919 143,569 106,296 90,729 Total deposits.............. 574,842 378,707 515,112 367,188 366,905 320,364 274,971 Other borrowings............ 58,500 9,000 34,000 5,000 3,500 4,000 8,500 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts(7)...... 13,000 5,000 13,000 -- -- -- -- Stockholders' equity........ 43,660 30,661 39,689 28,864 30,626 27,508 24,750 SELECTED PERFORMANCE RATIOS AND OTHER DATA: Return on average assets(8)................. 1.13% 1.17% 1.09% 0.95%(10) 0.92% 0.88% 0.69%(11) Return on average stockholders' equity(8)... 17.72 16.65 15.96 12.44(10) 11.62 10.92 7.83(11) Efficiency ratio(9)......... 59.10 59.06 60.12 63.75(10) 63.68 64.36 69.90(11) Net interest margin(8)...... 3.73 4.40 4.05 4.07 3.97 4.26 4.12 Dividend payout ratio....... 18.59 26.33 25.99 92.08 17.78 16.22 26.54 Number of branches.......... 19 17 19 17 15 13 13 PERIOD-END CONSOLIDATED CAPITAL RATIOS: Tier 1 risk-based capital... 10.65% 12.89% 11.39% 10.93% 12.77% 12.98% 13.44% Total risk-based capital.... 11.80 14.14 12.55 12.18 14.09 14.19 14.64 Leverage.................... 7.74 8.89 8.37 7.50 7.84 8.14 8.48 Stockholders' equity to total assets.............. 6.00 7.18 6.51 7.11 7.58 7.77 7.98 ASSET QUALITY RATIOS: Net charge-offs to average loans............. 0.18% 0.03% 0.17% 0.79% 0.48% 0.46% 0.34% Allowance for loan losses to period-end loans.......... 1.55 1.66 1.54 1.45 1.46 1.32 1.31 Allowance for loan losses to nonperforming loans....... 330.41 455.61 262.87 661.30 105.37 113.91 83.86 Nonaccrual loans to total loans..................... 0.47 0.36 0.59 0.22 1.39 1.16 1.57 Nonperforming assets to total loans and other real estate owned.............. 0.48 1.24 0.61 1.20 1.62 1.50 2.27 </Table> ------------------------- (1) Certain income statement data for the year ended December 31, 1999 excludes the following one-time charges related to the merger with Horizon: (a) a special loan loss provision of $756 thousand, (b) a portfolio restructuring expense of $781 thousand and (c) pretax merger-related expenses of $2.4 million (collectively, the one-time merger-related charges and expenses). If these one-time merger-related charges and expenses were included, the income statement data would have been as follows (in thousands): <Table> <S> <C> Provision for loan losses.................................. $ 2,130 Net interest income after provision for loan losses........ 13,318 Other income............................................... 2,834 Other expense.............................................. 14,589 Income before income taxes................................. 1,563 Income taxes............................................... 602 Net income................................................. 961 </Table> (2) Certain income statement data for the year ended December 31, 1996 excludes the pretax one-time federal deposit insurance recapitalization charge of $830 thousand. If this one-time charge was included, the income statement data would have been as follows (in thousands): <Table> <S> <C> Other expense............................................... $9,599 Income before income taxes.................................. 2,040 Income taxes................................................ 680 Net income.................................................. 1,360 </Table> (3) Earnings per share amounts for the year ended December 31, 1999 exclude the one-time merger-related charges and expenses. If these one-time merger-related charges and expenses were included, basic earnings per share would have been $0.36 and cash basis diluted earnings per share would have been $0.37. (4) Earnings per share amounts for the year ended December 31, 1996 exclude the one-time federal deposit insurance recapitalization charge. If this one-time charge was included, basic earnings per share would have been $0.54 per share and cash basis diluted earnings per share would have been $0.52 per share. (5) Calculated using shares of common stock outstanding plus 21,975 shares of common stock which were issuable upon the conversion of preferred stock at period end. (6) Calculated by dividing total assets, less total liabilities, goodwill and intangibles, by common shares outstanding at end of period. (7) Includes $5.0 million in preferred securities of Southern Financial Capital Trust I due July 15, 2030 and $8.0 million in preferred securities of Southern Financial Statutory Trust I due September 7, 2030. (8) Performance ratios for the six months ended June 30, 2001 and 2000 have been annualized. (9) Calculated by dividing total noninterest expense, net of goodwill and intangibles amortization, by net interest income plus noninterest income, excluding securities gains and losses. (10) Selected performance ratios for the year ended December 31, 1999 exclude the one-time merger-related charges and expenses. If these one-time merger-related charges and expenses were included, the return on average assets would have been 0.24%, the return on average equity would have been 3.11% and the efficiency ratio would have been 79.80%. (11) Selected performance ratios for the year ended December 31, 1996 exclude the one-time federal deposit insurance recapitalization charge. If this one-time charge was included, return on average assets would have been 0.48%, return on average equity would have been 5.66% and the efficiency ratio would have been 76.52%.

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+ Prospectus Summary About This Prospectus You should only rely on information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this or of any sale of common stock. About Aquis Communications Group, Inc. We are a leading regional provider of paging and other wireless messaging services through our local and regional wireless networks. We offer messaging services through a nine state regional network that provides coverage into New York, New Jersey, Connecticut, Pennsylvania, Maryland, Virginia, Rhode Island, Massachusetts, Delaware and Washington, D.C. as well as through a regional network providing coverage in Illinois, Indiana, Michigan, Wisconsin, Minnesota, and Missouri. We also provide service to over 1,000 U.S. cities, including the top 100 Standard Metropolitan Statistical Areas through our interconnect agreement with a nationwide wireless messaging provider. Since beginning operations in 1998 our subscriber base has increased to approximately 312,000 units in service as of June 30, 2001. We have achieved this through a combination of internal growth and a program of mergers and acquisitions. Based on data published by RCR Wireless News in June, 2001, we were as of that time the eighth largest messaging company in the United States based on the number of subscribers. We have traditionally operated technologically advanced paging systems that provide one-way wireless messaging services. We have recently entered the two-way or advanced wireless messaging space through an interconnect agreement with a nationwide advanced messaging provider. This will enable our customers to access Internet and wireless data services. This agreement allows us to pass advanced wireless messaging traffic from our existing technical and engineering infrastructure to the nationwide advanced wireless messaging company's transmission facilities on both a regional and nationwide basis. This agreement is important to us because it allows us to market advanced wireless messaging services to our existing subscriber base as well as take part in the potential high growth of new applications which will require advanced wireless messaging capabilities. We believe that the paging and wireless messaging industry is likely to undergo additional consolidation and have announced that we intend to participate in the consolidation process. Potential future consolidations would be evaluated on several key operating and financial elements including geographic presence, potential increase in both free and operating cash flow, potential operating efficiences and availability of financing. Any potential transaction may result in substantial capital requirements for which additional financing may be required. No assurance can be given that such additional financing would be available on terms satisfactory to us. For the years ended December 31, 2000 and 1999, respectively, we incurred operating losses of approximately $17,184,000 and $7,904,000 on total revenues of approximately $28,683,000 and $31,159,000. For the six months ended June 30, 2001, we incurred an operating loss of $5,469,000 on revenues of $10,140,000. The opinion of our auditors for the year ended December 31, 2000 contains a going concern qualification. Such a qualification is indicative of a history of operating losses and expectations of future losses, along with an uncertain ability to obtain sufficient financing to sustain ongoing operations for the forseeable future. In short, the going concern qualification suggests that a company's liabilities are unlikely to be discharged in the normal course of business as they become due and payable. As of December 31, 2000 we had written down the value of our intangible assets by $9,500,000 and written off

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+ SUMMARY This summary highlights certain information from this document and may not contain all of the information that is important to you. To understand the rights offering more fully and for a more complete description of the legal terms of the rights offering, you should read carefully this entire document and the Exhibits hereto, including the "Risk Factors" section. This summary does not contain a complete statement of all material information relating to the matters discussed in this document. For convenience, references in this prospectus to "we," "us," or "UniMark" mean The UniMark Group, Inc. and its consolidated subsidiaries unless we indicate otherwise or the context otherwise requires. OUR COMPANY Our company, The UniMark Group, Inc., a Texas corporation, is a vertically integrated citrus and tropical fruit growing and processing company with substantially all of its operations in Mexico. We operate and compete in two distinct business segments: packaged fruit and juice and oil. Within the packaged fruit segment, we focus on niche citrus and tropical fruit products including chilled, frozen and canned cut fruits and other specialty food ingredients. The packaged fruit segment processes and packages our products at four plants in Mexico. Our Mexican plants are strategically located in major fruit growing regions. We also utilize independent food brokers to sell our food service and industrial products in the United States. Sales to our Japanese consumers are facilitated through Japanese trading companies. Within the juice and oil segment, we have our juice division and our agricultural development products division. Through one of our Mexican subsidiaries, we are a major Mexican producer of citrus concentrate, oils and juices. We produce and export citrus concentrates, oils and juices. While our primary product is frozen concentrate orange juice, we also produce single strength orange juice and grapefruit, tangerine, Persian lime and lemon juice products. The juice division currently operates two juice concentrate plants strategically located in the citrus growing region of Mexico, close to the United States and the Mexican ports of Tampico and Veracruz. Our plant locations offer cost-effective transportation and distribution particularly to the central and southwestern markets of the United States. Collectively, the two plants have the capacity to process 800 metric tons of fruit per day, with 15 juice extractors and approximately 89,000 square feet of plant space. Our citrus concentrates and single strength citrus juices are sold directly to juice importers and distributors in North America, Europe and the Pacific Rim. In addition, we are developing, pursuant to a long-term supply contract with an affiliate of The Coca-Cola Company, 8,650 acres of lemon groves. The planting program began in November 1996 and harvesting of the first crops commenced in late 2000 with commercial production scheduled for 2004. Presently, we have acquired substantially all of the land for the project and have planted approximately 6,000 acres. Our principal executive offices are located at: UniMark House 124 McMakin Road Bartonville, Texas 76226 Our telephone number is (817) 491-2992 The UniMark Group, Inc. was organized in 1992 to combine the packaged fruit operations of a Mexican citrus and tropical fruit processor, which commenced operations in 1974, with UniMark Foods, a company that marketed and distributed products in the United States. On August 31, 2000, we sold to Del Monte Foods Company ("Del Monte") all of our interests in our worldwide rights to the Sunfresh(R), Fruits of Four Seasons(R) and Flavor Fresh(TM) brands ("Brands"), our McAllen Texas distribution facility, including certain inventory associated with our retail and wholesale club business, and other property and equipment. Separately, we entered into a long-term supply agreement with Del Monte under which we have been contracted to produce chilled and canned citrus products for Del Monte's retail and wholesale club markets. Under the terms of the agreement, Del Monte has agreed to purchase minimum quantities of our citrus products at agreed upon prices for sale in the United States. We retained the rights to our food service, industrial and Japanese business. Also, we were granted by Del Monte a long-term license for the rights to the Brands for specific areas, including Europe, Asia, the Pacific Rim and Mexico. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains or incorporates by reference certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, about our financial condition, results of operations and business that are based on our current and future expectations. You can find many of these statements by looking for words such as "estimate," "project," "believe," "anticipate," "intend," "expect," and similar expressions. Such statements reflect our current views with respect to future events and are subject to risks and uncertainties, including those discussed under "Risk Factors," that could cause actual results to differ materially from those contemplated in such forward-looking statements. You are cautioned that no forward-looking statement is a guarantee of future performance and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this prospectus. THE RIGHTS OFFERING <TABLE> <S> <C> The Rights .............................. UniMark will distribute to holders of its common stock as of the close of business on May 22, 2001, the record date, at no charge, one non-transferable subscription right for every 1.3567 shares of UniMark common stock owned by such shareholder. Each right entitles you to purchase one share of common stock for $ .73 per share. The aggregate number of rights distributed to each shareholder will be rounded down to the nearest whole number because fractional rights will not be issued. The rights will be evidenced by a non-transferable rights certificate. Basic Subscription Privileges: .......... Each right will entitle the holder to purchase one share of our common stock for $ .73, the per share subscription price. Over-Subscription Privilege: ............ Each holder who elects to exercise his or her rights in full may also subscribe for additional shares at the same subscription price per share. The number of additional shares available for the over-subscription privilege will depend on how many holders exercise their rights. If there are not enough of our shares available to fully satisfy all of the over-subscription privilege requests, the available shares will be distributed pro rata among rights holders who exercised their over-subscription privilege based on the number of rights exercised by them. In the event you choose to exercise the over-subscription privilege but receive a prorated amount, you will receive a refund for the subscription price of any shares you do not receive promptly after the expiration of the rights offering. Shareholders Receiving Rights............ Only shareholders who hold shares of our common stock on the record date will receive rights. Record Date.............................. May 22, 2001 Expiration Date and Time................. The rights expire at 5:00 p.m., New York City time, on June 25, 2001, unless properly exercised before that time. We may extend the expiration date upon notice to the exercise agent to a date not later than July 16, 2001. If you do not exercise your rights before the expiration date, as it may be extended, your rights will be void and you will not be able to exercise your rights in the future. Use of Proceeds.......................... We will use the net proceeds for repayment of indebtedness, capital expenditures for further development of our Lemon Project and for working capital. Recommendation to Rights Holders........ Although our Board of Directors has obtained a fairness opinion from an independent financial advisor in establishing the exercise price of the rights and encourages participation by all of our shareholders, you should make your own decision whether to exercise your rights and, if so how many rights to exercise, after reading this prospectus and consulting with your own financial advisors and based upon your own assessment of your best interests. Non-Transferability of Rights........... The rights are non-transferable. Only you may exercise your rights. We do not intend to list the rights on the OTC Bulletin Board or any other exchange. </TABLE> THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE AND ALL CONSENTS HAVE BEEN OBTAINED FROM THE RELEVANT STATE SECURITIES COMMISSIONS. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MAY 18, 2001 PROSPECTUS THE UNIMARK GROUP, INC. 10,273,972 SHARES OF COMMON STOCK $ .73 PER SHARE We are distributing, together with this prospectus, at no charge, non-transferable subscription rights to purchase shares of our common stock to persons who own our common stock as of the close of business on May 22, 2001, the record date. You will receive one (1) subscription right for every 1.3567 shares of our common stock that you own on the record date. Each subscription right will entitle you to purchase one share of our common stock at the subscription price of $ .73 per share. The shares are being offered directly by us without the services of an underwriter or selling agent. The subscription rights are exercisable beginning on the date of this prospectus and will expire at 5:00 p.m., New York City time, on June 25, 2001. If you timely exercise all of your subscription rights, you will be entitled to exercise over-subscription privileges to purchase additional shares of our common stock at the same subscription price. We are undertaking this rights offering to raise proceeds from the offering, which will be used for repayment of indebtedness, capital expenditures for further development of our Lemon Project and for working capital. Our largest shareholder, M & M Nominee L.L.C. ("M & M Nominee"), has indicated its intention, but is under no binding obligation, to purchase up to 6,849,315 shares through the exercise of its basic subscription privilege and its over-subscription privilege. M & M Nominee reserves the right to change its intent with respect to participation in this rights offering. M & M Nominee may purchase 4,643,714 shares through the exercise of its basic subscription privilege and up to 2,205,601 shares of our common stock through the exercise of its over-subscription privilege, depending upon the number of other shareholders who exercise their basic subscription privileges and their over-subscription privileges. Accordingly, if M & M Nominee exercises its intent as described above, we expect to receive gross proceeds from the offering of at least $5,000,000 million and up to $7,500,000 million, before deducting expenses payable by us and to issue at least 6,849,315 and up to 10,273,972 shares of common stock in the offering. We will terminate this offering in its entirety if shareholder approval to increase our authorized shares of common stock is not obtained or if M & M Nominee does not exercise its subscription rights to purchase at least 6,849,315 shares of our common stock. The subscription rights may not be sold, transferred or assigned, and will not be listed for trading on any stock exchange or on the Over-the-Counter Electronic Bulletin Board ("OTC Bulletin Board"). Shares of our common stock are currently listed for quotation on the OTC Bulletin Board under the symbol "UNMG.OB". On May 15, 2001, the closing price of a share of our common stock on the OTC Bulletin Board was $ .60. See "Risk Factors" beginning on page 6 of this prospectus to read about factors you should consider before buying additional shares of our common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is May , 2001. QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING What is a rights offering? A rights offering is an opportunity for you to purchase additional shares of our common stock at a fixed price of $ .73 per share and in an amount proportional to your existing interest, which enables you to maintain your current percentage ownership in UniMark. In addition, each right carries with it an over-subscription privilege. What is a subscription right? We are distributing to you, at no charge, one (1) subscription right for every 1.3567 shares of common stock that you owned on May 22, 2001, the record date. Each subscription right entitles you to purchase one share of our common stock for $ .73. When you "exercise" a subscription right, that means that you choose to purchase the common stock that the subscription right entitles you to purchase. You may exercise any number of your subscription rights, or you may choose not to exercise any subscription rights. Each right carries with it a basic subscription privilege and an over-subscription privilege. You cannot give or sell your subscription rights to anybody else; only you can exercise them. What is the basic subscription privilege? The basic subscription privilege of each subscription right entitles you to purchase one (1) share of our common stock at a subscription price of $ .73. What is the over-subscription privilege? We do not expect that all of our shareholders will exercise all of their basic subscription privileges. By extending over-subscription privileges to our shareholders, we are providing for the purchase of those shares which are not purchased through exercise of basic subscription privileges. The over-subscription privilege entitles you, if you exercise your rights in full, to subscribe for additional shares of our common stock at the same price. The over-subscription privilege covers shares for which rights were not exercised. If there are more shares of our common stock available than the number of over-subscription requests, all over-subscription requests will be filled in full. If there are more over-subscription requests than available shares, the available shares will be allocated pro rata among those holders exercising the over-subscription privilege based upon the number of rights exercised by them. However, in certain circumstances, in order to comply with applicable state securities laws, we may not be able to honor all over-subscription privileges even if we have shares available. Why are we engaging in a rights offering? We are proceeding with the rights offering to raise capital to allow us to reduce our indebtedness, capital expenditures for further development of our Lemon Project (see page 29 of this prospectus for a further discussion of the Lemon Project) and for working capital. We have determined to use a rights offering in order to allow our existing shareholders to participate in this offering and therefore not have their interest in UniMark be diluted by the issuance of additional equity to a third party. In addition, since no underwriting or sales commission will be paid with respect to any shares purchased in the rights offering, we have determined that a rights offering would be a low-cost method for raising additional capital. Our largest shareholder, M & M Nominee, has indicated its intention to purchase up to 6,849,315 shares through the exercise of its basic subscription privilege; and, if available, its over-subscription privilege. M & M Nominee may purchase 4,643,714 shares through the exercise of its basic subscription privilege and up to 2,205,601 shares of our common stock through the exercise of its over-subscription privileges, depending upon the number of other shareholders who exercise their basic subscription privileges and their over-subscription privileges. If no shareholders other than M & M Nominee exercise their subscription privileges, M & M Nominee's ownership interest in UniMark will increase to approximately 63.26% from approximately 45.2%. How many shares may I purchase? You will receive one (1) subscription right for every 1.3567 shares of common stock that you owned on May 22, 2001, the record date. Each subscription right entitles you to purchase one share of common stock <TABLE> <S> <C> No Revocation........................... If you exercise any rights, you are not allowed to revoke or change the exercise or request a refund of monies paid. Conditions.............................. We are presently seeking shareholder approval to increase our authorized shares of common stock from 20,000,000 to 40,000,000 and approve this rights offering. We will terminate this offering in its entirety if shareholder approval is not obtained. Also, we will terminate this offering in it entirety if M & M Nominee does not exercise its subscription rights to purchase at least 6,849,315 shares of our common stock. Subscription Agent ..................... Computershare Trust Company of New York Procedure for Exercising Rights ........ To exercise rights, you must complete the Subscription Certificate and deliver it to Computershare Trust Company of New York with full payment for the stock you elect to purchase. Computershare Trust Company of New York must receive the proper forms and payments on or before the expiration date. You may deliver the documents and payments by mail or commercial courier. If you use regular mail for this purpose, we recommend using insured, registered mail. You may use an alternative "Guaranteed Delivery Procedure" if you are unable to deliver the rights exercise agreement before the expiration date. There are, however, certain requirements of this procedure. Please see "The Rights Offering - under Guaranteed Delivery Procedures" on page 43 of this prospectus for further information regarding this procedure. Payment Adjustments .................... If you send a payment that is insufficient to purchase the number of shares requested, or if the number of shares requested is not specified in the forms you return, Computershare Trust Company of New York will apply the payment received to exercise rights to the extent of the payment. If your payment exceeds the purchase price for the full exercise of rights, Computershare Trust Company of New York will refund that excess as soon as practicable. We will not pay any interest on any payments received in this offering. Nominee Accounts ....................... If you wish to purchase shares in this offering and your common stock is held by a securities broker, bank, trust company or other nominee, you should promptly contact those record holders and request that they exercise rights on your behalf. You may also contact the nominee and request that the nominee send a separate Subscription Certificate to you. If you are a record holder who wishes an institution such as a broker or bank to exercise your rights for you, you should contact that institution promptly to arrange that method of exercise. You are responsible for the payment of any fees that brokers or other persons holding your common stock or preferred stock may charge. Exercise by Foreign and Other Shareholders............................ Computershare Trust Company of New York will hold rights exercise agreements for holders of our common stock having addresses outside the United States. In order to exercise rights, these holders must notify Computershare Trust </TABLE> for $ .73. If you exercise all of the subscription rights that you receive, you may have the opportunity to purchase additional shares of common stock. On the enclosed subscription certificate, you may exercise your over-subscription privilege by indicating the number of additional shares that you wish to purchase for $ .73 per share. If there are more shares of our common stock available than the number of over-subscription requests, all over-subscription requests will be filled in full. If there are more over-subscription requests than available shares, the available shares will be allocated pro rata among those holders exercising the over-subscription privilege based upon the number of rights exercised by them. However, in certain circumstances, in order to comply with applicable state securities laws, we may not be able to honor all over-subscription privileges even if we have shares available. How did UniMark arrive at the $ .73 per share price? We sought and obtained a fairness opinion from an independent financial advisor in establishing the subscription price. In determining the price at which a share of common stock may be purchased in this rights offering, a Special Committee of our Board of Directors, who did not include affiliates of M & M Nominee, considered several factors, including the independent valuation of our company's stock, the historic and current market price of the common stock, our financial condition, challenges facing our company, our history of profits and losses, general conditions in the securities market, our need for capital, alternatives available to us for raising capital, the amount of proceeds desired, the liquidity of our common stock, the level of risk to our investors and the need to offer shares at a price that would be attractive to our investors relative to the then current trading price of our common stock. What is the recommendation of the UniMark Board of Directors regarding exercising the rights? Although our Board of Directors has obtained an opinion from an independent financial advisor in establishing the exercise price of the rights and encourages participation by all of our shareholders, you should make your own decision whether to exercise your rights and, if so how many rights to exercise, after reading this prospectus and consulting with your own financial advisors and based upon your own assessment of your best interests. How do I exercise my subscription rights? You must properly complete the attached subscription certificate and deliver it to the Subscription Agent before 5 p.m., New York City time, on June 25, 2001. The address for the Subscription Agent is on page 45 of this prospectus. Your subscription certificate must be accompanied by proper payment for each share of our common stock that you wish to purchase. What should I do if I want to participate in the rights offering but my shares are held in the name of my broker or a custodian bank? If you hold shares of UniMark common stock through a broker, dealer or other nominee, we will ask your broker, dealer or nominee to notify you of the rights offering. If you wish to exercise your rights, you will need to have your broker, dealer or nominee act for you. To indicate your decision with respect to your rights, you should complete and return to your broker, dealer or nominee the form entitled "Beneficial Owner Election Form." You should receive this form from your broker, dealer or nominee with the other rights offering materials. How long will the rights offering last? You will be able to exercise your subscription rights only during a limited period. If you do not exercise your subscription rights before 5 p.m., New York City time, on June 25, 2001, your subscription rights will expire. We may, in our discretion, decide to extend the rights offering. In addition, if the commencement of the rights offering is delayed, the expiration date will similarly be extended. After I exercise my subscription rights, can I change my mind? No. Once you send in your subscription certificate and payment, you cannot revoke the exercise of your subscription rights, even if you later learn information about us that you consider to be unfavorable. You should not exercise your subscription rights unless you are certain that you wish to purchase additional shares of our common stock at a price of $ .73 per share. <TABLE> <S> <C> Company of New York and timely follow the other procedures discussed in this prospectus on or before the expiration date. Federal Income Tax Consequences ......... For United States federal income tax purposes, we believe that holders of our common stock will not recognize taxable income upon the receipt or exercise of the rights. If you sell the stock you acquire upon the exercise of your rights, you will recognize taxable income equal to the excess of the amount realized over your basis in the stock. You should consult your own tax advisor concerning the tax consequences of this offering under your own tax situation. For further information on tax consequences, please see "The Rights Offering - under Federal Income Tax Considerations" beginning on page 48 of this prospectus. Stock Certificates....................... We will deliver stock certificates representing shares of our common stock to those who purchase shares by exercising rights as soon as practicable after the expiration date. Amendment, Extension and Termination .... We will hold open our rights offering until the expiration date. We may extend the expiration date. We may amend, withdraw or terminate our rights offering at our discretion. Risk Factors............................. You should carefully consider the information set forth under "Risk Factors" beginning on page 6 of this prospectus and all of the information in this prospectus before deciding to exercise your rights. </TABLE>

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+ PROSPECTUS SUMMARY This summary highlights information we present in greater detail elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of factors described under "Risk Factors" and elsewhere in this prospectus. Pemstar Inc. We are a rapidly growing provider of electronics manufacturing services to original equipment manufacturers in the communications, computing, data storage, industrial and medical equipment markets. Electronics manufacturing services include: . Manufacturing services, including the assembly of electrical and mechanical components and products; . Engineering, design and test services, including the development of product specifications, manufacturing processes and equipment, and product testing systems; . Supply chain management, including materials procurement, identification of suppliers and inventory management; and . Fulfillment services, including delivery of completed products and components to end users and repair and replacement services for manufactured products and components. Original equipment manufacturers design, build, market and sell new products to end users of these products. These manufacturers may outsource one or more of these functions to electronics manufacturing services providers. We provide a comprehensive range of electronics manufacturing services, including engineering, manufacturing and fulfillment services to our customers on a global basis through fifteen facilities strategically located in North America, Asia, Europe and South America. Our comprehensive service offerings support our customers' needs from product development and design through manufacturing to worldwide distribution and aftermarket support. We offer our communications industry customers substantial expertise and experience in the optical and wireless components and systems markets that are experiencing rapidly growing demand for specialized engineering and manufacturing services. Since our founding in 1994, we have experienced strong financial growth and consistent profitability. Our pro forma net sales for fiscal 2001 were $650.9 million. The electronics manufacturing services industry is experiencing dramatic growth primarily driven by the overall growth of the electronics industry, increased use of outsourcing among original equipment manufacturers and frequent asset divestitures by these manufacturers to electronics manufacturing services businesses. By outsourcing electronics manufacturing services, original equipment manufacturers are able to focus on their core competencies, such as product development, sales, marketing and customer service, while utilizing the expertise of electronics manufacturing services providers in assembly and test operations and supply chain management. These manufacturers are increasingly outsourcing a broad spectrum of design services, including product definition, design for manufacturability and design for test. Technology Forecasters, Inc. projects that the global electronics manufacturing services industry will grow at an average annual rate of 27%, from $78.0 billion of revenues in 1999 to $260.3 billion in 2004. Technology Forecasters also projects that the communications segment, which represented $37.9 billion of revenues in 2000, will be the fastest growing electronics manufacturing services market through 2004. Additionally, the electronics manufacturing services industry is highly fragmented, with over 3,000 independent electronics manufacturing services providers in existence and the twenty largest providers accounting for 72% of the worldwide market in 2000 based on revenues. Our customers include industry leading original equipment manufacturers such as Diva Systems, Efficient Networks, Fluke Corporation, Fujitsu, Honeywell, IBM, Motorola, Pinnacle, RSA and Seagate. We also have capitalized on our expertise in the optical and wireless components and systems markets to develop strong relationships with a number of emerging optical and wireless components and systems original equipment manufacturers, including Interwave, ONI Systems, Optical Solutions, Qlogic, Repeater Technologies, Terayon and Western Multiplex. Over the past several years, we have completed a number of acquisitions and established new operations in order to expand our geographic presence, enhance our product and service offerings, diversify our customer base and increase our production capacity. Since May 1, 1999, we have completed four acquisitions to expand our operations to Almelo, the Netherlands; San Jose, California; Dunseith, North Dakota and Taunton, Massachusetts. Since 1994, we also have opened facilities in Austin, Texas; Guadalajara, Mexico; Tianjin, China; Navan, Ireland; Singapore; Hortolandia, Brazil; Yokohama, Japan and Bangkok, Thailand, which have expanded our manufacturing and distribution capabilities and further broadened our customer base. We continue to actively pursue potential acquisitions to complement our internal growth and to expand our business. Our business is built on several specific characteristics, including the following: . We provide our customers with worldwide engineering and product design services by utilizing over 600 engineering professionals across all of our locations. . We focus substantial resources on the rapidly expanding communications industry and have developed specific expertise in optical and wireless components and systems market segments. . We complement our engineering capabilities with a comprehensive range of manufacturing, value-added component assembly, customized final system assembly and fulfillment services, such as worldwide distribution and aftermarket services. . We have established a global network of facilities in the world's major electronics markets--North America, Asia, Europe and South America--to serve the increasing outsourcing needs of both multinational and regional original equipment manufacturers. Among the challenges we face and the risks inherent in investing in our business are the intense competition and significant fluctuation in product demand which characterize our industry. A significant portion of our net sales are made to a small number of customers with whom we do not have firm long-term purchase orders or commitments. We compete with a number of other electronics manufacturing services providers, many of which have global operations and greater resources than we do. In addition, we have experienced rapid growth in a short period of time and we may face challenges in managing our expansion and integrating acquired businesses. Our Strategy Our objective is to enhance our position as a provider of electronics manufacturing services to original equipment manufacturers worldwide. We intend to achieve this objective by continuing to employ the following strategies: . Leverage our worldwide engineering services; . Provide comprehensive engineering, manufacturing and fulfillment service offerings; . Focus on optical and wireless markets; . Expand our global scale and infrastructure; . Pursue selective acquisitions; . Focus on quality management; and . Provide superior supply chain management. Recent Developments On May 7, 2001, we completed the acquisition of the business of U.S. Assemblies New England, Inc., which operates through an 85,000 square foot facility located in Taunton, Massachusetts. This business' principal customer is Telco Systems, a telecommunications company. The aggregate purchase price included $12.6 million in cash and the assumption of $1.7 million of indebtedness. We believe this acquisition will enable us to better serve existing customers located in New England and provide access to important new customers. ---------------- Pemstar is a Minnesota corporation incorporated in 1994. Our principal executive office is located at 3535 Technology Drive N.W., Rochester, Minnesota 55901. Our telephone number is (507) 288-6720. We maintain a website on the Internet at www.pemstar.com. Our website, and the information contained therein, is not a part of this prospectus. The Offering Common stock offered by Pemstar..... 4,500,000 shares Common stock offered by selling 625,000 shares shareholders........................ Common stock to be outstanding after the offering................. 32,794,347 shares Use of proceeds..................... We intend to use the net proceeds from this offering to repay existing indebtedness. See "Use of Proceeds." Nasdaq National Market symbol....... "PMTR" The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of March 31, 2001, and excludes: . 4,418,677 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2001, with a weighted average exercise price of $5.93 per share; and . 765,778 additional shares reserved for issuance under our stock incentive plans. Our fiscal year ends on March 31 of each year and fiscal years are identified in this prospectus according to the calendar year in which they end. For example, the fiscal year ended March 31, 2001, is referred to as "fiscal 2001." Except as otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise the option granted by us. Summary Consolidated Financial Data The following table summarizes financial data regarding our business and should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the related notes included elsewhere in this prospectus. The unaudited pro forma consolidated data for the fiscal year ended March 31, 2001 gives effect to the acquisition of Turtle Mountain Corporation as if it had occurred on April 1, 2000. Operating results for Turtle Mountain from the date of acquisition, August 1, 2000, through March 31, 2001, are included in our statement of income data for the year ended March 31, 2001. <TABLE> <CAPTION> Year Ended March 31, ------------------------------------------------------------- 2001 1997 1998 1999 2000 2001 Pro Forma(1) ------- -------- -------- -------- -------- ------------ (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Consolidated Statements of Income Data: Net sales............... $31,895 $165,049 $187,381 $393,842 $635,307 $650,904 Costs of goods sold..... 27,347 147,962 172,219 363,974 581,278 594,993 ------- -------- -------- -------- -------- -------- Gross profit............ 4,548 17,087 15,162 29,868 54,029 55,911 Selling, general and administrative expenses............... 2,976 8,328 10,955 21,576 37,366 38,002 Amortization............ -- 54 190 1,281 1,961 2,118 ------- -------- -------- -------- -------- -------- Operating income........ 1,572 8,705 4,017 7,011 14,702 15,791 Other income (expense)-- net.................... 247 455 (438) (74) 967 1,030 Interest expense........ (315) (746) (640) (3,588) (7,550) (8,276) ------- -------- -------- -------- -------- -------- Income before income taxes.................. 1,504 8,414 2,939 3,349 8,119 8,545 Income tax expense...... 554 3,097 1,273 698 1,436 1,601 ------- -------- -------- -------- -------- -------- Net income.............. $ 950 $ 5,317 $ 1,666 $ 2,651 $ 6,683 $ 6,944 ======= ======== ======== ======== ======== ======== Net income per share: Basic................. $ 0.12 $ 0.55 $ 0.15 $ 0.23 $ 0.29 $ 0.30 Diluted............... 0.12 0.49 0.12 0.15 0.25 0.26 Weighted average number of common shares outstanding (2): Basic................. 8,009 9,653 10,897 11,503 23,013 23,013 Diluted............... 8,039 10,874 14,143 17,167 26,943 26,943 Other Financial Data: Depreciation............ $ 911 $ 1,929 $ 3,331 $ 7,455 $ 12,097 Capital expenditures.... 2,887 8,393 8,657 13,415 42,542 Supplemental Data: EBITDA (3).............. $ 2,730 $ 11,143 $ 7,100 $ 15,673 $ 29,727 Net cash provided by (used in) operating activities............. 776 (1,374) 65 (20,225) (54,219) Net cash provided by (used in) investing activities............. (2,938) (10,126) (4,989) (52,611) (62,684) Net cash provided by (used in) financing activities............. 2,133 14,661 2,556 74,734 119,512 </TABLE> The as adjusted balance sheet data gives effect to the consummation of this offering and the application of the net proceeds as described under "Use of Proceeds." <TABLE> <CAPTION> As of March 31, 2001 -------------------- As Adjusted Actual (unaudited) -------- ----------- (in thousands) <S> <C> <C> Consolidated Balance Sheet Data: Unrestricted cash and cash equivalents................... $ 5,882 $ 5,882 Working capital.......................................... 131,851 131,851 Total assets............................................. 349,077 349,077 Long-term debt and capital lease obligations less current maturities.............................................. 84,873 31,536 Total shareholders' equity............................... 150,712 204,049 </TABLE> -------- (1) Reflects adjustments for (i) the additional amortization expense related to the allocation of the purchase price to goodwill for the acquisition, based on an estimated useful life of twenty years for the goodwill, (ii) the additional interest expense related to the borrowings required by us to complete the acquisition using borrowing capacity available under our credit facility with US Bank; the additional interest charges represent four months of incremental borrowings for the purchase of Turtle Mountain totaling $16,584, calculated at an 10.4% interest rate, which approximates our current borrowing rate, and (iii) income tax effect of (i) and (ii) at a 38.5% marginal tax rate. See "Unaudited Consolidated Pro Forma Financial Data."

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+ PROSPECTUS SUMMARY Because this is a summary, it does not contain all the information that may be important to you. You should read carefully the entire prospectus, including "Risk Factors" and the financial statements, before you decide whether to invest in our common stock. Incara Pharmaceuticals Corporation Our Business Incara Pharmaceuticals Corporation is developing therapies focused on tissue protection, repair and regeneration. In particular, we are focused on developing adult liver stem cell therapy, referred to as liver progenitor cell therapy, for the treatment of liver failure. We are also conducting research on and development of a series of catalytic antioxidant molecules that we believe will provide strategic opportunities for collaboration with larger pharmaceutical companies in areas such as stroke and the prevention of side effects induced by radiation in cancer therapy. We are actively pursuing such collaborations. We are also developing catalytic antioxidants for applications in our liver cell therapy program and other uses of cell therapy. In collaboration with Elan Corporation, plc and its subsidiaries, we are conducting a Phase 2/3 clinical trial of an ultra-low molecular weight heparin for the treatment of ulcerative colitis. A summary of our current research and development programs is set forth below. Liver progenitor cell transplant. Liver progenitor cells are young cells found in the human liver that can grow and divide many times. Our process purifies human liver progenitor cells from the livers of organ donors. Based on animal models, we believe that following transplantation into patients our cells will be able to grow and expand to create new functioning liver tissue. Currently, chronic liver disease leads to approximately 330,000 hospitalizations and 30,000 deaths each year in the United States. There are, however, only approximately 4,900 donor livers available annually in the United States and over 17,500 people on the liver transplant waiting list. The number of patients with such severe cirrhosis that they could become candidates for a transplant exceeds 100,000. We plan to file in late 2001 an Investigational New Drug, or IND, application with the Food and Drug Administration, or FDA, in order to initiate clinical trials. We intend to conduct these clinical trials to determine the efficacy of our liver progenitor cell therapy for treatment of liver failure and some inherited liver diseases in infants and young children. Small molecule catalytic antioxidants. We intend to investigate small molecule catalytic antioxidants as a treatment for stroke and prevention of radiation-induced side effects from cancer therapy. An estimated 600,000 individuals suffer strokes in the United States each year, with estimated direct costs of treating stroke exceeding $28 billion annually. Our lead catalytic antioxidant molecule significantly reduced damaged brain tissue when administered as late as 7.5 hours after obstruction of blood flow in animal models of stroke. An estimated 400,000 cancer patients in the U.S. each year develop mucositis caused by chemotherapy or radiation. Mucositis is characterized by painful oral ulcers which may limit or delay therapy. Incara's catalytic antioxidants have reduced the severity of mucositis and lung damage induced by radiation in animal models. We believe compounds from our catalytic antioxidant program will also have application in the developing adult stem cell transplant industry. Antioxidants destroy free radicals, which damage cells within the human body. In cell culture experiments, these catalytic antioxidant compounds have been shown to improve the ability of liver cells to survive freezing and thawing. They have also been shown to protect neurons in culture from oxygen deprivation and pancreatic islet cells in culture from various toxins. In animals, one of our compounds has been shown to protect pancreatic islet cells against autoimmune attack in a model of juvenile onset diabetes. In addition, we are exploring the possibility that these compounds may enhance the viability of transplanted pancreatic islet cells and we intend to explore their effect on transplanted liver progenitor cells. OP2000, an ultra-low molecular weight heparin. We are exploring the use of OP2000 as a treatment for inflammatory bowel disease. Heparin is a naturally occurring mixture of substances produced by the human body with anti-clotting and anti-inflammatory properties. OP2000 is derived from heparin by breaking it down into smaller molecules. Lower weight, or smaller, molecules of heparin may prove to have advantages over heparin itself, including better safety, efficacy and convenience. OP2000 is being tested in a multicenter phase 2/3 clinical trial as a treatment for ulcerative colitis, a form of inflammatory bowel disease. Approximately 1,000,000 patients suffer from ulcerative colitis in the United States and Europe combined. Our History Our company was incorporated in Delaware as Intercardia, Inc. in 1994. In July 1999 our company changed its name to Incara Pharmaceuticals Corporation. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Corporate Information We have two wholly owned subsidiaries, Aeolus Pharmaceuticals, Inc., a Delaware corporation, and Incara Cell Technologies, Inc., a Delaware corporation. We own 80.1% of Incara Development, Ltd., a Bermuda corporation, and 35% of CPEC, LLC, a Delaware limited liability company. Unless otherwise stated, "Incara" and "we" refer collectively to Incara Pharmaceuticals Corporation and its subsidiaries. Our offices are located at 79 T.W. Alexander Drive, 4401 Research Commons, Suite 200, P.O. Box 14287, Research Triangle Park, North Carolina 27709, and our telephone number is (919) 558-8688. Our Web site is located at www.incara.com. -------------- Information on our Web site is not part of this prospectus. --------------------------------------------------------------------------------

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+ Prospectus Summary............................................................1 The Offering..................................................................2 Summary Financial Data........................................................6 Risk Factors..................................................................7 Use of Proceeds..............................................................15 Dilution ....................................................................16 Capitalization...............................................................17 Dividend Policy..............................................................17 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................18 Proposed Business............................................................19 Management...................................................................28 Principal Stockholders.......................................................31 Certain Transactions.........................................................33 Description of Securities....................................................35 Underwriting.................................................................39 Legal Matters................................................................41 Experts ....................................................................41 Where You Can Find Additional Information....................................42 Index to Financial Statements...............................................F-1

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+ Prospectus Summary This summary highlights some of the information in this Prospectus. The summary is not complete and may not provide all information you should consider before deciding whether or not to exercise the rights. Therefore, we urge you to read the entire prospectus carefully. Questions and Answers about the Rights Offering What is a right? Rights give our stockholders the privilege to purchase additional shares of our common stock for $2.53 per share. On October 23, 2001, the last reported sales price for our common stock on the American Stock Exchange was $2.25 per share. We have granted our stockholders as of 5:00 p.m. on October 26, 2001, 0.711 rights for every share of common stock owned at that time. Each whole right entitles you to purchase one share of common stock for $2.53. For example, if you were the record holder of 1,000 shares on the record date, you would have the right to purchase 711 shares of common stock for $2.53 per share. What is the record date? The record date is October 26, 2001 at 5:00 p.m. (Eastern Time). Only our stockholders of record as of the record date will receive rights to subscribe for new shares of common stock. Will I receive fractional rights or shares? We are not issuing fractional rights or shares. If the number of shares of common stock you held of record on the record date would result in your receipt of fractional rights, the number of rights issued to you is being rounded up to the nearest whole right. If you were the record holder of less than one share of common stock, you are receiving one whole right. Why is GSE Systems offering the rights? We are offering the rights to raise equity capital. We have determined that, given current market conditions, this rights offering is the most appropriate means of raising equity capital because it affords our existing stockholders an opportunity to subscribe for the new shares of common stock and to maintain their proportionate interest in GSE Systems. We will use the net proceeds of this offering for repayment of a $1 million loan from ManTech, working capital, strategic acquisitions, capital expenditures and general corporate purposes. How many shares is GSE Systems offering in the rights offering? We are offering 2,219,701 shares of common stock to be issued upon exercise of the rights. How much money will GSE Systems receive from the rights offering? Our gross proceeds from the rights offering depends on the number of shares that are purchased. If we sell all shares which may be purchased upon exercise of the rights offered by this Prospectus, then we will receive proceeds of $5,615,844, before deducting expenses payable by us, estimated to be $200,000. We will use the net proceeds of this offering for the repayment of a recent $1 million loan from ManTech, working capital, strategic acquisitions, capital expenditures and general corporate purposes. Has the board of directors made a recommendation regarding this offering? Our board of directors makes no recommendation to you about whether you should exercise any rights. Stockholders who do exercise rights risk investment loss on new money invested. We cannot assure you that the subscription price will be below any trading price for our common stock during or after the rights offering. For more information regarding some of the risks inherent in this rights offering, see "Risk Factors." Is exercising my subscription rights risky? The exercise of your subscription rights involves certain risks. Exercising your subscription rights means buying additional shares of our common stock, and should be carefully considered as you would view other equity investments. Among other things, you should carefully consider the risks described under the heading "Risk Factors" in this Prospectus. How soon must I, as a stockholder, act? The rights expire on December 14, 2001, at 5:00 p.m., Eastern Time. The subscription agent must actually receive all required documents and payments before that date and time. Although we have the option of extending the expiration date, we currently do not intend to do so. We also reserve the right to withdraw, terminate or amend the rights offering at any time for any reason. In the event that the offering is withdrawn or terminated, or any submitted subscriptions no longer comply with the amended terms of the offering, we will return all funds received from such subscriptions (without interest). May I transfer my rights? Generally, no. The rights may be exercised only by the person to whom they are granted. However, you may transfer your subscription rights to immediate family members or to entities wholly owned or controlled by you. For information on the persons to whom you can transfer your rights, as well as how the rights can be transferred, see "The Rights Offering -- Transferability of Rights." What is the basic subscription privilege? By exercising the rights, you may purchase 711 newly-issued shares of common stock for every 1,000 shares owned by you on October 26, 2001 at the subscription price of $2.53 per share. This is your "basic subscription privilege." What is the oversubscription privilege? If you fully exercise your basic subscription privilege, the oversubscription privilege entitles you to subscribe to additional shares of our common stock at the same subscription price of $2.53 per share that applies to your basic subscription privilege. What are the limitations on the oversubscription privilege? We will be able to satisfy your exercise of the oversubscription privilege only if our other stockholders do not elect to purchase all of the shares offered under their basic subscription privilege. We will honor oversubscription requests in full to the extent sufficient shares are available following the exercise of rights under the basic subscription privilege. If oversubscription requests exceed shares available, we will allocate the available shares pro rata among those who oversubscribed. Have any stockholders indicated their intentions with respect to participation in the offering? GP Strategies (including its subsidiaries SGLG, Inc. and General Physics Corporation) and ManTech have each waived its right to receive rights to purchase additional shares of common stock in this offering and will not exercise its basic subscription privilege or oversubscription privilege. Accordingly, we have excluded the rights that GP Strategies, including its subsidiaries, and ManTech would otherwise be granted from this offering and common stock that would otherwise underlie rights granted to GP Strategies, including its subsidiaries, and ManTech will not be included in the shares available for the oversubscription privilege. Am I required to subscribe in the rights offering? No. You are not required to exercise any rights, purchase any new shares, or otherwise take any action in response to this rights offering. What will happen if I do not exercise my rights? You will retain your current number of shares of our common stock even if you do not exercise your subscription rights. However, if other stockholders exercise their subscription rights and you do not, the percentage of GSE Systems that you own may diminish, and your relative voting rights may be diluted. In addition, because the prevailing market price of our common stock may be greater than the subscription price for part of the offering period, if you choose not to exercise your subscription rights you could experience dilution of your economic interest. May I change or cancel my exercise of rights after I send in the required forms? No. Once you send in your subscription warrant and payment, you cannot revoke the exercise of your subscription rights, even if you later learn information about us that you consider to be unfavorable. You should not exercise your subscription rights unless you are certain that you wish to purchase additional shares of common stock at the subscription price. Will my money be returned if the rights offering is cancelled? We can cancel or terminate the rights offering at any time. If we terminate or cancel this offering, we will return your subscription price, but without any payment of interest. Are there tax consequences to me as a result of the offering? For United States federal income tax purposes, we believe that a stockholder will not recognize taxable income upon the receipt or exercise of rights. See "Certain Federal Income Tax Considerations." Each stockholder should consult its own tax adviser concerning the tax consequences of this offering under the holder's own tax situation. This Prospectus does not summarize tax consequences arising under state tax laws, non-U.S. tax laws, or any tax laws relating to special tax circumstances or particular types of taxpayers. What should I do if I want to participate in the rights offering, but my shares are held in the name of my broker, dealer or other nominee? If you hold your shares of our stock through a broker, dealer or other nominee (for example, through a custodian bank), then your broker, dealer or other nominee is the record holder of the shares you own. This record holder must exercise the rights on your behalf for shares you wish to purchase. Therefore, you will need to have your broker, dealer or other nominee act for you. If you wish to participate in the rights offering and purchase new shares, please promptly contact the record holder of your shares. We will ask your broker, dealer or other nominee to notify you of the rights offering. To indicate your decision with respect to your rights, you should complete and return to your record holder the form entitled "Beneficial Owner Election Form." You should receive this form from your record holder with the other rights offering materials. What fees or charges apply if I purchase shares? We are not charging any fee or sales commission to issue rights to you or to issue shares to you if you exercise rights. If you exercise rights through a record holder of your shares, you are responsible for paying any fees that person may charge. How do I exercise my rights? What forms and payment are required to purchase shares? As a record holder of our common stock on October 26, 2001, you are receiving this Prospectus, a subscription warrant and instructions on how to purchase shares. If you wish to participate in this rights offering, then before your rights expire, you must: o deliver the subscription price by wire transfer, or certified or cashier's check drawn on a U.S. bank, or personal check that clears before expiration of the rights; and o deliver a properly completed subscription warrant. The instructions also describe an alternate procedure called "Notice of Guaranteed Delivery," which allows an extra three days to deliver the subscription warrant if full payment is received before the expiration date and a securities broker or qualified financial institution signs the form to guaranty that the subscription warrant will be timely delivered. To whom should I send forms and payment? You may send subscription documents to Continental Stock Transfer & Trust Company by mail, hand delivery or overnight courier: Continental Stock Transfer & Trust Company Attn: Reorganization Department 2 Broadway New York, New York 10004 Your subscription payment should also be sent to Continental Stock Transfer & Trust Company. For instructions on how this payment should be made, see "The Rights Offering -- Required Forms of Payment of Subscription Price." Securities brokers and other qualified financial institutions can use an alternate procedure called "Notice of Guaranteed Delivery." See "The Rights Offering -- Special Procedure under "Notice of Guaranteed Delivery" Form." What should I do if I have other questions? If you have questions, need additional copies of offering documents or otherwise need assistance, please contact: Gill Grady Sr. Vice President, Investor Relations GSE Systems, Inc. 9189 Red Branch Road Columbia, MD 21045 Phone 1-800-638-7912 or (410) 772-3500 Fax: (410) 772-3599 Email: investor@gses.com To ask other questions or to receive copies of our recent SEC filings, you can also contact us by mail or telephone, or refer to the other sources described under "Where You Can Find More Information." Our Company We are a world leader in the design, development and supply of high fidelity real-time process automation, simulation software, systems and services for the energy and manufacturing industries. We operate through two business segments, Power Simulation and Process Automation. Power Simulation Our Power Simulation products utilize proprietary high fidelity real-time software and third party hardware to replicate all or a portion of the process functions of a power or industrial plant. Our simulators provide an invaluable tool to train plant personnel, as well as to optimize and validate plant designs and test process modifications. We have a significant market presence in nuclear power plant simulation, and we are seeking to increase our market presence in the fossil fuel plant simulation market. Our substantial investment in simulation technology has facilitated the development of proprietary software tools, which significantly reduce the cost and time required to design and develop simulation software. We believe that these tools provide us with a competitive advantage in the simulation field. In addition, our development of signal analysis tools provides a complementary suite of plant optimization and asset management capabilities to improve power plant performance. Our strategy is to build upon our leading market position in Power Simulation to take advantage of new market opportunities. Specifically, we intend to: o Continue serving our traditional customer base and be prepared to meet increased demand if traditional simulation use grows in relation to increased electric capacity in the United States. o Market our existing and upgraded simulation products and our newly developed signal analysis products as plant optimization, asset management and condition monitoring tools. o Provide plant information systems that protect our customer's investment in legacy software while providing seamless real-time information across a diverse multi-national enterprise. o Leverage our existing engineering staff to provide additional services to domestic and international clients. In addition, we have grown through acquisitions and we will continue to pursue acquisitions and investment opportunities that will create value and enhance cash flow. We target acquisitions and investments that provide us: o Cost saving opportunities o Enhanced positioning in existing markets o Entry into new geographic and industry markets o Turnaround opportunities for under-performing businesses We have provided approximately 200 simulation systems to an installed base of over 75 customers worldwide. In 2000, approximately 73% of our Power Simulation revenue was generated from end users outside the United States. Our Power Simulation customers include: Ameren, Arizona Public Service, Carolina Power and Light Company, Commonwealth Edison Company, Eskom South Africa, Karnaraft Sakerhet & Utbildning AB, Korean Electric Power Company, Nationalina Elecktrischecka Kompania, Orgrez SC, Battelle's Pacific Northwest National Laboratory, Taiwan Power Company, and West Bengal Development Corp. For the year ended December 31, 2000, one Power Simulation customer (Battelle's Pacific Northwest National Laboratory) accounted for approximately 22% of our consolidated revenues. The Pacific Northwest National Laboratory is the purchasing agent for the Department of Energy and the numerous projects we perform in Eastern and Central Europe. Process Automation Our Process Automation products utilize high fidelity real-time software and hardware to manage a plant's process systems by monitoring, measuring, and automatically controlling variables such as temperature, pressure, flow, liquid level and chemical composition. These products are also used to acquire, store and manage information for regulatory compliance, asset management and other purposes. We believe that our investment in process control technology and recipe and batch management software provides us with a competitive advantage in batch applications in the process industries. Our Process Automation products and services are targeted at the following industries in which our personnel have substantial experience: o Specialty chemicals o Pharmaceutical o Food and beverage o Metals Our flagship product in our Process Automation business is the D/3 DCS, a distributed control system product that is highly flexible and designed to meet open standards. D/3 DCS is a real-time system, which uses multiple process control modules to monitor, measure, and automatically control variables in both continuous and complex batch processes. D/3 DCS also forms the platform for plant-wide information for operators, engineers and management. Our goal is to expand our leading position as a provider of process automation solutions and services to our target markets of batch and hybrid control for the specialty chemical, food and beverage, and pharmaceutical industries. Specifically, we intend to: o Improve our technology to improve processing speed and decrease manufacturing cost. o Expand our expertise beyond the specialty chemical, food and beverage, pharmaceutical, and metals industries. o Leverage our expertise through the sale of engineering consulting services. We have provided over 300 process control systems to an installed base of over 125 customers worldwide. In 2000, approximately 10% of our worldwide Process Automation revenue was generated from end users outside the United States. Our customers include, among others, Archer Daniels Midland Company, Aristech, Bethlehem Steel Corporation, Cargill Incorporated, Eastman Chemical Company, Formosa Plastics Company, GE Plastics, Merck & Co., Inc., Miller Brewing Company, and Westinghouse Savannah River Company. For the year ended December 31, 2000, one Process Automation customer (Westinghouse Savannah River Company) accounted for approximately 11% of our consolidated revenues. Avantium We have helped to found Avantium International B.V., a Netherlands-based technology company which uses high speed screening and simulation technology to reduce the product development cycle for the chemical, pharmaceutical and energy industries. Other participants in the creation of Avantium are such well-respected companies as Shell Chemical, Glaxo Smith-Kline, Akzo Nobel, Pfizer, W.R. Grace and others. We currently own over 19% of Avantium. However, Avantium currently requires a significant amount of additional capital to continue its business operations. They recently advised us that, under the terms of this additional financing, our ownership interest will be diluted to approximately 6.3%. We are currently in negotiations with Avantium about this situation. However, there can be no assurances that our ownership interest will not be diluted to 6.3% at this time, or that we will not face additional dilution in the future. Avantium is using our process control, batch management and simulation technologies as part of their informatics system. We see several benefits from this relationship, including the potential access to market, the sharing of technology development, and the financial ownership in a growing company in a large and expanding market space. We intend to continue working with Avantium in product development and marketing so that common clients will be able to use Avantium's VirtualPlant technology to develop scalable products that will fit together at the manufacturing level with our process control and simulation products. We hope this relationship will accelerate introduction of new products and reduce our research and development costs. Competitive Strengths We believe that we are in a strong position to compete in both the Power Simulation and Process Automation markets based upon the following strengths: o We have an experienced management and engineering team and as a company we have more than 30 years of experience producing high fidelity real-time simulators and over 25 years of experience producing fully integrated computerized process control systems. o We have developed a library of proprietary software tools that substantially facilitate and expedite the design, production and integration, testing and modification of software and systems used in both our power simulation and process control products. o Our software products and tools are executed on standard operating systems with third-party off-the-shelf hardware permitting our customers to acquire less expensive hardware and operating systems. o We have a multinational sales force with offices located in Nykoping, Sweden, and Tokyo, Japan and agents and representatives in 22 other countries. To capitalize on international opportunities and penetrate foreign markets, we have established strategic alliances and partnerships with several foreign entities.

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+ PROSPECTUS SUMMARY SIMPLEX SOLUTIONS, INC. We provide software and services for integrated circuit design and verification to enable our communications, computer and consumer products customers to achieve first-time production success and rapid delivery of complex system-on-chip. System-on-chip refers to an integrated circuit that includes computing, memory and communications components that previously had been available only on separate chips. Our customers can gain a competitive advantage by using our products and services in advance of manufacture to design and verify integrated circuits that will perform as intended, taking into account the complex effects of deep-submicron semiconductor physics. This competitive advantage manifests itself in our customers' ability to deliver greater functionality in smaller and faster chips for networking, computing and wireless products. Customers successfully using our products include chip and system vendors such as AMD, ATI Technologies, Cadence Design Systems, Conexant Systems, Inc., Infineon, Intel Corporation, LSI Logic, Matrox Graphics, Philips Semiconductors, Silicon Graphics, Inc., Sony Corporation, STMicroelectronics, Sun Microsystems, Texas Instruments Incorporated, Toshiba and Vitesse Semiconductor. Each of these customers accounted for over $1,000,000 in revenue during the last ten quarters. Semiconductor, consumer electronics and other technology product manufacturers depend on their ability to launch products successfully and cost effectively within narrow market windows. First-mover advantage when introducing new products can be vital to capturing dominant market share for a given product segment, making the efficiency of design and manufacturing processes critical to competitive positioning. Delays caused by unanticipated design flaws can force product launch postponement or cancellation, resulting in the failure of products, divisions and even companies. At the same time, demand for portable, power-efficient and high-performance electronic products, such as cell phones, has driven chip manufacturers to design complex system-on-chip with small feature sizes reaching 0.18 micron and below, referred to as deep submicron. Feature size relates to the size of an integrated circuit's components and is measured in microns, or millionths of a meter. These system-on-chip integrate digital components, such as microprocessors and memory, together with analog components, such as radio-frequency receivers and analog-to-digital converters, into a single chip. According to the Integrated Circuit Engineering Corporation report (ICE -- 2000), the worldwide market for system-on-chip and application-specific integrated circuits is expected to grow from $23 billion in 1999 to $64 billion in 2004. Of this total market in North America, Dataquest estimates that the percentage of chips manufactured at or below 0.18 micron will grow from less than 10% of all chips manufactured in 1999 to over 85% of all chips manufactured in 2004. Using smaller feature sizes allows increased design functionality on a single chip but results in numerous constraints imposed by semiconductor physics. These constraints often exceed the capabilities of traditional design software and can result in expensive design and manufacturing iterations. In addition, designers are sometimes unable to diagnose and address design flaws that cause their chips to fail. The Collett International Research, Inc. 1999 and 2000 surveys report that, over each of the last two years, approximately one-half of the chips released to manufacture in North America required more than one manufacturing iteration prior to production ramp-up. Our system-on-chip verification software and services are designed to provide comprehensive, high-speed verification that an integrated circuit will perform as intended, taking into account the complex effects of deep submicron semiconductor physics. Our design foundry services provide design implementation to help our customers facilitate first-to-market delivery of system-on-chip designs. Using our products and services, our customers can eliminate manufacturing iterations by avoiding potential design flaws early in the design cycle. Eliminating iterations provides our customers with both significant savings in manufacturing costs and reduced time-to-market. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MAY 1, 2001. 4,000,000 Shares SIMPLEX SOLUTIONS, INC. LOGO Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $10.00 and $12.00 per share. We have applied to have our common stock quoted on The Nasdaq Stock Market's National Market under the symbol "SPLX". The underwriters have an option to purchase a maximum of 600,000 additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6. <TABLE> <CAPTION> UNDERWRITING PRICE DISCOUNTS AND PROCEEDS TO TO PUBLIC COMMISSIONS SIMPLEX --------------- ------------- ----------- <S> <C> <C> <C> Per Share............................................ $ $ $ Total................................................ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2001. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON ROBERTSON STEPHENS SG COWEN The date of this prospectus is , 2001 The benefits we provide are the result of our expertise in chip design, computer science algorithms and software engineering, and include: - Advancing deep submicron integrated circuit design and manufacture: Our full-chip analysis capabilities are designed to enable electrical correctness throughout the design process. Integrated circuits with deep submicron feature sizes, or geometries, have electrical requirements, including power integrity, timing integrity, signal integrity and reliability that must be satisfied for a deep submicron chip to function as intended. Our products are designed to facilitate DSM closure early in the design process. DSM closure is the point in the deep submicron integrated chip design cycle where these electrical requirements are met. Although our products may be used to design chips with any feature size, at 0.18 micron and below design complexity reaches a point where our customers find the use of our products to be vital. - Accelerating product time-to-market: Our software and services accelerate time-to-market by helping designers deliver integrated circuits that function as intended, with fewer costly design and manufacturing iterations. - Delivering lower cost per chip: Our products increase design process efficiency, resulting in lower production costs, increased chip reliability and reduced end-product maintenance costs. Our customers use our products to design integrated circuits such as microprocessors, application-specific integrated circuits, digital signal processors and high-end graphics processors for many equipment markets including computers, networking, wireless and communications. In addition, we have developed strategic relationships with semiconductor manufacturers and software vendors in our customers' supply chain to integrate our software and services throughout our customers' design-through-production cycle. For example, we work with semiconductor manufacturers, or foundries, to measure the accuracy of our products and to obtain access to the most advanced semiconductor processes. These foundries include Chartered Semiconductor Manufacturing, IBM, NEC, Toshiba, Taiwan Semiconductor Manufacturing and United Microelectronics. Many of these foundries have recommended the use of our products to their customers to help ensure high-quality results from manufacturing. We also participate in software integration programs with Cadence Design Systems, Mentor Graphics and Synopsys. Our principal executive offices are located at 521 Almanor Avenue, Sunnyvale, California 94085, and our telephone number is (408) 617-6100. Our website is located at www.simplex.com. The information contained on our website does not constitute part of this prospectus. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................. 1 RISK FACTORS........................ 6 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........ 17 USE OF PROCEEDS..................... 18 DIVIDEND POLICY..................... 18 CAPITALIZATION...................... 19 DILUTION............................ 20 SELECTED CONSOLIDATED FINANCIAL DATA.............................. 21 SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA.................... 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 25 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> BUSINESS............................ 45 MANAGEMENT.......................... 63 CERTAIN TRANSACTIONS................ 73 PRINCIPAL STOCKHOLDERS.............. 76 DESCRIPTION OF CAPITAL STOCK........ 78 SHARES ELIGIBLE FOR FUTURE SALE..... 81 UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS.................. 83 UNDERWRITING........................ 86 NOTICE TO CANADIAN RESIDENTS........ 89 LEGAL MATTERS....................... 90 EXPERTS............................. 90 WHERE YOU CAN FIND ADDITIONAL INFORMATION....................... 90 INDEX TO FINANCIAL STATEMENTS....... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE ON THIS DOCUMENT. ------------------ Except as otherwise indicated, information in this prospectus is based on the following assumptions: - a one-for-three reverse stock split of our common stock; - the conversion of all outstanding shares of our convertible preferred stock into 4,188,791 shares of common stock upon the closing of this offering. If the initial public offering price is below $11.25 per share, additional shares of our common stock will be issued upon conversion of the outstanding shares of preferred stock. For example, if the initial public offering price is $10.00, the total number of shares of our common stock that will be issued upon conversion of the preferred stock will be 4,218,210, and if the initial public offering price is $9.00 the total number of shares of our common stock that will be issued upon conversion of the preferred stock will be 4,268,587; - the filing of a certificate of incorporation upon the consummation of this offering; and - no exercise of the underwriters' over-allotment option to purchase 600,000 shares. Unless the context indicates otherwise, the terms "we," "us" and "our" refer to Simplex Solutions, Inc., Altius Solutions, Inc., acquired in October 2000, and Snaketech S.A., acquired in March 2000. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE OFFERING Common stock offered by Simplex Solutions............................... 4,000,000 shares Common stock to be outstanding after this offering........................... 14,419,462 shares Use of proceeds......................... Working capital and general corporate purposes, including repayment of debt, prepayment of rent and facilities improvements, and for acquisition opportunities that may arise in the future. Proposed Nasdaq National Market Symbol.................................. SPLX The number of shares to be outstanding upon completion of this offering is based on shares outstanding as of March 31, 2001. This number excludes: - 4,585,401 shares of common stock authorized for issuance under our 1995 Stock Plan, of which 2,285,140 shares were subject to outstanding options; - 851,753 shares of common stock assumed and authorized for issuance under the Altius 1999 Stock Plan, of which 383,955 shares were subject to outstanding options; - 112,307 shares of preferred stock subject to outstanding warrants at a weighted average exercise price of $2.72 per share, which will automatically convert to 37,434 shares of common stock upon consummation of the offering; and - 2,091 shares of common stock subject to outstanding warrants at a weighted average exercise price of $1.91 per share. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary consolidated statements of operations data and consolidated cash flow data sets forth our historical information for the years ended September 30, 1998, 1999 and 2000 and the six months ended March 31, 2000 and 2001. The pro forma balance sheet data as of March 31, 2001 reflects the conversion of all outstanding preferred stock and warrants into common stock and warrants upon the closing of the initial public offering. The pro forma, as adjusted balance sheet data gives effect to the assumed net proceeds from the sale of 4,000,000 shares of common stock in this offering at an assumed price of $11.00 per share. <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED (REVISED) MARCH 31, --------------------------- ------------------------- 1998 1999 2000 2000 2001 ------- ------- ------- ----------- ----------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue.............................. $ 6,537 $10,881 $22,817 $ 9,393 $20,829 Gross profit............................... 5,640 8,811 18,914 7,942 14,345 Total operating expenses................... 13,167 15,930 25,110 13,370 21,084 Operating loss............................. (7,527) (7,119) (6,196) (5,428) (6,739) Net loss................................... (7,215) (7,041) (6,722) (5,627) (7,175) Basic and diluted net loss per share....... $ (4.64) $ (3.62) $ (2.40) $ (2.52) $ (1.30) ------- ------- ------- ------- ------- Number of shares used in calculation of basic and diluted net loss per share..... 1,557 1,944 2,801 2,236 5,508 ------- ------- ------- ------- ------- Pro forma basic and diluted net loss per share.................................... $ (0.96) $ (0.74) ------- ------- Number of shares used in calculation of pro forma basic and diluted net loss per share.................................... 6,984 9,691 ------- ------- OTHER FINANCIAL DATA (UNAUDITED)(1): Gross profit excluding non-cash charges.... $ 5,640 $ 8,811 $19,334 $ 8,051 $16,047 Total operating expenses excluding non-cash charges.................................. 12,669 15,917 18,160 7,755 15,392 Operating income (loss) excluding non-cash charges.................................. (7,029) (7,106) 1,174 296 655 Net income (loss) excluding non-cash charges.................................. (6,717) (7,028) 648 97 219 </TABLE> (1) In the Other Financial Data table above, we present gross profit, total operating expenses, operating income (loss) and net income (loss) as adjusted to exclude the following non-cash charges: stock-based compensation expense, in-process research and development charges, acquired development write-off, and amortization of goodwill and other intangibles. For a discussion of why we believe these measures are helpful to an understanding of our operations and for a reconciliation of these measures to those reported under generally accepted accounting principles, see "Selected Consolidated Financial Data" beginning on page 21. <TABLE> <CAPTION> AS OF MARCH 31, 2001 ----------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED --------- ------- ----------- (REVISED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 7,373 $ 7,373 $48,101 Working capital............................................. 2,618 2,618 43,346 Total assets................................................ 52,255 52,255 91,175 Convertible preferred stock and warrants.................... 24,251 -- -- Total common stock and other stockholders' equity........... 11,356 35,607 74,527 </TABLE> <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED (REVISED) MARCH 31, -------------------------- ------------------------- 1998 1999 2000 2000 2001 ------- ------- ------ ----------- ----------- <S> <C> <C> <C> <C> <C> CONSOLIDATED CASH FLOW DATA: Net cash (used in) provided by operating activities................................ $(6,522) $(5,384) $1,565 $1,113 $(3,622) Net cash (used in) provided by investing activities................................ (1,082) (696) 807 1,430 913 Net cash provided by financing activities... 11,368 3,243 871 244 2,635 </TABLE>

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+ Prospectus summary YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING US AND THE COMMON SHARES BEING SOLD IN THIS OFFERING WHICH IS SET FORTH ELSEWHERE IN THIS PROSPECTUS, INCLUDING UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 8 AND IN OUR CONSOLIDATED FINANCIAL STATEMENTS. ABOUT OUR COMPANY We are the third largest independent provider of clinical laboratory testing services in North America as measured by revenues. Through our integrated network of regional laboratory operations, we provide clinical laboratory testing services in 21 states in the United States and two provinces in Canada. We believe we offer a comprehensive menu of tests, comprised of more than 1,000 different tests. We provide clinical laboratory testing, which is performed on body fluids such as blood and urine and on tissues and other specimens, including human cells. Through Dynagene, our center for esoteric testing, we also provide a growing number of more complex esoteric tests, including molecular diagnostic services. Our customers include physicians, hospitals and other healthcare providers who utilize clinical laboratory testing in diagnosing, evaluating, monitoring and treating diseases and other medical conditions. We provide clinical laboratory testing services either directly through our wholly-owned laboratories or through joint venture partnerships we form with major local hospitals and academic medical centers. Since entering the clinical laboratory testing market in the United States in 1993, we have grown to become a significant provider of clinical laboratory testing services in a number of selected regions. Our U.S. revenues grew at a compound annual rate of approximately 40% for the five-year period ended June 30, 2001, as a result of strong internal growth combined with growth generated by 20 acquisitions and the commencement of four joint venture partnerships with hospitals. In the United States, we currently operate 22 central laboratories, 63 rapid response laboratories and 173 patient service centers, which we own directly or through our joint venture partnerships. We are positioned as a multi-regional provider with a major presence in four integrated regions in the United States: the Southeast, which is comprised of Alabama, Mississippi and Northern Florida; the Southwest, which is comprised of Louisiana, Arkansas, Texas, Oklahoma and Missouri; the Northwest, which is comprised of Oregon, Utah, Alaska, Wyoming, Colorado, Idaho, Montana and the state of Washington; and the Midwest, which is comprised of Wisconsin and Illinois. Additionally, we have operations in New York, Pennsylvania and Tennessee. In Canada, we operate in the provinces of Ontario and Alberta through two joint venture partnerships. Our operations in these provinces include four central laboratories, 18 rapid response laboratories and 143 patient service centers. Through our joint venture partnership in Ontario, we have an estimated 31% share of the Ontario independent clinical laboratory testing market. Through our joint venture partnership in Alberta, we have an estimated 60% share of the Northern Alberta market. We processed approximately 7 million requisitions during the six months ended June 30, 2001. For the six months ended June 30, 2001, we had net revenues of $197.7 million and net earnings of $8.0 million. INDUSTRY OVERVIEW According to industry sources, the U.S. clinical laboratory testing market in 1999 was approximately $31.8 billion, which includes an estimated $2.0 billion derived from esoteric testing. The clinical laboratory testing industry can be categorized into three broad types of laboratory providers: - hospital-based laboratories; - independent clinical laboratories; and - physician office laboratories. According to industry information, in 1999 those three segments accounted for approximately 63%, 26% and 11% of the clinical laboratory testing market in the United States, respectively. We estimate the Canadian clinical laboratory testing market was approximately $1.6 billion in 2000. The Canadian clinical laboratory testing industry operates in a stable environment characterized by limited competition and significant regulation under which a substantial majority of laboratory procedures are paid for by government health plans. We believe that clinical laboratory testing is critical to the delivery of quality healthcare to patients. We expect the demand and the volume of clinical laboratory testing services to increase in the future as a result of several trends, including: - the general aging of the North American population; - advances in specialized equipment and cost efficiencies that have made clinical laboratory testing available to a broader market; - an expanded base of scientific knowledge which has led to the development of more sophisticated clinical laboratory tests covering a wider array of procedures; - greater awareness by physicians and patients of the value of clinical laboratory testing as a cost- effective means of early detection of disease and the monitoring of treatment; - increased testing for high risk diseases, such as HIV/AIDS and hepatitis; and - advances in genomics facilitating the development of new and more specialized testing. OUR STRATEGY Our objective is to be a leading provider of clinical laboratory testing services in selected regional markets by focusing on the following key strategic elements: Enhance our Market Position in Existing Regions We intend to further develop our position in the regional markets in which we currently operate in three ways. - INCREASED SALES EFFORTS--We believe we have established a strong and indentifiable brand in each region, where we offer state-of-the-art diagnostic services, supported by cutting-edge information technology. This allows us to promptly report results with minimum reliance on air transport. With our local presence in the markets we service, we are able to provide prompt support and information to physicians. We employ experienced sales and marketing personnel who emphasize these attributes in marketing our services. Without giving effect to any revenue growth attributable to acquisitions and new joint venture partnerships and excluding revenues from long-term hospital contracts, our revenues in the United States have grown 7.6% for the six months ended June 30, 2001, primarily through the addition of new customers and increased testing volumes. - PURSUE FOLD-IN ACQUISITIONS--We expect to continue to make selective acquisitions of smaller laboratories and to improve laboratory efficiency and profitability by combining the acquired operations with our existing laboratory operations. This enables us to expand within existing regions and to strengthen our position in the local markets that we serve. During the five years ended June 30, 2001, we made 16 fold-in acquisitions. - REALIZE OPERATING EFFICIENCIES--As we grow and establish our regional operations, we seek to continue to realize operating efficiencies by consolidating certain of our laboratory operations and by implementing cost management initiatives. For example, we are currently in the process of consolidating laboratory operations in our Southwest Region and have undertaken materials management initiatives on a company-wide basis with a view to decreasing our materials cost per requisition. Expand into New Attractive Regional Markets We target expansion opportunities in new regions where we believe that market size, demographics, payor mix, competition and other factors will allow us to become a significant and profitable regional provider of laboratory services. We enter into selected new regional markets through either strategic acquisitions or joint venture partnerships. We prefer to enter markets adjacent to our existing regions as this allows us to leverage our existing infrastructure. Due to the fragmented nature of the clinical laboratory testing industry, we believe opportunities exist to selectively acquire additional clinical laboratories and enter into joint venture partnerships on terms favorable to us. Pursue the Hospital Market The hospital market constitutes 63% of the $31.8 billion U.S. clinical laboratory business. We intend to continue to pursue this segment of the market by establishing relationships with leading hospitals as follows: - FORM JOINT VENTURE PARTNERSHIPS WITH HOSPITALS--We believe that our joint venture partnership model is a cost-effective means of expanding into new markets. We gain access to an existing, fully equipped and staffed clinical laboratory within our partner hospital for a small initial investment. By marketing our services in the local community, we expand the volume of testing performed in the hospital laboratory and leverage its fixed costs, thereby maximizing profit on incremental testing volume. We are able to compete effectively for community based testing business by marketing clinical laboratory testing services to physicians, clinics and other healthcare providers in the community, capitalizing on the hospital's reputation and relationships with its network of affiliated physicians. We believe the desire of hospitals to control costs and participate in the revenue and profitability of community-based business will lead other hospitals to consider our joint venture partnership model. - OBTAIN LONG-TERM EXCLUSIVE LABORATORY SERVICES CONTRACTS WITH HOSPITALS--An integral component of our growth strategy is to secure, through our joint venture partnerships and wholly-owned operations, long-term exclusive contracts to provide all of a hospital's clinical laboratory testing requirements. These contracts provide us with a stable base of revenues and cash flows upon which we build our regional operations. For the six months ended June 30, 2001, long-term hospital contracts accounted for approximately 20% of our total revenues in the United States. Grow Esoteric Testing Capability Esoteric tests are generally more complex tests that are performed less frequently than routine tests and require more sophisticated instruments and/or highly skilled personnel. We believe that esoteric testing is the fastest growing segment of the clinical laboratory market. In November 2000, we launched Dynagene, our center for esoteric testing. We will continue to expand our esoteric testing capabilities to enhance our services to our existing clients, to attract new clients and to internalize and reduce testing currently out-sourced to other esoteric laboratories. RECENT DEVELOPMENTS On October 11, 2001 we issued a press release in which we stated, among other things, that we expect to report earnings for fiscal year 2001 in line with the then current consensus estimates. We also reported that we expect revenues for 2002 to be approximately $420 million; earnings before interest, taxes, depreciation and amortization to be approximately $58 million; and net earnings to be approximately $12 million, or $0.67 per diluted share (without giving effect to any future acquisitions and/or joint venture partnerships and to the shares to be issued pursuant to this offering). Additionally, we anticipated that in 2002 the discontinuance, in accordance with new accounting rules adopted in both Canada and the United States, of amortization for goodwill and intangible assets with an indefinite life is expected to add approximately $4 million in net earnings, or $0.23 per diluted share (without giving effect to any future acquisitions and/or joint venture partnerships and to the shares to be issued pursuant to this offering) for total expected net earnings of approximately $16 million, or $0.90 per diluted share. See "Management's discussion and analysis of financial condition and results of operations--Accounting Pronouncements" regarding the new accounting rules and required tests of impairment of goodwill and intangible assets which we are subject to beginning January 1, 2002. Our achievement of the results anticipated in the press release and in this paragraph is and will continue to be subject to all of the risks and uncertainties described below under "Risk factors" and "Forward-looking information." For the three months ended September 30, 2001, our revenues and net earnings increased to $102.0 million and $2.0 million, respectively, as compared to $93.9 million and $1.0 million, respectively, for the three months ended September 30, 2000. U.S. revenues for the three months ended September 30, 2001 were $76.4 million, an increase of 12% from the comparable 2000 period. Earnings per diluted share for the three months ended September 30, 2001 were $0.11, compared to $0.08 for the three months ended September 30, 2000 based on 5.4 million additional shares outstanding. For the nine months ended September 30, 2001, our revenues and net earnings increased to $299.7 million and $10.0 million, respectively, as compared to $265.7 million and $5.5 million, respectively, for the nine months ended September 30, 2000. U.S. revenues for the nine months ended September 30, 2001 were $221.3 million, an increase of 17% from the comparable 2000 period. Earnings per diluted share for the nine months ended September 30, 2001 were $0.57, compared to $0.44 for the nine months ended September 30, 2000. During the nine months ended September 30, 2001 and 2000, we recorded tax benefits of $3.0 million and $2.0 million, respectively. Excluding these tax benefits, net earnings for the nine months ended September 30, 2001 doubled to $7.0 million, or $0.40 per diluted share, from $3.5 million, or $0.28 per diluted share, in the comparable 2000 period. EBITDA for the three months ended September 30, 2001 was $12.5 million, as compared to $11.3 million for the three months ended September 30, 2000. EBITDA for the nine months ended September 30, 2001 was $39.2 million, as compared to $36.4 million in the comparable 2000 period. Please see Note (2) on page 7 for information with respect to EBITDA. At September 30, 2001 our days sales outstanding were 62 days, compared to 61 days at June 30, 2001 and 65 days at December 31, 2000.

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+ SUMMARY This summary highlights certain information from this document and may not contain all of the information that is important to you. To understand the rights offering more fully and for a more complete description of the legal terms of the rights offering, you should read carefully this entire document and the Exhibits hereto. This summary does not contain a complete statement of all material information relating to the matters discussed in this document. The terms "Westar Industries," "we," "us" and "our" as used in this prospectus refer to Westar Industries, Inc. and its consolidated subsidiaries unless we indicate otherwise or the context otherwise requires. The term "Western Resources" refers to Western Resources, Inc., the parent of Westar Industries. The term "Protection One" refers to Protection One, Inc., a subsidiary of Westar Industries, and its subsidiaries. The term "Monitoring" refers to Protection One Alarm Monitoring, Inc., a wholly owned subsidiary of Protection One, and its subsidiaries. The term "Protection One Europe" collectively refers to Protection One International, Inc. and Protection One (UK) plc, both wholly owned subsidiaries of Westar Industries, and their subsidiaries. The term "ONEOK" refers to ONEOK, Inc. and its subsidiaries, in which we own an approximate 45% interest. Westar Industries, Inc. 818 South Kansas Avenue Topeka, Kansas 66612 (785) 575-6507 We are principally engaged in the monitored security business through Protection One and Protection One Europe, which provided monitored security services to over 1.4 million customers in North America, the United Kingdom and continental Europe at March 31, 2001. We own approximately 85% of Protection One and 100% of Protection One Europe. We also own approximately 45% of ONEOK, an Oklahoma based company that purchases, gathers, processes, transports, stores, distributes and markets natural gas, an approximately 17% common stock interest in Western Resources, and a receivable owed to us by Western Resources in the amount of approximately $116.6 million at April 30, 2001. In addition, we own interests in international power plants and other investments which in the aggregate are not material. Following completion of the rights offering, assuming full exercise of the rights, approximately 85.7% of our outstanding capital stock will be owned by Western Resources. In April 2000, Western Resources announced that its board of directors had authorized the separation of its electric utilities from us and our subsidiaries. In May 2000, Western Resources announced that its board of directors had authorized management to explore strategic alternatives for its regulated electric utilities. On November 8, 2000, Western Resources entered into an agreement with Public Service Company of New Mexico (PNM) pursuant to which PNM (or a holding company formed by PNM, referred to in this prospectus as PNM Holdings) will acquire Western Resources in a tax-free stock-for-stock merger. All of our common stock held by Western Resources at that time will be distributed to Western Resources' shareholders in exchange for a portion of their Western Resources common stock. This exchange is referred to in this prospectus as the split-off. The rights offering is the initial step in our separation from Western Resources. The rights offering is intended to result in the creation of a public market for our common stock and in that respect is essentially an initial public offering of our common stock. However, no assurance can be given as to if, when or whether the PNM merger or the split-off will occur. Please refer to "Risk Factors" for information you should review in making a determination whether to exercise the rights you receive in the rights offering, including information with respect to an investigation by the KCC concerning the rights offering, the proposed split-off and PNM merger and related matters which could materially adversely impact these matters and our results of operations, financial position, business and prospects. FORWARD-LOOKING STATEMENTS You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any distribution of the rights. Except for the historical information contained herein, this prospectus contains forward-looking statements, all of which are subject to risks and uncertainties. These risks and uncertainties include future events and conditions concerning capital expenditures; earnings; restructuring Protection One's customer acquisition channels; the administrative and other services provided by Western Resources to us; litigation; possible corporate restructurings; mergers and acquisitions; liquidity and capital resources; capitalization or growth opportunities; changes in accounting requirements and other accounting matters; and Protection One's financial condition and its impact on our consolidated results. Forward-looking statements can be identified by their use of words such as "expects," "plans," "will," "believes," "may," "could," "estimates," "intends" and other words of similar meaning. Should known or unknown risks or uncertainties materialize, including changes in future economic conditions, legislative developments, competing markets, amendments or revisions to Western Resources' current plans, when and whether the closing of the PNM merger and the related split-off of our company referred to below will occur, the impact of regulation by the State Corporation Commission of the State of Kansas, or the KCC, on such matters, and other circumstances affecting anticipated operations, revenues and costs, or should our assumptions prove inaccurate, actual results could vary materially from those anticipated. See "Risk Factors" for further information on these and other uncertainties. CORPORATE STRUCTURE SUBSEQUENT TO PROPOSED TRANSACTION The chart below illustrates the corporate structure after the consummation of the rights offering assuming all of the rights are exercised. [GRAPHIC] As of May 18, 2001. QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING Q: What is a right? A: Each right entitles its holder to purchase one share of our common stock at a subscription price of $10 per share through July 13, 2001 or, if the subscription period is extended, through such later expiration date. In addition, each right carries with it an over-subscription privilege. Q: What is the rights offering? A: The rights offering is a distribution of rights on a pro rata basis to all Western Resources stockholders, other than foreign stockholders, who held shares of Western Resources common stock on May 9, 2001, the record date. We are also distributing rights to holders on that date of Western Resources stock options and restricted share units. "Pro rata" means in proportion to the number of shares of Western Resources common stock which you and the other persons receiving rights hold on the record date. We are distributing one right for every six shares of Western Resources common stock, or every six shares underlying a stock option or restricted share unit, held on the record date, provided that each such holder will receive at least one right. Q: What is the over-subscription privilege? A: The over-subscription privilege entitles you, if you exercise your rights in full, to subscribe for additional shares of our common stock at the subscription price in an amount up to a maximum of the higher of (1) five times the number of rights you receive, and (2) 100 shares. The over- subscription privilege covers shares for which rights were not exercised. If there are more shares of our common stock available than the number of over- subscription requests, all over-subscription requests will be filled in full. If there are more over-subscription requests than available shares, the available shares will be allocated among those holders exercising the over-subscription privilege. The allocation will be made first to holders of less than 100 rights so that those holders may subscribe for 100 shares (or the next higher multiple of 10 shares) and thereafter pro rata among all holders exercising the over-subscription privilege. For purposes of determining the number of additional shares available for the over-subscription privilege, a participant in the Western Resources, Inc. Employees' 401(k) Savings Plan or Protection One 401(k) Plan will be treated as having subscribed for the full number of shares elected by such participant even if the number of shares actually purchased for such participant's account is reduced because his or her available account is insufficient to pay the total subscription price. Q: How was the subscription price per share determined? A: Prior to the rights offering, there has been no public market for our common stock. We set the subscription price based upon factors we deemed relevant. In making this determination, we did not obtain an independent valuation of our company, our assets or our common stock. Accordingly, the actual value or resale value of our common stock may be significantly higher or lower than the subscription price for the rights. See "The Rights Offering--How The Exercise Price Was Arrived At" for further information. Q: How do I exercise my rights? A: You may exercise your rights by completing and signing the enclosed rights certificate. You must deliver your rights certificate together with full payment of the subscription price, including the price of any shares to be acquired by over-subscription, to the Subscription Agent on or prior to the expiration date. If you use the mail, we recommend that you use insured, registered mail, return receipt requested. If you cannot deliver your rights certificate to the Subscription Agent on time, you may follow the procedures set forth in this prospectus under the heading "The Rights Offering--Guaranteed Delivery Procedures." If you hold your shares of Western Resources common stock through a broker, custodian bank The Rights Offering The Rights: We will distribute to holders of Western Resources' common stock, other than ourself and foreign stockholders as of the close of business on May 9, 2001, the record date, at no charge, one non-transferable right for every six shares of Western Resources common stock owned by such stockholder. We will also distribute rights on the same terms to holders of Western Resources stock options and restricted share units. Participants in the Western Resources, Inc. Employees' 401(k) Savings Plan or Protection One 401(k) Plan who have any portion of their accounts invested in the Western Resources Common Stock Fund will receive an allocation of rights in the rights offering to their respective plan accounts based on the number of shares of Western Resources common stock allocated to their respective account. Each participant will have the right to decide whether or not he or she wishes to exercise the rights allocated to his or her account. If the participant elects to exercise any such rights, the cash subscription price will be paid from the participant's plan account by liquidating the account's interest pro rata from the plan's investment funds other than the Western Resources Common Stock Fund based on the participant's account balance in each such fund. Shares purchased pursuant to the participant's election will be allocated to the participant's plan account. The number of rights distributed to each person receiving rights will be rounded down to the nearest whole number because fractional rights will not be issued. The rights will be evidenced by a non-transferable rights certificate or, for 401(k) plan participants, a 401(k) subscription form. Basic Subscription Each right will entitle the holder to purchase one share of Privileges: our common stock for $10, the per share subscription price. Each share of our common stock has associated with it one right to purchase one one-hundredth of a share of our preferred stock at a stipulated price in certain circumstances relating to changes in our ownership. See "Description of Westar Industries Capital Stock--Rights Plan." Over-Subscription Privilege: Each holder who elects to exercise his or her rights in full may also subscribe for additional shares at the same subscription price per share in an amount up to a maximum of the higher of (1) five times the number of rights received and (2) 100 shares. The number of additional shares available for the over-subscription privilege will depend on how many holders exercise their rights. If there are not enough of our shares available to fully satisfy all of the over-subscription privilege requests, the available shares will be distributed among rights holders who exercised their over-subscription privilege. The allocation will be made first to holders of less than 100 rights so that those holders may subscribe for 100 shares (or the next higher multiple of 10 shares) and thereafter pro rata among all holders exercising the over-subscription privilege. In the event you choose to exercise the over- subscription privilege but receive a prorated amount, you will receive a refund for the subscription price of any shares you do not receive promptly after the expiration of the rights offering. For purposes of determining the over- subscription privilege, a participant in the Western Resources, Inc. Employees' 401(k) Savings Plan or Protection One 401(k) Plan will be treated as having subscribed for the full number of shares elected by such participant even if the number of shares actually purchased for such participant's account is reduced because his or her available account is insufficient to pay the total subscription payment. or other nominee, you must follow the instructions provided to you by that person. Participants in the Western Resources, Inc. Employees' 401(k) Savings Plan and in the Protection One 401(k) Plan who have any portion of their accounts invested in the Western Resources Common Stock Fund will receive an allocation of rights in the rights offering to their respective plan accounts based on the number of shares of Western Resources common stock allocated to their respective accounts. Each participant will have the right to decide whether or not he or she wishes to exercise the rights allocated to his or her account. If the participant elects to exercise any such rights he or she must complete and sign the enclosed 401(k) subscription form and deliver it to the Subscription Agent on or prior to July 3, 2001 (or any later deadline that may be established if the expiration date of the rights offering is extended). This deadline is earlier than the expiration date of the rights offering because the 401(k) plan trustee (as recordholder of the Western Resources shares held in the 401(k) plan) is the party that must exercise any rights that plan participants receive through the plan and the additional time is needed to enable the trustee to process participants' elections. Plan participants who exercise rights should not include the payment of the subscription price. If plan participants use the mail, we recommend that they use insured, registered mail, return receipt requested. The subscription price will be paid by the plan trustee from the participant's plan account by liquidating the account's interest pro rata from the plan's investment funds other than the Western Resources Common Stock Fund based on the participant's account balance in each such fund. Shares purchased pursuant to the participant's election will be allocated to the participant's plan account. Q. Will I be charged a sales commission or a fee if I exercise my rights? A. No. A brokerage commission or a fee will not be charged to rights holders for exercising their rights. However, if you exercise your rights through another person such as a broker, custodian bank or other nominee, you will be responsible for any fees charged by that person. Q. Are there any conditions to the completion of the rights offering? A. Yes. We will complete the rights offering only if rights for at least 8.2 million shares of our common stock, representing approximately 10% of our outstanding common stock (including rights exercised pursuant to the over- subscription privilege), are exercised by the final expiration date; the common stock offered hereby shall have been approved for listing on the NYSE or on The Nasdaq National Market; each of the agreements discussed in "Certain Relationships and Related Transactions--Our Transactions Involving Western Resources" shall have been executed and delivered; and we are exempt from registration as an investment company under the Investment Company Act of 1940, as amended. However, we may waive any of these conditions. We also reserve the right to terminate the rights offering at any time for any other reason, including the KCC's investigation (described in this prospectus) concerning the rights offering, the proposed split-off and PNM merger, and any other legal or regulatory proceedings. Q: May I transfer my rights if I do not want to purchase any shares? A: No. You may not assign or transfer your rights. Q: Am I required to subscribe in the rights offering? A: No. You may choose not to exercise your rights. Q: If I exercise rights in the rights offering, may I cancel or change my decision? A: No. Once you have exercised your rights or your over-subscription privilege, your exercise may not be revoked unless the expiration date is extended by more than thirty days or a material change in the terms of the rights offering is made. Q: If the rights offering is not completed, will my subscription payment be refunded to me? A: Yes. The Subscription Agent will hold all funds it receives in escrow until completion of the rights offering. If the rights offering is not Conditions to the Rights Offering: We will not consummate the rights offering unless the following conditions have been satisfied: rights for at least 8.2 million shares of our common stock, representing approximately 10% of our outstanding common stock (including rights exercised pursuant to the over- subscription privilege), are exercised by the final expiration date; the common stock offered hereby shall have been approved for listing on the NYSE or on The Nasdaq National Market; we are exempt from registration as an investment company under the Investment Company Act of 1940, as amended (referred to as the Investment Company Act); and each of the agreements discussed in "Certain Relationships and Related Transactions--Our Transactions Involving Western Resources" shall have been executed and delivered. However, we may waive any of these conditions and choose to proceed with the rights offering. We also reserve the right to terminate the rights offering at any time for any other reason, including the KCC's investigation concerning the rights offering, the proposed split-off and PNM merger, and any other legal or regulatory proceedings (see "Risk Factors".) Subscription Price: $10 per share. Record Date: Western Resources stockholders of record, and persons holding Western Resources stock options and restricted shares units, as of the close of business on May 9, 2001, the record date, will receive the rights. Expiration Date: Unexercised rights will expire at 5:00 p.m., New York City time, on July 13, 2001, unless we decide in our sole discretion to extend the rights offering until some later time. Rights Are Non- The rights will be evidenced by non-transferable rights Transferable: certificates. Only you may exercise your rights. You may not assign or transfer your rights. Procedure for You may exercise your rights by completing and signing your Exercising rights certificate. You must deliver your rights Rights: certificate with full payment of the subscription price, including the price of any shares to be acquired by over- subscription, to the Subscription Agent on or prior to the expiration date. If you use the mail, we recommend that you use insured, registered mail, return receipt requested. If you cannot deliver your rights certificate to the Subscription Agent on time, you may follow the procedures set forth under "The Rights Offering--Guaranteed Delivery Procedures." In the case of rights received by the Trustee of the Western Resources, Inc. Employees' 401(k) Savings Plan or the Protection One 401(k) Plan, plan participants may exercise rights allocated to their respective accounts by completing and signing their 401(k) subscription form and delivering it to the Subscription Agent on or prior to July 3, 2001 (or any later deadline that may be established if the expiration date of the rights offering is extended). This deadline is earlier than the expiration date of the rights offering because the 401(k) plan trustee (as recordholder of the Western Resources shares held in the 401(k) plan) is the party that must exercise any rights that plan participants receive through the plan and the additional time is needed to enable the trustee to process participants' elections. Plan participants who exercise rights should not include payment of the subscription price. If plan participants use the mail, we recommend that they use insured, registered mail, return receipt requested. The completed, the Subscription Agent will return promptly, without interest, all subscription payments. In the event you choose to exercise your over- subscription privilege, but receive a prorated amount, you will receive a refund for the shares you do not receive. Q. What are the material U.S. federal income tax consequences of the rights offering? A: For United States federal income tax purposes, the receipt of rights in the rights offering by stockholders (other than the Western Resources, Inc. Employees' 401(k) Savings Plan, the Protection One 401(k) Plan and employees or former employees of Western Resources receiving rights in the rights offering by reason of holding outstanding stock options or restricted share units) generally will be treated as a taxable dividend in an amount equal to the fair market value of the rights, which we currently estimate to be $0.04 per right. The exercise of the rights will not cause you to recognize taxable income, gain or loss, and our shares you receive from the exercise of those rights will have a basis equal to the value of the rights on the date of distribution plus the subscription price paid. In general, if your rights expire unexercised, you will have a capital loss equal to the value of the rights on the date of distribution. Utilization of such capital loss is subject to limitations. In the case of employees and former employees of Western Resources who receive rights in the rights offering by reason of holding outstanding stock options or restricted share units, the receipt of such rights will not be a taxable event but the exercise of such rights will result in taxable income at the time of exercise in an amount equal to the difference between the then fair market value of the stock and the cash subscription price. Our shares that such employees or former employees receive from the exercise of those rights will have a basis equal to the value of those shares on the date of exercise. The expiration of such rights unexercised would have no tax consequences for such employees or former employees. Participants in the Western Resources, Inc. Employees' 401(k) Savings Plan or Protection One 401(k) Plan who have any portion of their accounts invested in the Western Resources Common Stock Fund will receive an allocation of rights in the rights offering to their respective plan accounts based on the number of shares of Western Resources common stock allocated to their respective accounts. Neither the receipt of such rights nor the exercise of such rights within the plan accounts will be a taxable event. The participant will not be taxed on amounts held in his or her account until the participant receives distributions from the plan. Q. What should I do if I have any questions? A. If you have questions or need assistance, please contact the Information Agent, Georgeson Shareholder Communications Inc., toll free at (888) 388- 2251. Banks and brokerage firms please call (212) 440-9800. subscription price will be paid by the plan trustee from the participant's account by liquidating the account's interest pro rata from the plan's investment funds other than the Western Resources Common Stock Fund based on the participant's account balance in each such fund. Once you have exercised your rights or your over- subscription privilege, your exercise may not be revoked unless the expiration date is extended for more than thirty days or a material change in the terms of the rights offering is made. Rights not exercised prior to the expiration of the rights offering will be void. How Rights If you hold shares of Western Resources' common stock Holders Can through a broker, custodian bank or other nominee, we will Exercise Rights ask your broker, custodian bank or other nominee to notify Through Others: you of the rights offering. If you wish to exercise your rights, you will need to have your broker, custodian bank or other nominee act for you. Material U.S. Federal Income For United States federal income tax purposes, the receipt Tax Consequences: of rights in the rights offering by stockholders (other than the Western Resources, Inc. Employees' 401(k) Savings Plan or Protection One 401(k) Plan and employees or former employees of Western Resources receiving rights in the rights offering by reason of holding outstanding stock options or restricted share units) generally will be treated as a taxable dividend in an amount equal to the fair market value of the rights, which we currently estimate to be $0.04 per right. The exercise of the rights will not cause you to recognize taxable income, gain or loss, and the shares of our common stock you receive from the exercise of those rights will have a basis equal to the value of the rights on the date of distribution plus the subscription price paid. In general, if your rights expire unexercised, you will have a capital loss equal to the value of the rights on the date of distribution. Utilization of such capital loss is subject to limitations. In the case of employees and former employees of Western Resources who receive rights in the rights offering by reason of holding outstanding stock options or restricted share units, the receipt of such rights will not be a taxable event, but the exercise of such rights will result in taxable income at the time of exercise in an amount equal to the difference between the then fair market value of the stock and the cash subscription price. Our shares that such employees or former employees receive from the exercise of those rights will have a basis equal to the value of those shares on the date of exercise. The expiration of such rights unexercised would have no tax consequences for such employees or former employees. Participants in the Western Resources, Inc. Employees' 401(k) Savings Plan or Protection One 401(k) Plan who have any portion of their accounts invested in the Western Resources Common Stock Fund will receive an allocation of rights in the rights offering to their respective plan accounts based on the number of shares of Western Resources common stock allocated to their respective accounts. Neither the receipt of such rights nor the exercise of such rights within the plan accounts will be a taxable event. The participant will not be taxed on amounts held in his or her account until the participant receives distributions from the plan. Issuance of Our Common Stock: We will issue shares purchased in the rights offering as soon as practicable after the expiration of the rights offering. For a more complete description of the rights offering, see "The Rights Offering" beginning on page 19. WHO CAN HELP ANSWER YOUR QUESTIONS If you have more questions about the rights offering or would like additional copies of the prospectus, you should contact the Subscription or Information Agent for the rights offering, as follows: For information call Georgeson Shareholder Communications Inc., the Information Agent, at the following numbers: Registered holders call toll free (888) 388-2251 Brokers and banks call (212) 440-9800 For delivery of documents and payments to the Subscription Agent: By Mail: Alpine Fiduciary Services, Inc. c/o Georgeson Shareholder Communications Inc. P.O. Box 2065 South Hackensack, NJ 07606-9974 By Overnight: Alpine Fiduciary Services, Inc. c/o Georgeson Shareholder Communications Inc. 111 Commerce Road Carlstadt, NJ 07072 By Hand: Alpine Fiduciary Services, Inc. c/o Georgeson Shareholder Communications Inc. 110 Wall Street, 11th Floor New York, NY 10005 Attn: Will Richard For wire transfers: Alpine Fiduciary Services, Inc., at the Provident Bank, One East Fourth Street, Cincinnati, OH 45202 ABA No. #042000424 Account No. #0767-618 for further credit to Alpine Fiduciary Services, Inc. as Agent for Westar Industries Number of Shares Immediately following the rights offering and assuming all of Common Stock of the rights have been exercised, approximately 85.4 to Be Outstanding million shares of our common stock will be outstanding, of After the Rights which approximately 85.7% will be owned by Western Offering: Resources. No Recommendation None of Westar Industries, Western Resources or their to Rights respective boards of directors or management makes any Holders: recommendation as to whether or not you should exercise your rights. You should make your own decision whether to exercise your rights and, if so, how many rights to exercise, after reading this prospectus and consulting with your advisors and based upon your own assessment of your best interests. Public Trading Market for Our Prior to the rights offering, there has been no public Common Stock: market for our shares of common stock. Application has been made to have our common stock listed on the NYSE. In the event we do not qualify for listing on the NYSE, we have made application to have our common stock listed for quotation on The Nasdaq National Market. Use of Proceeds: The gross proceeds from the rights offering, assuming all of the rights have been exercised, will be approximately $122.5 million, all of which will be received by us. The net proceeds of the offering will be advanced to Western Resources which will increase the receivable from Western Resources. Expenses of the rights offering will be paid by us and are estimated to be approximately $2.25 million. Risk Factors: You should carefully consider the information set forth under "Risk Factors" beginning on page 8 and all of the information in this prospectus before deciding to exercise your rights. Subscription Georgeson Shareholder Communications Inc. is acting as the Agent and Information Agent and Alpine Fiduciary Services, Inc. is Information acting as the Subscription Agent. Agent: Solicitation Georgeson Shareholder Securities Corporation. Agent: Summary Historical Consolidated Financial Data The following table sets forth our summary historical consolidated financial data derived from our audited consolidated financial statements as of December 31, 2000, 1999 and 1998 and for the four years ended December 31, 2000, our unaudited consolidated financial statements as of December 31, 1997 and 1996 and for the year ended December 31, 1996, and our unaudited interim consolidated financial statements as of and for the three months ended March 31, 2001 and 2000. Such summary information may not be indicative of our future performance as an independent company. In our opinion, all adjustments, which are normal and recurring in nature, considered necessary for a fair presentation have been included in our summary interim consolidated financial data. The results of operations for the three months ended March 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the entire fiscal year or any other interim period. The summary financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and the consolidated financial statements and the notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> As of and for the Three Months As of and for the Year Ended December 31, Ended March 31, ---------------------------------------------------------- --------------------- 2000 1999 1998 1997 1996 2001 2000 -------- -------- -------- -------- -------- -------- -------- (in millions except per share amounts) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total revenues........... $ 539.3 $ 600.4 $ 422.4 $ 153.7 $ 10.8 $ 114.7 $ 147.4 Earnings (loss) before extraordinary gains and accounting change....... 8.7(a) (82.7)(c) (83.7)(d) 419.0(e) (19.4) (17.8) 44.5(f) Net income (loss)........ 54.1(b) (71.0)(c) (82.1)(d) 419.0(e) (19.4) (12.8)(b) 59.2(f) Earnings (loss) per common share--Basic and diluted(g): Before extraordinary gain and accounting change................. $ 0.12 $ (1.13) $ (1.14) $ 5.72 $ (0.27) $ (0.25) $ 0.61 Extraordinary gain...... 0.67 0.16 0.02 -- -- 0.07 0.25 Accounting change....... (0.05) -- -- -- -- -- (0.05) -------- -------- -------- -------- -------- -------- -------- Earnings (loss) per common share............ $ 0.74 $ (0.97) $ (1.12) $ 5.72 $ (0.27) $ (0.18) $ 0.81 Balance Sheet Data: Current assets........... $ 155.6 $ 371.0 $ 476.3 $ 247.2 $ 32.5 $ 162.7 $ 190.9 Total assets............. 3,268.4 3,419.7 3,483.9 2,296.8 1,363.0 3,310.8 3,165.1 Long-term debt (net)..... 543.2 771.0 842.9 331.8 65.2 527.0 697.2 Shareholder's equity..... 2,248.1 2,151.9 1,237.3 1,298.2 437.7 2,331.7 1,967.4 Book value per common share(g)................ $ 30.71 $ 29.40 $ 16.90 $ 17.73 $ 5.98 $ 31.85 $ 26.88 Other Data: EBITDA(h)................ $ 341.5 $ 179.7 $ 54.4 $ 879.8 $ (7.1) $ 47.2 $ 159.8 </TABLE> -------- (a) Includes a $91.1 million pre-tax gain on the sale of an equity investment in a gas compression company and a $24.9 million pre-tax gain on the sale of investments in paging companies. (b) Includes extraordinary gain of $49.2 million in 2000 and $4.9 million in the first quarter of 2001 associated with the extinguishment of Protection One debt. (c) Includes a $76.2 million pre-tax charge to record impairment for marketable securities. (d) Includes a $98.9 million pre-tax charge to record exit costs associated with international power development activities. (e) Includes a $864.3 million pre-tax gain on the sale of Tyco International Ltd. common stock. (f) Includes a $73.7 million pre-tax gain on the sale of an equity investment in a gas compression company and a $24.9 million pre-tax gain on the sale of investments in paging companies. (g) Per share amounts based on approximately 73.2 million outstanding shares of our common stock. (h) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA does not represent cash flow from operations as defined by accounting principles generally accepted in the United States, should not be construed as an alternative to operating income and is indicative neither of operating performance nor cash flows available to fund the cash needs of our company. Items excluded from EBITDA are significant components in understanding and assessing the financial performance of our company. We believe presentation of EBITDA enhances an understanding of financial condition, results of operations and cash flows because EBITDA is used by our company to satisfy its debt service obligations, capital expenditures, dividends and other operational needs. Our computation of EBITDA may not be comparable to other similarly titled measures of other companies.

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+ PROSPECTUS SUMMARY.............................................................1 RISK FACTORS...................................................................3 FORWARD-LOOKING STATEMENTS....................................................15 SELLING STOCKHOLDERS..........................................................16 USE OF PROCEEDS...............................................................18 DILUTION......................................................................18 DIVIDEND POLICY...............................................................18 CAPITALIZATION................................................................18 SELECTED CONSOLIDATED FINANCIAL DATA..........................................19 EQUITY LINE OF CREDIT.........................................................20 PLAN OF DISTRIBUTION..........................................................22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................23 DESCRIPTION OF BUSINESS.......................................................28 DESCRIPTION OF PROPERTY.......................................................32 LEGAL PROCEEDINGS.............................................................32 MANAGEMENT....................................................................32 PRINCIPAL SHAREHOLDERS........................................................39 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................41 COMPARATIVE STOCK PERFORMANCE.................................................43 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS...........................................44 DESCRIPTION OF SECURITIES.....................................................45 EXPERTS.......................................................................46 LEGAL MATTERS.................................................................46 AVAILABLE INFORMATION.........................................................46 FINANCIAL STATEMENTS.........................................................F-1 -------------------------------------------------------------------------------- We intend to distribute to our shareholders annual reports containing audited financial statements. Our audited financial statements for the fiscal year December 31, 2000 were contained in our Annual Report on Form 10-K.

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+ PROSPECTUS SUMMARY This summary highlights information that we present more fully in the rest of this prospectus. This summary is not complete and does not contain all of the information that you should consider before buying shares of our common stock. You should read the entire prospectus carefully. OUTSOURCE INTERNATIONAL, INC. BUSINESS We are a provider of human resource services focusing on the flexible industrial staffing market through our Tandem division. Tandem recruits, trains and deploys temporary industrial personnel and provides payroll administration and risk management services to our employer clients. Tandem's clients include businesses in the manufacturing, distribution, hospitality and construction industries. As the name Tandem implies, we contract with our employer clients and our service employees to provide a steady stream of workers to the business community and a predictable and reliable source of production throughout the year. We fulfill our client's need to economically staff up or down according to market demands for products and services and satisfy the industrial workers' need for steady employment. We utilize the physical dispatch approach in our business to better serve our clients. By meeting face-to-face with our service employees prior to dispatching them for the day, we provide a significantly higher level of certainty to our employer clients, assuring them of greater reliability and a higher level of job-readiness. As of December 31, 2000, our Tandem division provided approximately 23,800 flexible staffing personnel daily through a nationwide network of 84 company-owned and 51 franchised recruiting and dispatch branch offices. Our Tandem division has approximately 5,000 clients and provides services to approximately 3,000 of these clients each day. We aggregate our company-owned Tandem branches into 12 geographical districts, which we combine into three geographic zones: East, Midwest and West. INDUSTRY Over the last five years, the staffing industry has experienced significant growth, due largely to the utilization of temporary help across a broader range of industries. Staffing industry revenues grew from approximately $102 billion in 1998 to approximately $117 billion in 1999, or a 14.7% increase. During that same period, the industrial staffing sector grew from approximately $15.6 billion to approximately $16.7 billion, or a 7.0% increase. During 1999, the industrial staffing sector represented 12.6% of the staffing industry, compared to 13.8% during 1998. HISTORY; RECENT FINANCIAL PERFORMANCE Outsource International, Inc. was incorporated in April 1996, but through predecessor companies, has been providing industrial staffing services since 1974. We have had a recent history of significant losses, having suffered net losses of $12.6 million for the fiscal year ended December 31, 1997, $30.9 million for the fiscal year ended December 31, 1999, $2.7 million for the fiscal period ended April 2, 2000 and incurred a loss before income taxes of $0.8 million for the twenty-six week period ended October 1, 2000. In addition, we had an accumulated deficit of $39.8 million and $25.9 million as of December 31, 1999 and October 1, 2000, respectively. In April 2000, we sold our professional employer organization division, Synadyne, which represented 36% of our revenues for the fiscal period ended April 2, 2000. In August 2000, we cured the defaults on our acquisition notes payable, which are obligations we owe to certain of the sellers of the temporary staffing businesses we acquired in 1997 and 1998. Our principal executive offices are located at 1690 South Congress Avenue, Suite 210, Delray Beach, Florida 33445. Our telephone number is (561) 454-3500. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the earlier offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE <TABLE> <CAPTION> =================================================================================================================================== Proposed Maximum Proposed Maximum Amount of Title of Each Class of Amount to be Offering Price Per Aggregate Registration Securities to be Registered Registered(1) Unit(2) Offering Price(2) Fee --------------------------- ------------- ------------------ ----------------- ------------- <S> <C> <C> <C> <C> Common stock, par value $.001 per share 6,055(3) $0.50 $3,027.50 $1.00 =================================================================================================================================== </TABLE> (1) In the event of a stock split, stock dividend or similar transaction involving the common stock of the Registrant, the number of shares registered hereby shall be automatically increased pursuant to Rule 416 to cover the additional shares of common stock. (2) Estimated solely for the purpose of calculating the registration fee under Rule 457(c) under the Securities Act. The average of the bid and asked prices of the Registrant's common stock as reported on the OTC Bulletin Board System on January 26, 2001 was $0.50. (3) The registrant previously paid a filing fee of $1,120.18 in connection with the original registration statement filed on October 30, 2000. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ TABLE OF CONTENTS <TABLE> <S> <C> <C> Prospectus Summary...................................................................................... 1 Risk Factors ........................................................................................... 8 Management's Discussion and Analysis of Financial Condition and Results of Operations................... 13 Quantitative and Qualitative Disclosures about Market Risk.............................................. 37 Business................................................................................................ 39 Properties.............................................................................................. 45 Legal Proceedings....................................................................................... 46 Market Price and Dividend Data.......................................................................... 47 Management.............................................................................................. 48 Related Party Transactions.............................................................................. 54 Security Ownership of Management and Certain Beneficial Owners.......................................... 57 Description of Capital Stock............................................................................ 61 Dividend Policy......................................................................................... 63 Selling Shareholders.................................................................................... 63 Use of Proceeds......................................................................................... 65 Plan of Distribution.................................................................................... 65 Experts................................................................................................. 66 Legal Matters........................................................................................... 66 Additional Information.................................................................................. 66 Index to Financial Statements........................................................................... F-1 </TABLE> You should rely only on the information contained in this prospectus or any supplement. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus or any supplement. THE OFFERING <TABLE> <S> <C> Common stock outstanding as of January 10, 2001... 8,687,488 shares Common stock offered by the selling shareholders.. 6,177,826 shares Use of proceeds................................... We will not receive any proceeds from the sale of the shares by the selling shareholders. Trading symbol on the OTCBB....................... OSIX </TABLE>

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+ SUMMARY You should read the following summary together with the detailed information regarding EarthWatch, including "Risk factors" and the financial statements, including the notes to the financial statements, appearing elsewhere in this prospectus. DigitalGlobe(TM) and Your Planet Online(R) are our registered trademarks, and Seconds on Orbit(TM) is our trademark. References herein to the "EarthWatch system" refer collectively to our planned satellite, ground stations, the Digital Globe, and our distribution system. EarthWatch Incorporated We plan to create and market a variety of information products derived from satellite imagery of the earth's surface. We are currently building one satellite capable of collecting high-resolution digital imagery of the earth's surface, as well as a comprehensive image collection, enhancement, and digital archive system known as our DigitalGlobe database. Our QuickBird satellite is designed to collect 0.6-meter resolution gray scale and 2.5-meter resolution color imagery of the earth and will have an ability to revisit most areas within three to five days. Although we launched the QuickBird 1 satellite on November 20, 2000, it failed to achieve orbit. The QuickBird 1 satellite was not recoverable. Our previous satellite, the EarlyBird 1, was launched in December 1997, but we lost contact with it and determined that it was a total loss. We plan to launch the QuickBird 2 satellite in October 2001. We believe that our system will allow us to provide high-resolution imagery-based products at a low cost and in the forms most useful to our targeted customer segments. For sophisticated government, scientific, and commercial users, we expect to deliver raw imagery data on a near real-time basis in response to specific customer requests. In addition, we can process and enhance the imagery data to make them more useful to our customers. For example, we can add precision correction, elevation, terrain, and topographic information or integrate information from other sources such as political borders or utility infrastructure. We also expect to collect and store imagery for resale in our DigitalGlobe archive. This will allow us to produce satellite imagery at negligible incremental cost, facilitating an array of new geographic information, mapping, multimedia applications, and markets that do not currently use geographic imagery. Geographic imagery is used in a broad and increasing range of applications. Most governments and businesses need geographic information. The United States and foreign governments use geographic imagery for national security reconnaissance. Local and municipal governments use geographic imagery for land use and infrastructure planning, resource management, and environmental monitoring. Geographic imagery products are also important to a variety of industries, including mapping, surveying, agriculture, forestry, environmental protection, and mineral and oil exploration. Industry estimates of worldwide revenues for aerial imagery exceed $2 billion annually, according to Frost & Sullivan. We believe the broader market for geographic imagery and derivative products and services significantly exceeds this amount and that the near-term world market for high spatial resolution satellite imagery will exceed $1 billion annually. We believe this market will grow as low-cost, high-quality satellite imagery becomes commercially available, stimulating demand for satellite imagery-based products and services and encouraging development of new products and applications. High-resolution satellites have significant advantages over aerial photography and low-resolution satellites that are currently used to collect geographic imagery. Aerial photography provides accurate, high-resolution overhead imagery of discrete areas, but can be subject to a number of limitations, including: . limited coverage area; . slow delivery time; . restricted ability to fly over certain areas; and . high marginal cost of images. In addition, we believe that many aerial providers still have a limited ability to produce imagery in a digital format, which constrains their ability to process and enhance images and to maintain a low cost, readily accessible image archive. Existing low spatial resolution satellite imagery systems, such as Landsat and the French satellite consortium SPOT, can provide imagery that is less costly and covers wider areas than aerial photography, but the low spatial resolution of these satellite systems significantly limits their usefulness for many applications. High spatial resolution satellite imagery has fewer of these limitations and has several additional advantages. In addition to providing high spatial resolution gray scale (panchromatic) imagery, high-resolution satellites can take precise color and infrared (multispectral) images, enabling a wide range of monitoring, detection, and exploration applications. The digital format of satellite imagery facilitates quick delivery, enables low-cost archiving, allows for image enhancement and manipulation, and preserves much more of the information value than analog imagery. We are not aware of any additional competitors that plan to enter this market other than our three announced competitors: . Space Imaging, Inc., which successfully launched its first 1-meter resolution satellite in September 1999 and has begun serving the commercial market; . Orbital Imaging Corp., or Orbimage, which is developing two 1-meter high-resolution imaging systems, which are scheduled for launch during the third and fourth quarters of 2001, as publicly announced; and . ImageSat International (formerly known as West Indian Space Ltd.), which successfully launched a 1.8-meter resolution satellite in December 2000 and has announced plans to launch a 1-meter high- resolution satellite for commercial use during the third quarter of 2001. We believe there are significant barriers for other potential entrants. The design, creation, launch, and operation of an integrated high-resolution commercial satellite system require significant expertise and knowledge. We and each of our three announced competitors have been developing commercial satellite imagery systems for more than five years. We believe it would take a new potential competitor more than two years and significant capital to develop and construct a high-resolution commercial imaging satellite. Most aerospace companies capable of constructing such a satellite have already aligned themselves with one of the announced entrants. As a result, we believe that EarthWatch, together with the other announced entrants, will have a significant advantage over new market entrants. Initially, we expect to provide imagery primarily to the United States and foreign governments and agencies. The United States government supports the development of a commercial satellite imaging industry and is now taking steps to include commercial providers in several major security, mapping, and earth monitoring programs. For example, the United States government is currently upgrading its EagleVision mobile reconnaissance ground stations to accommodate high-resolution commercial satellite imagery. Between NASA and the Department of Defense, the United States government has identified over $1 billion in prospective purchases of imagery products and related value-added services that it expects to obtain from commercial vendors in the next five years. As one of three announced United States entrants, we believe we are well positioned to secure a portion of this business. We have already provided commercial imagery products to NASA and the National Imagery and Mapping Agency, or NIMA. Governments of many foreign countries have a strong national security interest in obtaining near real-time high-resolution imagery of their borders and neighboring countries. This type of imagery has generally not been available to governments other than those of the United States, France, Israel, and the former Soviet Union. We have submitted proposals to foreign governments and commercial entities, with several of these being prospective customers. We have entered into contracts with agencies in two countries, have outstanding proposals for contracts with agencies in fifteen countries, and are in discussions with many other countries to provide them with a wide range of images and other products when QuickBird 2 has been launched. We believe that once QuickBird 2 is operational, we will be able to quickly convert customer interest into contracts and revenue opportunities. We are also targeting as potential customers civilian agencies and local and municipal governments that currently use aerial and low-resolution satellite imagery for mapping, environmental monitoring, land use, and infrastructure planning. In the longer term, we expect that our customers will include commercial users in industries such as mapping and surveying, oil, gas, and mineral exploration, agriculture, forestry, scientific and environmental monitoring, and insurance risk analysis and damage assessment. We also expect value-added resellers to develop products based on satellite imagery from our DigitalGlobe archive for various commercial and consumer-oriented applications, such as real estate assessment, travel planning, commodities forecasting, economic intelligence, and entertainment. We are committed to achieving leadership positions in specific markets for digital imagery and derivative information products. Our strategy to achieve our objectives includes the following elements: . become a leading provider of imagery-driven solutions; . pursue targeted market entry and expansion; . maintain leadership through partnerships with leading technology companies; . leverage our technical advantages; . build direct relationships with key customers and market influencers; and . develop a comprehensive DigitalGlobe archive. EarthWatch is a Delaware corporation. Our principal executive offices are located at 1900 Pike Road, Longmont, Colorado 80501-6700. Our telephone number is (303) 682-3800. Recent recapitalization transactions On February 28, 2001, as required by the indentures governing the notes and our then-outstanding 12 1/2% Senior Notes due 2005, we offered to purchase all of the outstanding notes and our then-outstanding 12 1/2% notes at their accreted value on the date of purchase, using the insurance proceeds relating to the loss of our QuickBird 1 satellite. The offer expired on April 2, 2001, and we repurchased $127.4 million in principal amount at maturity of the notes and all outstanding 12 1/2% notes on April 3, 2001. The combined repurchase price totaled $172.9 million. In connection with the offer, we entered into a Recapitalization Agreement and Consent dated as of April 2, 2001 with certain holders of the notes. Pursuant to the Recapitalization Agreement, these holders agreed to refrain from tendering their notes in the offer, thus allowing us to have the use of the funds that would otherwise be used to repurchase their notes. Pursuant to the Recapitalization Agreement, we also: . granted registration rights to certain holders of notes and Series C preferred stock; . pledged government securities to secure certain repurchase rights of the noteholders; . obtained the consent of the holders of notes and amended the indenture governing the notes in certain respects; . obtained $9 million of vendor financing from Ball Aerospace & Technologies Corp., or Ball Aerospace; . amended our certificate of incorporation in certain respects; . issued 10,843,297 additional shares of our Series C preferred stock to the holders of the notes that signed the Recapitalization Agreement and their assignees; . purchased launch and in-orbit insurance for our QuickBird 2 satellite; and . pledged the QuickBird 2 insurance in favor of The Bank of New York, as collateral agent for (a) the holders of notes and for Ball Aerospace, and (b) the holders of our Series A preferred stock and Series B preferred stock. See "Recapitalizations - 2001 Recapitalization" for a further discussion of the recent recapitalization transactions. Summary of the terms of the notes The notes................................. 13% Senior Discount Notes due 2007, which have an aggregate principal amount at maturity of $71,650,000. Maturity.................................. July 15, 2007. Interest payment dates ................... The notes will not begin to accrue cash interest until July 15, 2002. Beginning on January 15, 2003, interest on the notes will be payable semiannually in cash on January 15 and July 15 of each year. Optional redemption....................... We may, at our option, redeem the notes beginning on July 15, 2004. The initial redemption price is 106.5% of the principal amount at maturity, plus accrued interest. The redemption price of the notes will then decline each year until maturity. See "Description of the notes - Optional redemption." Change of control......................... Upon a change of control of EarthWatch, we will be required to make an offer to purchase the notes at a purchase price equal to 101% of their accreted value on the date of repurchase, plus any accrued and unpaid interest. We cannot assure you that we will have sufficient funds available at the time of any change of control to make any required debt repayment, including repurchases of the notes. Insurance collateral...................... We have obtained insurance policies for the QuickBird 2 satellite to cover $155 million of risks associated with the launch and first year of operations of QuickBird 2. The notes are secured equally with up to $9 million in principal amount of vendor financing by any proceeds of insurance policies covering certain aspects of our QuickBird 2 satellite. If the trustee for the notes receives proceeds from the insurance policy covering risks related to QuickBird 2, we will make an offer to repay the vendor financing described above and purchase the notes at a purchase price equal to their accreted value, plus any accrued and unpaid interest to the date of purchase. To the extent that the aggregate accreted value and accrued interest of the notes tendered in response to the offer to purchase and the amount of vendor financing requested to be repaid exceeds the amount of insurance proceeds available for such offer, holders of the notes that subscribe to the offer to purchase and the lender in the vendor financing will receive a ratable portion of the insurance proceeds. To the extent the accreted value and interest on the notes tendered, together with the vendor financing to be repaid, are less than the available proceeds, the excess will be placed into a similar pledge account to secure a put right on behalf of the holders of our Series A and B preferred stock, and any remaining funds after exercise of this put right will be returned to EarthWatch. Ranking................................... The notes rank equally in right of payment with all of our unsubordinated and unsecured indebtedness. At June 30, 2001, we had $5.7 million of indebtedness outstanding which ranked equally in right of payment with the notes. Restrictive covenants..................... The indenture under which the notes have been issued contains covenants that, among other things, restrict our ability and the ability of our subsidiaries to: . incur additional debt; . incur liens; . engage in sale-leaseback transactions; . pay dividends or make other distributions in respect of our capital stock; . redeem capital stock; or . make investments or restricted payments. However, these limitations are subject to a number of important qualifications and exceptions. We are, among other things, permitted to incur additional indebtedness, including secured debt, under specified circumstances. Form of notes............................. The notes have been issued in fully registered form, without coupons. The notes have been deposited with The Bank of New York, as custodian for The Depository Trust Company, and registered in the name of Cede & Co. in the form of one or more global notes. Holders of the notes own book-entry interests in the global note, and evidence of these interests is kept in the records maintained by The Depository Trust Company. See "Form of notes." Use of proceeds........................... We will not receive any proceeds from this offering. Summary historical financial data The following summary financial data are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 1999 and 2000, and the consolidated statement of operations data for each of the three years in the period ended December 31, 2000, are derived from our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 1996, 1997, and 1998, and the consolidated statement of operations data for each of the two years in the period ended December 31, 1997, are derived from our historical consolidated financial statements not included in this prospectus. The consolidated balance sheet data as of June 30, 2000 and 2001, and the consolidated statement of operations data for the six-month periods ended June 30, 2000 and 2001 and for the period from January 1, 1995 (inception) to June 30, 2001, are derived from unaudited consolidated financial statements which have been prepared on the same basis as the audited consolidated financial statements and, in our opinion, include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the results of operations and financial position of EarthWatch for the period in accordance with generally accepted accounting principles. Historical results may not be indicative of results for any future period. <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------------------ 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Revenue $ 1,900 $ 437 $ 1,809 $ 5,913 $ 3,336 ---------- ---------- ---------- ---------- ---------- Cost of goods sold 1,922 382 1,905 5,120 2,099 Selling, general, and administrative 5,992 8,588 4,975 12,763 15,333 Research and development 20,178 19,121 9,113 6,956 13,442 Gain (loss) from impairment of fixed assets, net of insurance recoveries - (25,519) (599) - 107,608 Gain from arbitration settlement - - 1,515 - - Gain (loss) from operations (26,192) (53,173) (13,268) (18,926) 80,070 Interest expense (63) (86) (1,340) (5,482) (4,492) Interest income 2,549 2,528 1,688 4,089 4,104 Income tax provision - - - - (3,000) Extraordinary loss on early extinguishment of debt - - - - - ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (23,706) $ (50,731) $ (12,920) $ (20,319) $ 76,682 ========== ========== ========== ========== ========== Other Consolidated Financial Data: Capital expenditures $ 33,952 $ 54,271 $ 26,037 $ 75,238 $ 82,640 Cash provided (used) by operating activities (20,967) (14,192) (10,864) (6,420) (18,891) Cash provided (used) by investing activities (33,951) (68,290) 11,471 (97,070) (57,534) Cash provided (used) by financing activities 68,452 53,668 (1,972) 180,639 (43) Ratio of earnings to fixed charges - - - - 2.89x Deficiency of earnings to fixed charges (23,851) (56,401) (18,976) (31,659) - Consolidated Balance Sheet Data (end of period): Cash and cash equivalents $ 35,224 $ 6,410 $ 5,045 $ 82,193 $ 5,726 Total assets 90,547 104,299 85,328 271,469 379,378 Total debt 1,188 51,511 49,804 167,148 195,485 Mandatorily redeemable preferred stock - - - 129,978 141,246 Stockholders' equity (deficit) 83,107 39,737 26,831 (40,114) 26,387 <CAPTION> Period From Six Months January 1, 1995 Ended June 30, (Inception) to -------------------------- June 30, 2000 2001 2001 ----------- ----------- ----------- <S> <C> <C> <C> Consolidated Statement of Operations Data: Revenue $ 2,404 $ 5,152 $ 21,539 ----------- ----------- ----------- Cost of goods sold 1,554 3,905 17,045 Selling, general, and administrative 6,420 6,048 56,128 Research and development 5,992 4,289 76,225 Gain (loss) from impairment of fixed assets, net of insurance recoveries - - (81,490) Gain from arbitration settlement - - (1,515) Gain (loss) from operations (11,561) (9,091) (44,855) Interest expense (3,430) (4,726) (16,215) Interest income 2,537 2,458 17,808 Income tax provision - - (3,000) Extraordinary loss on early extinguishment of debt - (23,038) (23,038) ----------- ----------- ----------- Net income (loss) $ (12,454) $ (34,397) $ (69,300) =========== =========== =========== Other Consolidated Financial Data: Capital expenditures $ 29,303 $ 45,426 $ 331,441 Cash provided (used) by operating activities (9,588) (75,156) (148,043) Cash provided (used) by investing activities (26,909) 231,499 (23,153) Cash provided (used) by financing activities (6) (116,158) 217,107 Ratio of earnings to fixed charges - - - Deficiency of earnings to fixed charges (23,583) (40,399) (119,842) Consolidated Balance Sheet Data (end of period): Cash and cash equivalents $ 45,690 $ 45,911 Total assets 269,670 205,609 Total debt 181,296 58,004 Mandatorily redeemable preferred stock 135,553 153,705 Stockholders' equity (deficit) (57,986) (10,969) </TABLE>

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+ PROSPECTUS SUMMARY THE COMPANY Our principal business is the design and installation of custom machine vision systems. The principal industrial applications of machine vision systems are inspection, location analysis and pattern recognition. Our custom machine vision systems are suitable for both product inspection and location analysis applications. To date, we have designed and installed customized machine vision systems to perform quality control functions and to inspect and sort manufactured automotive parts. We are also developing eVisionFactory, a computer program for use in building and supporting machine vision systems. eVisionFactory includes software which links together the different software components used in a machine vision system. eVisionFactory also includes an Internet based service and support system which can be used to provide technical support through the Internet to purchasers of our machine vision systems. The Internet based service and support system can also be adapted to provide technical support to companies operating other types of industrial machinery and manufacturing systems. Our intention is to market the Internet based customer and support system to companies that supply machinery and manufacturing systems, so that they can use the system to provide technical support to their own customers. We market our products and services through our alliance with ABB Flexible Automation, a division of ABB Inc. ABB is a leading supplier of industrial robotic systems and services to industries including the automotive and metal fabrication industries. We believe our alliance with ABB is our best prospect for generating future sales. As a result, we plan to concentrate our efforts on developing our relationship with ABB, and on attempting to secure additional contracts to develop our customized machine vision systems through that alliance. We have a limited operating history, and have not yet generated substantial operating revenues. In addition, we operate in a highly competitive market. An investment in our shares is speculative and involves a high degree of risk. The principal risks affecting our business and securities are described under the heading "RISK FACTORS", which starts on page 4 of this prospectus. Our office is located at Unit 102-930 West 1st Street, North Vancouver, British Columbia, Canada, V7P 3N4, and our telephone number is (604) 988-6440. Our world wide web address is www.braintech.com. THE OFFERING Common shares being Up to 16,060,289 common shares each with a offered by the selling par value of $0.001: Of these shares: shareholders - 7,600,000 were issued to selling shareholders in a private placement that we completed on March 15, 2001. - 3,800,003 are issuable on the exercise of share purchase warrants which we issued to selling shareholders who participated in the private placement completed on March 15, 2001; - 2,773,523 were issued to selling shareholders in a private placement that we completed on June 29, 2001. - 1,386,763 are issuable on the exercise of share purchase warrants which we issued to selling shareholders who participated in the private placement completed on June 29, 2001; - 400,000 were issued to a selling shareholder in settlement of legal proceedings; and - 100,000 were issued to a selling shareholder as part of that selling shareholder's employment agreement with us. The shares and share purchase warrants were issued to the selling shareholders under exemptions from registration under the Securities Act of 1933. Risk Factors An investment in our common shares is speculative and involves a high degree of risk. Before making an investment decision, you should read this entire prospectus carefully, including the information under the heading "Risk Factors" and the consolidated financial statements with accompanying related notes. Use of Proceeds We will not receive any proceeds from the sale of shares offered by the selling shareholders. To the extent that any warrants are exercised, we will receive the warrant exercise price for each warrant exercised. Proceeds from the exercise of warrants, if any, will be used for working capital purposes. Listing or Quotation of Our common shares currently trade on the OTC Common Shares Bulletin Board quotation service under the symbol "BNTI". SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION The tables below describe summary consolidated financial information for the periods indicated. It is important that you read this information together with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. <TABLE> <CAPTION> Consolidated Statement Period from Six months Years ended December 31, of Operations inception on ended June January 3, 1994 30, to June 30, 2001 2000 1999 1998 2000 ($) ($) ($) ($) ($) <S> <C> <C> <C> <C> <C> Sales................... 222,361 24,802 140,049 - 57,510 Gross Margin............ 131,300 17,327 86,468 - 27,505 Total Operating Expenses 9,214,235 968,023 1,227,064 1,236,074 2,138,061 Operating Loss.......... (9,082,935) (950,696) (1,140,596) (1,236,074) (2,110,556) Non-Operating Interest Income 41,968 15,375 26,5935 - - Net Loss................ (9,040,967) (935,321) (1,114,003) (1,236,074) (2,110,556) Loss per share: Basic and diluted............. (0.33) (0.02) (0.03) (0.03) (0.07) Weighted average number of shares outstanding: Basic and diluted ... 27,224,969 49,268,805 43,737,333 36,076,379 28,620,884 </TABLE> <TABLE> <CAPTION> Consolidated Balance Sheets As at June 30, As at December 31, 2001 2000 1999 ($) ($) ($) <S> <C> <C> <C> Current Assets 701,852 954,880 471,984 Total Assets 891,966 1,134,072 616,324 Current Liabilities 108,176 50,686 109,216 Amounts in dispute - - 606,000 Total Stockholders'equity (deficit) 783,790 1,083,386 (98,892) </TABLE>

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+ PROSPECTUS SUMMARY This summary highlights important information. As a summary, it is necessarily incomplete and does not contain all the information you should consider before investing. You should read the entire prospectus carefully. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in those forward-looking statements as a result of the factors described under the heading "Risk Factors" and elsewhere in this prospectus. OUR COMPANY Wareforce.com, Inc. provides computer-related technical services, support, hardware and software that clients need to design, develop, manage and maintain their data processing and information systems. Our approach to the market for information technology is to be a diversified information technology organization and develop a complete single-source solution for all information technology requirements. Since 1990, our revenues have grown from $2 million in 1990 to $148.3 million in 1999. Our client base exceeded 800 customers in 1999, and is currently composed of blue chip Fortune 1,000 corporations, state, county and local governments and educational institutions such as: - Pacific Bell, - Universal Studios, - Warner Brothers, - Scripps Institute, - Los Angeles County, and - University of California University School System. During 1998, we began implementing an electronic commerce and technical services acquisition strategy. In September 1998, we completed the acquisition of C.Y. Investment Inc. d/b/a Impres Technology and d/b/a Advanced Optical Distribution, a technical services/ computer products company with net revenues of $68 million in 1998. This doubled the size of our core business. In March 1999, we completed the purchase of the assets and assumed the liabilities of a second company, Kennsco, Inc. that generated $18 million in net revenues in fiscal year 1998 from its operations in the Midwest and Florida. Most recently, in June 2000 we completed the purchase of certain assets and assumed certain liabilities of Pacific Online Computers, Inc. d/b/a Online Connecting Point. Online generated $61 million in net revenues in fiscal 1999. We intend to pursue additional acquisitions of information technology services businesses and electronic commerce companies. We expect this to broaden our service offerings; add technical and sales personnel; increase our presence in existing markets; expand our reach into new geographic markets in the U.S. and Europe; improve our operating efficiencies through economies of scale; and cement strategic vendor and customer relationships. We cannot however, guarantee that we can find suitable acquisition candidates or that, if we do, we can acquire them on favorable terms. Our principal executive office is at 2361 Rosecrans Avenue, Suite 155, El Segundo, California 90245. Our telephone number is (310) 725-5555. THE OFFERING Common stock offered by selling stockholders 10,537,420 shares of our common stock, including 9,090,900 shares issuable upon the conversion of our Series A Preferred Stock and 116,667 shares issuable upon the exercise of warrants held by certain investors. We will not receive any proceeds from the sale of these shares. However, if the selling stockholders who hold warrants determine to exercise the warrants in order to sell shares registered by the prospectus, we will receive the net proceeds of the exercise of the warrants. Common stock currently outstanding 12,167,615 shares as of October 20, 2000 excluding the aggregate of 9,207,567 shares issuable upon (i) conversion of the Series A Preferred Stock and (ii) exercise of the warrants. Risk Factors An investment in Wareforce.com is highly speculative. Investors will suffer substantial dilution in the book value per share of the common stock compared to the purchase price. If we do not receive substantial funds from exercise of the warrants, which is not assured, we may require additional funding for which we have no commitments. You should not invest if you cannot afford to risk loss of your entire investment. See "Risk Factors."