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parsed_sections/risk_factors/1994/CIK0000083394_kerzner_risk_factors.txt

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+RISK FACTORS The Mortgage Notes, Units and Common Stock offered hereby involve certain risks that should be carefully considered by prospective investors. See "Risk Factors." EMERGENCE FROM BANKRUPTCY On May 3, 1994, a joint plan of reorganization proposed by RII, together with certain of its debtor and non-debtor subsidiaries, including RIHF, became effective. As a result, among other things, RII has significantly reduced its consolidated debt and sold its former casino, hotel and resort operations on Paradise Island in The Bahamas. See "Restructuring of Series Notes" and "Pro Forma Financial Data." THE OFFERING The following securities may be offered from time to time by the Selling Securityholders: $87,500,000 principal amount of 11% Mortgage Notes due 2003, issued by RIHF. 24,500 Units, each Unit consisting of $1,000 principal amount of 11.375% Junior Mortgage Notes due 2004, issued by RIHF, and one share of Class B Common Stock, issued by RII. 11,900,000 shares of Common Stock, issued by RII. The Mortgage Notes and Junior Mortgage Notes are guaranteed by RIH and secured by the Resorts Casino Hotel. See "Description of Mortgage Notes" and "Description of Junior Mortgage Notes." None of the securities are being offered by the Company, which will receive none of the proceeds of any sales. See "Selling Securityholders" and "Plan of Distribution." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables set forth certain historical and pro forma consolidated financial data for RII and RIH. The pro forma statement of operations data give effect to the Restructuring as if it had occurred on January 1, 1993. See "Restructuring of Series Notes." The pro forma balance sheet data give effect to the Restructuring as if it had occurred on December 31, 1993. The unaudited pro forma financial information is not necessarily indicative of future results or what the respective entities' financial position or results of operations would actually have been had the transactions occurred on the dates indicated. Such information should not be used as a basis to project results for any future periods. For additional information, see the Consolidated Financial Statements and the notes thereto and "Pro Forma Financial Data" and the notes thereto. <TABLE> <CAPTION> HISTORICAL PRO FORMA --------------------------------- ----------------- FOR THE YEAR ENDED DECEMBER 31, FOR THE --------------------------------- YEAR ENDED 1991 1992 1993 DECEMBER 31, 1993 ------ ------ ------- ----------------- (IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS) <S> <C> <C> <C> <C> RII Statement of Operations Data: Operating revenues................................................... $418.2 $436.9 $ 439.6 $279.5 Depreciation......................................................... 23.8 25.3 27.9 13.8 Earnings from operations............................................. 16.0 21.5 12.9 21.2 Interest income (expense), net(a).................................... (58.4) (73.5) (105.3) (26.0) Recapitalization costs............................................... (2.8) (8.8) Loss before income taxes............................................. (42.4) (54.8) (101.2) (4.8) Net loss............................................................. (41.6) (53.5) (102.2) (5.8) Net loss per share................................................... (2.07) (2.65) (5.07) (.15) Ratio of earnings to fixed charges(b)................................ -- -- -- -- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1993 ----------------------- HISTORICAL PRO FORMA ---------- --------- <S> <C> <C> RII Balance Sheet Data: Cash and cash equivalents(c)......................................................................... $ 62.5 $ 20.0 Net property and equipment........................................................................... 447.8 274.4 Total assets......................................................................................... 575.8 327.1 Current maturities of long-term debt(d).............................................................. 466.3 0.1 Long-term debt, excluding current maturities(d)...................................................... 85.0 232.5 Shareholders' equity (deficit)....................................................................... (113.7) .6 Book value per share................................................................................. (5.64) .02 </TABLE> <TABLE> <CAPTION> HISTORICAL PRO FORMA -------------------------------- ----------------- FOR THE YEAR ENDED DECEMBER 31, FOR THE -------------------------------- YEAR ENDED 1991 1992 1993 DECEMBER 31, 1993 ------ ------ ------ ----------------- (IN MILLIONS, EXCEPT RATIOS) <S> <C> <C> <C> <C> RIH Statement of Operations Data: Operating revenues.................................................... $247.5 $262.7 $271.5 $ 271.5 Depreciation.......................................................... 9.1 11.4 13.7 13.7 Earnings from operations.............................................. 14.8 21.0 12.1 12.1 Interest income (expense), net (e).................................... 7.0 7.3 7.4 (17.8) Recapitalization costs................................................ (.9) (2.7) Earnings (loss) before income taxes................................... 21.8 27.4 16.8 (5.7) Net earnings (loss)................................................... 13.1 16.4 16.4 (6.1) Ratio of earnings to fixed charges (f)................................ 15.5 21.5 16.0 -- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1993 ----------------------- HISTORICAL PRO FORMA ---------- --------- <S> <C> <C> RIH Balance Sheet Data: Cash and cash equivalents............................................................................ $ 25.9 $ 15.0 Net property and equipment........................................................................... 163.3 163.3 Total assets......................................................................................... 264.2 204.4 Current maturities of notes payable to affiliate and other long-term debt............................ 325.1 0.1 Notes payable to affiliate and other long-term debt, excluding current maturities.................... -- 147.6 Shareholder's equity (deficit)....................................................................... (148.0) 12.5 </TABLE> - --------------- (a) Amounts presented include amortization of debt discount. (b) The ratios of earnings to fixed charges were computed by dividing earnings available for fixed charges (earnings before income taxes adjusted for interest expense, amortization of debt discount and one-third of rent expense) by fixed charges. Fixed charges include interest expense, amortization of debt discount and one-third of rent expense. Historical earnings were insufficient to cover fixed charges by $42,402,000 for 1991; $54,802,000 for 1992; and $101,164,000 for 1993. Pro forma earnings were insufficient to cover fixed charges by $4,785,000. For ratios of earnings to fixed charges for additional periods see "Selected Historical Financial Data." (c) Excludes restricted cash equivalents. (d) Amounts are net of unamortized discounts. (e) Pro forma amount includes amortization of debt discount. (f) The ratios of earnings to fixed charges were computed by dividing earnings available for fixed charges (earnings before income taxes adjusted for interest expense, amortization of debt discount and one-third of rent expense) by fixed charges. Fixed charges include interest expense, amortization of debt discount and one-third of rent expense. Pro forma earnings were insufficient to cover fixed charges by $5,720,000. For ratios of earnings to fixed charges for additional periods see "Selected Historical Financial Data."

parsed_sections/risk_factors/1994/CIK0000094610_smurfit_risk_factors.txt

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+RISK FACTORS BEFORE INVESTING, PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH BELOW AND THE OTHER INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. SIGNIFICANT LEVERAGE AND DEBT SERVICE REQUIREMENTS Since July 1993, the Company has issued more than $1.1 billion of debt securities, the proceeds from which were used to refinance indebtedness, including the repayment of revolving credit facilities (which were subsequently reborrowed), and to fund working capital needs due to continued losses. Therefore, the Company remains significantly leveraged and will continue to be significantly leveraged after completion of the Offering and the Related Transactions. The Company's long-term debt to total capitalization ratio was 75.3% at June 30, 1994. On a pro forma basis, after giving effect to (i) the Offering and the use of the estimated net proceeds therefrom, together with borrowings under the Credit Agreement and (ii) the consummation of the Related Transactions, such ratio at June 30, 1994 would have been approximately 78.4%. Capitalization, for purposes of this ratio, includes long-term debt, deferred income taxes, redeemable preferred stock, minority interests and stockholders' equity. Giving effect to the Offering and the Related Transactions, the amounts of long-term debt (excluding capitalized lease obligations) outstanding at June 30, 1994 maturing through 2000 and thereafter are as follows: <TABLE> <CAPTION> THE COMPANY NON-RECOURSE EXCLUDING CONSOLIDATED INDEBTEDNESS OF SEMINOLE AND (IN MILLIONS) TOTAL CERTAIN SUBSIDIARIES(1) STONE-CONSOLIDATED ---------------------- ------------ -------------------------- ------------------- <S> <C> <C> <C> Remainder of 1994................................... $ 19.8 $ 13.1 $ 6.7 1995................................................ 274.1(2) 21.8 252.3(2) 1996................................................ 47.5 27.7 19.8 1997................................................ 254.6 22.6 232.0 1998................................................ 485.5 20.5 465.0 1999................................................ 471.6(3) 21.6 450.0(3) 2000................................................ 716.1 255.2 460.9 Thereafter.......................................... 2,157.3 167.2 1,990.1 <FN> - ------------------------------ (1) Includes indebtedness of Seminole and Stone-Consolidated. See "-- Credit Agreement Restrictions." (2) The 1995 maturities currently include approximately $232.0 million outstanding under Stone Financial Corporation's and Stone Fin II Receivables Corporation's revolving credit facilities at June 30, 1994, which the Company intends to refinance. The Company is currently planning a transaction to refinance these two existing receivables programs contemplated to approximate up to $300 million of receivables financing, which would be scheduled to mature in 1999. The proposed refinancing is subject to execution of definitive documentation and the public offering of notes by a newly created financial corporation to provide funding for such receivables financing, and there can be no assurance that such transactions will be consummated. (3) The revolving credit facility under the Credit Agreement will mature in May, 1999 and the letter of credit relating to certain industrial revenue bonds in Florence County, South Carolina (the "Florence Letter of Credit"), currently in the amount of approximately $61 million, will expire in May, 1999. This amount does not account for any borrowings which may be outstanding under the revolving credit facility of the Credit Agreement as of its expiration. </TABLE> In order to meet its amortization obligations for 1996 and subsequent years (assuming successful refinancing of the two existing receivables programs), the Company will be required to raise sufficient funds from operations and/or other sources and/or refinance or restructure maturing indebtedness. No assurance can be given that the Company will be successful in doing so. In addition to these amortization obligations, the Company will continue to incur substantial ongoing interest expense relating to its indebtedness. The Company's income before interest expense, income taxes, extraordinary loss and cumulative effects of accounting changes was insufficient to cover interest expense for the six months ended June 30, 1994 and June 30, 1993 by $189.7 million and $198.9 million respectively, and for the years ended December 31, 1993 and 1992 by $466.9 million and $229.3 million, respectively, and will be insufficient for the year 1994. The Company's net interest expense will increase as a result of this Offering and the Related Transactions, as the estimated net proceeds of the Offering and borrowings under the Credit Agreement will be used in part to (i) repay all of the outstanding borrowings under the 1989 Credit Agreement and the Savannah River Credit Agreement, which borrowings currently bear interest at lower rates than expected interest rates for the Notes, and (ii) purchase the shares of common stock of Savannah River not owned by the Company and redeem the shares of Savannah River Preferred not owned by the Company. See "Use of Proceeds." Furthermore, even though the Company has repaid amounts borrowed under its 1989 Credit Agreement, borrowings under the Credit Agreement will still bear interest calculated based upon a floating rate of interest, and the Company's cost of borrowing under the Credit Agreement will fluctuate as these underlying base rates of interest change. See "Credit Agreement." The Company will incur a charge for the write-off of previously unamortized debt issuance costs, related to the debt being repaid (approximately $45 million, net of income tax benefit) upon the completion of the Offering and Related Transactions. This non-cash charge will be recorded as an extraordinary loss from the early extinguishment of debt in the Company's Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit). The Company will continue to require access to significant funds, whether from operating cash flows, revolving credit facilities or other sources of liquidity, such as additional asset sales, to meet its debt service requirements in the future. Moreover, the restrictive terms of certain indebtedness of Seminole and Stone-Consolidated (which owns all of the Canadian and United Kingdom newsprint and uncoated groundwood assets of the Company) will not permit Seminole or Stone-Consolidated to provide funds to the Company (whether by dividend, loan or otherwise) including from cash generated from operations, if any, to fund the Company's obligations, including its payment obligations with respect to the Notes, until certain financial covenants contained in such debt instruments of these companies have been met. Such financial covenants have not been satisfied to date and are not likely to be satisfied in 1994. There can be no assurances that such financial covenants will be met in the future. CYCLICALITY AND PRICING; FIBER SUPPLY AND PRICING The markets for paper, packaging products and market pulp sold by the Company are highly competitive, and are sensitive to changes in industry capacity and cyclical changes in the economy, both of which can significantly impact selling prices and thereby the Company's profitability. From 1990 through the third quarter of 1993, the Company experienced substantial declines in the pricing of most of its products. Market conditions have improved since October 1993, which have allowed the Company to increase prices for most of its products. While prices for most of the Company's products are approaching the historical high prices achieved during the peak of the last industry cycle, the Company's production costs (including labor, fiber and energy), as well as its interest expense, have also significantly increased since the last pricing peak in the industry, increasing pressure on the Company's net margins for its products. In addition, since the Company is more than 80% integrated in the production of corrugated containers, price increases for corrugated containers, which typically occur up to 90 days after linerboard and corrugated medium price increases and accordingly have not to date fully reflected the price increases for linerboard and corrugating medium, are essential for the Company to obtain substantial financial benefits from price increases in the Company's linerboard and corrugated medium product lines. Although supply/demand balances appear favorable for most of the Company's products, there can be no assurance that announced price increases will be achieved, that linerboard and corrugating medium price increases will be fully passed through to corrugated container customers or that prices can be maintained at present levels. Wood fiber and recycled fiber, the principal raw materials in the manufacture of the Company's products, are purchased in highly competitive, price sensitive markets. These raw materials have historically exhibited price and demand cyclicality. In addition, the supply and price of wood fiber, in particular, is dependent upon a variety of factors over which the Company has no control, including environmental and conservation regulations, natural disasters, such as forest fires and hurricanes, and weather. In addition, recent increased demand for the Company's products has resulted in greater demand for raw materials which has recently translated into higher raw material prices. The Company purchases or cuts a variety of species of timber from which the Company utilizes wood fiber depending upon the product being manufactured and each mill's geographic location. Despite this diversification, wood fiber prices have increased substantially in 1994. A decrease in the supply of wood fiber, particularly in the Pacific Northwest and the southeastern United States due to environmental considerations, has caused, and will likely continue to cause, higher wood fiber costs in those regions. In addition, the increase in demand for products manufactured in whole or in part from recycled fiber has caused a shortage of recycled fiber, particularly old corrugated containers ("OCC") used in the manufacture of premium priced recycled containerboard and related products. The Company's paperboard and paper packaging products use a large volume of recycled fiber. In 1993, the Company processed approximately 1.9 million tons of recycled fiber. The Company used approximately 1.25 million tons of OCC in its products in 1993. The Company believes that the cost of OCC has risen from $55 per ton at June 30, 1993 to $110 per ton as of September 1, 1994. While the Company has not experienced any significant difficulty in obtaining wood fiber and recycled fiber in economic proximity to its mills, there can be no assurances that this will continue to be the case for any or all of its mills. In addition, there can be no assurance that all or any part of increased fiber costs can be passed along to consumers of the Company's products directly or in a timely manner. RECENT LOSSES; NET CASH USED IN OPERATING ACTIVITIES Due to industry conditions during the past few years and due principally to depressed product prices and significant interest costs attributable to the Company's highly leveraged capital structure, the Company incurred net losses in each of the last three years and for the first half of 1994 and expects to incur a net loss for the 1994 fiscal year. The net loss for the second quarter of 1994 was $50.8 million, or $.58 per common share, compared to the net loss of $71.6 million, or $1.03 per common share, for the second quarter of 1993. For the first six months of 1994, the loss was $129.7 million, or $1.55 per common share, before the extraordinary loss on the early extinguishment of debt and the cumulative effect of a change in accounting for post-employment benefits ("SFAS 112"). Including the extraordinary loss and the cumulative effect of SFAS 112, the Company reported a net loss of $160.7 million, or $1.92 per common share, for the first six months of 1994. For the first six months of 1993, the Company's loss was $134.3 million, or $1.94 per common share, before the cumulative effect of a change in accounting for post-retirement benefits other than pensions (SFAS 106). The adoption of SFAS 106, effective January 1, 1993, resulted in a one-time non-cash cumulative charge of $39.5 million net of income taxes, or $.56 per common share, resulting in a net loss of $173.8 million, or $2.50 per common share, for the first six months of 1993. The second-quarter and first-half losses were increased by significantly higher costs of recycled fiber for the Company's North American paper mills. Costs of OCC, the primary source of recycled fiber for containerboard, were approximately $20 million higher in the second quarter 1994 compared to the second quarter 1993, and approximately $18 million higher in the second quarter 1994 compared to the first quarter 1994. Income from operations for the second quarter 1994 includes a gain from an involuntary conversion relating to a digester rupture at the Company's Panama City, Florida, pulp and paperboard mill. This $22 million pre-tax gain reflects the expected net proceeds from the property damage claim in excess of the carrying value of the assets destroyed or damaged. The operations of the Panama City mill were shut down until August 19 and September 8, 1994, when the mill started up its pulp and linerboard operations, respectively. For the year 1993, the Company incurred a loss (before the cumulative effect of an accounting change) of $319.2 million, or $4.59 per common share, and (after the cumulative effect of such change) a net loss of $358.7 million or $5.15 per common share. For the year 1992, the loss (before the cumulative effect of an accounting change), was $169.9 million, or $2.49 per common share and (after the cumulative effect of such change) a net loss of $269.4 million or $3.89 per common share. The Company's continued net losses have significantly impaired its liquidity and available sources of liquidity. Net cash used in operating activities totalled $98.3 million for the six months ended June 30, 1994 compared with $2.0 million for the same period in 1993 and totalled $213 million for the year ended December 31, 1993, while net cash provided by operating activities totalled $86 million for the year ended December 31, 1992. See "Selected Consolidated Financial Data." Notwithstanding the improvements in the Company's liquidity and financial flexibility which will result from the Offering and the execution and delivery of the new Credit Agreement, unless the Company achieves and maintains increased selling prices beyond current levels, the Company will continue to incur net losses and will not generate sufficient cash flows to meet fully the Company's debt service requirements in the future. Without such price increases, the Company may exhaust all or substantially all of its cash resources and borrowing availability under the existing revolving credit facilities. In such event, the Company would be required to pursue other alternatives to improve liquidity, including further cost reductions, additional sales of assets, the deferral of certain capital expenditures, obtaining additional sources of funds or liquidity and/or pursuing the possible restructuring of its indebtedness. There can be no assurance that such measures, if required, would generate the liquidity required by the Company to operate its business and service its indebtedness. Beginning in 1996 (assuming successful refinancing of the two existing receivables programs) and continuing thereafter, the Company will be required to make significant amortization payments on its existing indebtedness which will require the Company to raise sufficient funds from operations and/or other sources and/or refinance or restructure maturing indebtedness. No assurance can be given that the Company will be successful in doing so. CREDIT AGREEMENT RESTRICTIONS All indebtedness under the Credit Agreement will be secured by a significant portion of the assets of the Company. The Credit Agreement is expected to contain covenants that include, among other things, requirements to maintain certain financial tests and ratios (including an indebtedness ratio and a minimum interest coverage ratio) and certain restrictions and limitations, including those on capital expenditures, changes in control, payment of dividends, sales of assets, lease payments, investments, additional indebtedness, liens, repurchases or prepayment of certain indebtedness, guarantees of indebtedness, mergers and purchases of stock and assets. The Credit Agreement is also expected to contain cross default provisions to the indebtedness of $10 million or more of the Company and certain subsidiaries, as well as cross-acceleration provisions to the non-recourse debt of $10 million or more of Stone-Consolidated, Seminole and Stone Venepal (Celgar) Pulp Inc. ("SVCP"), through which the Company indirectly owns a 25% interest in the Celgar mill. Additionally, the term loan portion of the Credit Agreement will provide for mandatory prepayments from sales of certain assets (other than the Collateral and the collateral pledged under the Credit Agreement ("Bank Collateral")), certain debt financings and excess cash flows. All mandatory and voluntary prepayments will be allocated against the term loan amortizations in inverse order of maturity. Amortization amounts under the term loan will be 0.5% of principal amount on each April 1 and October 1 for the period from April 1, 1995 through April 1, 1999, 47.5% on October 1, 1999 and 48.0% on April 1, 2000. In addition, mandatory prepayments from sales of Bank Collateral (unless substitute collateral has been provided) will be allocated pro rata between the term loan (in inverse order of maturities) and the revolving credit facility, and, to the extent applied to repay the revolving credit facility, will permanently reduce loan commitments thereunder. The Credit Agreement limits, except in certain specific circumstances, any further investments by the Company in Stone-Consolidated, Seminole and SVCP. As of June 30, 1994, Seminole had $153.1 million in outstanding indebtedness (including $115.1 million in secured indebtedness owed to lenders under its credit agreement) and is significantly leveraged. Pursuant to an output purchase agreement entered into in 1986 with Seminole, the Company is obligated to purchase and Seminole is obligated to sell all of Seminole's linerboard production. Seminole produces 100% recycled linerboard and is dependent upon an adequate supply of recycled fiber, in particular OCC. Under the agreement, the Company paid fixed prices for linerboard, which generally exceeded market prices, until June 3, 1994. Thereafter, the Company is only obligated to pay market prices for the remainder of the agreement. Because market prices for linerboard are currently less than the fixed prices previously in effect under the output purchase agreement and due to recent significant increases in the cost of recycled fiber, it is anticipated that Seminole will not comply with certain financial covenants at September 30, 1994. Seminole's lenders under its credit agreement have agreed to grant waivers and amendments with respect to such covenants for periods up to and including June 30, 1995. Furthermore, in the event that management determines that it is probable that Seminole will not be able to comply with any covenant contained in the Seminole credit agreement within twelve months after the waiver of a violation of such covenant, then the debt under the Seminole credit agreement would be reclassified as short-term debt under the provisions of Emerging Issues Task Forces Issue No. 86-30 "Classification of Obligations When a Violation is Waived By the Creditor." There can be no assurance that Seminole will not require additional waivers in the future. Depending upon the level of market prices and the cost and supply of OCC, Seminole may need to undertake additional measures to meet its debt service requirements and its financial covenants including obtaining additional sources of funds or liquidity, postponing or restructuring of debt service payments or refinancing the indebtedness. In the event that such measures are required and not successful, and such indebtedness is accelerated by the respective lenders to Seminole, the lenders to the Company under the Credit Agreement and various other of its debt instruments would be entitled to accelerate the indebtedness owed by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity." There can be no assurance that the Company will be able to achieve and maintain compliance with the prescribed financial ratio tests or other requirements of the Credit Agreement. Failure to achieve or maintain compliance with such financial ratio tests or other requirements under the Credit Agreement, in the absence of a waiver or amendment, would result in an event of default and could lead to the acceleration of the obligations under the Credit Agreement. While the Company has successfully sought and received waivers and amendments under its 1989 Credit Agreement on various occasions, if waivers or amendments are requested by the Company under the Credit Agreement, there can be no assurance that the new lenders under the Credit Agreement will grant requests if required by the Company. The failure to obtain any waivers or amendments from the lenders under the Credit Agreement could reduce the Company's flexibility to respond to adverse industry conditions and could have a material adverse effect on the Company. See "Credit Agreement -- Covenants." ENVIRONMENTAL MATTERS The Company's operations are subject to extensive environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over its foreign operations. The Company has in the past made significant capital expenditures to comply with water, air and solid and hazardous waste regulations and expects to make significant expenditures in the future. Capital expenditures for environmental control equipment and facilities were approximately $29.7 million in 1993 and the Company anticipates that 1994 and 1995 environmental capital expenditures will approximate $78 million and $114 million, respectively (not including any expenditures required under the proposed "cluster rules" described below). Included in these amounts are capital expenditures for Stone-Consolidated which were approximately $6.7 million in 1993 and are anticipated to approximate $43 million in 1994 and $82 million in 1995. Although capital expenditures for environmental control equipment and facilities and compliance costs in future years will depend on legislative and technological developments which cannot be predicted at this time, the Company anticipates that these costs will increase when final "cluster rules" are adopted and as further environmental regulations are imposed on the Company. In December 1993, the U.S. Environmental Protection Agency (the "EPA") issued a proposed rule affecting the pulp and paper industry. These proposed regulations, informally known as the "cluster rules," would make more stringent requirements for discharge of wastewaters under the Clean Water Act and would impose new requirements on air omissions under the Clean Air Act. Pulp and paper manufacturers (including the Company) have submitted extensive comments to the EPA on the proposed regulations in support of the position that requirements under the proposed regulations are unnecessarily complex, burdensome and environmentally unjustified. The EPA has indicated that it may reopen the comment period on the proposed regulations to allow review and comment on new data that the industry will submit to the agency on the industry's air toxic emissions. It cannot be predicted at this time whether the EPA will modify the requirements in the final regulations which are scheduled to be issued in 1996, with compliance required within three years from such date. The Company is considering and evaluating the potential impact of the rules, as proposed, on its operations and capital expenditures over the next several years. Preliminary estimates indicate that the Company could be required to make capital expenditures of $350-$450 million during the period of 1996 through 1998 in order to meet the requirements of the rules, as proposed. In addition, annual operating expenses would increase by as much as $20 million beginning in 1998. The ultimate financial impact of the regulations cannot be accurately estimated at this time but will be affected by several factors, including the actual requirements imposed under the final rule, advancements in control process technologies, possible reconfiguration of mills and inflation. In addition, the Company is from time to time subject to litigation and governmental proceedings regarding environmental matters in which injunctive and/or monetary relief is sought. The Company has been named as a potentially responsible party ("PRP") at a number of sites which are the subject of remedial activity under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") or comparable state laws. Although the Company is subject to joint and several liability imposed under Superfund, at most of the multi-PRP sites there are organized groups of PRPs and costs are being shared among PRPs. Future environmental regulations, including the final "cluster rules," may have an unpredictable adverse effect on the Company's operations and earnings, but they are not expected to adversely affect the Company's competitive position. For further information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Liquidity -- Environmental Issues." RANKING The First Mortgage Notes will be senior secured obligations of the Company and the Senior Notes will be senior unsecured obligations of the Company. The First Mortgage Notes and the Senior Notes will rank PARI PASSU in right of payment with each other and with all existing and future Senior Indebtedness of the Company, including the indebtedness under the Credit Agreement and the Company's $240 million principal amount of 11 7/8% Senior Notes due 1998, $150 million principal amount of 12 5/8% Senior Notes due 1998 and $710 million principal amount of 9 7/8% Senior Notes due 2001. The payment of the principal of, interest on and any other amounts due on Subordinated Indebtedness will be subordinated in right of payment to the prior payment in full of the Notes. As of June 30, 1994, the total amount of outstanding Senior Indebtedness was approximately $2.3 billion (which amount does not reflect the effects of the Offering or the Related Transactions). Obligations of the Company's subsidiaries will represent prior claims with respect to assets and earnings of such subsidiaries. Thus, the Notes will be structurally subordinated to all current and future indebtedness of the Company's subsidiaries, including trade payables. A significant portion of the Company's assets will secure borrowings outstanding under the Credit Agreement. See "Credit Agreement -- Security." The First Mortgage Notes are also secured obligations of the Company. See "Description of Notes -- Additional First Mortgage Note Indenture Definitions -- Collateral." In the event of the Company's insolvency or liquidation, the claims of the lenders under the Credit Agreement would have to be satisfied out of the Bank Collateral securing borrowings under the Credit Agreement before any such assets would be available to pay claims of holders of the Notes. Similarly, the holders of First Mortgage Notes would have to be satisfied out of the Collateral under the First Mortgage Note Indenture and Security Documents (as defined) before any such assets would be available to pay claims of holders of the Senior Notes. If the lenders under the Credit Agreement and/or the First Mortgage Note Trustee under the First Mortgage Note Indenture and the Security Documents should foreclose on their respective collateral, no assurance can be given that there will be sufficient assets available in the Company to pay amounts due on the First Mortgage Notes or the Senior Notes, respectively. See "Description of Notes -- Ranking." Pursuant to the Company's receivables financing programs (excluding Stone-Consolidated's program), at June 30, 1994, approximately $232 million was outstanding under Stone Financial Corporation's and Stone Fin II Receivables Corporation's revolving credit facilities. The Company is currently planning a transaction to refinance these two existing receivables programs contemplated to approximate $300 million of receivables financing which would be scheduled to mature in 1999. The proposed refinancing is subject to execution of definitive documentation and the public offering of notes by a newly created financial corporation to provide funding for such receivables financing, and there can be no assurance that it will be consummated. FIRST MORTGAGE NOTE HOLDERS MAY RECEIVE LESS THAN THEIR INVESTMENT UPON LIQUIDATION No assurance can be given that the proceeds of a sale of the Collateral securing the First Mortgage Notes would be sufficient to repay all of the First Mortgage Notes upon acceleration. The aggregate appraised value as of September 1, 1994 of the four mills pledged as collateral securing the First Mortgage Notes (the "Collateral Mills") as estimated by American Appraisal Associates, Inc. (the "Consultant") is $695,000,000. The amount that might be realized from the sale of the Collateral Mills may be materially less than its appraised value. The appraisal is only the Consultant's estimate or opinion of the value of the Collateral Mills and cannot be relied upon as a precise measure of its value or worth or as an assurance that a buyer willing and able to buy the Collateral Mills existed at the date of such appraisal or will exist at the time of sale of the Collateral Mills. The Collateral Mills are valued in the appraisal on the assumption that the assets comprising them would, upon sale, remain at their present locations as part of the current operations. Currently, the products manufactured at the Collateral Mills are utilized by the Company in the production of corrugated containers at other facilities of the Company which will be pledged to secure the indebtedness under the Credit Agreement. The amount that the First Mortgage Note Trustee could obtain in connection with the liquidation of the Collateral Mills could be less than would be obtained for the Collateral Mills if they were sold together with facilities of the Company which currently use their production. In addition, the appraisal reflects the Consultant's estimate or opinion of the value of the Collateral Mills as of the date of the appraisal and assumes that a sale would not be made under distress conditions. Accordingly, the actual amount realized from a sale of the Collateral Mills could be significantly reduced by adverse changes in market conditions, the condition of the Collateral Mills or other factors affecting the resale value of the Collateral Mills between the date of the appraisal and the estimates, as the case may be, and such sale or if such sale took place under distress conditions. See "The Collateral Under the First Mortgage Note Indenture - -- Appraisal." Moreover, the value of the Collateral Mills, and the First Mortgage Note Trustee's ability to foreclose upon and sell the Collateral Mills, could be affected by environmental conditions existing at any of the Collateral Mills, as well as capital expenditures required to comply with existing and future environmental regulations. See "-- Environmental Matters" and "The Collateral Under the First Mortgage Note Indenture -- Environmental Considerations." If the net proceeds received from the sale of the Collateral Mills (after payment of any expenses of the sale and repayment of indebtedness secured by Permitted Collateral Liens (see "Description of the Notes -- Additional First Mortgage Note Indenture Definitions -- Permitted Collateral Liens") or other liens on the Collateral Mills which might, in either case, have priority under applicable law to the lien on the Collateral Mills in favor of the First Mortgage Note Trustee) were insufficient to pay all amounts due on the First Mortgage Notes, then holders of the First Mortgage Notes would (to the extent of such insufficiency) only have an unsecured claim against any remaining unencumbered assets of the Company (subject, in the case of subsidiaries of the Company, to the claims of holders of indebtedness of each subsidiary). As a result, there is a risk that holders of the First Mortgage Notes will receive less than their investment upon any liquidation of the Company. Furthermore, the ability of the First Mortgage Note Trustee to cause the Collateral Mills to be sold will be delayed if the Company is the subject of any bankruptcy or receivership proceedings. See "The Collateral under the First Mortgage Note Indenture -- Bankruptcy Considerations."

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+RISK FACTORS Prospective purchasers of Securities offered hereby should carefully consider the matters set forth under "Risk Factors," as well as the other information and data included in this Prospectus. - 9 - <PAGE> 12 RISK FACTORS Prospective purchasers of Securities offered hereby should carefully read the entire Prospectus and, in particular, should consider, among other things, the following risks. LEVERAGE The Company has a high degree of leverage. At June 30, 1994, the outstanding consolidated indebtedness (excluding trade payables and accrued liabilities) of the Company's continuing operations was $193.8 million. This high degree of leverage may have important consequences, including the following: (i) the ability of the Company to obtain additional financing in the future for working capital, capital expenditures, debt service requirements or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations will be required to satisfy debt service obligations; (iii) the Company may be more highly leveraged than companies with which it competes, which may place it at a competitive disadvantage; and (iv) the Company's high degree of leverage may make it more vulnerable in the event of a downturn in its business and may limit its ability to capitalize on business opportunities. Although the Company believes that its operating cash flow as well as amounts available under the Domestic Credit Facility will be sufficient to fund working capital, capital expenditures and debt service requirements for the next 24 months, the Company's ability to satisfy its obligations will be dependent upon its future performance, which is subject to prevailing economic conditions and financial, business and other factors, including factors beyond the Company's control. Commencing March 1995, the Company is required to make quarterly principal payments of $1.0 million under its Domestic Term Loan. In addition, the Company is required to make mandatory sinking fund payments of $17.0 million on each of September 1, 1996 and September 1, 1997 with respect to the Senior Secured Notes and a single payment of $8.8 million on June 1, 1998 with respect to the Senior Subordinated Notes. In addition, the Debt Financing matures on May 20, 1997, subject to extension in certain circumstances. The Company currently believes that it must obtain a significant infusion of capital before any significant deleveraging can occur. However, there can be no assurances as to the timing or likelihood of such deleveraging. To the Company's knowledge, neither its high degree of leverage nor the bankruptcy of Ideal has resulted in the refusal by any of its customers, suppliers or manufacturers to do business with the Company or in the alteration of material terms which have had a material impact on the Company's business. RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS The terms and conditions of the instruments evidencing the Debt Financing, as well as other indebtedness of the Company impose restrictions that affect, among other things, the ability of the Company and/or its subsidiaries to incur debt, pay dividends, make acquisitions, create liens, sell assets and make certain investments. The breach of any of the foregoing covenants would result in a default under the applicable debt instrument permitting the holders of indebtedness outstanding thereunder, subject to applicable grace periods, to accelerate such indebtedness. There can be no assurance that the Company would have sufficient funds to repay or assets to satisfy such obligations. CONTROL BY PRINCIPAL STOCKHOLDERS; CERTAIN ANTI-TAKEOVER EFFECTS Approximately 16.7% (and 12.7%, assuming the exercise of all of the Warrants offered hereby) of the outstanding shares of the Company's common stock, par value $.01 per share, and 82.7% of the outstanding shares of the Company's Class B common stock are held by Melvin and Armond Waxman, brothers and respectively, the Chairman of the Board and Co-Chief Executive Officer and the President and Co-Chief Executive Officer of the Company (the "Principal Stockholders"). These holdings represent 62.9% (and 57.6%, assuming the exercise of - 10 - <PAGE> 13 all of the Warrants offered hereby) of the outstanding voting power of the Company. Consequently, the Principal Stockholders have sufficient voting power to elect the entire Board of Directors of the Company and, in general, to determine the outcome of any corporate transaction or other matter submitted to the stockholders for approval, including any merger, consolidation, sale of all or substantially all of the Company's assets or "going private" transactions, and to prevent or cause a change in control of the Company. In addition, certain provisions in the Company's Certificate of Incorporation, By-laws and debt instruments, including the Change of Control provisions in the Indenture governing the Notes, may be deemed to have the effect of discouraging a third party from pursuing a non-negotiated takeover of the Company and preventing certain changes in control. DEFICIENCY OF EARNINGS TO FIXED CHARGES In fiscal 1994, 1993, and 1992, the Company's earnings (as defined in footnote 4 to Selected Financial Data) were insufficient to cover its fixed charges by $3.1 million, $15.7 million and $5.1 million, respectively. The Company's business strategy, described herein, is designed to capitalize on the growth prospects for Barnett and Consumer Products and thereby increase earnings. The Company believes that the successful implementation of its business strategy will enable it to reduce or eliminate the deficiency of earnings to fixed charges. However, there can be no assurances regarding when such deficiencies will be reduced or eliminated or that the deficiencies experienced in the past will not reoccur. FOREIGN SOURCING In fiscal 1994, products manufactured outside of the United States accounted for approximately 27.2% of the total product purchases made by the Company's continuing operations. Foreign sourcing involves a number of risks, including the availability of letters of credit, maintenance of quality standards, work stoppages, transportation delays and interruptions, political and economic disruptions, foreign currency fluctuations, expropriation, nationalization, the imposition of tariffs and import and export controls and changes in governmental policies (including United States' policy toward the foreign country where the products are produced), which could have an adverse effect on the Company's business. The occurrence of certain of these factors would delay or prevent the delivery of goods ordered by the Company's customers, and such delay or inability to meet delivery requirements would have an adverse effect on the Company's results of operations and could have an adverse effect on the Company's relationships with its customers. In addition, the loss of a foreign manufacturer could have a short-term adverse effect on the Company's business until alternative supply arrangements were secured. RELIANCE ON KEY CUSTOMERS During fiscal 1994, Kmart and its subsidiaries, Consumer Products' largest customer, accounted for approximately 13% of the Company's continuing operations' net sales. During the same period, Consumer Products' ten largest customers accounted for approximately 25% of the Company's continuing operations' net sales. The loss of or a substantial decrease in the business of Consumer Products' largest customers could have a material adverse effect on the Company's continuing operations. PROCEEDS OF THE OFFERING The Company will not receive any of the proceeds of this offering. All of the proceeds of this offering will be received by the Selling Security Holders. - 11 - <PAGE> 14 ABSENCE OF PUBLIC MARKET At present, the Warrants are owned by a small number of investors and there is no active trading market for the Warrants. If an active trading market does not develop, purchasers of the Warrants may have difficulty liquidating their investment and the Warrants may not be readily accepted as collateral for loans. Accordingly, no assurances can be given as to the price at which holders of the Warrants will be able to sell the Warrants, if at all. The liquidity of and the market prices for the Warrants and Common Stock can be expected to vary with changes in market and economic conditions, the financial condition and prospects of the Company and other factors that generally influence the market prices of securities, including fluctuations in the market for warrants and common stock generally. POSSIBLE FUTURE SALES OF SHARES BY THE SELLING SECURITY HOLDERS Subject to the restrictions described under "Risk Factors -- Shares Eligible for Future Sale" and applicable law, upon the effectiveness of the Registration Statement of which this Prospectus forms a part, the Selling Security Holders could cause the sale of any or all of the Warrants or underlying shares of Common Stock they own. The Selling Security Holders may determine to sell Warrants or the underlying shares of Common Stock from time to time for any reason. Although the Company can make no prediction as to the effect, if any, that sales of Warrants or shares of Common Stock owned by the Selling Security Holders would have on the market price of Common Stock prevailing from time to time, sales of substantial amounts of Warrants or Common Stock, or the availability of such Warrants or shares of Common Stock for sale in the public market, could adversely affect prevailing market prices of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE As of September 12, 1994, there were 9,491,457 shares of Common Stock outstanding and 2,220,705 shares of Class B Common Stock outstanding (convertible into 2,220,705 shares of Common Stock). To the extent such shares are not held by "affiliates" or otherwise subject to restrictions on resale, including those imposed by Section 16(b) of the Exchange Act, the Warrants, and upon exercise of the Warrants, the shares of Common Stock which are issuable upon exercise of the Warrants and offered hereby are eligible for sale in the public market. Although the Company can make no prediction as to the effect, if any, that sales of the Warrants and shares of Common Stock referred to above would have on the market price of the Common Stock prevailing from time to time, sales of a substantial amount of Warrants or Common Stock, or the availability of such Warrants or shares of Common Stock for sale in the public market could adversely affect prevailing market prices of the Common Stock.

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+RISK FACTORS Investors should carefully consider all of the information set forth in this Prospectus. In particular, careful consideration should be given to the information set forth below with respect to certain risk factors generally applicable to an investment in the Series A Shares. SUBSTANTIAL LEVERAGE; RISK IN REFINANCING AND REPAYMENT OF INDEBTEDNESS The Company has, in the past and upon the recent consummation of the offering of the Senior Notes (the "Senior Note Offering") continues to have, substantial debt outstanding. At October 3, 1993 the Company had total outstanding long-term debt of $244,351,000, most of which bears interest at fluctuating rates, as compared to common stockholder's equity of $37,729,000. On a pro forma basis assuming consummation of the Senior Note Offering and the application of the net proceeds therefrom on October 3, 1993, the Company's total outstanding long-term debt would have been $329,659,000 as compared to common stockholders' equity of $32,556,000 at that date. In addition, the Company had $86,008,000 of mandatory redeemable preferred stock outstanding at that date comprised of the Series A Shares and the Redeemable Senior Preferred Stock. Cash dividends on the Series A Shares were approximately $7,500,000 in fiscal 1993 and will be approximately $8,000,000 in fiscal 1994. In fiscal 1995, the Company's Senior Cumulative Preferred Stock will begin to accrue cash dividends in the amount of approximately $5,200,000 each year. At October 3, 1993, on a pro forma basis giving effect to the use of net proceeds from the Senior Note Offering, the Company would have had approximately $36,000,000 of availability under the Senior Credit Agreement, subject to the satisfaction of certain conditions and covenants. The substantial leverage and capital commitments of the Company have important consequences for holders of the Series A Shares, including the risk that the Company may not generate sufficient cash flow from operations to pay principal of and interest on indebtedness and cash dividends on the preferred stock and to meet its capital expenditure requirements. In addition, the operating and financial restrictions contained in the agreements governing the Company's credit facilities and the Indenture could affect the Company in certain ways, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be significantly impaired; (ii) the Company's ability to respond quickly to increased competition and other market forces may be limited; and (iii) the Company's vulnerability to weak general economic conditions may be greater than it would otherwise be absent such restrictions. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources," "Capital Structure -- Credit Facilities" and "Selected Consolidated Financial Information." While cash flow from operations and funds available under the Senior Credit Agreement may be sufficient to meet anticipated requirements, including mandatory principal installments on the term loan portion of the Senior Credit Agreement, the Company expects to refinance the Senior Credit Agreement upon its maturity in 1998, which is prior to the maturity of the Senior Notes and the mandatory redemption of the Series A Shares. While the Company believes, based upon its historical and anticipated performance, that it should be able to satisfy its obligations from operations and appropriate refinancings, no assurance to that effect can be given. Other measures to raise cash to satisfy obligations include potential sales of assets or equity. However, the Company's ability to raise funds by selling assets is greatly restricted by the Senior Credit Agreement and the Indenture and its ability to effect equity offerings is dependent on results of operations and market conditions. In the event that the Company is unable to refinance such indebtedness or raise funds through asset sales, sales of equity or otherwise, its ability to pay dividends on the Series A Shares or to repurchase such Series A Shares would be adversely affected. RESTRICTIONS ON PAYMENT OF DIVIDENDS ON AND REDEMPTION OF THE SERIES A SHARES The Senior Credit Agreement, the Indenture, the Company's Certificate of Incorporation (including provisions pertaining to the Redeemable Senior Preferred Stock) and the Certificate of Designation adopted by the Board of Directors of the Company setting forth the terms of the Series A Shares (the "Certificate of Designation") contain various restrictions and financial covenants and ratios restricting the ability of the Company to pay dividends on or redeem or repurchase the Series A Shares, including a requirement under the Senior Credit Agreement that the Company meet specified applicable interest coverage ratios in order to pay dividends on or redeem shares of its equity securities, including the Series A Shares. With respect to the Indenture, the Company is only permitted to pay dividends on the Series A Shares to the extent the Company is not in default under the Indenture. With respect to the terms of the Company's Certificate of Incorporation governing the Redeemable Senior Preferred Stock, from and after January 15, 1995, the Company may be prohibited from paying dividends on, or redeeming or repurchasing, the Series A Shares unless, on or before that date, it shall have issued all dividends payable in additional shares of Redeemable Senior Preferred Stock accrued on the Redeemable Senior Preferred Stock and thereafter pays full cash dividends on such shares in subsequent quarters. To the extent that the Company fails to satisfy the conditions contained in the Senior Credit Agreement, the Indenture or the Company's Certificate of Incorporation for paying dividends on a current basis, the unpaid dividends on the Series A Shares will accumulate and could thereafter be paid only at such time as the Company satisfies such conditions. To date, the Company has paid in full all dividends payable on the Series A Shares. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources," "Capital Structure - -- Credit Facilities" and "-- Redeemable Senior Preferred Stock" and "Description of the Securities -- Series A Shares." RESTRICTIONS ON EXERCISE OF CHANGE OF CONTROL RIGHTS The holders of the Senior Notes and the Series A Shares have certain rights to require the Company to repurchase such securities upon a Change of Control (as defined in the Indenture in respect of the Senior Notes and in the Purchase Agreement in respect of the Series A Shares). The ability of the Company to purchase the outstanding Series A Shares upon the exercise by a holder of Series A Shares of such holder's rights following a "Change of Control" as required by the Purchase Agreement is restricted by the Company's Senior Credit Agreement, the Indenture, its Certificate of Incorporation and the DGCL. Under the terms of its Senior Credit Agreement, unless the Company's lenders were to waive certain covenants contained in the Senior Credit Agreement, a Change of Control as defined in the Purchase Agreement in respect of the Series A Shares would constitute a default under the Senior Credit Agreement and could result in the acceleration of the Company's debt repayment obligations. In such event, the Company may not have sufficient resources to satisfy all its repayment and repurchase obligations arising from a Change of Control. See "Capital Structure -- Credit Facilities - -- Senior Credit Agreement." Under the Indenture, the Company may not repurchase any Series A Shares following a Change of Control (as defined in the Indenture) unless or until it has repurchased all Senior Notes that may be tendered for repurchase upon such Change of Control, except out of the proceeds from a contemporaneous public offering of capital stock. In addition, any exercise of the repurchase rights by holders of the Series A Shares upon a Change of Control would be unenforceable for so long as (i) the Company had insufficient legally available funds (as determined under the DGCL) to effect such repurchases or (ii) the Company was in default with respect to the obligations to pay dividends on the Redeemable Senior Preferred Stock, which obligations will commence in January 1995, or the obligation to redeem or purchase shares of such stock. See "Capital Structure -- Redeemable Senior Preferred Stock." A failure by the Company to purchase the Series A Shares upon the exercise by a holder of Series A Shares of such holder's rights following a Change of Control would result in a breach of the terms of the Purchase Agreement and may adversely affect the market value of the Series A Shares. SALES DECLINE AND RECENT OPERATING LOSSES Comparable store sales for Company Stores (excluding Canadian stores) open over one year for the nine months ended October 3, 1993 declined 6.2% from the nine months ended September 27, 1992. The Company believes that its sales decline resulted primarily from a decline in retail sales of residential flooring in the United States and the continuing weakness in the economy generally during the nine months ended October 3, 1993, combined with the resulting pressure exerted on selling prices. The Company had losses applicable to its common stockholder of approximately $26.6 million and $28.2 million in fiscal 1991 and fiscal 1992, respectively. The Company's ability to increase profitability is substantially dependent upon its ability to increase sales and maintain operating margins, which management believes is dependent upon an increase in consumer spending in the residential remodeling market. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." LACK OF PUBLIC MARKET Prior to the registration of the Series A Shares under the Securities Act, such Shares were eligible to trade in the PORTAL Market, subject to the rules and regulations governing such market. Other than the PORTAL Market, there has been no trading market for any of the Company's capital stock, including the Series A Shares. However, only restricted securities that have not been registered pursuant to the Securities Act are qualified for trading on the PORTAL Market. Accordingly, upon the registration of the Series A Shares under the Securities Act, the Series A Shares were no longer qualified to trade in the PORTAL Market. While the Series A Shares offered hereby may be resold by non-affiliates of the Company without registration, there can be no assurance that an active trading market for such shares will develop nor is it expected that such an active trading market will develop. Accordingly, holders of Series A Shares may be unable to sell such shares until locating a suitable purchaser. The Series A Shares will not be qualified for listing on any exchange or authorized to be quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). CONTROL BY INVESTCORP Since the acquisition of the Company by CT Holdings in connection with the 1989 Merger, Investcorp and its affiliates, through their ownership of the outstanding common stock of CT Holdings or through other contractual arrangements, have indirectly controlled the power to vote the outstanding common stock of the Company. Accordingly, Investcorp and its affiliates are entitled indirectly to elect all directors of the Company. See "Security Ownership of Certain Beneficial Owners and Management" and "Management." COMPETITION AND OTHER BUSINESS FACTORS The Company competes with general merchandise and discount stores, home improvement centers and specialty retailers operating on a local, regional or national basis. During the past several years, this competition has intensified as certain home improvement centers have continued to expand on a nationwide basis. Many of its competitors sell a considerably broader variety of products than the Company does within each of the Company's product lines and certain of its competitors have substantially greater financial resources than the Company. The Company believes its growth in sales and earnings depends principally upon its ability to respond to consumer preferences and to remain competitive with the pricing policies of its competitors. See "Business --Competition." GROWTH OF FRANCHISED STORES The Company commenced operations of a franchising program in 1989 to allow the Company to expand its network of Color Tile Stores generally in less populous markets that historically would not support multiple locations and, therefore, would not enable the Company to achieve satisfactory operating, administrative and advertising efficiencies. While franchising permits the Company to increase the geographic coverage of its store network without substantial contributions of working capital, the operation of Franchised Stores raises certain other risks, such as the loss of operational control over Franchised Stores to the franchisee (including the ability to determine products offered, retail pricing and other operational matters). The Company does not believe these risks are material in the aggregate. See "Business - --Franchising."

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+RISK FACTORS Each prospective investor should carefully consider the following fac- tors before purchasing Notes. Leverage. Upon completion of this offering, the Company will be highly leveraged. At December 31, 1993, the Company and its consolidated subsid- iary, CPPI, had first mortgage bank debt of approximately $33.6 million. Af- ter giving effect to this offering and the application of the estimated net offering proceeds to repay all outstanding bank debt, the Company will have long-term debt obligations of approximately $85 million. The Company also has substantial minimum lease obligations under its lease arrangements with the Partnership. See "The Company - Corporate Structure." After completion of this offering, the Company will continue to have substantial interest expense. The Company's ratio of earnings to fixed charges for the year ended December 31, 1992 was 1.64 to 1 and on a pro forma basis after giving effect to this offering and the application of the estimated proceeds to redeem all outstanding bank debt, the Company's ratio of earnings to fixed charges for the year ended December 31, 1992 would have been 1.20 to 1. The Company's ability to satisfy its obligations is depen- dent upon its future performance, which will be subject to prevailing eco- nomic conditions and to financial, business and other factors, including factors beyond the control of the Company, affecting the business operations of the Company. The Company's future performance will depend in part on the success of the Claridge's internal expansion to be funded with part of the proceeds of this offering. If the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or ac- ceptable to the Company. See "Selected Financial Data." Lease Obligations. CPPI has been permitted to pay reduced amounts of rent under the Operating Lease pursuant to an agreement with the Partnership providing for deferral or abatement of rent under the Operating Lease. CPPI has fully utilized the $15.1 million of deferrals provided for in that agreement, and it expects to fully utilize the $38.8 million of abatements to which it is entitled prior to the end of 1996. Accordingly, CPPI's rental payments under the Operating Lease are projected to increase significantly for the period commencing late 1996 through September 30, 1998; however, payments on the Operating Lease will decline immediately after that date. Deferred Tax Liability. Under the terms of the Wraparound Mortgage, CPPI is not permitted to foreclose on the Wraparound Mortgage and take ownership of the Hotel Assets so long as a senior mortgage (such as the Mortgage that will secure the Notes) is outstanding. As an alternative to continuing to collect interest payments following a default by the Partnership under the Wraparound Mortgage, CPPI may choose to acquire the Hotel Assets in exchange for a discharge of the Partnership's obligations under the Wraparound Mort- gage. Due to the structure of certain prior transactions in connection with the restructuring, CPPI's tax basis in the Wraparound Mortgage is consider- ably less than the face amount of the Wraparound Mortgage. Depending on the fair market value of the Hotel Assets and the tax rates in effect at the time, it is expected that if the Company should cause CPPI to acquire the Hotel Assets, the Company would have a tax liability, for federal and state income tax purposes, of between approximately $17 million and $25 million. However, because at the time of an acquisition of the Hotel Assets the obli- gation of CPPI to make lease payments to the Partnership would cease, this <PAGE> <PAGE> 21 tax liability would be substantially offset by the resulting increase in cash flow available to CPPI. It is unlikely that the Company would receive any cash in connection with an acquisition of the Hotel Assets with which to pay its tax liability. It is also unlikely that the Company would choose to acquire the Hotel Assets without such cash, unless it believed at that time that its liquid resources would be sufficient to discharge that tax liabil- ity and its other obligations, including its obligations to pay principal and interest to the holders of Notes. Pre-1989 Operating Results. The Company negotiated its 1989 restructur- ing in order to remain financially viable and to avoid the possible need to seek protection in bankruptcy. Although, at the time that the Restructuring Agreement was entered into (and at all times since) the Company had (and has) made all required payments under its existing First Mortgage, it was clear at the time of the restructuring that the Company would not be able to make the principal payments required on the First Mortgage in 1988 and sub- sequent years. In the restructuring, $132 million of indebtedness was for- given and the principal amount secured by the First Mortgage was reduced by approximately $15 million to approximately $74.5 million. In addition, the principal payment schedule was modified. The modification of the principal payment schedule under the First Mortgage was sufficient, however, only to permit the Company to demonstrate to the New Jersey Casino Control Commis- sion (the "NJCCC") that the Company would remain financially viable for the term of a one-year licensing renewal effective October 1988. As a re- sult, in connection with the two-year renewals of the casino license for the Company in 1989, 1991 and 1993, it was necessary for the Company to negoti- ate further modifications of the principal payment schedule under the First Mortgage. In connection with the 1993 relicensing, the First Mortgage lender agreed for the first time to modify the principal payment schedule beyond the two-year relicensing period. The Company believes the financial diffi- culties it experienced prior to the 1989 restructuring were attributable principally to its very substantial debt burden at that time. Since immedi- ately following the 1989 restructuring and the implementation of the Com- pany's present operating and marketing strategy, the principal amount of the Company's First Mortgage bank debt has been reduced from approximately $74.5 million to approximately $34.8 million at September 30, 1993. Competition in Atlantic City. Competition in the Atlantic City casino- hotel market is intense. Twelve casino-hotels are operating in Atlantic City, most of which are larger and newer than the Claridge, and may have greater access to capital and resources. Competition in Atlantic City ex- tends to the employment market as well. See "Business - Market." Competition from New Gaming Jurisdictions. The Company believes the le- galization of casino and other gaming ventures in states other than New Jer- sey, including Colorado, Illinois, Indiana, Iowa, Louisiana, Mississippi, Missouri, South Dakota and on various Native American reservations has not had to date an adverse impact on its operations. The Company believes it is too early to determine the effect, if any, of the recent expansion of the Foxwoods High Stakes Casino and Bingo Hall operated by the Mashantucket Pe- quot Indian Tribe in Ledyard, Connecticut. That facility installed its 3,150 slot machines in 1993, making it the largest casino in the United States, and also recently added a 300-room hotel and 1500-seat theater. The legal- ization of casino and other gaming ventures in states closer to New Jersey, particularly Delaware, Maryland, New York or Pennsylvania, may have a seri- ous adverse effect on the Company's business. A number of commentators be- lieve legalization of at least limited forms of gambling in Philadelphia in the relatively near future is a significant possibility. See "Business - Market." <PAGE> <PAGE> 22 Expansion Plans. The Company's business plans for its Atlantic City fa- cility are based on its planned internal expansion and the addition of a self-parking garage to that facility. The completion and opening of those expansions and additions, as well as the opening of any other expansion or new facility which may be introduced by the Company, will be contingent upon a variety of factors, including the Company's ability to acquire the site for the parking facility, the completion of construction, the hiring and training of sufficient personnel and the receipt of all regulatory licenses, permits, allocations and authorizations. The scope of the approvals required to construct and open a new facility or expand an existing facility may be extensive, and the failure to obtain such approvals could prevent or delay the completion of construction or opening of all or part of such facilities or otherwise affect the design and features of any such project. In addi- tion, there can be no assurance that any such expansion, including the in- ternal improvements and the possible addition of a self-parking garage to be funded with a portion of the net proceeds of this offering, will have a pos- itive impact on the Company's operations. Hotel/Gaming Business. The Company is subject to the risks inherent in the hotel and gaming operations business. The level and profitability of gaming activity can vary significantly as a result of a number of factors, including the competitive environment, weather, and general economic condi- tions, and is subject to substantial governmental regulation. For example, the Company believes that during 1991 the Company's operations were adversely affected by poor general economic conditions in the United States and the war in the Persian Gulf. Additionally, hotel and gaming operations are subject to the imposition of special taxes or assessments by regulatory bodies. Any new tax or assessment may have an adverse impact on the Company's operations. See "Business - Gaming Regulation and Licensing." Ability to Realize on Collateral; Adequacy of Collateral. If a default occurs with respect to the Notes there can be no assurance that the liquida- tion of the collateral for the Notes would produce proceeds in an amount sufficient to pay the principal of and accrued interest on the Notes. The ability of the Trustee for the holders of Notes to foreclose upon the collateral will be limited by the relevant gaming laws, which require that persons who own or operate a casino hotel hold a casino license. No person can hold a license in the State of New Jersey unless the person is found qualified or suitable by the NJCCC. In order for the Trustee to be found qualified or suitable the NJCCC would have discretionary authority to require the Trustee and any or all of the holders of Notes to file applica- tions, be investigated and be found qualified or suitable as a landlord or landlords of gaming establishments. The applicant for qualification, a find- ing of suitability or licensing, must pay all costs of such investigation. If the Trustee is unable or chooses not to qualify, be found suitable, or licensed to own or operate such assets, it would either have to sell such assets or retain an entity licensed to operate such assets. In addition, in any foreclosure sale or subsequent resale by the Trustee, licensing require- ments under the relevant gaming laws may limit the number of potential bid- ders and may delay any sale, either of which events could have an adverse effect on the sale price of such collateral. See "Business - Gaming Regula- tion and Licensing." Regulatory Matters. The ownership and operation of casino-hotels such as the Claridge are subject to extensive regulation by state and local gaming authorities in New Jersey. Among other things, CPPI is required to maintain gaming licenses and approvals for gaming activities at the Claridge. The <PAGE> <PAGE> 23 Company and/or its subsidiaries will be subject to similar requirements with respect to any other gaming establishment they may own or operate. See "Business - Gaming Regulation and Licensing." Holders of Notes are subject to certain regulatory restrictions on own- ership. While holders of obligations such as the Notes are generally not re- quired to be investigated and found suitable to hold such securities, the NJCCC has the discretionary authority to (i) require holders of debt securi- ties of corporations governed by New Jersey gaming law to file applications; (ii) investigate such holders; and (iii) require such holders to be found suitable or qualified to be an owner or operator of a gaming establishment. The applicant for a finding of suitability or qualification must pay all costs of such investigation. Pursuant to the regulations of the NJCCC such gaming corporations may be sanctioned, including the loss of its approvals, if, without prior approval of the NJCCC, it (i) pays to the unsuitable or unqualified person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable or unqualified person in connection with the securities; (iii) pays the unsuitable or unqualified person remuneration in any form; or (iv) makes any payments to the unsuit- able or unqualified person by way of principal, redemption, conversion, ex- change, liquidation, or similar transaction. If the Company is served with notice of disqualification of any holder, such holder will be prohibited by the New Jersey Casino Control Act from receiving any payments on, or exer- cising any rights under, the Notes. The Indenture provides that if a holder or beneficial owner of a Note is required to be found suitable or qualified and does not submit, within the requested time, the necessary applications and information for such finding or is not found suitable or qualified, the Company will have the right (i) to require the holder or beneficial owner to dispose of his Notes within 30 days or such earlier period as may be ordered by the NJCCC; or (ii) redeem the holder's or beneficial owner's Notes at the lesser of (x) the principal amount thereof, (y) the price at which the holder or owner acquired the Notes, together with accrued interest to the redemption date or (z) the market value of the Notes. See "Description of Notes - Optional Redemption." The Notes will be subject to certain restric- tions on transfer and sale to the extent required by the New Jersey Casino Control Act. Federal Income Tax. The existing relationship among the Company, CPPI and the Partnership is the result of a complex series of transactions de- scribed in this Prospectus under "The Company - Corporate Structure" and "Business - Certain Transactions and Agreements." Although these entities support the positions taken in respect of these transactions on their fed- eral income tax returns filed with the Internal Revenue Service, it is pos- sible that the Internal Revenue Service may make adjustments to the posi- tions taken in those returns that would result in adverse tax consequences. Fraudulent Conveyance Considerations. Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, if any of the Company or CPPI or the Partnership at the time of the is- suance of the Notes, and CPPI's guarantee and the granting of the Mortgage by the Partnership (a) (i) is insolvent or rendered insolvent by reason of such issuance or grant or (ii) is engaged in a business or transaction for which the assets of the Company or CPPI or the Partnership constituted un- reasonably small capital or (iii) intends to incur, or believes that it would incur, debts beyond its ability to pay such debts as they mature or (iv) was a defendant in an action for money damages, or had a judgment for money damages docketed against it (if, in either case, after final judgment the judgment is unsatisfied), and (b) receives less than reasonably equiva- lent value or fair consideration, the Notes, CPPI's guarantee, the Mortgage <PAGE> <PAGE> 24 and any pledge or other security interest securing such indebtedness could be voided, or claims in respect of the Notes (including the guarantee and the Mortgage) or such indebtedness could be subordinated to all other debts of the Company, CPPI or the Partnership. The voiding of any of such pledges or other security interests or any of such indebtedness could result in an event of default with respect to such indebtedness, which could result in acceleration thereof. In addition, the payment of interest and principal by the Company pursuant to the Notes or the payment of amounts by CPPI pursuant to the guarantee could be voided and be required to be returned to the Com- pany or CPPI, or to a fund for the benefit of the creditors of the Company or CPPI or to any judgment creditor referred to in clause (iv) above. Other Gaming Ventures. The Company may pursue opportunities to partici- pate in gaming outside Atlantic City. There can be no assurance that these opportunities will be realized by the Company, or that they will be success- ful if realized. The Company may cease pursuing additional gaming opportuni- ties at any time. The development of any significant new venture which re- quires the Company to make a substantial capital investment may require additional debt or equity financing. There can be no assurance that the cash flow generated by the operations of the Company or any other new venture will be sufficient to service any new debt which may be incurred in connec- tion therewith. In addition there can be no assurance that additional fi- nancing can be obtained on terms which are acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Restrictions on Payments to Holding Company. The Company is a holding company that operates the Claridge through CPPI and expects to operate any additional future business activities through similar subsidiaries. Divi- dends and other payments from CPPI and any other subsidiaries are expected to be the Company's only sources of cash to pay operating expenses, princi- pal of and interest on debt. Such payments may, under certain circumstances, be subject to regulatory restrictions. See "Business - Gaming Regulation and Licensing." Change of Control. Upon the occurrence of a Change of Control (as here- inafter defined) each holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multi- ple thereof) of such holder's Notes pursuant to a Change of Control Offer (as hereinafter defined) at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. Due to its highly leveraged nature, the Company may not have adequate financial resources to purchase Notes tendered pursuant to a Change of Control Offer and there can be no assurance that the Company would be able to obtain such resources through a refinancing of the Notes to be purchased or otherwise. The inability of the Company to repurchase Notes tendered upon a Change of Control would constitute an Event of Default (as hereinafter defined) under the Indenture. See "Description of Notes." Market for the Notes. Although the Notes have been approved for listing on the New York Stock Exchange, there can be no assurance that an active public trading market in the Notes will in fact develop. If an active market for the Notes does not develop, purchasers may be unable to sell the Notes at the times and at the prices desired. <PAGE> <PAGE> 25

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+RISK FACTORS INDUSTRY CONDITIONS AND PRICE AND VOLUME FLUCTUATIONS The Company's financial performance and growth are related to conditions in the vegetable processing industry. The United States vegetable processing industry is a mature industry, with a relatively modest 1.8% compounded annual growth rate from 1988 to 1993. The Company's net sales are a function of product availability and market pricing. In the vegetable processing industry, product availability and market prices tend to have an inverse relationship: market prices tend to decrease as more product is available, whereas if less product is available, market prices tend to increase. Product availability is a direct result of plantings, growing conditions, crop yields and inventories, all of which vary from year to year. In addition, price can be affected by the planting, inventory level and individual pricing decisions of the three or four largest processors in the industry. Generally, the market prices in the vegetable processing industry tend to adjust more quickly to variations in product availability than an individual processor can adjust its cost structure; thus, in an over-supply situation, a processor's margins likely will weaken, as suppliers generally are not able to adjust their cost structure as rapidly as market prices adjust for the over-supply. The Company typically has experienced lower margins during times of industry over-supply. There can be no assurance the Company's margins will improve in response to favorable market conditions or that the Company will be able to operate profitably during depressed market conditions. RECENT OPERATING LOSSES; IMPLEMENTATION OF RESTRUCTURING PROGRAM; LEVERAGE CONSIDERATIONS The Company reported net losses (after-tax) of $9.9 million, $31.1 million (which includes the effect of a restructuring charge of $14.7 million) and $2.2 million for the fiscal years ended March 31, 1992, 1993 and 1994, respectively. In fiscal 1993, the Company's business faced continuing depressed vegetable market conditions caused primarily by over-supply and excess capacity. In response to these net losses and market conditions, the Company implemented restructuring measures designed to return the Company to profitability. See "Stokely Restructuring Program." Although the Company believes the restructuring program has contributed to the Company's ability to achieve favorable operating results during the last five fiscal quarters, there can be no assurance the Company will be able to sustain such results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Business Strategy." The terms and conditions of the Company's multi-year credit facility with various lenders and the other indebtedness of the Company currently impose restrictions that affect, among other things, the ability of the Company to incur debt, pay dividends, make acquisitions, create liens and make capital expenditures. Terms of the Company's indebtedness also require it to satisfy certain financial covenants on a monthly basis. The ability of the Company to make cash payments to satisfy its indebtedness and to comply with such financial or similar covenants that may be contained in future agreements will depend upon its future operating performance, which is subject to prevailing economic conditions, and to financial, business and other factors beyond the Company's control. In addition, the Company's debt service obligations and related financial and operating covenants could limit its ability to withstand competitive pressures or a downturn in its business or in the economy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's operations are affected by the growing cycle of the vegetables it processes. Most of the Company's production occurs during the second quarter of each fiscal year (due to the timing of crop production and climate conditions) and a majority of sales occurs during the third and fourth quarter of each fiscal year (due to seasonal consumption patterns for its products). Accordingly, inventory levels are highest during the second and third quarters, and accounts receivable levels are highest during the fourth quarter. Net sales generated during the third and fourth quarter of each fiscal year have a significant impact on the Company's results of operations. Because of seasonal fluctuations, there can be no assurance that the results of any particular quarter will be indicative of results for the full year or for future years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION All of the Company's products compete with those of other national, major and smaller regional food processing companies under highly competitive conditions. Three of the Company's major competitors, Del Monte, Green Giant and Dean Foods, are larger and have greater financial and marketing resources than the Company. In addition, many of the Company's major competitors in the international export market are larger and have greater financial and marketing resources than the Company. Continued industry consolidation also may increase the market strength of the Company's larger competitors. See "Business -- Competition." As a result of recent plant reduction and consolidation in the vegetable processing industry, many of the Company's principal national competitors have narrowed their business focus to specific product lines and channels of distribution. To date, the Company believes its major competitors have not placed significant emphasis on the private label channel of distribution. Del Monte has focused on brand label canned products, with a limited emphasis on the private label canned business. Both Green Giant and Dean Foods have significant frozen vegetable operations. However, should such competitors in the future increase their emphasis on the private label channel of distribution, the Company's results of operations may be adversely affected. DEPENDENCE ON KEY PERSONNEL In connection with the Company's restructuring program, the Company's management team was substantially changed. The Company's success is dependent to a great extent on its current management team and other key personnel, the loss of one or more of whom could have a material adverse effect on the Company. The Company does not maintain key man life insurance policies on any of its executive officers. See "Management." EXPORT SALES The Company derived 8.1%, 8.6% and 7.4% of its net sales for the fiscal years ended March 31, 1992, 1993 and 1994, respectively, from export sales. The Company intends to increase its emphasis on export sales. International sales are subject to various risks, including exposure to currency fluctuations, political and economic instability, the greater difficulty of administering business abroad and the need to comply with a wide variety of international and domestic export laws and regulatory requirements. There can be no assurance the Company will be able to successfully expand its export sales, or that the Company's export sales will be profitable. See "Business." REGULATION United States and foreign governmental laws, regulations and policies directly affect the agricultural industry and the vegetable processing industry. The Company is subject to regulation by the Food and Drug Administration, the United States Department of Agriculture, the Federal Trade Commission, the Environmental Protection Agency and various state agencies with respect to the production, packaging, labeling and distribution of its food products. In addition, the disposal of solid and liquid vegetable waste material resulting from the preparation and processing of foods is subject to various federal, state and local laws and regulations relating to the protection of the environment. In some international markets, there are regulations and policies designed to discourage the importation of agricultural commodities. The application or modification of existing, or the adoption of new, laws, regulations or policies could have an adverse effect on the Company's business and results of operations. See "Business-Regulations." POSSIBLE VOLATILITY OF STOCK PRICE The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. General business, economic and other external factors, as well as period-to-period fluctuations in Stokely's financial results or changes in earnings estimates by analysts, may have a significant impact on the market price of the shares of Common Stock. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Articles of Incorporation and By-Laws and certain statutes and regulations assist the Company in maintaining its status as an independent publicly-owned corporation, and could have the effect of preventing or delaying a person from acquiring or seeking to acquire a substantial equity interest in, or control of, the Company. These provisions provide for, among other things, staggered board of directors' terms, a fair price requirement for certain business combinations and shareholder repurchase rights in certain circumstances. See "Description of Capital Stock." DILUTION Purchasers of shares of Common Stock in the Offering will experience immediate and substantial dilution in the net tangible book value of the shares of Common Stock of $4.55 per share, and current shareholders will receive an increase in the book value of their shares of Common Stock of $1.37 per share. Additional dilution to purchasers of shares of Common Stock will occur upon the exercise of outstanding options and warrants. See "Dilution." NO DIVIDENDS The Company discontinued the payment of quarterly dividends during the first quarter of the fiscal year ended March 31, 1993. Since that time, the Company has not declared or paid any cash dividends on its shares of Common Stock, and does not anticipate paying such dividends in the foreseeable future. Furthermore, the Company's multi-year credit facility restricts, and future credit agreements may restrict, the payment of dividends without lender permission. See "Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares of Common Stock by existing shareholders pursuant to Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), could adversely affect the price of the shares of Common Stock of the Company. Upon completion of the Offering, approximately 11,324,645 shares of Common Stock will be outstanding. All of these shares of Common Stock will be freely transferable without restriction under the Securities Act, unless held by an affiliate of the Company. The Company's executive officers and directors beneficially own 594,833 shares of Common Stock. See "Principal Shareholders."

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+RISK FACTORS Prospective investors should consider carefully the following factors relating to the business of the Company and the Offering, together with the information and financial data set forth elsewhere in this Prospectus, prior to purchasing any Secured Notes. Adverse Financial Condition and High Leverage. At September 30, 1993, Mesa had outstanding approximately $1.2 billion of long-term debt. Mesa's primary cash requirements, after paying operating expenses and general and administrative expenses, are principal and interest payments on its debt and capital expenditures. Over the next two years, Mesa will incur annual cash interest costs of less than $5 million on the $13.7 million principal amount of Subordinated Notes outstanding and amounts outstanding under the Credit Agreement. There are no interest payments due under the Discount Notes until December 31, 1995. Interest payments on the HCLP Secured Notes are expected to total approximately $50 million to $55 million per year for the next two years. Under the Credit Agreement, $18.7 million of principal was paid in the fourth quarter of 1993, $19.5 million is due in the first half of 1994 and $50 million is due on June 30, 1995 (including cash collateralization of $10.4 million of letter of credit obligations). There are no principal payments due under the Subordinated Notes or the Discount Notes until 1996. The scheduled amortization of the HCLP Secured Notes is $42.9 million in 1994 and $39.3 million in 1995. The proceeds from production of HCLP's Hugoton properties are dedicated to service the HCLP Secured Notes before any cash may be distributed to the Obligors. Mesa's capital expenditure requirements are estimated to be $23.5 million in 1994 and $15.4 million in 1995. At September 30, 1993, Mesa had $73.2 million of working capital; and cash and securities totaled $122.2 million. Working capital at that date included a $37.4 million note receivable, which was collected in October 1993. Of the $122.2 million of cash and securities, $23.4 million was held at HCLP. After giving effect to this Offering and the use of proceeds therefrom as described in "Use of Proceeds" and the conversion of the Convertible Notes into Common Stock, the Company would have had total pro forma long-term indebtedness of approximately $1.2 billion at September 30, 1993 (as if such events had occurred on that date) and pro forma fixed charges in excess of earnings of $65.7 million and $98.7 million for the nine months ended September 30, 1993 and the year ended December 31, 1992, respectively (as if such events had occurred at the beginning of such periods). See "Historical and Pro Forma Capitalization" and "Selected Financial Information." During the next two years, Mesa expects to be able to service its debt and make capital expenditures with cash generated by operating activities and with existing cash and securities balances. On December 31, 1995, Mesa will begin making interest payments on the Discount Notes. Assuming no changes in Mesa's capital structure prior to such date, Mesa will be required to make cash interest payments related to the Discount Notes totaling approximately $48 million (approximately $51 million if all of the additional Secured Notes offered hereby are issued) on December 31, 1995 and payments totaling approximately $84 million (approximately $90 million if all of the additional Secured Notes offered hereby are issued) during 1996. In addition, Unsecured Notes in the amount of $178.8 million and 12% Subordinated Notes in the amount of $6.3 million become due in mid-1996. Mesa's current financial forecasts indicate that Mesa will be unable to fund such payments in 1996 with cash flows from operating activities and existing cash and securities balances. Depending on industry and market conditions, Mesa may generate cash by selling assets or issuing new debt or equity securities. However, Mesa has limited ability to sell assets since its two largest assets, its interests in the Hugoton and West Panhandle fields, are pledged under long-term debt agreements. After the June 30, 1995 repayment of the balances outstanding under the Credit Agreement, Mesa would have $82.5 million of first lien borrowing capacity on the West Panhandle field properties. See "Description of the Secured Notes -- Limitation on Incurrence of First Lien Debt." Mesa's current business strategy includes continuing its effort to strengthen its financial condition by raising equity capital and applying the proceeds thereof to retire debt, and issuing new lower-cost debt to refinance its existing high cost debt securities. There can be no assurance that Mesa will be able to raise equity capital or otherwise refinance its debt. As a result of the potential adverse consequences discussed above relating to certain principal and interest payments due in 1996 on Mesa's debt, Mesa's independent public accountants' report, as reissued for this Prospectus, contains an "emphasis-of-a-matter" paragraph which calls attention to such matters. The amended Credit Agreement contains restrictive covenants which require Mesa to maintain tangible adjusted equity, as defined, of at least $50 million and a ratio of cash flow and available cash to debt service, as each is defined, of at least 1.50 to 1. At September 30, 1993, tangible adjusted equity was $132 million and the ratio was 2.11 to 1. Mesa expects to accrue a loss of approximately $43 million in the fourth quarter of 1993 representing its share of the settlement of the Unocal lawsuit. In addition, Mesa expects to report a net loss from operations in the fourth quarter of 1993. Mesa expects tangible adjusted equity at December 31, 1993 to be in excess of $100 million, giving effect to the loss from operations, the Unocal Settlement, the conversion of the Convertible Notes into Common Stock and certain nonrecurring gains. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Assuming no changes in its capital structure, Mesa expects to continue to report losses from operations in the foreseeable future. The Unocal Settlement would not result in tangible adjusted equity falling below the $50 million requirement, but would accelerate the point in time at which tangible adjusted equity may fall below the $50 million requirement. Assuming no changes in its capital structure and in existing business conditions, Mesa's financial forecasts indicate that tangible adjusted equity is likely to fall below the $50 million requirement in the second half of 1994. The financial forecasts also indicate that Mesa will have adequate financial resources, including cash on hand, to satisfy any obligations which may become due under the Credit Agreement in the event the tangible adjusted equity covenant is not satisfied and cannot be renegotiated or compliance therewith waived. At December 31, 1993, Mesa had approximately $150 million of cash and securities. In addition, payment of the settlement amount to Unocal would not cause the ratio of cash flow and available cash to debt service to fall below the required level. In addition, the Secured Indenture, as well the indenture governing the Unsecured Notes and the Credit Agreement, impose operating and financial restrictions on Mesa. Such restrictions will affect, and in many respects limit or prohibit, among other things, the ability of Mesa to incur additional indebtedness, create liens, sell assets, engage in merger and acquisition transactions and make dividend and other payments. The leveraged position of Mesa and the restrictive covenants contained in these indentures and the Credit Agreement could significantly limit the ability of Mesa to respond to changing business or economic conditions or to respond to substantial declines in operating results. See "Description of the Secured Notes" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity." Additional Indebtedness Resulting from Increase in Accreted Value. The Accreted Value of the Discount Notes will increase from December 31, 1993 through June 30, 1995 at a rate of 12 3/4% per annum, compounded semiannually. Consequently, the overall indebtedness of Mesa will increase each year through June 30, 1995 in an amount equal to the increase in the Accreted Value of the Discount Notes during such year. From December 31, 1993 to June 30, 1995, and assuming no redemptions, the Accreted Value of each Secured Note and each Unsecured Note will increase by $169.23, or an aggregate of approximately $126.6 million for all Secured Notes and Unsecured Notes outstanding. Mesa's cash interest requirements have been substantially reduced as a result of the Exchange Offer, given that the Discount Notes do not currently bear interest and will not begin to accrue interest until July 1, 1995, with interest being payable thereafter semiannually in arrears on each June 30 and December 31, beginning December 31, 1995. Litigation. Mesa is involved in certain litigation, including a lawsuit brought by and on behalf of Unocal seeking recovery of more than $150 million, which, if decided adversely to Mesa, would have a material adverse effect on Mesa. Mesa is offering the Secured Notes offered hereby to fund its share of the settlement payment with respect to the Unocal litigation. See "Unocal Litigation and Settlement" and "Business -- Legal Proceedings." Mesa's independent public accountants have included an explanatory paragraph in their report on Mesa's 1992 Consolidated Financial Statements, which is included elsewhere in this Prospectus. Such paragraph describes the Unocal case discussed in the Notes to the Consolidated Financial Statements, and indicates that an unfavorable judgment would have a material adverse effect on the Company's financial position and results of operations. Uncertainty of Natural Gas Prices. Revenues generated from Mesa's operations are highly dependent upon the sales price of, and demand for, natural gas and natural gas liquids. As of December 31, 1992, over 70% of Mesa's proved reserves, calculated on an energy-equivalent basis, were natural gas and substantially all of its other reserves were natural gas liquids. In recent years, prices for natural gas have declined for a number of reasons, including a nationwide oversupply of gas. The average sales price received by Mesa for natural gas declined from approximately $2.92 per Mcf in 1983 to $1.84 per Mcf in 1987 to $1.46 per Mcf in 1991. Both the 1990/1991 and 1991/1992 winter periods were much warmer than normal resulting in lower heating season natural gas prices. Aggregate demand for natural gas did, however, increase each year. Low drilling activity in the U.S. during the past several years resulted in a failure to replace reserves and Hurricane Andrew disrupted natural gas supplies from the prolific Gulf Coast region during September and October of 1992. As a result, 1992 natural gas market prices were higher than in 1991 and the average price received by Mesa for natural gas produced during 1992 was $1.66 per Mcf. The average price received by Mesa for natural gas produced during the first nine months of 1993 was $1.77 per Mcf. For 1992, the annual average Gulf Coast Henry Hub cash market price for natural gas, as reported by Natural Gas Week, was $1.80 per MMBtu. For the first nine months of 1993, the monthly average Gulf Coast Henry Hub cash market price for natural gas ranged from $1.69 per MMBtu to $2.35 per MMBtu, and the average of such nine monthly average prices was $2.08 per MMBtu. Mesa cannot predict whether the recent increase in natural gas prices is likely to continue or whether such prices will remain at current levels for the remainder of the year or in future years. Market prices for natural gas are volatile and are the result of a number of factors outside of Mesa's control, including changing economic conditions, governmental regulations, seasonal weather conditions, natural gas storage levels and markets for alternative energy sources, among other things. Mesa cannot predict how developments in these or related areas will affect the markets for natural gas or how such effects will impact Mesa's operations. Uncertainty in Estimates of Production. Revenues generated from Mesa's operations are also highly dependent on the quantities of natural gas and natural gas liquids sold. Mesa's producing properties in the Hugoton field and the West Panhandle field are subject to production limitations imposed by state regulatory authorities, by contracts or both. See "Business -- Properties" for a discussion of, among other things, the allocation of allowables to Mesa's properties. Consequently, Mesa's actual future production may be substantially affected by factors outside of Mesa's control. Declining Reserve Base. In recent years, the majority of Mesa's capital expenditures have been dedicated to developing and upgrading its existing long-life reserve base through infill drilling of its Hugoton reserves, additions to its compression and gathering system and pipeline interconnects, and the construction and expansion of gas processing plants. A relatively modest amount of expenditures have been made to explore for or develop new reserve positions. Assuming continuance of this capital expenditure policy and absent substantial positive revisions to its estimated reserves, Mesa expects that its annual production of reserves will exceed estimated reserve additions in future years, and that Mesa's reserves will decline accordingly. Mesa expects its annual production, expressed as a percentage of the prior year-end estimated reserves, to increase from approximately 6% in 1992 to approximately 11% by 1999. Estimates of Reserves and Future Net Revenues. Petroleum engineering is not an exact science. Information relating to Mesa's oil and gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and gas reserves and of future net revenues necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to Mesa's reserves will likely vary from estimates, and such variances may be material. The present values of future net revenues referred to in this Prospectus should not be construed as the current market value of the estimated oil and gas reserves attributable to Mesa's properties. In accordance with applicable requirements of the Commission, the estimated discounted future net revenues from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and gas, curtailments or increases in consumption by gas purchasers, changes in governmental regulations or taxation, the impact of inflation on costs, general and administrative costs and interest expense. The timing of actual future net revenues from proved reserves, and thus their actual present value, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and gas properties. In addition, the 10% discount factor, which is required by the Commission to be used to calculate discounted future net revenues for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the oil and gas industry. Operating Hazards; Limited Insurance Coverage. Mesa is subject to all of the operating hazards and risks normally incident to drilling for or producing oil and natural gas and processing and transporting gas, including blowouts, cratering, pollution and fires, each of which could result in damage to or destruction of oil and gas wells, producing formations or production, pipeline or processing facilities or damage to persons or other property. As is common in the industry, Mesa is not fully insured against all of these risks. Trading Market. As of December 31, 1993, $569.3 million face value (at maturity) of Secured Notes was outstanding. The Secured Notes are not listed for trading on any national securities exchange, but are traded in the over-the-counter market by certain dealers who from time to time are willing to make a market in Secured Notes. These Secured Notes are currently traded by appointment by certain market makers. No assurance can be given that an active market for the Secured Notes will continue or as to the liquidity of such market. Accordingly, no assurance can be given that a holder of the Secured Notes will be able to sell such Secured Notes in the future or as to the price at which such sale may occur. The liquidity of the market for the Secured Notes and the prices at which the Secured Notes trade will depend upon the amount of such issue outstanding, the number of holders thereof, the interest of securities dealers in maintaining a market in the Secured Notes and other factors beyond the Obligors' control. In addition, no assurance can be given as to the relationship that the current market prices of Secured Notes will bear to the market prices of the Secured Notes after the Offering. Security for the Secured Notes. The Secured Notes will be secured by (i) the Mortgage granting a second lien on certain properties and related assets and contractual rights of MOC in the West Panhandle field of Texas and (ii) the Pledge Agreement granting a second lien and security interest in an approximately 77% (assuming all of the Secured Notes offered hereby are issued) limited partnership interest in HCLP (which is part of the limited partnership interest in HCLP owned by MOC). Such liens will be subordinate to a lien securing the First Lien Debt, which currently consists of the outstanding obligations under the Credit Agreement. There can be no assurance that, following an acceleration after an Event of Default (as defined in the Secured Indenture), the proceeds from the sale of such Collateral remaining after satisfaction of all amounts owing in respect of First Lien Debt and allocable to the Secured Notes would be sufficient, either alone or when combined with proceeds from the sale of other assets not constituting Collateral and allocable to the Secured Notes, to satisfy all amounts due on the Secured Notes. The ability of the holders of Secured Notes to realize upon the Collateral will also be subject to certain limitations in the Secured Indenture, the Mortgage, the Pledge Agreement and the Intercreditor Agreement dated as of August 26, 1993 among the Secured Trustee and the collateral agent for the holders of First Lien Debt and would be further restricted by applicable law in the event of a bankruptcy proceeding involving one or more of the Obligors. See "Description of the Secured Notes -- Security." In addition, HCLP has outstanding HCLP Secured Notes which, because HCLP will not be an Obligor under the Secured Notes, are effectively senior to the Secured Notes with respect to the assets of HCLP. The incurrence of First Lien Debt and other additional indebtedness by the Obligors and their subsidiaries will be restricted by the Secured Indenture. See "Description of the Secured Notes." Governmental Regulation and Environmental Matters. Mesa is subject to various local, state and federal laws and regulations including environmental laws and regulations. Mesa believes that it is in substantial compliance with such laws and regulations. However, significant liability could be imposed on Mesa for damages, clean up costs and penalties in the event of certain discharges into the environment. See "Business -- Regulation and Prices." Funding of Change in Control Offer. In the event of a Change in Control (as defined in the Secured Indenture), the Obligors would be required to make an offer to purchase all of the Secured Notes. As of September 30, 1993, after giving effect to the Offering and the application of the net proceeds therefrom, the Obligors would not have sufficient funds available to purchase all of the outstanding Secured Notes were they to be tendered in response to an offer made as a result of a Change in Control. See "Description of the Secured Notes -- Change in Control."

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+RISK FACTORS The Mortgage Notes, Units and Common Stock offered hereby involve certain risks that should be carefully considered by prospective investors. See "Risk Factors." EMERGENCE FROM BANKRUPTCY On May 3, 1994, a joint plan of reorganization proposed by RII, together with certain of its debtor and non-debtor subsidiaries, including RIHF, became effective. As a result, among other things, RII has significantly reduced its consolidated debt and sold its former casino, hotel and resort operations on Paradise Island in The Bahamas. See "Restructuring of Series Notes" and "Pro Forma Financial Data." THE OFFERING The following securities may be offered from time to time by the Selling Securityholders: $87,500,000 principal amount of 11% Mortgage Notes due 2003, issued by RIHF. 24,500 Units, each Unit consisting of $1,000 principal amount of 11.375% Junior Mortgage Notes due 2004, issued by RIHF, and one share of Class B Common Stock, issued by RII. 11,900,000 shares of Common Stock, issued by RII. The Mortgage Notes and Junior Mortgage Notes are guaranteed by RIH and secured by the Resorts Casino Hotel. See "Description of Mortgage Notes" and "Description of Junior Mortgage Notes." None of the securities are being offered by the Company, which will receive none of the proceeds of any sales. See "Selling Securityholders" and "Plan of Distribution." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables set forth certain historical and pro forma consolidated financial data for RII and RIH. The pro forma statement of operations data give effect to the Restructuring as if it had occurred on January 1, 1993. See "Restructuring of Series Notes." The pro forma balance sheet data give effect to the Restructuring as if it had occurred on December 31, 1993. The unaudited pro forma financial information is not necessarily indicative of future results or what the respective entities' financial position or results of operations would actually have been had the transactions occurred on the dates indicated. Such information should not be used as a basis to project results for any future periods. For additional information, see the Consolidated Financial Statements and the notes thereto and "Pro Forma Financial Data" and the notes thereto. <TABLE> <CAPTION> HISTORICAL PRO FORMA --------------------------------- ----------------- FOR THE YEAR ENDED DECEMBER 31, FOR THE --------------------------------- YEAR ENDED 1991 1992 1993 DECEMBER 31, 1993 ------ ------ ------- ----------------- (IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS) <S> <C> <C> <C> <C> RII Statement of Operations Data: Operating revenues................................................... $418.2 $436.9 $ 439.6 $279.5 Depreciation......................................................... 23.8 25.3 27.9 13.8 Earnings from operations............................................. 16.0 21.5 12.9 21.2 Interest income (expense), net(a).................................... (58.4) (73.5) (105.3) (26.0) Recapitalization costs............................................... (2.8) (8.8) Loss before income taxes............................................. (42.4) (54.8) (101.2) (4.8) Net loss............................................................. (41.6) (53.5) (102.2) (5.8) Net loss per share................................................... (2.07) (2.65) (5.07) (.15) Ratio of earnings to fixed charges(b)................................ -- -- -- -- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1993 ----------------------- HISTORICAL PRO FORMA ---------- --------- <S> <C> <C> RII Balance Sheet Data: Cash and cash equivalents(c)......................................................................... $ 62.5 $ 20.0 Net property and equipment........................................................................... 447.8 274.4 Total assets......................................................................................... 575.8 327.1 Current maturities of long-term debt(d).............................................................. 466.3 0.1 Long-term debt, excluding current maturities(d)...................................................... 85.0 232.5 Shareholders' equity (deficit)....................................................................... (113.7) .6 Book value per share................................................................................. (5.64) .02 </TABLE> <TABLE> <CAPTION> HISTORICAL PRO FORMA -------------------------------- ----------------- FOR THE YEAR ENDED DECEMBER 31, FOR THE -------------------------------- YEAR ENDED 1991 1992 1993 DECEMBER 31, 1993 ------ ------ ------ ----------------- (IN MILLIONS, EXCEPT RATIOS) <S> <C> <C> <C> <C> RIH Statement of Operations Data: Operating revenues.................................................... $247.5 $262.7 $271.5 $ 271.5 Depreciation.......................................................... 9.1 11.4 13.7 13.7 Earnings from operations.............................................. 14.8 21.0 12.1 12.1 Interest income (expense), net (e).................................... 7.0 7.3 7.4 (17.8) Recapitalization costs................................................ (.9) (2.7) Earnings (loss) before income taxes................................... 21.8 27.4 16.8 (5.7) Net earnings (loss)................................................... 13.1 16.4 16.4 (6.1) Ratio of earnings to fixed charges (f)................................ 15.5 21.5 16.0 -- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1993 ----------------------- HISTORICAL PRO FORMA ---------- --------- <S> <C> <C> RIH Balance Sheet Data: Cash and cash equivalents............................................................................ $ 25.9 $ 15.0 Net property and equipment........................................................................... 163.3 163.3 Total assets......................................................................................... 264.2 204.4 Current maturities of notes payable to affiliate and other long-term debt............................ 325.1 0.1 Notes payable to affiliate and other long-term debt, excluding current maturities.................... -- 147.6 Shareholder's equity (deficit)....................................................................... (148.0) 12.5 </TABLE> - --------------- (a) Amounts presented include amortization of debt discount. (b) The ratios of earnings to fixed charges were computed by dividing earnings available for fixed charges (earnings before income taxes adjusted for interest expense, amortization of debt discount and one-third of rent expense) by fixed charges. Fixed charges include interest expense, amortization of debt discount and one-third of rent expense. Historical earnings were insufficient to cover fixed charges by $42,402,000 for 1991; $54,802,000 for 1992; and $101,164,000 for 1993. Pro forma earnings were insufficient to cover fixed charges by $4,785,000. For ratios of earnings to fixed charges for additional periods see "Selected Historical Financial Data." (c) Excludes restricted cash equivalents. (d) Amounts are net of unamortized discounts. (e) Pro forma amount includes amortization of debt discount. (f) The ratios of earnings to fixed charges were computed by dividing earnings available for fixed charges (earnings before income taxes adjusted for interest expense, amortization of debt discount and one-third of rent expense) by fixed charges. Fixed charges include interest expense, amortization of debt discount and one-third of rent expense. Pro forma earnings were insufficient to cover fixed charges by $5,720,000. For ratios of earnings to fixed charges for additional periods see "Selected Historical Financial Data."

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+RISK FACTORS Persons receiving this Prospectus should consider carefully the following factors, in addition to those discussed elsewhere in this Prospectus. NATURE OF THE SECURITIES BUSINESS The Company's principal business activities, investment banking, securities trading and sales are, by their nature, subject to volatility, primarily due to changes in interest and foreign exchange rates, global economic and political trends, industry competition and substantial fluctuations in the volume and price level of securities held in trading and underwriting positions. As a result, revenues and earnings may vary significantly from quarter to quarter and from year to year. In periods of low volume, levels of profitability are adversely affected because certain expenses remain relatively fixed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." COMPETITION All aspects of the Company's business are highly competitive. The Company competes in domestic and international markets directly with numerous other brokers and dealers in securities and commodities, investment banking firms, investment advisors and certain commercial banks and, indirectly for investment funds, with insurance companies and others. The financial services industry has become considerably more concentrated as numerous securities firms have either ceased operations or have been acquired by or merged into other firms. In addition, several small and specialized securities firms have been successful in raising significant amounts of capital for their merger and acquisition activities and merchant banking investment vehicles and for their own accounts. These developments have increased competition from these firms, many of whom have significantly greater equity capital than the Company. PRINCIPAL TRANSACTIONS The Company's trading, market making, underwriting and arbitrage activities involve the purchase, sale or short sale of securities (including foreign exchange, derivative products and certain commodities) as principal. These activities involve the risk of changes in the market prices of such securities and a decrease in the liquidity of markets, which could limit the Company's ability to resell securities purchased or to repurchase securities sold short. See "Business." REGULATION The Company's business is, and the securities and commodities industries generally are, subject to extensive regulation in the United States, at both the federal and state level. As a matter of public policy, regulatory bodies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets, not protecting the interests of Holdings' stockholders. In addition, self-regulatory organizations and other regulatory bodies in the United States such as the NYSE, the NASD, the Commodity Futures Trading Commission (the "CFTC"), the National Futures Association (the "NFA") and the Municipal Securities Rulemaking Board (the "MSRB") require strict compliance with their rules and regulations. Abroad, the Company's business is subject to control by various foreign governments and regulatory bodies. Any change in regulation by such governments and bodies could restrict the participation of United States securities firms, including the Company, in the relevant international capital market. Failure to comply with any of these laws, rules or regulations could result in fines, suspension or expulsion, which could have an adverse effect upon the Company. See "Business -- Regulation." NET CAPITAL REQUIREMENTS The SEC, the NYSE, the CFTC and various other securities and commodities exchanges and other regulatory bodies in the United States and abroad have rules with respect to net capital requirements which could affect the Company. A change in such rules, or the imposition of new rules, affecting the scope, coverage, calculation or amount of such net capital requirements, or a significant operating loss or any unusually large charge against net capital, could adversely affect the ability of Lehman Brothers to expand or maintain present levels of business. See "Business -- Regulation -- Capital Requirements." MERCHANT BANKING PARTNERSHIPS The Company's merchant banking activities consist principally of making equity and equity-related investments in privately negotiated merger, acquisition and leveraged transactions. These transactions can result in investments with higher risks relating to illiquidity and leverage. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." HIGH YIELD SECURITIES The Company underwrites, trades, invests and makes markets in high yield debt securities. The Company also syndicates, trades and invests in loans of below investment grade companies. High yield debt securities are defined as securities or loans to companies rated below BBB- by Standard & Poor's Corporation ("S&P") and below Baa3 by Moody's Investor Services, Inc. ("Moody's"), as well as non-rated securities or loans which, in the opinion of management, are non-investment grade. High yield debt securities held for sale by the Company generally involve greater risk and volatility than investment grade debt securities due to the lower credit ratings of the issuers, which typically have relatively high levels of indebtedness and are, therefore, more sensitive to adverse economic conditions. Such debt securities typically rank subordinate to bank debt of the issuer and may rank subordinate to other debt of the issuer. In addition, the market for these securities has been, and may in the future continue to be, characterized by periods of illiquidity. The liquidity of any particular issue may be significantly better or worse than the overall liquidity of the high yield debt market at any time, depending on the quality of the issuer, and during certain periods market quotations may not represent firm bids of dealers or prices of actual sales. In addition, the Company, through its market making and trading activities, may be the sole or principal source of liquidity in certain issues and, as a result, may substantially affect the prices at which such issues trade. High yield debt securities are carried at market value and unrealized gains or losses for these securities are reflected in the Company's Consolidated Statement of Operations. The Company's portfolio of such securities at December 31, 1993 and 1992 included long positions with an aggregate market value of approximately $1 billion and $920 million, respectively, and short positions with an aggregate market value of approximately $75 million and $50 million, respectively. The Company's portfolio may from time to time contain concentrated holdings of selected issues. The Company's two largest high yield positions were $179 million and $82 million at December 31, 1993 and $180 million and $123 million at December 31, 1992. NON-CORE ASSETS The Company has made investments in and provided financial support to certain partnerships (the assets of which are primarily real estate). At December 31, 1993 and 1992, the Company had net exposure including commitments and contingent liabilities of $252 million and $329 million, respectively, for these activities. Although a decline in the real estate market or the economy in general or a change in the Company's disposition strategy could result in additional real estate reserves, the Company believes it is adequately reserved. The Company discontinued the origination of partnership syndication and real estate investments in March 1990. DEPENDENCE ON CREDIT RATINGS The Company, like other companies in the securities industry, relies on external sources to finance a significant portion of its day-to-day operations. Access to the global capital markets for unsecured financing, such as commercial paper and short-term debt, senior notes and subordinated indebtedness, is dependent on the Company's short-term and long-term debt ratings. In addition, the Company's existing and prospective customers and clients base their decision to do business with the Company in part on the Company's debt ratings. A debt rating downgrade would reduce the availability of unsecured funding and increase the cost of that funding to the Company and could affect the Company's ability to transact business with certain customers and clients. Holdings' current long-term/short-term senior debt ratings are as follows: S&P A/A-1; Moody's A3/P-2; IBCA A-/A1; and Thomson BankWatch -- /TBW-1. As of the Distribution Date, the Company expects to receive long-term/short-term debt ratings from Fitch Investor Services of A/F-1. The Company maintains an ongoing dialogue with several of the nationally recognized rating agencies to provide timely information on the Company's financial results, operations and other credit related matters. The Company expects that, as of the Distribution, all of its current debt ratings will be affirmed. However, no assurances can be given that, following the Distribution, the Company will continue to maintain its current debt ratings and level of access to the global capital markets. CERTAIN ANTI-TAKEOVER EFFECTS The Certificate of Incorporation and By-laws of Holdings will include, as of the Distribution Date, certain provisions that may be deemed to have anti-takeover effects and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might believe to be in its best interest including those attempts that might result in a premium over the market price for the shares of Common Stock. These provisions include a classified board of directors, the inability of the stockholders to take any action without a meeting or to call special meetings of stockholders, certain advance notice procedures for nominating candidates for election as directors and for submitting proposals for consideration at stockholders' meetings, and limitations on the ability to remove directors and the filling of vacancies on the Board of Directors. In addition, the Board of Directors has the ability to establish by resolution one or more series of preferred stock having such number of shares, designation, relative voting rights, dividend rate, liquidation and other rights, preferences and limitations as may be fixed by the Board of Directors, without any further stockholder approval. Section 203 of the Delaware General Corporation Law may have an anti-takeover effect as well. See "Description of Capital Stock" and "Certain Corporate Governance Matters." In addition, the terms of the Redeemable Preferred Stock provide that, in the case of certain change of control situations, the holders of the Redeemable Preferred Stock shall have the right to require the Company to redeem all of the Redeemable Preferred Stock for an aggregate redemption price initially equal to $400 million if such an event takes place prior to the first anniversary of the Distribution Date, declining by $50 million per year in each of the next seven years thereafter. Also, Nippon Life has certain rights pursuant to which it may require, under certain circumstances, the Company to repurchase shares of Series A Preferred Stock and/or Common Stock held by Nippon Life. These redemption and repurchase rights may have an anti-takeover effect and may delay, defer or prevent a tender offer or take-over attempt that a stockholder might believe to be in his best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. See "Certain Transactions and Agreements Among Holdings, American Express and Nippon Life" and "Description of Capital Stock -- Preferred Stock." NO PRIOR MARKET Prior to the Offering and the Distribution, there has been no public market for the Common Stock. Although the Company is applying for the listing of the Common Stock on the NYSE, no assurance can be given that an active trading market for the Common Stock will develop. Prices at which the Common Stock may trade cannot be predicted. The prices at which the shares of Common Stock will trade will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for the Common Stock, investor perception of the Company and the securities industry, the Company's dividend policy and general economic and market conditions. LITIGATION Many aspects of the Company's business involve substantial risks of liability. In recent years, there has been an increasing incidence of litigation involving the securities and commodities industries, including class action suits that generally seek substantial damages and often treble damages for alleged violations of the Federal Racketeer Influenced and Corrupt Organizations Act ("RICO"). Underwriters are subject to substantial potential liability for material misstatements and omissions in prospectuses and other communications with respect to underwritten offerings of securities. The Company has been named as defendant in class action and other suits. See "Business -- Legal Proceedings." PERSONNEL Most aspects of the Company's business are dependent on highly skilled individuals. The Company devotes considerable resources to recruiting, training and compensating such individuals. Individuals employed by the Company may, however, choose to leave the Company at any time to pursue other opportunities. See "Business -- Employees" and "Management." The Company has attempted to reduce this possibility by creating incentives for employees to remain with the Company including certain deferred compensation programs. See "Recent Developments" and "Management."

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+RISK FACTORS Prospective investors in the New Notes should consider carefully the factors set forth below as well as the other information contained in this Prospectus before making an investment in the New Notes. REAL ESTATE, ECONOMIC AND CERTAIN OTHER CONDITIONS The Company is affected by real estate market conditions in areas where its development projects are located and in areas where its potential customers reside. The residential homebuilding industry is cyclical and sensitive to changes in general national and regional economic conditions, such as: levels of employment; consumer confidence and income; availability of financing to homebuilders for acquisitions, development and construction; availability of financing to homebuyers for permanent mortgages; interest rate levels; the condition of the resale market for used homes; and the general demand for housing. Housing demand is particularly sensitive to changes in interest rates. If mortgage interest rates increase significantly, thus affecting prospective buyers' ability to obtain affordable financing for their home purchases, the Company's sales and operating results may be adversely affected. The residential homebuilding industry has, from time to time, experienced fluctuating lumber prices and supply and serious shortages of labor and materials, including shortages of insulation, drywall, certain carpentry work and cement. Delays in construction of homes due to these shortages or to inclement weather conditions could have an adverse effect upon the Company's homebuilding operations. Historically, the Company has experienced shortages of material and labor but such shortages have not adversely affected the Company's ability to deliver homes on a timely schedule. However, this may not be true with respect to any future shortages of material or labor. Several of the Company's projects are in master-planned developments. In these projects, the Company attempts to minimize its development costs and entitlement risks by relying upon the master-plan developer for substantially all of the necessary infrastructure development (such as roads and utilities) and sometimes common facilities (such as parks, pools and other recreation facilities) outside the confines of the Company's project. Although this approach results in a substantial reduction in the capital investment required of the Company in a project, the Company may experience difficulty in obtaining permits or approvals from governmental authorities or in marketing homes in a project in the event the master-plan developer fails to complete the required facilities on a timely basis. The master-plan developer's performance of its obligations in this respect are generally bonded, but failure by the developer to perform may result in a significant increase in costs and/or difficulty or delays in marketing finished homes in the affected project. See "Business -- Developments in Process -- California," and "Business-- Developments in Process -- Nevada." California Risks. While the Company recently has diversified its operations into Nevada, where the market for new housing has remained strong, the Company currently conducts approximately 60% of its business (on an annual revenue basis) in Southern California and intends to continue to conduct a substantial portion of its future homebuilding activities in that region. California real estate in general, and Southern California in particular, is currently adversely impacted by a weak economy, resulting in reduced demand for new homes and lower home selling prices than in the recent past. A substantial amount of real estate in Southern California acquired upon foreclosure or in satisfaction of loans is held for sale by banks and other financial institutions, as well as by the RTC and the Federal Deposit Insurance Corporation (the "FDIC"), or has been purchased recently from such agencies by financial buyers. Efforts to sell such assets may further depress markets generally, including markets in which the Company is developing and selling homes or in which the Company holds property for development. The average sale price of homes in most of the areas in Southern California in which the Company does business has decreased over the past three years and there can be no assurance that home sale prices will not decline more in the future. Since mid-1990, California's job base has declined, predominantly in Southern California, due in part to cutbacks in the defense industry and to the high cost of doing business in the region. There can be no assurance that there will be any significant recovery in the California economy in the near term and a continued weak economy in Southern California would have a material adverse effect on the Company. The climate and geology of the markets in Southern California in which the Company operates present certain risks of natural disasters. To the extent that earthquakes, floods, droughts, wildfires or other natural disasters or similar events occur, the homebuilding industry in general, and the Company's business in particular, may be adversely affected. The Company has substantial operations in Southern California. Based upon its assessment, none of the Company's projects was materially adversely affected by the Northridge, California earthquake in January 1994. Nevada Risks. Las Vegas is located in a desert environment and the continued availability of property for development is materially affected by the continued availability of an adequate water supply. For a short period beginning in 1991, the Las Vegas Valley Water District imposed a moratorium on the issuance of new water commitments to correct a then projected over-allocation of water commitments. The moratorium was lifted in 1992 and, based on current population growth forecasts, the Water District estimates that the Las Vegas community's total supply of water for new commitments will not be exhausted prior to the year 2007. Until recently, the gaming industry was principally limited to the Nevada and New Jersey markets. In an effort to raise revenues without increasing taxes, however, a number of states have recently legalized casino gaming and other forms of gaming. These additional gaming venues create alternative destinations for gamblers and tourists who might otherwise visit Nevada, the result of which may be fewer jobs in the gaming industry in Nevada. Legalization of casino gaming in California would have a particularly adverse impact on the gaming market in Nevada. Given the reliance of the Nevada economy in general, and the Las Vegas economy in particular, on gaming, a material adverse change for the Nevada gaming industry may have a material adverse effect on the Company's Nevada operations. The Las Vegas population has undergone significant growth in recent years. While the population growth has had a positive impact on the demand for housing, there has been a corresponding increase in the demand for infrastructure to support the increased population and housing. If the infrastructure is unable to keep pace with the growth in demand for services, additional development may be limited, which may have an adverse effect on the Company's business. RECENT OPERATING RESULTS AND CHANGE IN BUSINESS STRATEGY Recent Losses. The Company had significant operating losses during the 1991, 1992 and 1993 fiscal years, which included the 22-month period of RTC control (November 1990 to August 1992). During much of the period of RTC control, the operations of the Company essentially were limited to liquidating standing inventory and, at the direction of its RTC-controlled board of directors, the Company did not start any new projects or acquire land or options for land for new projects. The Company was profitable during the 1994 fiscal year, but it did incur losses during the first two quarters of such fiscal year. The Company was profitable for the first quarter of fiscal 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Change in Business Strategy. As described above, during the period of RTC control, operations of the Company were essentially limited to liquidating standing inventory. Since the Acquisition, the Company's strategy has focused on: (i) recommencing California building operations; (ii) diversifying its geographic markets to include areas outside of Southern California; (iii) diversifying its product offerings to include both entry level and move-up homes in order to appeal to a broad customer base; (iv) improving and broadening its capital base and sources of financial liquidity; (v) controlling costs while increasing operational efficiency; and (vi) reducing land and inventory risk by avoiding speculative building, constraining project sizes, avoiding entitlement risks and acquiring land through the use of options, purchase contracts, development agreements and joint ventures. While the Company believes that it has made progress toward implementing these strategies, there can be no assurance that the Company will continue to be successful in implementing its strategies or that such strategies, once implemented, will be successful. LEVERAGE AND ABILITY TO SERVICE DEBT The Company has and will continue to have significant indebtedness. At May 31, 1994 the Company had total consolidated debt of $110.0 million, the Company's ratio of total consolidated debt to stockholders' equity was approximately 1.8 to 1.0 and its total consolidated debt as a percentage of total debt and stockholders' equity was 63%. In addition, the Company may borrow additional amounts under credit lines and project construction loans available to the Company and its subsidiaries as required for its business and as permitted by the Indenture. See "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The ability of the Company to meet its debt service obligations will be dependent upon the future performance of the Company, which in turn will be subject to general economic and financial conditions, competition and other factors, including factors beyond the Company's control. The level of the Company's indebtedness, as well as certain covenants described under "Description of the Notes -- Certain Covenants," could restrict its flexibility in responding to changing business and economic conditions. The Company believes that its cash flow will be sufficient to cover its debt service requirements. However, if the Company is at any time unable to generate sufficient cash flow from operations to service its debt, it may be required to seek refinancing for all or a portion of that debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The credit agreements and certain joint venture agreements of the Company impose restrictions on the Company's operations and require the Company to achieve and maintain certain financial ratios. Such restrictions include, among other things, limitations on the ability of the Company to incur additional indebtedness, to pay dividends or make other distributions, to acquire unentitled land and to enter into mergers and certain other transactions. Obligations under the credit agreements of the Company are secured by liens on a substantial portion of the Company's housing inventory and a portion of its finished building lots. For information on the covenants and events of default contained in the credit agreements and certain joint venture agreements of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Joint Ventures." ABILITY TO FUND FUTURE GROWTH The Company's homebuilding operations are dependent on the availability and cost of construction and development financing and may be adversely affected by any shortage or increased cost of such financing. The availability and cost of financing may also be affected by the net worth of the Company and the amount the Company can invest in a given project. If the Company is at any time unsuccessful in obtaining capital to fund its planned project expenditures, its projects at that time may be significantly delayed, as was the case in most of fiscal years 1992 and 1993 while the Company was under the control of the RTC. Any such delay could result in cost increases and adversely affect the Company's future results of operations and cash flows. Moreover, any financing that is available may be more difficult and costly to obtain than that which has been available in the past because, among other reasons, traditional sources of capital (savings and loan institutions, banks and insurance companies) are currently restricting loans for the acquisition and development of real estate. The Company believes that the enactment of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") in 1989 which, among other things, imposed additional limitations and requirements upon the lending activities of financial institutions, has adversely affected the availability and cost of borrowed funds for acquisition, development and construction. In addition, the Company believes that increased regulations have caused delays in completing financing, increased borrower equity requirements and increased financing costs for the Company. Cash flow management is crucial due to the high leverage and seasonal cycle of home sales, particularly as the number of the Company's real estate projects increases, as is expected, for the Company. The need to stage raw materials such as land and finished lots ahead of the start of home construction requires homebuilders to commit working capital for longer periods than traditional manufacturing companies. LAND ACQUISITION AND HOUSING INVENTORIES The Company acquires land for new projects in its geographic market areas. The Company generally seeks to reduce its land risk by not purchasing land without the necessary entitlements to build. Excess landholdings can have a negative impact on earnings and liquidity due to the payment of required carrying charges such as interest and real property taxes. Market conditions may adversely affect the value of land owned by the Company, resulting in lower margins or charges against earnings. The Company attempts to reduce these risks through constraining project size and acquiring lots and land through the use of options, development agreements and joint ventures where possible, thereby enabling the Company to control lots with a smaller capital investment and to reduce land holding periods. However, there can be no assurance that such efforts will be successful. In addition, the Company believes that the supply of home sites in the California market is constrained by, among other things, reduced availability of financing, a burdensome regulatory environment, infrastructure limitations in certain areas and a scarcity of available land near employment centers. This constrained supply of home sites, coupled with the Company's efforts to reduce inventory risk, could result in fewer home sites being available to the Company. In addition to land risk, the risk of holding completed housing inventory is substantial for homebuilders due to the high inventory carrying costs. The market value of housing inventories can change significantly over the life of a project, reflecting shifting market conditions, and such changes can result in material losses to the Company. VARIABILITY OF RESULTS The Company historically has experienced, and in the future expects to continue to experience, variability in its unit sales and revenues on a quarterly basis. Factors expected to contribute to this variability include, among others: (i) the timing of home closings; (ii) the Company's ability to continue to acquire land and options thereon on acceptable terms; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and general economic conditions in California and Nevada, especially in the Company's Southern California and Las Vegas markets; (v) the cyclical nature of the homebuilding industry; (vi) prevailing interest rates and the availability of mortgage financing; and (vii) the cost and availability of materials and labor. The Company expects its financial results to vary from project to project and from quarter to quarter. COMPETITION The residential homebuilding industry is highly competitive, with homebuilders competing for desirable properties, financing, raw materials and skilled labor. The Company currently competes with a number of homebuilding companies, as well as resales of existing residential housing by individuals, financial institutions and government agencies. Some of these companies are larger than the Company and have greater financial resources. Additionally, several large homebuilders have begun, or announced their intention to begin, operations in the Company's Southern California and Las Vegas markets. Many homebuilders have also begun to refocus their efforts towards the entry level market. REGULATORY AND ENVIRONMENTAL MATTERS The Company and its competitors are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation that imposes restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. Governmental agencies have broad discretion in administering such requirements. The Company may also be subject to periodic delays in its homebuilding projects due to building moratoria in the areas in which it operates. In recent years, several cities and counties in California and Nevada in which the Company has projects have approved the inclusion of "slow growth" initiatives and other election ballot measures that could impact the affordability and availability of homes and land within those cities and counties. Although the majority of these initiatives have been defeated, the Company believes that if similar initiatives are introduced and approved in the future, residential construction by the Company and its competitors could be negatively impacted in California and Nevada. Periodically, the states of California and Nevada have experienced drought conditions, resulting in certain water conservation measures and, in some cases, rationing by local municipalities with which the Company does business. Although curtailments of construction activity as a result of drought conditions have not had a material impact on the Company's operations, restrictions on future construction activity could have an adverse effect upon the Company's homebuilding operations. The Company and its competitors are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws that apply to any given homebuilding site vary according to the site's location, the site's environmental conditions and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and may prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. CONTROL OF THE COMPANY At May 31, 1994, CPH owned 80.0% of the Company's Common Stock. CPH is wholly-owned by Messrs. Makarechian and Dowers, executive officers of the Company. Due to this ownership position, CPH (and, indirectly, Messrs. Makarechian and Dowers) has, and following exercise of all of the Warrants will continue to have, the ability to control the affairs and policies of the Company. It has the ability to elect a sufficient number of directors to control the Company's Board of Directors and to approve or disapprove any matters submitted to a vote by stockholders. The Company's policy is that any material transactions between the Company and CPH or any affiliate thereof are required to be on terms no less favorable to the Company than could reasonably be obtained in arms'-length transactions with independent third parties and must be approved by a majority of the Company's outside directors who do not have a financial interest in the transaction. The Indenture will impose certain restrictions on the Company's and its Restricted Subsidiaries' ability to enter into transactions with affiliates. See "Certain Relationships and Related Transactions" and "Description of the Notes -- Certain Covenants -- Limitations on Transactions with Shareholders and Affiliates." POTENTIAL CONFLICTS OF INTEREST Certain decisions concerning the operations or financial structure of the Company may present conflicts of interest between the owners of the Company's stock and the holders of the New Notes. For example, if the Company encounters financial difficulties or is unable to pay its debts as they mature, the interests of the Company's equity investors might conflict with those of the holders of the New Notes. In addition, the equity investors may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risk to the holders of the Notes. POTENTIAL ADVERSE TAX CONSEQUENCES OF DECONSOLIDATION CPH and the Company file consolidated state and federal income tax returns. If at any time CPH's ownership of the Company is diluted to below 80%, such dilution would result in a deconsolidation for tax purposes. While such a deconsolidation would not necessarily have an adverse effect on the Company, it may trigger a significant tax liability to CPH. Thus, the Company will be unlikely to issue any equity securities (including shares of Common Stock issuable upon exercise of the Warrants) prior to an anticipated downstream merger of CPH into the Company. The Indenture requires that CPH use its best efforts to merge into the Company within 180 days after consummation of the Exchange Offer or effectiveness of the Shelf Registration Statement (as defined), as the case may be, and, in any event, to complete such merger by the earlier of (i) one year thereafter or (ii) 18 months after the initial issuance of the Old Notes. See "Description of the Notes -- Consolidation, Merger and Sale of Assets." DEPENDENCE ON SENIOR MANAGEMENT The Company's future performance will depend to a significant extent upon the efforts and abilities of certain members of senior management, in particular those of Messrs. Makarechian and Dowers, who serve as Chairman of the Board and Chief Executive Officer and President and Chief Operating Officer, respectively. The loss of the services of one or more of its senior management could have a material adverse effect on the Company's business. The Company does not have employment contracts with any of its senior executives. AMOUNT OF SECURED DEBT; STRUCTURAL SUBORDINATION The New Notes will be unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future unsecured indebtedness of the Company that is not, by its terms, expressly subordinated in right of payment to the New Notes. Any current and future secured indebtedness of the Company will have priority over the New Notes with respect to the assets pledged as collateral therefor. The Indenture permits the Company to grant liens to secure additional Indebtedness permitted by the Indenture so long as such Indebtedness (other than Non-Recourse Indebtedness) does not exceed 40% of the Adjusted Consolidated Net Tangible Assets of the Company and to grant certain other liens. See "Description of the Notes -- Certain Covenants -- Limitation on Liens." At May 31, 1994, the Company had no indebtedness junior to the Old Notes and $10 million of secured indebtedness senior to the Old Notes. In addition, many of the operations of the Company, including its joint venture building operations, are conducted through subsidiaries and therefore the Company is dependent on the cash flow of its subsidiaries to meet its debt obligations, including its obligations under the New Notes. Except to the extent the Company or the holders of the New Notes may be creditors with recognized claims against such subsidiaries (including claims under the subsidiary guarantees), the claims of creditors of the subsidiaries will have priority with respect to the assets and earnings of the subsidiaries over the claims of creditors of the Company, including holders of the New Notes. At May 31, 1994 the Company's subsidiaries had liabilities aggregating $10.9 million (primarily consisting of trade payables), none of which constituted Indebtedness. POSSIBLE UNENFORCEABILITY OF AND LIMITS ON GUARANTEES BY SUBSIDIARIES Certain subsidiaries of the Company will guarantee the New Notes. As a matter of law, a guarantee by a subsidiary of the obligation of its parent corporation will be unenforceable, in whole or in part, if, among other things, (i) the subsidiary received less than a reasonably equivalent value in exchange for the guarantee and the subsidiary was insolvent on the date the guarantee was made or became insolvent as a result of the guarantee or (ii) the subsidiary was engaged or was about to engage in a business or transaction for which its remaining property constituted unreasonably small capital. Whether either of these tests are met as to any subsidiary of the Company is a question of fact, as to the ultimate determination of which no assurance can be given. Certain of the Company's subsidiaries have incurred and, to the extent permitted under the Indenture, may in the future incur indebtedness that is secured. Holders of such indebtedness will have a claim against the assets of the subsidiary that secure such indebtedness which is prior to the claim of the holders of the New Notes under the guarantees. At May 31, 1994 the Company's subsidiaries that will guarantee the New Notes had no secured debt. Certain recent decisions by federal courts have required that recipients of guarantees from "insiders" be treated as "insiders" for bankruptcy purposes. Under current judicial interpretations, the subsidiary guarantees may constitute guarantees by insiders. As a result, holders of the New Notes may be treated as "insiders" in a bankruptcy proceeding and would thus be subject to a one-year preference period applicable to insiders rather than a 90-day preference period applicable to general creditors. The "preference period" is the period of time prior to the filing of the bankruptcy petition for which payments to the affected creditor may be challenged as preferential payments. Thus, because of the subsidiary guarantees, payments made to holders of the New Notes within one year prior to the filing of any bankruptcy petition may be subject to challenge. ORIGINAL ISSUE DISCOUNT CONSEQUENCES Under certain circumstances described in more detail below, a holder of a New Note might be required to include in such holder's income for federal income tax purposes the original issue discount with respect to the New Note as it accrues. If a bankruptcy case is commenced by or against the Company under the United States Bankruptcy Code after the issuance of the New Notes, the claim of a holder of New Notes may be limited to an amount equal to the sum of the issue price as determined by the bankruptcy court and that portion of the original issue discount which is deemed to accrue from the issue date to the date of any such bankruptcy filing. See "Certain Federal Income Tax Considerations."

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+RISK FACTORS The Mortgage Notes, Units and Common Stock offered hereby involve certain risks that should be carefully considered by prospective investors. See "Risk Factors." EMERGENCE FROM BANKRUPTCY On May 3, 1994, a joint plan of reorganization proposed by RII, together with certain of its debtor and non-debtor subsidiaries, including RIHF, became effective. As a result, among other things, RII has significantly reduced its consolidated debt and sold its former casino, hotel and resort operations on Paradise Island in The Bahamas. See "Restructuring of Series Notes" and "Pro Forma Financial Data." THE OFFERING The following securities may be offered from time to time by the Selling Securityholders: $87,500,000 principal amount of 11% Mortgage Notes due 2003, issued by RIHF. 24,500 Units, each Unit consisting of $1,000 principal amount of 11.375% Junior Mortgage Notes due 2004, issued by RIHF, and one share of Class B Common Stock, issued by RII. 11,900,000 shares of Common Stock, issued by RII. The Mortgage Notes and Junior Mortgage Notes are guaranteed by RIH and secured by the Resorts Casino Hotel. See "Description of Mortgage Notes" and "Description of Junior Mortgage Notes." None of the securities are being offered by the Company, which will receive none of the proceeds of any sales. See "Selling Securityholders" and "Plan of Distribution." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables set forth certain historical and pro forma consolidated financial data for RII and RIH. The pro forma statement of operations data give effect to the Restructuring as if it had occurred on January 1, 1993. See "Restructuring of Series Notes." The pro forma balance sheet data give effect to the Restructuring as if it had occurred on December 31, 1993. The unaudited pro forma financial information is not necessarily indicative of future results or what the respective entities' financial position or results of operations would actually have been had the transactions occurred on the dates indicated. Such information should not be used as a basis to project results for any future periods. For additional information, see the Consolidated Financial Statements and the notes thereto and "Pro Forma Financial Data" and the notes thereto. <TABLE> <CAPTION> HISTORICAL PRO FORMA --------------------------------- ----------------- FOR THE YEAR ENDED DECEMBER 31, FOR THE --------------------------------- YEAR ENDED 1991 1992 1993 DECEMBER 31, 1993 ------ ------ ------- ----------------- (IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS) <S> <C> <C> <C> <C> RII Statement of Operations Data: Operating revenues................................................... $418.2 $436.9 $ 439.6 $279.5 Depreciation......................................................... 23.8 25.3 27.9 13.8 Earnings from operations............................................. 16.0 21.5 12.9 21.2 Interest income (expense), net(a).................................... (58.4) (73.5) (105.3) (26.0) Recapitalization costs............................................... (2.8) (8.8) Loss before income taxes............................................. (42.4) (54.8) (101.2) (4.8) Net loss............................................................. (41.6) (53.5) (102.2) (5.8) Net loss per share................................................... (2.07) (2.65) (5.07) (.15) Ratio of earnings to fixed charges(b)................................ -- -- -- -- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1993 ----------------------- HISTORICAL PRO FORMA ---------- --------- <S> <C> <C> RII Balance Sheet Data: Cash and cash equivalents(c)......................................................................... $ 62.5 $ 20.0 Net property and equipment........................................................................... 447.8 274.4 Total assets......................................................................................... 575.8 327.1 Current maturities of long-term debt(d).............................................................. 466.3 0.1 Long-term debt, excluding current maturities(d)...................................................... 85.0 232.5 Shareholders' equity (deficit)....................................................................... (113.7) .6 Book value per share................................................................................. (5.64) .02 </TABLE> <TABLE> <CAPTION> HISTORICAL PRO FORMA -------------------------------- ----------------- FOR THE YEAR ENDED DECEMBER 31, FOR THE -------------------------------- YEAR ENDED 1991 1992 1993 DECEMBER 31, 1993 ------ ------ ------ ----------------- (IN MILLIONS, EXCEPT RATIOS) <S> <C> <C> <C> <C> RIH Statement of Operations Data: Operating revenues.................................................... $247.5 $262.7 $271.5 $ 271.5 Depreciation.......................................................... 9.1 11.4 13.7 13.7 Earnings from operations.............................................. 14.8 21.0 12.1 12.1 Interest income (expense), net (e).................................... 7.0 7.3 7.4 (17.8) Recapitalization costs................................................ (.9) (2.7) Earnings (loss) before income taxes................................... 21.8 27.4 16.8 (5.7) Net earnings (loss)................................................... 13.1 16.4 16.4 (6.1) Ratio of earnings to fixed charges (f)................................ 15.5 21.5 16.0 -- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1993 ----------------------- HISTORICAL PRO FORMA ---------- --------- <S> <C> <C> RIH Balance Sheet Data: Cash and cash equivalents............................................................................ $ 25.9 $ 15.0 Net property and equipment........................................................................... 163.3 163.3 Total assets......................................................................................... 264.2 204.4 Current maturities of notes payable to affiliate and other long-term debt............................ 325.1 0.1 Notes payable to affiliate and other long-term debt, excluding current maturities.................... -- 147.6 Shareholder's equity (deficit)....................................................................... (148.0) 12.5 </TABLE> - --------------- (a) Amounts presented include amortization of debt discount. (b) The ratios of earnings to fixed charges were computed by dividing earnings available for fixed charges (earnings before income taxes adjusted for interest expense, amortization of debt discount and one-third of rent expense) by fixed charges. Fixed charges include interest expense, amortization of debt discount and one-third of rent expense. Historical earnings were insufficient to cover fixed charges by $42,402,000 for 1991; $54,802,000 for 1992; and $101,164,000 for 1993. Pro forma earnings were insufficient to cover fixed charges by $4,785,000. For ratios of earnings to fixed charges for additional periods see "Selected Historical Financial Data." (c) Excludes restricted cash equivalents. (d) Amounts are net of unamortized discounts. (e) Pro forma amount includes amortization of debt discount. (f) The ratios of earnings to fixed charges were computed by dividing earnings available for fixed charges (earnings before income taxes adjusted for interest expense, amortization of debt discount and one-third of rent expense) by fixed charges. Fixed charges include interest expense, amortization of debt discount and one-third of rent expense. Pro forma earnings were insufficient to cover fixed charges by $5,720,000. For ratios of earnings to fixed charges for additional periods see "Selected Historical Financial Data."

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+RISK FACTORS Prospective investors should consider carefully the following factors relating to the business of the Company and the Offering, together with the information and financial data set forth elsewhere in this Prospectus, prior to purchasing any Secured Notes. Adverse Financial Condition and High Leverage. At September 30, 1993, Mesa had outstanding approximately $1.2 billion of long-term debt. Mesa's primary cash requirements, after paying operating expenses and general and administrative expenses, are principal and interest payments on its debt and capital expenditures. Over the next two years, Mesa will incur annual cash interest costs of less than $5 million on the $13.7 million principal amount of Subordinated Notes outstanding and amounts outstanding under the Credit Agreement. There are no interest payments due under the Discount Notes until December 31, 1995. Interest payments on the HCLP Secured Notes are expected to total approximately $50 million to $55 million per year for the next two years. Under the Credit Agreement, $18.7 million of principal was paid in the fourth quarter of 1993, $19.5 million is due in the first half of 1994 and $50 million is due on June 30, 1995 (including cash collateralization of $10.4 million of letter of credit obligations). There are no principal payments due under the Subordinated Notes or the Discount Notes until 1996. The scheduled amortization of the HCLP Secured Notes is $42.9 million in 1994 and $39.3 million in 1995. The proceeds from production of HCLP's Hugoton properties are dedicated to service the HCLP Secured Notes before any cash may be distributed to the Obligors. Mesa's capital expenditure requirements are estimated to be $23.5 million in 1994 and $15.4 million in 1995. At September 30, 1993, Mesa had $73.2 million of working capital; and cash and securities totaled $122.2 million. Working capital at that date included a $37.4 million note receivable, which was collected in October 1993. Of the $122.2 million of cash and securities, $23.4 million was held at HCLP. After giving effect to this Offering and the use of proceeds therefrom as described in "Use of Proceeds" and the conversion of the Convertible Notes into Common Stock, the Company would have had total pro forma long-term indebtedness of approximately $1.2 billion at September 30, 1993 (as if such events had occurred on that date) and pro forma fixed charges in excess of earnings of $65.7 million and $98.7 million for the nine months ended September 30, 1993 and the year ended December 31, 1992, respectively (as if such events had occurred at the beginning of such periods). See "Historical and Pro Forma Capitalization" and "Selected Financial Information." During the next two years, Mesa expects to be able to service its debt and make capital expenditures with cash generated by operating activities and with existing cash and securities balances. On December 31, 1995, Mesa will begin making interest payments on the Discount Notes. Assuming no changes in Mesa's capital structure prior to such date, Mesa will be required to make cash interest payments related to the Discount Notes totaling approximately $48 million (approximately $51 million if all of the additional Secured Notes offered hereby are issued) on December 31, 1995 and payments totaling approximately $84 million (approximately $90 million if all of the additional Secured Notes offered hereby are issued) during 1996. In addition, Unsecured Notes in the amount of $178.8 million and 12% Subordinated Notes in the amount of $6.3 million become due in mid-1996. Mesa's current financial forecasts indicate that Mesa will be unable to fund such payments in 1996 with cash flows from operating activities and existing cash and securities balances. Depending on industry and market conditions, Mesa may generate cash by selling assets or issuing new debt or equity securities. However, Mesa has limited ability to sell assets since its two largest assets, its interests in the Hugoton and West Panhandle fields, are pledged under long-term debt agreements. After the June 30, 1995 repayment of the balances outstanding under the Credit Agreement, Mesa would have $82.5 million of first lien borrowing capacity on the West Panhandle field properties. See "Description of the Secured Notes -- Limitation on Incurrence of First Lien Debt." Mesa's current business strategy includes continuing its effort to strengthen its financial condition by raising equity capital and applying the proceeds thereof to retire debt, and issuing new lower-cost debt to refinance its existing high cost debt securities. There can be no assurance that Mesa will be able to raise equity capital or otherwise refinance its debt. As a result of the potential adverse consequences discussed above relating to certain principal and interest payments due in 1996 on Mesa's debt, Mesa's independent public accountants' report, as reissued for this Prospectus, contains an "emphasis-of-a-matter" paragraph which calls attention to such matters. The amended Credit Agreement contains restrictive covenants which require Mesa to maintain tangible adjusted equity, as defined, of at least $50 million and a ratio of cash flow and available cash to debt service, as each is defined, of at least 1.50 to 1. At September 30, 1993, tangible adjusted equity was $132 million and the ratio was 2.11 to 1. Mesa expects to accrue a loss of approximately $43 million in the fourth quarter of 1993 representing its share of the settlement of the Unocal lawsuit. In addition, Mesa expects to report a net loss from operations in the fourth quarter of 1993. Mesa expects tangible adjusted equity at December 31, 1993 to be in excess of $100 million, giving effect to the loss from operations, the Unocal Settlement, the conversion of the Convertible Notes into Common Stock and certain nonrecurring gains. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Assuming no changes in its capital structure, Mesa expects to continue to report losses from operations in the foreseeable future. The Unocal Settlement would not result in tangible adjusted equity falling below the $50 million requirement, but would accelerate the point in time at which tangible adjusted equity may fall below the $50 million requirement. Assuming no changes in its capital structure and in existing business conditions, Mesa's financial forecasts indicate that tangible adjusted equity is likely to fall below the $50 million requirement in the second half of 1994. The financial forecasts also indicate that Mesa will have adequate financial resources, including cash on hand, to satisfy any obligations which may become due under the Credit Agreement in the event the tangible adjusted equity covenant is not satisfied and cannot be renegotiated or compliance therewith waived. At December 31, 1993, Mesa had approximately $150 million of cash and securities. In addition, payment of the settlement amount to Unocal would not cause the ratio of cash flow and available cash to debt service to fall below the required level. In addition, the Secured Indenture, as well the indenture governing the Unsecured Notes and the Credit Agreement, impose operating and financial restrictions on Mesa. Such restrictions will affect, and in many respects limit or prohibit, among other things, the ability of Mesa to incur additional indebtedness, create liens, sell assets, engage in merger and acquisition transactions and make dividend and other payments. The leveraged position of Mesa and the restrictive covenants contained in these indentures and the Credit Agreement could significantly limit the ability of Mesa to respond to changing business or economic conditions or to respond to substantial declines in operating results. See "Description of the Secured Notes" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity." Additional Indebtedness Resulting from Increase in Accreted Value. The Accreted Value of the Discount Notes will increase from December 31, 1993 through June 30, 1995 at a rate of 12 3/4% per annum, compounded semiannually. Consequently, the overall indebtedness of Mesa will increase each year through June 30, 1995 in an amount equal to the increase in the Accreted Value of the Discount Notes during such year. From December 31, 1993 to June 30, 1995, and assuming no redemptions, the Accreted Value of each Secured Note and each Unsecured Note will increase by $169.23, or an aggregate of approximately $126.6 million for all Secured Notes and Unsecured Notes outstanding. Mesa's cash interest requirements have been substantially reduced as a result of the Exchange Offer, given that the Discount Notes do not currently bear interest and will not begin to accrue interest until July 1, 1995, with interest being payable thereafter semiannually in arrears on each June 30 and December 31, beginning December 31, 1995. Litigation. Mesa is involved in certain litigation, including a lawsuit brought by and on behalf of Unocal seeking recovery of more than $150 million, which, if decided adversely to Mesa, would have a material adverse effect on Mesa. Mesa is offering the Secured Notes offered hereby to fund its share of the settlement payment with respect to the Unocal litigation. See "Unocal Litigation and Settlement" and "Business -- Legal Proceedings." Mesa's independent public accountants have included an explanatory paragraph in their report on Mesa's 1992 Consolidated Financial Statements, which is included elsewhere in this Prospectus. Such paragraph describes the Unocal case discussed in the Notes to the Consolidated Financial Statements, and indicates that an unfavorable judgment would have a material adverse effect on the Company's financial position and results of operations. Uncertainty of Natural Gas Prices. Revenues generated from Mesa's operations are highly dependent upon the sales price of, and demand for, natural gas and natural gas liquids. As of December 31, 1992, over 70% of Mesa's proved reserves, calculated on an energy-equivalent basis, were natural gas and substantially all of its other reserves were natural gas liquids. In recent years, prices for natural gas have declined for a number of reasons, including a nationwide oversupply of gas. The average sales price received by Mesa for natural gas declined from approximately $2.92 per Mcf in 1983 to $1.84 per Mcf in 1987 to $1.46 per Mcf in 1991. Both the 1990/1991 and 1991/1992 winter periods were much warmer than normal resulting in lower heating season natural gas prices. Aggregate demand for natural gas did, however, increase each year. Low drilling activity in the U.S. during the past several years resulted in a failure to replace reserves and Hurricane Andrew disrupted natural gas supplies from the prolific Gulf Coast region during September and October of 1992. As a result, 1992 natural gas market prices were higher than in 1991 and the average price received by Mesa for natural gas produced during 1992 was $1.66 per Mcf. The average price received by Mesa for natural gas produced during the first nine months of 1993 was $1.77 per Mcf. For 1992, the annual average Gulf Coast Henry Hub cash market price for natural gas, as reported by Natural Gas Week, was $1.80 per MMBtu. For the first nine months of 1993, the monthly average Gulf Coast Henry Hub cash market price for natural gas ranged from $1.69 per MMBtu to $2.35 per MMBtu, and the average of such nine monthly average prices was $2.08 per MMBtu. Mesa cannot predict whether the recent increase in natural gas prices is likely to continue or whether such prices will remain at current levels for the remainder of the year or in future years. Market prices for natural gas are volatile and are the result of a number of factors outside of Mesa's control, including changing economic conditions, governmental regulations, seasonal weather conditions, natural gas storage levels and markets for alternative energy sources, among other things. Mesa cannot predict how developments in these or related areas will affect the markets for natural gas or how such effects will impact Mesa's operations. Uncertainty in Estimates of Production. Revenues generated from Mesa's operations are also highly dependent on the quantities of natural gas and natural gas liquids sold. Mesa's producing properties in the Hugoton field and the West Panhandle field are subject to production limitations imposed by state regulatory authorities, by contracts or both. See "Business -- Properties" for a discussion of, among other things, the allocation of allowables to Mesa's properties. Consequently, Mesa's actual future production may be substantially affected by factors outside of Mesa's control. Declining Reserve Base. In recent years, the majority of Mesa's capital expenditures have been dedicated to developing and upgrading its existing long-life reserve base through infill drilling of its Hugoton reserves, additions to its compression and gathering system and pipeline interconnects, and the construction and expansion of gas processing plants. A relatively modest amount of expenditures have been made to explore for or develop new reserve positions. Assuming continuance of this capital expenditure policy and absent substantial positive revisions to its estimated reserves, Mesa expects that its annual production of reserves will exceed estimated reserve additions in future years, and that Mesa's reserves will decline accordingly. Mesa expects its annual production, expressed as a percentage of the prior year-end estimated reserves, to increase from approximately 6% in 1992 to approximately 11% by 1999. Estimates of Reserves and Future Net Revenues. Petroleum engineering is not an exact science. Information relating to Mesa's oil and gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and gas reserves and of future net revenues necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to Mesa's reserves will likely vary from estimates, and such variances may be material. The present values of future net revenues referred to in this Prospectus should not be construed as the current market value of the estimated oil and gas reserves attributable to Mesa's properties. In accordance with applicable requirements of the Commission, the estimated discounted future net revenues from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and gas, curtailments or increases in consumption by gas purchasers, changes in governmental regulations or taxation, the impact of inflation on costs, general and administrative costs and interest expense. The timing of actual future net revenues from proved reserves, and thus their actual present value, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and gas properties. In addition, the 10% discount factor, which is required by the Commission to be used to calculate discounted future net revenues for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the oil and gas industry. Operating Hazards; Limited Insurance Coverage. Mesa is subject to all of the operating hazards and risks normally incident to drilling for or producing oil and natural gas and processing and transporting gas, including blowouts, cratering, pollution and fires, each of which could result in damage to or destruction of oil and gas wells, producing formations or production, pipeline or processing facilities or damage to persons or other property. As is common in the industry, Mesa is not fully insured against all of these risks. Trading Market. As of December 31, 1993, $569.3 million face value (at maturity) of Secured Notes was outstanding. The Secured Notes are not listed for trading on any national securities exchange, but are traded in the over-the-counter market by certain dealers who from time to time are willing to make a market in Secured Notes. These Secured Notes are currently traded by appointment by certain market makers. No assurance can be given that an active market for the Secured Notes will continue or as to the liquidity of such market. Accordingly, no assurance can be given that a holder of the Secured Notes will be able to sell such Secured Notes in the future or as to the price at which such sale may occur. The liquidity of the market for the Secured Notes and the prices at which the Secured Notes trade will depend upon the amount of such issue outstanding, the number of holders thereof, the interest of securities dealers in maintaining a market in the Secured Notes and other factors beyond the Obligors' control. In addition, no assurance can be given as to the relationship that the current market prices of Secured Notes will bear to the market prices of the Secured Notes after the Offering. Security for the Secured Notes. The Secured Notes will be secured by (i) the Mortgage granting a second lien on certain properties and related assets and contractual rights of MOC in the West Panhandle field of Texas and (ii) the Pledge Agreement granting a second lien and security interest in an approximately 77% (assuming all of the Secured Notes offered hereby are issued) limited partnership interest in HCLP (which is part of the limited partnership interest in HCLP owned by MOC). Such liens will be subordinate to a lien securing the First Lien Debt, which currently consists of the outstanding obligations under the Credit Agreement. There can be no assurance that, following an acceleration after an Event of Default (as defined in the Secured Indenture), the proceeds from the sale of such Collateral remaining after satisfaction of all amounts owing in respect of First Lien Debt and allocable to the Secured Notes would be sufficient, either alone or when combined with proceeds from the sale of other assets not constituting Collateral and allocable to the Secured Notes, to satisfy all amounts due on the Secured Notes. The ability of the holders of Secured Notes to realize upon the Collateral will also be subject to certain limitations in the Secured Indenture, the Mortgage, the Pledge Agreement and the Intercreditor Agreement dated as of August 26, 1993 among the Secured Trustee and the collateral agent for the holders of First Lien Debt and would be further restricted by applicable law in the event of a bankruptcy proceeding involving one or more of the Obligors. See "Description of the Secured Notes -- Security." In addition, HCLP has outstanding HCLP Secured Notes which, because HCLP will not be an Obligor under the Secured Notes, are effectively senior to the Secured Notes with respect to the assets of HCLP. The incurrence of First Lien Debt and other additional indebtedness by the Obligors and their subsidiaries will be restricted by the Secured Indenture. See "Description of the Secured Notes." Governmental Regulation and Environmental Matters. Mesa is subject to various local, state and federal laws and regulations including environmental laws and regulations. Mesa believes that it is in substantial compliance with such laws and regulations. However, significant liability could be imposed on Mesa for damages, clean up costs and penalties in the event of certain discharges into the environment. See "Business -- Regulation and Prices." Funding of Change in Control Offer. In the event of a Change in Control (as defined in the Secured Indenture), the Obligors would be required to make an offer to purchase all of the Secured Notes. As of September 30, 1993, after giving effect to the Offering and the application of the net proceeds therefrom, the Obligors would not have sufficient funds available to purchase all of the outstanding Secured Notes were they to be tendered in response to an offer made as a result of a Change in Control. See "Description of the Secured Notes -- Change in Control."

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+RISK FACTORS Prospective investors should consider carefully the following factors relating to the business of the Company and the Offering, together with the information and financial data set forth elsewhere in this Prospectus, prior to purchasing any Secured Notes. Adverse Financial Condition and High Leverage. At September 30, 1993, Mesa had outstanding approximately $1.2 billion of long-term debt. Mesa's primary cash requirements, after paying operating expenses and general and administrative expenses, are principal and interest payments on its debt and capital expenditures. Over the next two years, Mesa will incur annual cash interest costs of less than $5 million on the $13.7 million principal amount of Subordinated Notes outstanding and amounts outstanding under the Credit Agreement. There are no interest payments due under the Discount Notes until December 31, 1995. Interest payments on the HCLP Secured Notes are expected to total approximately $50 million to $55 million per year for the next two years. Under the Credit Agreement, $18.7 million of principal was paid in the fourth quarter of 1993, $19.5 million is due in the first half of 1994 and $50 million is due on June 30, 1995 (including cash collateralization of $10.4 million of letter of credit obligations). There are no principal payments due under the Subordinated Notes or the Discount Notes until 1996. The scheduled amortization of the HCLP Secured Notes is $42.9 million in 1994 and $39.3 million in 1995. The proceeds from production of HCLP's Hugoton properties are dedicated to service the HCLP Secured Notes before any cash may be distributed to the Obligors. Mesa's capital expenditure requirements are estimated to be $23.5 million in 1994 and $15.4 million in 1995. At September 30, 1993, Mesa had $73.2 million of working capital; and cash and securities totaled $122.2 million. Working capital at that date included a $37.4 million note receivable, which was collected in October 1993. Of the $122.2 million of cash and securities, $23.4 million was held at HCLP. After giving effect to this Offering and the use of proceeds therefrom as described in "Use of Proceeds" and the conversion of the Convertible Notes into Common Stock, the Company would have had total pro forma long-term indebtedness of approximately $1.2 billion at September 30, 1993 (as if such events had occurred on that date) and pro forma fixed charges in excess of earnings of $65.7 million and $98.7 million for the nine months ended September 30, 1993 and the year ended December 31, 1992, respectively (as if such events had occurred at the beginning of such periods). See "Historical and Pro Forma Capitalization" and "Selected Financial Information." During the next two years, Mesa expects to be able to service its debt and make capital expenditures with cash generated by operating activities and with existing cash and securities balances. On December 31, 1995, Mesa will begin making interest payments on the Discount Notes. Assuming no changes in Mesa's capital structure prior to such date, Mesa will be required to make cash interest payments related to the Discount Notes totaling approximately $48 million (approximately $51 million if all of the additional Secured Notes offered hereby are issued) on December 31, 1995 and payments totaling approximately $84 million (approximately $90 million if all of the additional Secured Notes offered hereby are issued) during 1996. In addition, Unsecured Notes in the amount of $178.8 million and 12% Subordinated Notes in the amount of $6.3 million become due in mid-1996. Mesa's current financial forecasts indicate that Mesa will be unable to fund such payments in 1996 with cash flows from operating activities and existing cash and securities balances. Depending on industry and market conditions, Mesa may generate cash by selling assets or issuing new debt or equity securities. However, Mesa has limited ability to sell assets since its two largest assets, its interests in the Hugoton and West Panhandle fields, are pledged under long-term debt agreements. After the June 30, 1995 repayment of the balances outstanding under the Credit Agreement, Mesa would have $82.5 million of first lien borrowing capacity on the West Panhandle field properties. See "Description of the Secured Notes -- Limitation on Incurrence of First Lien Debt." Mesa's current business strategy includes continuing its effort to strengthen its financial condition by raising equity capital and applying the proceeds thereof to retire debt, and issuing new lower-cost debt to refinance its existing high cost debt securities. There can be no assurance that Mesa will be able to raise equity capital or otherwise refinance its debt. As a result of the potential adverse consequences discussed above relating to certain principal and interest payments due in 1996 on Mesa's debt, Mesa's independent public accountants' report, as reissued for this Prospectus, contains an "emphasis-of-a-matter" paragraph which calls attention to such matters. The amended Credit Agreement contains restrictive covenants which require Mesa to maintain tangible adjusted equity, as defined, of at least $50 million and a ratio of cash flow and available cash to debt service, as each is defined, of at least 1.50 to 1. At September 30, 1993, tangible adjusted equity was $132 million and the ratio was 2.11 to 1. Mesa expects to accrue a loss of approximately $43 million in the fourth quarter of 1993 representing its share of the settlement of the Unocal lawsuit. In addition, Mesa expects to report a net loss from operations in the fourth quarter of 1993. Mesa expects tangible adjusted equity at December 31, 1993 to be in excess of $100 million, giving effect to the loss from operations, the Unocal Settlement, the conversion of the Convertible Notes into Common Stock and certain nonrecurring gains. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Assuming no changes in its capital structure, Mesa expects to continue to report losses from operations in the foreseeable future. The Unocal Settlement would not result in tangible adjusted equity falling below the $50 million requirement, but would accelerate the point in time at which tangible adjusted equity may fall below the $50 million requirement. Assuming no changes in its capital structure and in existing business conditions, Mesa's financial forecasts indicate that tangible adjusted equity is likely to fall below the $50 million requirement in the second half of 1994. The financial forecasts also indicate that Mesa will have adequate financial resources, including cash on hand, to satisfy any obligations which may become due under the Credit Agreement in the event the tangible adjusted equity covenant is not satisfied and cannot be renegotiated or compliance therewith waived. At December 31, 1993, Mesa had approximately $150 million of cash and securities. In addition, payment of the settlement amount to Unocal would not cause the ratio of cash flow and available cash to debt service to fall below the required level. In addition, the Secured Indenture, as well the indenture governing the Unsecured Notes and the Credit Agreement, impose operating and financial restrictions on Mesa. Such restrictions will affect, and in many respects limit or prohibit, among other things, the ability of Mesa to incur additional indebtedness, create liens, sell assets, engage in merger and acquisition transactions and make dividend and other payments. The leveraged position of Mesa and the restrictive covenants contained in these indentures and the Credit Agreement could significantly limit the ability of Mesa to respond to changing business or economic conditions or to respond to substantial declines in operating results. See "Description of the Secured Notes" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity." Additional Indebtedness Resulting from Increase in Accreted Value. The Accreted Value of the Discount Notes will increase from December 31, 1993 through June 30, 1995 at a rate of 12 3/4% per annum, compounded semiannually. Consequently, the overall indebtedness of Mesa will increase each year through June 30, 1995 in an amount equal to the increase in the Accreted Value of the Discount Notes during such year. From December 31, 1993 to June 30, 1995, and assuming no redemptions, the Accreted Value of each Secured Note and each Unsecured Note will increase by $169.23, or an aggregate of approximately $126.6 million for all Secured Notes and Unsecured Notes outstanding. Mesa's cash interest requirements have been substantially reduced as a result of the Exchange Offer, given that the Discount Notes do not currently bear interest and will not begin to accrue interest until July 1, 1995, with interest being payable thereafter semiannually in arrears on each June 30 and December 31, beginning December 31, 1995. Litigation. Mesa is involved in certain litigation, including a lawsuit brought by and on behalf of Unocal seeking recovery of more than $150 million, which, if decided adversely to Mesa, would have a material adverse effect on Mesa. Mesa is offering the Secured Notes offered hereby to fund its share of the settlement payment with respect to the Unocal litigation. See "Unocal Litigation and Settlement" and "Business -- Legal Proceedings." Mesa's independent public accountants have included an explanatory paragraph in their report on Mesa's 1992 Consolidated Financial Statements, which is included elsewhere in this Prospectus. Such paragraph describes the Unocal case discussed in the Notes to the Consolidated Financial Statements, and indicates that an unfavorable judgment would have a material adverse effect on the Company's financial position and results of operations. Uncertainty of Natural Gas Prices. Revenues generated from Mesa's operations are highly dependent upon the sales price of, and demand for, natural gas and natural gas liquids. As of December 31, 1992, over 70% of Mesa's proved reserves, calculated on an energy-equivalent basis, were natural gas and substantially all of its other reserves were natural gas liquids. In recent years, prices for natural gas have declined for a number of reasons, including a nationwide oversupply of gas. The average sales price received by Mesa for natural gas declined from approximately $2.92 per Mcf in 1983 to $1.84 per Mcf in 1987 to $1.46 per Mcf in 1991. Both the 1990/1991 and 1991/1992 winter periods were much warmer than normal resulting in lower heating season natural gas prices. Aggregate demand for natural gas did, however, increase each year. Low drilling activity in the U.S. during the past several years resulted in a failure to replace reserves and Hurricane Andrew disrupted natural gas supplies from the prolific Gulf Coast region during September and October of 1992. As a result, 1992 natural gas market prices were higher than in 1991 and the average price received by Mesa for natural gas produced during 1992 was $1.66 per Mcf. The average price received by Mesa for natural gas produced during the first nine months of 1993 was $1.77 per Mcf. For 1992, the annual average Gulf Coast Henry Hub cash market price for natural gas, as reported by Natural Gas Week, was $1.80 per MMBtu. For the first nine months of 1993, the monthly average Gulf Coast Henry Hub cash market price for natural gas ranged from $1.69 per MMBtu to $2.35 per MMBtu, and the average of such nine monthly average prices was $2.08 per MMBtu. Mesa cannot predict whether the recent increase in natural gas prices is likely to continue or whether such prices will remain at current levels for the remainder of the year or in future years. Market prices for natural gas are volatile and are the result of a number of factors outside of Mesa's control, including changing economic conditions, governmental regulations, seasonal weather conditions, natural gas storage levels and markets for alternative energy sources, among other things. Mesa cannot predict how developments in these or related areas will affect the markets for natural gas or how such effects will impact Mesa's operations. Uncertainty in Estimates of Production. Revenues generated from Mesa's operations are also highly dependent on the quantities of natural gas and natural gas liquids sold. Mesa's producing properties in the Hugoton field and the West Panhandle field are subject to production limitations imposed by state regulatory authorities, by contracts or both. See "Business -- Properties" for a discussion of, among other things, the allocation of allowables to Mesa's properties. Consequently, Mesa's actual future production may be substantially affected by factors outside of Mesa's control. Declining Reserve Base. In recent years, the majority of Mesa's capital expenditures have been dedicated to developing and upgrading its existing long-life reserve base through infill drilling of its Hugoton reserves, additions to its compression and gathering system and pipeline interconnects, and the construction and expansion of gas processing plants. A relatively modest amount of expenditures have been made to explore for or develop new reserve positions. Assuming continuance of this capital expenditure policy and absent substantial positive revisions to its estimated reserves, Mesa expects that its annual production of reserves will exceed estimated reserve additions in future years, and that Mesa's reserves will decline accordingly. Mesa expects its annual production, expressed as a percentage of the prior year-end estimated reserves, to increase from approximately 6% in 1992 to approximately 11% by 1999. Estimates of Reserves and Future Net Revenues. Petroleum engineering is not an exact science. Information relating to Mesa's oil and gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and gas reserves and of future net revenues necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to Mesa's reserves will likely vary from estimates, and such variances may be material. The present values of future net revenues referred to in this Prospectus should not be construed as the current market value of the estimated oil and gas reserves attributable to Mesa's properties. In accordance with applicable requirements of the Commission, the estimated discounted future net revenues from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and gas, curtailments or increases in consumption by gas purchasers, changes in governmental regulations or taxation, the impact of inflation on costs, general and administrative costs and interest expense. The timing of actual future net revenues from proved reserves, and thus their actual present value, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and gas properties. In addition, the 10% discount factor, which is required by the Commission to be used to calculate discounted future net revenues for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the oil and gas industry. Operating Hazards; Limited Insurance Coverage. Mesa is subject to all of the operating hazards and risks normally incident to drilling for or producing oil and natural gas and processing and transporting gas, including blowouts, cratering, pollution and fires, each of which could result in damage to or destruction of oil and gas wells, producing formations or production, pipeline or processing facilities or damage to persons or other property. As is common in the industry, Mesa is not fully insured against all of these risks. Trading Market. As of December 31, 1993, $569.3 million face value (at maturity) of Secured Notes was outstanding. The Secured Notes are not listed for trading on any national securities exchange, but are traded in the over-the-counter market by certain dealers who from time to time are willing to make a market in Secured Notes. These Secured Notes are currently traded by appointment by certain market makers. No assurance can be given that an active market for the Secured Notes will continue or as to the liquidity of such market. Accordingly, no assurance can be given that a holder of the Secured Notes will be able to sell such Secured Notes in the future or as to the price at which such sale may occur. The liquidity of the market for the Secured Notes and the prices at which the Secured Notes trade will depend upon the amount of such issue outstanding, the number of holders thereof, the interest of securities dealers in maintaining a market in the Secured Notes and other factors beyond the Obligors' control. In addition, no assurance can be given as to the relationship that the current market prices of Secured Notes will bear to the market prices of the Secured Notes after the Offering. Security for the Secured Notes. The Secured Notes will be secured by (i) the Mortgage granting a second lien on certain properties and related assets and contractual rights of MOC in the West Panhandle field of Texas and (ii) the Pledge Agreement granting a second lien and security interest in an approximately 77% (assuming all of the Secured Notes offered hereby are issued) limited partnership interest in HCLP (which is part of the limited partnership interest in HCLP owned by MOC). Such liens will be subordinate to a lien securing the First Lien Debt, which currently consists of the outstanding obligations under the Credit Agreement. There can be no assurance that, following an acceleration after an Event of Default (as defined in the Secured Indenture), the proceeds from the sale of such Collateral remaining after satisfaction of all amounts owing in respect of First Lien Debt and allocable to the Secured Notes would be sufficient, either alone or when combined with proceeds from the sale of other assets not constituting Collateral and allocable to the Secured Notes, to satisfy all amounts due on the Secured Notes. The ability of the holders of Secured Notes to realize upon the Collateral will also be subject to certain limitations in the Secured Indenture, the Mortgage, the Pledge Agreement and the Intercreditor Agreement dated as of August 26, 1993 among the Secured Trustee and the collateral agent for the holders of First Lien Debt and would be further restricted by applicable law in the event of a bankruptcy proceeding involving one or more of the Obligors. See "Description of the Secured Notes -- Security." In addition, HCLP has outstanding HCLP Secured Notes which, because HCLP will not be an Obligor under the Secured Notes, are effectively senior to the Secured Notes with respect to the assets of HCLP. The incurrence of First Lien Debt and other additional indebtedness by the Obligors and their subsidiaries will be restricted by the Secured Indenture. See "Description of the Secured Notes." Governmental Regulation and Environmental Matters. Mesa is subject to various local, state and federal laws and regulations including environmental laws and regulations. Mesa believes that it is in substantial compliance with such laws and regulations. However, significant liability could be imposed on Mesa for damages, clean up costs and penalties in the event of certain discharges into the environment. See "Business -- Regulation and Prices." Funding of Change in Control Offer. In the event of a Change in Control (as defined in the Secured Indenture), the Obligors would be required to make an offer to purchase all of the Secured Notes. As of September 30, 1993, after giving effect to the Offering and the application of the net proceeds therefrom, the Obligors would not have sufficient funds available to purchase all of the outstanding Secured Notes were they to be tendered in response to an offer made as a result of a Change in Control. See "Description of the Secured Notes -- Change in Control."

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+RISK FACTORS In addition to the other information in this Prospectus, prospective investors should carefully review the following risk factors before deciding to make an investment in the Notes. VARIABILITY OF FINANCIAL RESULTS The consolidated financial performance of the Company, and in particular of its subsidiary, Acme Steel, is significantly affected by the cyclical nature of the steel industry. For the years 1990, 1991, 1992 and 1993, Acme Steel shipped approximately 695,000, 560,000, 610,000 and 698,000 net tons of steel, respectively, with an average realized price per ton of approximately $422, $423, $413 and $426. Principally as a result of the impact of these changes in shipment volumes and, to a lesser extent, steel prices, the Company's consolidated net sales for the years 1990, 1991, 1992 and 1993 were $446.0 million, $376.9 million, $391.6 million and $457.4 million, respectively, and its consolidated operating income (or loss) was $8.8 million, ($1.5) million, ($2.1) million and $12.7 million, respectively. For the six months ended June 26, 1994, Acme Steel shipped approximately 382,000 net tons of steel with an average realized price per ton of $444, compared to shipments of approximately 360,000 net tons of steel and an average realized price per ton of $411 in the six months ended June 27, 1993. The Company reported consolidated net sales of $256.4 million and consolidated operating income of $17.8 million for the six months ended June 26, 1994, compared to consolidated net sales of $225.0 million and consolidated operating income of $5.4 million for the six months ended June 27, 1993. No assurance can be given that these trends in the Company's consolidated financial performance will continue or that other events likely to have an adverse effect on the steel industry or the Company, such as an economic downturn or an increase in competition, may not occur. LEVERAGE AND ACCESS TO CAPITAL After the Note Offering and the incurrence of the Term Loans, the Company and its subsidiaries will have significant amounts of outstanding indebtedness. The indebtedness of the Company and its subsidiaries and the restrictive covenants contained in existing and future debt instruments, including the Indentures relating to the Notes, the Term Loan Facility and the loan documents relating to the Working Capital Facility, could significantly limit the operating and financial flexibility of the Company. These factors could also limit the ability of the Company and its subsidiaries to take action in response to competitive pressures or adverse economic conditions. The Company currently is, and upon the consummation of the Note Offering and the incurrence of the Term Loans will be, in compliance with the restrictive covenants and tests contained in its debt instruments. After giving effect to the issuance of the Notes and the incurrence of the Term Loans, the Company's ratios of EBITDA to pro forma total interest expense and EBITDA to pro forma cash interest expense would have been 0.9:1 and 1.5:1 for the fiscal year ended December 26, 1993 and 1.6:1 and 2.6:1 for the six months ended June 26, 1994. The Company believes that internally generated funds, currently available cash resources, the net proceeds of the Note Offering, the Special Warrant Offering and the incurrence of the Term Loans, and amounts to be available to the Company and its subsidiaries under the Working Capital Facility will be sufficient to fund the anticipated capital and other expenditures (including expenses relating to the Modernization Project) of the Company and meet its fixed charge requirements for the foreseeable future, including through the completion of the Modernization Project. However, there can be no assurance that the amounts available from such sources will be sufficient for such purposes. The Company may be required to seek additional capital financing from a variety of potential sources, including additional bank financing and/or debt or equity securities offerings. No assurance can be given that such sources of funding will be available if required or, if available, will be on terms satisfactory to the Company. CYCLICALITY, COMPETITION, AND OTHER INDUSTRY FACTORS The U.S. steel industry is a cyclical business characterized by excess capacity and intense competition. In the first half of the 1980s, many steel producers sustained large losses which led to several major bankruptcies and restructurings. Factors such as production overcapacity, increased U.S. and international competition, high labor costs, inefficient plants and reduced levels of steel demand contributed to these losses. Between 1982 and 1993, U.S. steel producers reduced their raw steel production capacity by approximately 25%. In addition, in the late 1980s the U.S. steel industry experienced increased demand, lower levels of steel imports and increased efficiency through modernization of production facilities. As a result of these and other factors, industry profits reached record levels in 1988. However, in the latter half of 1989, steel prices and demand again began to decline, and a number of U.S. producers reported losses in 1990, 1991 and 1992 in a sluggish U.S. economic environment. Although many steel producers reported improved results in 1993 compared to 1992, and the first six months of 1994 compared with the same period in 1993, there can be no assurance that this recovery will continue or that there will be any future improvement in U.S. steel industry earnings. Competition among U.S. steelmakers is intense with respect to price, service and quality. Integrated steel producers have lost market share to mini-mills in recent years. Mini-mills are generally smaller volume steel producers that use ferrous scrap as their basic raw material and employ non-union workers. These mills have recently expanded their product lines from commodity type items to include larger-size structural products and flat-rolled products, including those made with new, continuous thin cast technologies. To date, mini-mills are the only U.S. producers to utilize these technologies. In addition, certain U.S. integrated steelmakers have gone through reorganizations under Chapter 11 of the U.S. Bankruptcy Code. Following their reorganizations, these companies generally have reduced costs and become more effective competitors. U.S. steel producers also have invested heavily in new plants and equipment that have enabled many companies to improve efficiency and increase productivity. Foreign competition, from time to time and product line by product line, has been a significant competitive factor for U.S. integrated steel producers. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against several other currencies. The Company believes that the attractiveness of the United States steel markets to certain foreign producers has been diminished somewhat during recent years by a substantial decline in the value of the United States dollar relative to these foreign currencies. However, foreign exchange rates are subject to substantial fluctuations, and there can be no assurance that this condition will continue to exist. Further, many foreign steel producers are controlled or subsidized by foreign governments whose decisions concerning production and exports may be influenced by political and economic policy considerations as well as by prevailing market conditions and profit opportunities. As a result, despite relatively low U.S. steel prices and narrow profit margins, many foreign producers have continued to ship steel products into the U.S. market. Acme Steel has experienced little foreign competition in recent years in the markets it serves. There can be no assurance, however, that foreign competition will not increase in the future, which could adversely affect the Company's operating results. Materials such as aluminum, composites, plastics, and ceramics compete as substitutes for steel in many of Acme Steel's markets. No assurance can be given that an increase in use of these or other product substitutes will not occur or, if such substitutions were to occur, that they would not have a material adverse effect on the Company. NEED TO MODERNIZE Over the past decade, the price of steel, adjusted for inflation, has fallen significantly. Although a significant portion of this decline is the result of worldwide steelmaking overcapacity, steel pricing is also influenced by low cost producers in the U.S. steel industry. Many of Acme Steel's competitors have implemented steelmaking technologies not utilized by Acme Steel. As a result, Acme Steel's costs to produce a ton of finished steel are substantially higher than those of certain of its competitors. The Company believes that foreign and U.S. steel producers will continue to invest heavily to replace aging or obsolete facilities and to achieve increased production efficiencies and improved product quality. These investments are expected to be made in various aspects of the manufacturing process, including continuous casting and other mill technologies. The Company believes that it must undertake the Modernization Project and make the significant capital investments required if Acme Steel is to achieve levels of cost, productivity and product quality already attained by certain of its competitors. MODERNIZATION AND EXPANSION PROJECT The Company believes the equipment selected for and design of the Modernization Project are appropriate and well conceived, but there can be no assurance that the potential benefits of the Modernization Project, including the anticipated increase in finished steel shipping capability, will actually be achieved or that sufficient demand will exist for the additional finished steel production. In particular, the estimated cost savings per ton expected to be realized from the Modernization Project are based on numerous assumptions including operation of Acme Steel's facilities at its full expanded capability of approximately 970,000 tons per year, which assumptions may not prove to be accurate. In the event that output is less than that which could be generated at full capacity, the actual cost savings per ton will likely be lower than anticipated. In addition, continuous thin slab casting is a relatively new technology, with the first continuous thin slab casting facilities having been constructed in 1989. At present, there are only two operating continuous thin slab casting facilities in North America with an estimated combined capacity of 3.8 million tons per year. Unlike Acme Steel's contemplated operation upon completion of the Modernization Project, the operator of these facilities uses ferrous scrap as its basic raw material and does not cast certain of the specialty steels and grades which Acme Steel intends to produce. There can be no assurance that the Company can successfully implement these aspects of the Modernization Project in the manner and for the purposes planned. Acme Steel has entered into an Engineering, Procurement and Construction Contract ("EPC Contract") with Raytheon Engineers & Constructors, Inc. ("Raytheon"), a wholly-owned subsidiary of Raytheon Company, pursuant to which Raytheon will assume responsibility for the timely and effective completion of the Modernization Project. Although the EPC Contract provides for liquidated damages, there can be no assurance that the amount of liquidated damages will be sufficient to cover the Company's damages in the event of a significant delay in the construction of the Modernization Project or an inability, for any reason, to complete successfully the Modernization Project. Furthermore, if the Modernization Project is not completed in a timely manner or for the amounts budgeted, or there were to be substantial, unexpected production interruptions or other start-up difficulties, the consolidated results of operations and competitive position of the Company and its subsidiaries could be materially adversely affected. In the event of any such difficulties, senior management may then have to devote substantial time to these matters which could adversely affect existing operations. See "Modernization and Expansion Project." POSSIBLE FLUCTUATIONS IN RAW MATERIAL AND ENERGY COSTS The Company's operations at its Acme Steel subsidiary are heavily dependent on the supply of various raw materials including iron ore pellets, coal and energy. Acme Steel is contractually obligated to purchase, at the higher of production cost or market price, its proportionate share of the iron ore produced at Wabush Mines, a joint venture project in which Acme Steel has an approximate 15.1% interest. See "Business--Raw Materials and Energy." In 1993 Acme Steel acquired approximately 56% of its iron ore pellet requirements from this venture. Production costs at Wabush Mines currently approximate market price; however, there can be no assurance that the mines' cost structure will not result in above world market prices in the future. The balance of Acme Steel's iron ore pellet needs and all of its coal and energy needs are obtained at market prices. Supply interruptions or cost increases, to the extent that Acme Steel could not pass on these costs to its customers, could adversely affect the future consolidated results of operations of the Company and its subsidiaries. ENVIRONMENTAL COMPLIANCE AND ASSOCIATED COSTS U.S. steel producers, including Acme Steel, are subject to stringent Federal, state and local environmental laws and regulations concerning, among other things, air emissions, waste water discharge, and solid and hazardous waste disposal. U.S. steel producers, including Acme Steel, have spent and can be expected to spend in the future, substantial amounts for compliance with these environmental laws and regulations. The costs of environmental compliance may place U.S. steel producers at a competitive disadvantage (1) to foreign steel producers, which may not be subject to environmental requirements as stringent as those in the United States and (2) to producers of materials that compete with steel, which may not be required to bear equivalent costs in producing their products. The Company, on a consolidated basis, has incurred substantial costs in complying with Federal, state and local environmental laws and regulations. The Company's capital expenditures related to environmental compliance were $6.6 million in 1991, $0.3 million in 1992 and $3.4 million in 1993. The Company currently estimates that capital expenditures for environmental compliance will be approximately $6 million and $7 million in 1994 and 1995, respectively. The Company believes that it is currently in substantial compliance with the various environmental regulations applicable to its businesses and, in particular, that its coke ovens currently are in compliance with Clean Air Act standards anticipated to be in effect through 2007. Nevertheless, there can be no assurance that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. The need to comply with even more stringent environmental laws and regulations could have a material adverse effect on the Company's financial condition and results of operations. See "Business--Environmental" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." CERTAIN INDEMNIFICATION ARRANGEMENTS In connection with the spinoff of Acme Steel from The Interlake Corporation ("Interlake") in 1986, Interlake entered into cross-indemnification agreements with Acme Steel relating to certain environmental, tax and other matters. To date, Interlake has met all of its obligations under such agreements. In the event that Interlake for any reason were unable to fulfill its obligations under such agreements, the Company could have significant increased future liabilities. See "Business--Other Legal Proceedings." SECURITY FOR THE NOTES The Notes will be senior obligations of the Company secured by a pledge of all of the capital stock of its direct subsidiaries. The Guarantee of the Notes and the Term Loans by Acme Steel will be secured by a first priority lien on substantially all of its existing and future real property and equipment, including the Modernization Project, and a pledge of all of the capital stock of its subsidiary. The Guarantee of the Notes and the Term Loans by Acme Packaging will be secured by a pledge of all of the capital stock of its subsidiaries. No appraisals of the Collateral have been prepared by or on behalf of the Company. The net book value of the Collateral (without taking into account cash on hand other than the net proceeds of the Note Offering and the Special Warrant Offering) will be substantially lower than the principal amount of the Notes offered hereby and the Term Loans. There can be no assurance that the proceeds of any sale of the Collateral pursuant to the Indentures and the related Security Documents following an acceleration after an Event of Default would not be substantially less than that which would be required to satisfy payments due on the Notes. By its nature, some or all of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the Collateral will be able to be sold in a short period of time, if at all. The right of the Collateral Agent under the Indentures (as the secured party under the various Security Documents) to foreclose upon and sell Collateral upon an acceleration after an Event of Default is likely to be significantly impaired by applicable bankruptcy laws if a bankruptcy proceeding were to be commenced by or against the Company, Acme Steel and/or Acme Packaging. Under applicable Federal bankruptcy laws, secured creditors are prohibited from foreclosing upon collateral held by a debtor in a bankruptcy case, or from disposing of collateral repossessed from such a debtor, without bankruptcy court approval. Moreover, applicable Federal bankruptcy laws generally permit a debtor to continue to retain and to use collateral, including cash collateral, even if the debtor is in default under the applicable debt instruments, provided that the secured creditor is given "adequate protection." The interpretation of the term "adequate protection" may vary according to the circumstances, but it is intended in general to protect the value of the secured creditor's interest in collateral. Because the term "adequate protection" is subject to varying interpretation and because of the broad discretionary powers of a bankruptcy court, it is impossible to predict (i) if payments under the Notes would be made following commencement of and during a bankruptcy case, (ii) whether or when the Collateral Agent could foreclose upon or sell the Collateral or (iii) whether or to what extent holders of any Notes would be compensated for any delay in payment or loss of value of Collateral securing the Notes under the doctrine of "adequate protection." Furthermore, in the event a bankruptcy court were to determine that the value of the Collateral securing the Notes is not sufficient to repay all amounts due on the Notes, the holders of the Notes would become holders of "undersecured claims." Applicable Federal bankruptcy laws do not permit the payment and/or accrual of interest, costs and attorney's fees for "undersecured claims" during a debtor's bankruptcy case. A portion of the Collateral securing Acme Steel's Guarantee of the Notes is comprised of real property. Real property pledged as security to a lender may be subject to known and unforeseen environmental risks. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), even a lender who does not foreclose on a property may be held liable, in certain limited circumstances, for the costs of remediating or preventing releases or threatened releases of hazardous substances at a mortgaged property. There may be similar risks under various state laws and common law theories. Such liability has seldom been imposed, and finding a lender liable generally has been based on the lender's having become sufficiently involved in the operations of the borrower so that its activities are deemed to constitute "participation in the management." This is the standard of liability set forth in CERCLA and elaborated on in a number of court decisions. A lender may also be considered to be a current owner of a property who can be held liable under CERCLA if the lender takes title to property by foreclosure, although certain courts have held that mere foreclosure on the borrower's property, in order to protect the lender's security interest, does not make the lender liable under CERCLA. The EPA promulgated a rule which would have allowed lenders to participate in work-out situations and foreclosure, and to exercise some control over the borrower's business following foreclosure, without risking liability under CERCLA as a current owner or operator. That rule was subsequently declared to be invalid by the Court of Appeals for the District of Columbia on the grounds that the rule-making was not within the EPA's statutory authority. While a number of recent court decisions appear to be consistent with the EPA's interpretation of CERCLA under the rule, the uncertain state of current law does not provide an assurance that lenders can avoid the risk of liability under CERCLA if they foreclose on properties or become involved in work-outs or similar situations that may entail some involvement in, or influence over, facility operations. Under the Indentures, the Trustees may, prior to taking certain actions and exercising certain remedies on behalf of the holders, request that holders of the Notes provide an indemnification against their costs, expenses and liabilities. It is possible that CERCLA (or analogous) cleanup costs could become a liability of the Trustees and cause a loss to any holders that provided an indemnification. In addition, holders may act directly rather than through a Trustee, in specified circumstances, in order to pursue a remedy under the Indentures. If holders exercise that right, they could be deemed to be lenders that are subject to the risks discussed above. See "Description of Notes--Security" for a more detailed description of the security provisions for the Notes. FRAUDULENT CONVEYANCE ISSUES Under applicable provisions of the Federal bankruptcy law and comparable provisions of state fraudulent transfer laws, if it were found that any Guarantor had incurred the indebtedness represented by its Guarantee with an intent to hinder, delay or defraud creditors or had received less than a reasonably equivalent value or fair consideration for such indebtedness and (i) was insolvent, (ii) was rendered insolvent by reason of such occurrence, (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iv) intended to incur or believed that it would incur debts beyond its ability to pay as such debts matured, the obligations of such Guarantor under its Guarantee could be avoided or claims in respect of such Guarantee could be subordinated to all other debts of such Guarantor. A legal challenge of a Guarantee on fraudulent conveyance grounds could, among other things, focus on the benefits, if any, realized by a Guarantor as a result of the issuance by the Company of the Notes. To the extent that a Guarantee were held to be unenforceable as a fraudulent conveyance or for any other reason, the holders of the Notes would cease to have any direct claim in respect of a Guarantor and would be solely creditors of the Company and any other Guarantors whose Guarantees were not avoided or held unenforceable. In the event a Guarantee were held to be subordinated, the claims of the holders of the Notes would be subordinated to claims of other creditors of such Guarantor. A substantial majority of the net proceeds from the sale of the Notes will be contributed to Acme Steel and the remainder of such proceeds will be used by the Company to repay certain of its existing indebtedness. Each Guarantor will agree, jointly and severally with the other Guarantors, to contribute to the obligations of any other Guarantor under a Guarantee of the Notes. Further the Guarantee of each Guarantor will provide that it is limited to an amount that would not render the Guarantor thereunder insolvent. The Company believes, therefore, that the Guarantors will receive equivalent value at the time the indebtedness is incurred under the Guarantees. In addition, the Company believes that none of the Guarantors (i) is or will be insolvent, (ii) is or will be engaged in a business or transaction for which its remaining assets constitute unreasonably small capital, or (iii) intends or will intend to incur debt beyond its ability to repay such debts as they mature. Since each of the components of the question of whether a Guarantee is a fraudulent conveyance is inherently fact based and fact specific, there can be no assurance that a court passing on such questions would agree with the Company. Neither counsel for the Company nor counsel for the Underwriter will express any opinion as to Federal or state laws relating to fraudulent transfers. ORIGINAL ISSUE DISCOUNT The Senior Secured Discount Notes will be issued at a substantial discount from their principal amount. Consequently, the purchasers of the Senior Secured Discount Notes generally will be required to include amounts in gross income for Federal income tax purposes prior to receipt of the cash payments to which the income is attributable. For a more detailed discussion of the Federal income tax consequences of the purchase, ownership and disposition of the Senior Secured Discount Notes. See "Certain Federal Income Tax Considerations Relating to an Investment in the Senior Secured Discount Notes."

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+RISK FACTORS Prospective purchasers should carefully consider the following investment considerations and risks, as well as the other information set forth in this Prospectus, before making a decision to invest in the Senior Notes. Distributions of Available Cash Pursuant to its governing partnership agreement (the "Partnership Agreement"), the Partnership is required to distribute, on a quarterly basis, 100% of its Available Cash to the Master Partnership and the General Partner. "Available Cash" is generally all of the cash receipts of the Partnership, adjusted for cash disbursements and net changes in reserves. See "Glossary of Terms," attached hereto as Appendix A. The Master Partnership in turn will distribute 100% of its Available Cash to its partners. Distributions by the Partnership will be subject to the covenant in the Indenture limiting restricted payments. Such covenant provides that no such distributions may be made unless, among other things, no default or event of default shall exist, the Partnership's pro forma fixed charge coverage ratio for the preceding four fiscal quarters shall be at least 2.25 to 1 and certain minimum targets for capital expenditures and expenditures for permitted acquisitions have been met. The fixed charge coverage ratio is defined as the ratio of earnings from continuing operations before income taxes, plus interest expense (including amortization of original issue discount) and depreciation and amortization (excluding amortization of prepaid cash expenses) to fixed charges. As of April 30, 1994, the Partnership's fixed charge coverage ratio would have been 3.3 to 1 on a pro forma basis after giving effect to the Transactions. See "Description of Senior Notes--Certain Covenants--Restricted Payments." The timing and amount of distributions by the Partnership could significantly reduce the cash available to the Partnership to meet its business needs and to pay principal, premium (if any) and interest on the Senior Notes. The General Partner will determine the amount and timing of such distributions and has broad discretion to establish and make additions to reserves of the Partnership for any proper purpose, including but not limited to reserves for the purpose of (i) complying with the terms of any agreement or obligation of the Partnership (including the establishment of reserves to fund the payment of interest and principal in the future), (ii) to provide for level distributions of cash notwithstanding the seasonality of the Partnership's business, and (iii) providing for future capital expenditures and other payments deemed by the General Partner to be necessary or advisable. Leverage Upon the consummation of the transactions contemplated by this Prospectus, the Partnership will be significantly leveraged and will have indebtedness that is substantial in relation to its equity. As of April 30, 1994, after giving pro forma effect to such transactions, the Partnership would have had an aggregate of $267.4 million of long-term indebtedness (excluding current maturities) and $144.5 million in equity, resulting in a debt to equity ratio of 1.9 to 1. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Partnership's leverage could have important consequences to investors in the Senior Notes. The Partnership's ability to make scheduled payments, to refinance its obligations with respect to its indebtedness or its ability to obtain additional financing in the future will depend on its financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond its control. The Partnership believes that it will have sufficient cash flow from operations and available borrowings under the Credit Facility to service its indebtedness, although the principal amount of the Senior Notes will likely need to be refinanced at maturity in whole or in part. However, a significant downturn in the propane industry or other development adversely affecting the Partnership's cash flow could materially impair the Partnership's ability to service its indebtedness. If the Partnership's cash flow and capital resources are insufficient to fund its debt service obligations, the Partnership may be forced to refinance all or a portion of its debt or sell assets. There can be no assurance that the Partnership would be able to refinance its existing indebtedness or sell assets on terms that are commercially reasonable. The Partnership's pro forma consolidated financial statements assume that the Partnership will issue $250 million of Senior Notes with a fixed interest rate of 9.75%. It is possible, however, that a portion of the Senior Notes, not anticipated to be in excess of $50 million, will bear interest at a floating rate. In such event, the Partnership would be subject to increases in the rate of interest which, if material, could adversely impact the Partnership's ability to make payments in respect of the Senior Notes. In order to mitigate the risk of such interest rate increases, the General Partner intends, if possible, to cause the Partnership to enter into appropriate interest rate protection arrangements with respect to all or a portion of the Senior Notes bearing interest at a floating rate. There can be no assurance, however, as to whether the Partnership will be able to enter into such arrangements or whether such arrangements will be on terms satisfactory to the Partnership. Limitations Imposed by Certain Indebtedness The credit agreement relating to the Credit Facility (the "Credit Agreement") and the Indenture are expected to contain a number of restrictive covenants limiting the Partnership from incurring other indebtedness, making certain restricted payments, entering into sale and leaseback transactions, incurring liens and engaging in transactions with affiliates. A failure by the Partnership to comply with the restrictions contained in the Credit Agreement, the Indenture or other agreements relating to the Partnership's indebtedness could result in a default thereunder, which in turn could cause such indebtedness (and, by reason of cross-default provisions, other indebtedness) to become immediately due and payable. There can be no assurance that such restrictions will not adversely affect the Partnership's ability to conduct its operations or finance its capital needs or impair the Partnership's ability to pursue attractive business and investment opportunities if such opportunities arise. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Senior Notes." Fraudulent Conveyance Considerations The incurrence by the Issuers of indebtedness such as the Senior Notes for the purposes described herein may be subject to review under relevant federal and state fraudulent conveyance laws if a bankruptcy case or a lawsuit (including in circumstances where bankruptcy is not involved) is commenced by or on behalf of unpaid creditors of the Issuers. Under these laws, if a court were to find that, at the time the Senior Notes were issued, (a) the Issuers either incurred indebtedness represented by the Senior Notes with the intent of hindering, delaying or defrauding creditors or received less than reasonably equivalent value or fair consideration for incurring such indebtedness and (b) the Issuers (i) were insolvent or were rendered insolvent by reason of such transaction, (ii) were engaged in a business or transaction for which the assets remaining with them constituted unreasonably small capital or (iii) intended to incur, or believed that they would incur, debts beyond their ability to pay such debts as they matured, such court may subordinate the Senior Notes to presently existing and future indebtedness of such entities, void the issuance of the Senior Notes and direct the repayment of any amounts paid thereunder to the Issuers or to a fund for the benefit of the Issuers' creditors or take other action detrimental to the Holders of the Senior Notes. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, an entity would be considered insolvent for purposes of the foregoing if the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets at a fair valuation, or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and matured. The Issuers believe they will receive equivalent value at the time the indebtedness represented by the Senior Notes is incurred. In addition, neither of the Issuers believes that it, as a result of the issuance of the Senior Notes, (i) will be insolvent or rendered insolvent under the foregoing standards, (ii) will be engaged in a business or transaction for which its remaining assets constitute unreasonably small capital or (iii) intends to incur or believes that it will incur, debts beyond its ability to pay such debts as they mature. These beliefs are based on the Company's operating history, the Issuers' net worth and management's analysis of internal cash flow projections and estimated values of assets and liabilities of the Issuers at the time of this Offering. There can be no assurance, however, that a court passing on these issues would make the same determination. Lack of Previous Public Market The Senior Notes will constitute a new issue of securities with no established trading market. The Issuers do not intend to list the Senior Notes on any national securities exchange or to seek the admission of the Senior Notes for quotation and trading in the Nasdaq National Market. The Underwriters have advised the Issuers that the Underwriters currently intend to make a market in the Senior Notes, but they are not obligated to do so and may discontinue any such market-making activities at any time without notice at their sole discretion. Accordingly, there can be no assurance that an active public market will develop or be sustained upon completion of the Offering or as to the liquidity of any such trading market. If such a market does not develop or is not maintained, the prices at which the Senior Notes trade, as well as the liquidity of the trading market for the Senior Notes, could be adversely affected. If such a market were to develop, the Senior Notes may trade at prices that are higher or lower than the initial offering price depending upon many factors, including, among others, prevailing interest rates, the Partnership's operating results, the market for similar securities and general economic and political conditions. Weather Conditions Affect the Demand For Propane National weather conditions can have a substantial impact on the demand for propane and, therefore, the results of operations of the Partnership. In particular, the demand for propane by residential customers is affected by weather, with peak sales typically occurring during the winter months. Average winter temperatures as measured by degree days across the Company's operating areas in fiscal 1991, 1992 and 1993 were warmer than historical standards, thus lowering demand for propane. Average winter temperatures as measured by degree days across the Company's operating areas in fiscal 1994 to date have been slightly colder than historical averages. There can be no assurance that average temperatures in future years will be close to the historical average. Agricultural demand is also affected by weather. Wet weather during harvest season causes an increase in propane used for crop drying and dry weather during the growing season causes an increase in propane used for irrigation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Retail Propane Industry is a Mature One The retail propane industry is a mature one, with only limited growth in total demand for the product foreseen (the exception being in the case of motor fuel applications, which is being driven by recent environmental legislation, but for which the opportunity cannot be estimated). Based on information available from the Energy Information Administration, the Company believes the overall demand for propane has remained relatively constant over the past several years, with year to year industry volumes being impacted primarily by weather patterns. Therefore, the Partnership's ability to grow within the industry is dependent on the success of its marketing efforts to acquire new customers and on the ability to acquire other retail distributors. The Partnership Will Be Subject To Pricing and Inventory Risk An important element of the Company's high retention of retail customers has been its ability to deliver propane during periods of extreme demand. To help insure this capability, the Partnership intends to continue engaging in the brokerage and trading of propane and other natural gas liquids historically performed by the Company. If the Partnership sustains material losses from its trading activities, payments in respect of the Senior Notes and the other indebtedness of the Partnership could be jeopardized. The Company has sought to minimize its trading risks through the enforcement of trading policies, which include total inventory limits and loss limits. The Partnership intends to continue these policies. Personnel responsible for trading activities have an average of over 10 years of trading experience with the General Partner. See "Business--Other Operations." In addition, depending on inventory and price outlooks, the Partnership may purchase and store propane or other natural gas liquids. This activity may subject the Partnership to losses if the prices of propane or such other natural gas liquids decline prior to their sale by the Partnership. The Partnership may be unable to pass rapid increases in the wholesale cost of propane on to its retail customers, reducing margins on retail sales. In the long term, however, margins generally have not been materially impacted by rapid increases in the wholesale cost of propane, as the Company has generally been able to eventually pass on increases to its retail customers. There can be no assurance as to whether the Partnership will be able to pass on such costs in the future. The Retail Propane Business Experiences Competition From Other Energy Sources and Within the Industry The Partnership will compete for customers against suppliers of natural gas, electricity and fuel oil. Because of the significant cost advantage of natural gas over propane, propane is generally not competitive with natural gas in those areas where natural gas is readily available. The expansion of the nation's natural gas distribution systems has resulted in the availability of natural gas in many areas that previously depended upon propane. Propane is generally less expensive to use than electricity for space heating, water heating and cooking and competes effectively with electricity in those parts of the country where propane is cheaper than electricity on an equivalent BTU basis. Although propane is similar to fuel oil in application, market demand and price, propane and fuel oil have generally developed their own distinct geographic markets. In addition, given the cost of conversion from fuel oil to propane, potential customers of propane generally will only switch from fuel oil if there is a significant price advantage with propane. Long-standing customer relationships are also typical to the retail propane industry. Retail propane customers generally lease their storage tanks from their suppliers. The lease terms and, in most states, certain fire safety regulations, restrict the refilling of a leased tank solely to the propane supplier that owns the tank. The cost and inconvenience of switching tanks minimizes a customers tendency to switch among suppliers of propane on the basis of minor variations in price. As a result, the Partnership may experience difficulty in acquiring new retail customers in areas where there are existing relationships between potential customers and other propane distributors. Partnership Operations are Subject to Operating Risks The Partnership's operations will be subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane. As a result, the Company is, and the Partnership will be, a defendant in various legal proceedings and litigation arising in the ordinary course of business. The Partnership will maintain insurance policies with insurers in such amounts and with such coverages and deductibles as the General Partner believes are reasonable and prudent. However, there can be no assurance that such insurance will be adequate to protect the Partnership from all material expenses related to potential future claims for personal and property damage or that such levels of insurance will be available in the future at economical prices. After taking into account the pending and threatened matters against the Company that will be assumed by the Partnership and the insurance coverage and reserves to be maintained by the Partnership, the General Partner is of the opinion that there are no known contingent claims or uninsured claims that are likely to have a material adverse effect on the results of operations or financial condition of the Partnership. See "Business--Litigation." The General Partner will neither guarantee nor indemnify the Partnership against any claims, whether known or unknown, or contingent liabilities. The occurrence of an event not fully covered by insurance, or the occurrence of a large number of claims that are self-insured, may have a material adverse effect on the results of operations or financial position of the Partnership. The Partnership May Not Be Successful in Making Acquisitions The Company has historically expanded its business through acquisitions. The Partnership intends to consider and evaluate opportunities for growth through acquisitions in its industry, although it currently has no material acquisitions under consideration. There can be no assurance that the Partnership will find attractive acquisition candidates in the future, or that the Partnership will be able to acquire such candidates on economically acceptable terms. Energy Efficiency and Technology Trends May Affect Demand For Propane Retail customers primarily use propane as a heating fuel. Increased technological advances in energy efficiency, including the development of more efficient heating devices, has slowed the growth of demand for propane by retail gas customers. The Partnership is unable to predict the effect that any technological advances in energy efficiency, conservation, energy generation or other devices might have on the Partnership's operations. The Partnership Will Be Dependent Upon Key Personnel of the General Partner The Company believes its success has been, and the Partnership's success will be, dependent to a significant extent upon the efforts and abilities of its senior management team, in particular James E. Ferrell, President and Chairman of the Board of the Company. The failure of the General Partner to retain Mr. Ferrell and other executive officers could adversely affect the Partnership's operations. Mr. Ferrell, who has been associated with the Company for nearly 30 years and who will indirectly own approximately 57.5% of the Partnership, has indicated to the Company that he intends to continue as chief executive officer of the General Partner. The General Partner and Its Affiliates May Have Conflicts of Interest with the Partnership Conflicts of interest may arise between the Partnership, on the one hand, and Ferrellgas and its affiliates, on the other hand. The directors and officers of Ferrellgas have fiduciary duties to manage Ferrellgas in a manner beneficial to the sole shareholder of Ferrellgas, Ferrell. At the same time, Ferrellgas, as general partner, has fiduciary duties to manage the Partnership in a manner beneficial to the Partnership. The duties of Ferrellgas, as general partner, to the Partnership therefore may conflict with the duties of the directors and officers of Ferrellgas to its sole shareholder. Such conflicts of interest might arise in the following situations, among others: (i) the Partnership will rely solely on employees of the General Partner and its affiliates, (ii) the Partnership will reimburse the General Partner and its affiliates for costs incurred in the Partnership's operations, (iii) the General Partner intends to limit, whenever possible, its liability under contractual arrangements of the Partnership, (iv) the contractual arrangements between the Partnership, on the one hand, and the General Partner and its affiliates, on the other hand, may not be the result of arms'-length negotiations (although the Indenture requires that all transactions between the Partnership and its affiliates must be on terms at least as favorable to the Partnership as those which could have been obtained on an arms'-length basis), (v) the General Partner may redeem the Common Units as provided in the Partnership Agreement provided that the Partnership meets certain financial tests and conditions set forth in the Indenture and (vi) the Partnership Agreement does not restrict the General Partner and its affiliates from engaging in activities that may be in competition with the Partnership, except that the General Partner and its affiliates may not engage in the retail sale of propane to end users in the continental United States. See "Description of Senior Notes--Certain Covenants--Affiliate Transactions" and "--Restricted Payments." The General Partner will have an audit committee consisting of independent members of its Board of Directors which will be able, at the General Partner's discretion or as required by the Indenture, to review matters involving potential conflicts of interest. The General Partner Will Manage and Operate the Partnership The General Partner will manage and operate the Partnership. The control exercised by the General Partner may make it more difficult for others to gain control or influence the activities of the Partnership.

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+RISK FACTORS Prospective purchasers should carefully consider the following investment considerations and risks, as well as the other information set forth in this Prospectus, before making a decision to invest in the Senior Notes. Distributions of Available Cash Pursuant to its governing partnership agreement (the "Partnership Agreement"), the Partnership is required to distribute, on a quarterly basis, 100% of its Available Cash to the Master Partnership and the General Partner. "Available Cash" is generally all of the cash receipts of the Partnership, adjusted for cash disbursements and net changes in reserves. See "Glossary of Terms," attached hereto as Appendix A. The Master Partnership in turn will distribute 100% of its Available Cash to its partners. Distributions by the Partnership will be subject to the covenant in the Indenture limiting restricted payments. Such covenant provides that no such distributions may be made unless, among other things, no default or event of default shall exist, the Partnership's pro forma fixed charge coverage ratio for the preceding four fiscal quarters shall be at least 2.25 to 1 and certain minimum targets for capital expenditures and expenditures for permitted acquisitions have been met. The fixed charge coverage ratio is defined as the ratio of earnings from continuing operations before income taxes, plus interest expense (including amortization of original issue discount) and depreciation and amortization (excluding amortization of prepaid cash expenses) to fixed charges. As of April 30, 1994, the Partnership's fixed charge coverage ratio would have been 3.3 to 1 on a pro forma basis after giving effect to the Transactions. See "Description of Senior Notes--Certain Covenants--Restricted Payments." The timing and amount of distributions by the Partnership could significantly reduce the cash available to the Partnership to meet its business needs and to pay principal, premium (if any) and interest on the Senior Notes. The General Partner will determine the amount and timing of such distributions and has broad discretion to establish and make additions to reserves of the Partnership for any proper purpose, including but not limited to reserves for the purpose of (i) complying with the terms of any agreement or obligation of the Partnership (including the establishment of reserves to fund the payment of interest and principal in the future), (ii) to provide for level distributions of cash notwithstanding the seasonality of the Partnership's business, and (iii) providing for future capital expenditures and other payments deemed by the General Partner to be necessary or advisable. Leverage Upon the consummation of the transactions contemplated by this Prospectus, the Partnership will be significantly leveraged and will have indebtedness that is substantial in relation to its equity. As of April 30, 1994, after giving pro forma effect to such transactions, the Partnership would have had an aggregate of $267.4 million of long-term indebtedness (excluding current maturities) and $144.5 million in equity, resulting in a debt to equity ratio of 1.9 to 1. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Partnership's leverage could have important consequences to investors in the Senior Notes. The Partnership's ability to make scheduled payments, to refinance its obligations with respect to its indebtedness or its ability to obtain additional financing in the future will depend on its financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond its control. The Partnership believes that it will have sufficient cash flow from operations and available borrowings under the Credit Facility to service its indebtedness, although the principal amount of the Senior Notes will likely need to be refinanced at maturity in whole or in part. However, a significant downturn in the propane industry or other development adversely affecting the Partnership's cash flow could materially impair the Partnership's ability to service its indebtedness. If the Partnership's cash flow and capital resources are insufficient to fund its debt service obligations, the Partnership may be forced to refinance all or a portion of its debt or sell assets. There can be no assurance that the Partnership would be able to refinance its existing indebtedness or sell assets on terms that are commercially reasonable. The Partnership's pro forma consolidated financial statements assume that the Partnership will issue $250 million of Senior Notes with a fixed interest rate of 9.75%. It is possible, however, that a portion of the Senior Notes, not anticipated to be in excess of $50 million, will bear interest at a floating rate. In such event, the Partnership would be subject to increases in the rate of interest which, if material, could adversely impact the Partnership's ability to make payments in respect of the Senior Notes. In order to mitigate the risk of such interest rate increases, the General Partner intends, if possible, to cause the Partnership to enter into appropriate interest rate protection arrangements with respect to all or a portion of the Senior Notes bearing interest at a floating rate. There can be no assurance, however, as to whether the Partnership will be able to enter into such arrangements or whether such arrangements will be on terms satisfactory to the Partnership. Limitations Imposed by Certain Indebtedness The credit agreement relating to the Credit Facility (the "Credit Agreement") and the Indenture are expected to contain a number of restrictive covenants limiting the Partnership from incurring other indebtedness, making certain restricted payments, entering into sale and leaseback transactions, incurring liens and engaging in transactions with affiliates. A failure by the Partnership to comply with the restrictions contained in the Credit Agreement, the Indenture or other agreements relating to the Partnership's indebtedness could result in a default thereunder, which in turn could cause such indebtedness (and, by reason of cross-default provisions, other indebtedness) to become immediately due and payable. There can be no assurance that such restrictions will not adversely affect the Partnership's ability to conduct its operations or finance its capital needs or impair the Partnership's ability to pursue attractive business and investment opportunities if such opportunities arise. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Senior Notes." Fraudulent Conveyance Considerations The incurrence by the Issuers of indebtedness such as the Senior Notes for the purposes described herein may be subject to review under relevant federal and state fraudulent conveyance laws if a bankruptcy case or a lawsuit (including in circumstances where bankruptcy is not involved) is commenced by or on behalf of unpaid creditors of the Issuers. Under these laws, if a court were to find that, at the time the Senior Notes were issued, (a) the Issuers either incurred indebtedness represented by the Senior Notes with the intent of hindering, delaying or defrauding creditors or received less than reasonably equivalent value or fair consideration for incurring such indebtedness and (b) the Issuers (i) were insolvent or were rendered insolvent by reason of such transaction, (ii) were engaged in a business or transaction for which the assets remaining with them constituted unreasonably small capital or (iii) intended to incur, or believed that they would incur, debts beyond their ability to pay such debts as they matured, such court may subordinate the Senior Notes to presently existing and future indebtedness of such entities, void the issuance of the Senior Notes and direct the repayment of any amounts paid thereunder to the Issuers or to a fund for the benefit of the Issuers' creditors or take other action detrimental to the Holders of the Senior Notes. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, an entity would be considered insolvent for purposes of the foregoing if the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets at a fair valuation, or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and matured. The Issuers believe they will receive equivalent value at the time the indebtedness represented by the Senior Notes is incurred. In addition, neither of the Issuers believes that it, as a result of the issuance of the Senior Notes, (i) will be insolvent or rendered insolvent under the foregoing standards, (ii) will be engaged in a business or transaction for which its remaining assets constitute unreasonably small capital or (iii) intends to incur or believes that it will incur, debts beyond its ability to pay such debts as they mature. These beliefs are based on the Company's operating history, the Issuers' net worth and management's analysis of internal cash flow projections and estimated values of assets and liabilities of the Issuers at the time of this Offering. There can be no assurance, however, that a court passing on these issues would make the same determination. Lack of Previous Public Market The Senior Notes will constitute a new issue of securities with no established trading market. The Issuers do not intend to list the Senior Notes on any national securities exchange or to seek the admission of the Senior Notes for quotation and trading in the Nasdaq National Market. The Underwriters have advised the Issuers that the Underwriters currently intend to make a market in the Senior Notes, but they are not obligated to do so and may discontinue any such market-making activities at any time without notice at their sole discretion. Accordingly, there can be no assurance that an active public market will develop or be sustained upon completion of the Offering or as to the liquidity of any such trading market. If such a market does not develop or is not maintained, the prices at which the Senior Notes trade, as well as the liquidity of the trading market for the Senior Notes, could be adversely affected. If such a market were to develop, the Senior Notes may trade at prices that are higher or lower than the initial offering price depending upon many factors, including, among others, prevailing interest rates, the Partnership's operating results, the market for similar securities and general economic and political conditions. Weather Conditions Affect the Demand For Propane National weather conditions can have a substantial impact on the demand for propane and, therefore, the results of operations of the Partnership. In particular, the demand for propane by residential customers is affected by weather, with peak sales typically occurring during the winter months. Average winter temperatures as measured by degree days across the Company's operating areas in fiscal 1991, 1992 and 1993 were warmer than historical standards, thus lowering demand for propane. Average winter temperatures as measured by degree days across the Company's operating areas in fiscal 1994 to date have been slightly colder than historical averages. There can be no assurance that average temperatures in future years will be close to the historical average. Agricultural demand is also affected by weather. Wet weather during harvest season causes an increase in propane used for crop drying and dry weather during the growing season causes an increase in propane used for irrigation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Retail Propane Industry is a Mature One The retail propane industry is a mature one, with only limited growth in total demand for the product foreseen (the exception being in the case of motor fuel applications, which is being driven by recent environmental legislation, but for which the opportunity cannot be estimated). Based on information available from the Energy Information Administration, the Company believes the overall demand for propane has remained relatively constant over the past several years, with year to year industry volumes being impacted primarily by weather patterns. Therefore, the Partnership's ability to grow within the industry is dependent on the success of its marketing efforts to acquire new customers and on the ability to acquire other retail distributors. The Partnership Will Be Subject To Pricing and Inventory Risk An important element of the Company's high retention of retail customers has been its ability to deliver propane during periods of extreme demand. To help insure this capability, the Partnership intends to continue engaging in the brokerage and trading of propane and other natural gas liquids historically performed by the Company. If the Partnership sustains material losses from its trading activities, payments in respect of the Senior Notes and the other indebtedness of the Partnership could be jeopardized. The Company has sought to minimize its trading risks through the enforcement of trading policies, which include total inventory limits and loss limits. The Partnership intends to continue these policies. Personnel responsible for trading activities have an average of over 10 years of trading experience with the General Partner. See "Business--Other Operations." In addition, depending on inventory and price outlooks, the Partnership may purchase and store propane or other natural gas liquids. This activity may subject the Partnership to losses if the prices of propane or such other natural gas liquids decline prior to their sale by the Partnership. The Partnership may be unable to pass rapid increases in the wholesale cost of propane on to its retail customers, reducing margins on retail sales. In the long term, however, margins generally have not been materially impacted by rapid increases in the wholesale cost of propane, as the Company has generally been able to eventually pass on increases to its retail customers. There can be no assurance as to whether the Partnership will be able to pass on such costs in the future. The Retail Propane Business Experiences Competition From Other Energy Sources and Within the Industry The Partnership will compete for customers against suppliers of natural gas, electricity and fuel oil. Because of the significant cost advantage of natural gas over propane, propane is generally not competitive with natural gas in those areas where natural gas is readily available. The expansion of the nation's natural gas distribution systems has resulted in the availability of natural gas in many areas that previously depended upon propane. Propane is generally less expensive to use than electricity for space heating, water heating and cooking and competes effectively with electricity in those parts of the country where propane is cheaper than electricity on an equivalent BTU basis. Although propane is similar to fuel oil in application, market demand and price, propane and fuel oil have generally developed their own distinct geographic markets. In addition, given the cost of conversion from fuel oil to propane, potential customers of propane generally will only switch from fuel oil if there is a significant price advantage with propane. Long-standing customer relationships are also typical to the retail propane industry. Retail propane customers generally lease their storage tanks from their suppliers. The lease terms and, in most states, certain fire safety regulations, restrict the refilling of a leased tank solely to the propane supplier that owns the tank. The cost and inconvenience of switching tanks minimizes a customers tendency to switch among suppliers of propane on the basis of minor variations in price. As a result, the Partnership may experience difficulty in acquiring new retail customers in areas where there are existing relationships between potential customers and other propane distributors. Partnership Operations are Subject to Operating Risks The Partnership's operations will be subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane. As a result, the Company is, and the Partnership will be, a defendant in various legal proceedings and litigation arising in the ordinary course of business. The Partnership will maintain insurance policies with insurers in such amounts and with such coverages and deductibles as the General Partner believes are reasonable and prudent. However, there can be no assurance that such insurance will be adequate to protect the Partnership from all material expenses related to potential future claims for personal and property damage or that such levels of insurance will be available in the future at economical prices. After taking into account the pending and threatened matters against the Company that will be assumed by the Partnership and the insurance coverage and reserves to be maintained by the Partnership, the General Partner is of the opinion that there are no known contingent claims or uninsured claims that are likely to have a material adverse effect on the results of operations or financial condition of the Partnership. See "Business--Litigation." The General Partner will neither guarantee nor indemnify the Partnership against any claims, whether known or unknown, or contingent liabilities. The occurrence of an event not fully covered by insurance, or the occurrence of a large number of claims that are self-insured, may have a material adverse effect on the results of operations or financial position of the Partnership. The Partnership May Not Be Successful in Making Acquisitions The Company has historically expanded its business through acquisitions. The Partnership intends to consider and evaluate opportunities for growth through acquisitions in its industry, although it currently has no material acquisitions under consideration. There can be no assurance that the Partnership will find attractive acquisition candidates in the future, or that the Partnership will be able to acquire such candidates on economically acceptable terms. Energy Efficiency and Technology Trends May Affect Demand For Propane Retail customers primarily use propane as a heating fuel. Increased technological advances in energy efficiency, including the development of more efficient heating devices, has slowed the growth of demand for propane by retail gas customers. The Partnership is unable to predict the effect that any technological advances in energy efficiency, conservation, energy generation or other devices might have on the Partnership's operations. The Partnership Will Be Dependent Upon Key Personnel of the General Partner The Company believes its success has been, and the Partnership's success will be, dependent to a significant extent upon the efforts and abilities of its senior management team, in particular James E. Ferrell, President and Chairman of the Board of the Company. The failure of the General Partner to retain Mr. Ferrell and other executive officers could adversely affect the Partnership's operations. Mr. Ferrell, who has been associated with the Company for nearly 30 years and who will indirectly own approximately 57.5% of the Partnership, has indicated to the Company that he intends to continue as chief executive officer of the General Partner. The General Partner and Its Affiliates May Have Conflicts of Interest with the Partnership Conflicts of interest may arise between the Partnership, on the one hand, and Ferrellgas and its affiliates, on the other hand. The directors and officers of Ferrellgas have fiduciary duties to manage Ferrellgas in a manner beneficial to the sole shareholder of Ferrellgas, Ferrell. At the same time, Ferrellgas, as general partner, has fiduciary duties to manage the Partnership in a manner beneficial to the Partnership. The duties of Ferrellgas, as general partner, to the Partnership therefore may conflict with the duties of the directors and officers of Ferrellgas to its sole shareholder. Such conflicts of interest might arise in the following situations, among others: (i) the Partnership will rely solely on employees of the General Partner and its affiliates, (ii) the Partnership will reimburse the General Partner and its affiliates for costs incurred in the Partnership's operations, (iii) the General Partner intends to limit, whenever possible, its liability under contractual arrangements of the Partnership, (iv) the contractual arrangements between the Partnership, on the one hand, and the General Partner and its affiliates, on the other hand, may not be the result of arms'-length negotiations (although the Indenture requires that all transactions between the Partnership and its affiliates must be on terms at least as favorable to the Partnership as those which could have been obtained on an arms'-length basis), (v) the General Partner may redeem the Common Units as provided in the Partnership Agreement provided that the Partnership meets certain financial tests and conditions set forth in the Indenture and (vi) the Partnership Agreement does not restrict the General Partner and its affiliates from engaging in activities that may be in competition with the Partnership, except that the General Partner and its affiliates may not engage in the retail sale of propane to end users in the continental United States. See "Description of Senior Notes--Certain Covenants--Affiliate Transactions" and "--Restricted Payments." The General Partner will have an audit committee consisting of independent members of its Board of Directors which will be able, at the General Partner's discretion or as required by the Indenture, to review matters involving potential conflicts of interest. The General Partner Will Manage and Operate the Partnership The General Partner will manage and operate the Partnership. The control exercised by the General Partner may make it more difficult for others to gain control or influence the activities of the Partnership.

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+RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE PURCHASERS OF THE UNITS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING AN INVESTMENT IN THE UNITS. HIGH LEVERAGE AND ABILITY TO SERVICE DEBT As of March 31, 1994, on a pro forma basis after giving effect to the application of the proceeds of this Offering as set forth in "Use of Proceeds," and the Transaction, the Company would have had approximately $107.2 million aggregate outstanding principal amount (in the case of the Senior Secured Notes, such amount being the accreted value) of indebtedness on a consolidated basis, and a stockholders' deficit of approximately $27.8 million. See "Capitalization." On a pro forma basis, after giving effect to the application of the proceeds of this Offering and the Transaction, earnings would have been inadequate to cover fixed charges by $4.4 million for fiscal year 1993, $2.2 million for the nine months ended March 31, 1994 and by $4.4 million for the twelve months ended March 31, 1994, resulting in the reporting of losses of $2.7 million and $2.4 million, respectively, for the fiscal year ended June 30, 1993 and the twelve months ended March 31, 1994. The Company had income of $2,000 on a pro forma basis for the nine months ended March 31, 1993. On a historical basis, the Company reported income of $2.2 million, $5.8 million and $2.1 million for the fiscal year ended June 30, 1993, and the nine and twelve months ended March 31, 1994, respectively. See "Capitalization"; "Selected Consolidated Financial and Other Data for the Company Prior to the Transaction;" and "Pro Forma Consolidated Financial and Other Data." The Company expects earnings to be inadequate to cover fixed charges for fiscal year 1994, resulting in the reporting of a loss for that period. The Company's high degree of leverage will make it vulnerable to adverse changes in the weather and may limit its ability to respond to market conditions, to capitalize on business opportunities, and to meet its contractual and financial obligations. Fluctuations in interest rates will affect the Company's financial condition inasmuch as the credit facility the Company will enter into simultaneously with this Offering (the "New Credit Facility") will bear interest at a floating rate. The Company will be required to use a significant portion of its cash flow from operations to meet its debt service obligations, which through fiscal year 1997 are expected to consist primarily of interest, including interest on the Senior Secured Notes. On a pro forma basis, after giving effect to the Offering and the Transaction, debt service obligations (which consist of interest expense and mortgage principal payments) would have been $10.4 million for the fiscal year ended June 30, 1993 and $7.5 million for the nine months ended March 31, 1994, and earnings before interest, taxes, depreciation and amortization (EBITDA) would have been $17.4 million and $16.3 million, respectively. After meeting its debt service obligations, operating cash flow for the Company on a pro forma basis would have been approximately $2.3 million and approximately $7.8 million respectively for these periods. The ability of the Company to meet its debt service obligations, including the increase in the cash interest rate on the Senior Secured Notes to % in fiscal year 1999, and to reduce its total debt, will be dependent upon the future performance of the Company and its subsidiaries, which, in turn, will be subject to general economic conditions and to financial, business, weather, and other factors, including factors beyond the Company's control. The Company believes that, based on current levels of operations and assuming winter weather that is not substantially warmer in the various regions in which the Company operates than the historical average of winter temperatures for these regions, it will be able to fund these debt service obligations from funds generated from operations, proceeds of the sales of service centers pursuant to the Company's consolidation strategy and, if necessary, funds available under the New Credit Facility. If the Company and its subsidiaries are unable to comply with the terms of their debt agreements and fail to generate sufficient cash flow from operations in the future, they may be required to refinance all or a portion of their existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained, particularly in view of the Company's anticipated high levels of debt, the fact that a significant portion of the Company's consolidated current assets will be given as collateral to secure indebtedness under the New Credit Facility and all of the capital stock of the Company's present and future subsidiaries will be pledged to secure the Senior Secured Notes, and the debt incurrence restrictions under existing debt agreements. If no such refinancing or additional financing were available, the Company could be forced to default on its respective debt obligations and, as an ultimate remedy, seek protection under the federal bankruptcy laws. RESTRICTIONS IN FINANCING AGREEMENTS The Indenture contains provisions that will limit, among other things, (a) the ability of the Company and its subsidiaries to incur additional indebtedness, (b) certain restricted payments and investments, (c) the sale and issuance of capital stock by subsidiaries, (d) dividend and other payments, (e) transactions with affiliates, (f) the creation of liens, (g) the types of mergers, consolidations, or asset sales in which the Company may participate, and (h) subsidiary investments. The Indenture also contains provisions which require the Company, in the event of a Change in Control, to make an offer to purchase the Senior Secured Notes. A Change in Control is defined in the Indenture to include: (i) the acquisition of over 30% of the voting shares of the Company in certain circumstances; (ii) certain changes in the Board of Directors of the Company; (iii) a sale of all or substantially all of the assets of the Company; (iv) a reduction in the percentage of voting shares of the Company held by certain members of management below 50%; or (v) the failure of the Board of Directors to have at least two independent members, to have an audit committee consisting solely of independent members or to have fewer than eight members. See "Description of the Senior Secured Notes -- Certain Definitions (Change of Control)." There can be no assurance that the Company will have the financial resources necessary to purchase the Senior Secured Notes upon a Change in Control. See "Description of the Senior Secured Notes -- Covenants." The New Credit Facility will contain provisions similar to the provisions in the Indenture, as well as certain financial maintenance tests. Any failure of the Company to comply with these or other covenants contained in these agreements could result in a default thereunder, which, in turn, could cause such indebtedness (and by reason of cross-default provisions, the Senior Secured Notes) to be declared immediately due and payable. The ability of the Company to comply with these provisions may be affected by events beyond its control. See "Description of Other Indebtedness -- New Credit Facility." EFFECTIVE RANKING OF SENIOR SECURED NOTES The Senior Secured Notes will be senior secured obligations of the Company and will rank PARI PASSU with all other existing and future senior indebtedness of the Company. Pursuant to the Indenture, the Company may incur up to $15.0 million of senior secured indebtedness under the New Credit Facility and may, subject to certain limitations, incur other secured indebtedness. In the event of a bankruptcy, liquidation or similar proceeding affecting the Company, the other secured creditors of the Company would be entitled to repayment in full from the proceeds of any collateral subject to their security interests before any payment therefrom could be made to holders of the Senior Secured Notes. See "Description of Senior Secured Notes -- General" and "Description of Other Indebtedness." The Company is a holding company that conducts its operations through its subsidiaries (the vast majority of which are retail service centers) and has no material assets other than its interests in its subsidiaries. As a result of the Company's holding company structure, except to the extent that the Senior Secured Notes (and the Subsidiary Guarantees) constitute recognized creditor claims against the assets and earnings of the Company's subsidiaries, claims of creditors of the Company's subsidiaries (including lenders under the New Credit Facility which will also be guaranteed by subsidiaries of the Company) will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the Senior Secured Notes, even though such subsidiary obligations do not constitute senior indebtedness. On a pro forma basis as of March 31, 1994, after giving effect to the application of the proceeds of the Offering and the Transaction, the obligations of the Company's subsidiaries, other than their respective guarantees of Empire Gas' obligations under the Senior Secured Notes and the New Credit Facility, would have consisted of total payables of approximately $530,000 including trade payables, accrued expenses and taxes payable. The New Credit Facility and the Indenture will restrict the subsidiaries' ability to incur additional indebtedness other than in limited circumstances, including to fund acquisitions. See "Description of the Senior Secured Notes." SECURITY FOR THE SENIOR SECURED NOTES The Senior Secured Notes will be secured by a pledge of all of the capital stock of the Company's present and future subsidiaries. Currently there is no market for such stock. There can be no assurance that the proceeds from the sale or sales of all such collateral would be sufficient to satisfy the amounts due on the Senior Secured Notes in the event of a default. If such proceeds are not sufficient to repay all such amounts due on the Senior Secured Notes, then Holders of the Senior Secured Notes (to the extent not repaid from the proceeds of the sale of the collateral) would have only an unsecured claim against the Company's remaining assets (together with a claim against the Subsidiary Guarantors pursuant to the Subsidiary Guarantees). In addition, the ability of the Holders of the Senior Secured Notes to rely upon the collateral (or upon the Subsidiary Guarantees) for fulfillment of the Company's obligations under the Indenture may be subject to certain bankruptcy law limitations in the event of a bankruptcy. PAYMENTS DUE ON INDEBTEDNESS PRIOR TO MATURITY OF SENIOR SECURED NOTES The Company intends to refinance or replace some portion of its New Credit Facility prior to its maturity on or about July 1997. There can be no assurance that any such refinancing will be possible, or that any additional financing in the future can be obtained, particularly in view of the Company's anticipated high levels of debt, and the restrictions on the Company's ability to incur additional debt under the New Credit Facility and the Indenture. If no such refinancing or additional financing is available or possible, as the case may be, the Company could be forced to default on its debt obligations and, as an ultimate remedy, seek protection under the federal bankruptcy laws. TAX CONSEQUENCES OF THE OFFERING The Senior Secured Notes will be issued at a substantial discount from their principal amount. Consequently, purchasers of Units generally will be required to include amounts in gross income for Federal income tax purposes in advance of their receipt of the cash payments to which the income is attributable. If the Senior Secured Notes are "applicable high yield discount obligations," the Company's federal income tax deductions with respect to the original issue discount on the Senior Secured Notes will be deferred until the Company makes the related payments and possibly, in part, disallowed. See "Certain Federal Income Tax Considerations -- Certain Federal Income Tax Consequences to the Company and to Corporate Holders." BANKRUPTCY CONSIDERATIONS If a bankruptcy case is commenced by or against the Company under the Bankruptcy Code after the issuance of the Senior Secured Notes, the claim of a holder of Senior Secured Notes may be limited to an amount equal to the sum of (i) the initial public offering price of the Senior Secured Notes (which may exclude amounts attributable to the value of the Warrants) and (ii) that portion of original issue discount which is not deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code. Any original issue discount that was not amortized as of the date of any such bankruptcy filing would constitute "unmatured interest." WEATHER Weather conditions have a substantial impact on the demand for propane, particularly by retail customers, with peak sales typically occurring during the winter months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Warmer than normal winter weather in fiscal years 1991 and 1992 had a material adverse effect on the Company's operating income in each of those years. Warmer than normal weather in the future could have a material adverse effect on the Company's operating income and could affect its ability to fulfill its debt service obligations. While the fiscal year 1993 winter was a nearly normal winter, there can be no assurance that average temperatures in future years will be closer to the historical average. PROPANE COST VOLATILITY The cost of propane purchased by the Company can fluctuate dramatically over a short period of time due to a variety of factors, including severe cold weather and product transportation difficulties. In general, the Company's supply contracts permit its suppliers to charge posted prices at the time of delivery, less any negotiated discount. The Company has generally been able to pass any cost increases on to its customers; however, there can be no assurance that the Company will be able to pass on such cost increases in the future. COMPETITION Empire Gas encounters competition from a number of other propane distributors in each geographic region in which it operates and competes for customers against suppliers of other energy sources. For residential and commercial customers, Empire Gas competes primarily with suppliers of electricity and propane. The Company currently enjoys, and historically has enjoyed, a competitive advantage over suppliers of electricity because of the higher cost of electricity. The Company believes that fuel oil does not present a significant competitive threat in the Company's primary service areas because: (i) propane is a residue-free, cleaner energy source, (ii) environmental concerns make fuel oil relatively unattractive, and (iii) fuel oil appliances are not as efficient as propane appliances. Empire Gas generally does not attempt to sell propane in areas served by natural gas distribution systems, except sales for specialized industrial applications and for motor fuel, because the price per equivalent energy unit of propane is, and has historically been, higher than that of natural gas. To use natural gas, however, a retail customer must be connected to a distribution system provided by a local utility. Because of the costs involved in building or connecting to a natural gas distribution system, natural gas is not expected to create significant competition for the Company in areas that are not currently served by natural gas distribution systems. CONSERVATION AND IMPROVED EFFICIENCY OF GAS APPLIANCES Retail customers primarily use propane for heating, water heating, and cooking. Conservation measures or technological advances, including the development of more efficient gas appliances, could slow the growth of demand for propane by retail propane customers. The Company believes that decreases in oil and gas prices in recent years have decreased the incentive to conserve and that the gas appliances used today are already operating at high levels of efficiency. The Company cannot predict the impact of future conservation measures. Nor is the Company able to predict the effect that any technological advances might have on the Company's operations. OPERATING RISKS The Company's propane operations are subject to all operating hazards and risks normally incident to handling, storing and transporting combustible liquids, such as the risk of personal injury and property damage caused by fire. Empire Gas maintains insurance policies with insurers in such amounts and with such coverages and deductibles as management of the Company believes is reasonable and prudent. Empire Gas' current automobile liability policy provides coverage for losses of up to $101.0 million per occurrence with a $500,000 deductible per occurrence. Empire Gas' general liability policy has a $500,000 deductible per occurrence (subject to an aggregate deductible of $1.0 million per policy period) with total coverage of $101.0 million. Current workers compensation coverage also has a $500,000 deductible per incident. Current liability insurance coverage substantially exceeds any liability Empire Gas has previously incurred, though the $500,000 deductible on each of the policies means that the Company is effectively self-insured for liability up to these deductibles. The occurrence of an event not fully covered by insurance could have a material adverse effect on the Company's financial condition and results. See "Business of the Company -- Propane Operations -- Risks of Business." REORGANIZATION OF THE COMPANY Prior to the Offering, the Company consisted of 284 retail outlets operating in 27 states. As a result of the Transaction, the number of retail outlets will be reduced to 158 operating in 20 states (resulting in a decrease of approximately 40% based on gallons sold during the fiscal year ended June 30, 1993). In addition, new management of the Company after the Offering intends to pursue a strategy of acquisitions and start-ups, expansion of the Company's existing residential customer base, geographic rationalization and reduction of operating expenses, which differs in some regards from the strategy of current management. See "Business -- Business Strategy." The operations of the Company after the Offering will therefore differ from the operations prior to the Offering in terms of the size, geographical scope, management and leverage of the Company and there is no assurance that new management's business strategy will be carried out effectively. Accordingly, operations of the Company prior to the Offering are not indicative of expected operations of the Company after the Offering. POTENTIAL ACQUISITIONS AND DEVELOPMENT OF NEW RETAIL SERVICE CENTERS The Company intends to consider and evaluate opportunities for growth in its industry through acquisitions and the development of new retail propane service centers. While the Company recently completed an acquisition of one retail service center in Colorado, has signed an agreement to purchase a small retail propane company in Missouri, and will complete the Acquisition contemporaneously with this Offering, there can be no assurance that the Company will continue to find attractive acquisition opportunities, or to the extent such opportunities or opportunities to develop new retail service centers are identified, that the Company will be able to consummate the acquisitions or develop such centers or will be able to obtain financing for any such acquisitions or projects. In addition, the Company's ability to undertake acquisitions will be limited in certain geographic areas by the non-competition agreement (the "Non-Competition Agreement") entered into by the Company and Empire Energy Corporation ("Energy"), whose stock will be transferred to Mr. Plaster and certain other departing officers as part of the Transaction. Subject to an exception for multi-state acquisitions, the Non-Competition Agreement restricts the Company from making acquisitions in seven states (Alabama, Florida, Georgia, Indiana, Kentucky, Mississippi and Tennessee) and certain territories in three states (southeastern Missouri, northern Arkansas and an area within a 50-mile radius of an existing Energy operation in Illinois) (the "Energy Territories") for a period of three years from the date the Stock Purchase is consummated (the "Effective Date"). The Non-Competition Agreement also restricts the Company from starting service centers (other than through acquisitions) in western Virginia and western West Virginia. The Non-Competition Agreement also requires the Company not to disclose secret information it may have regarding Energy, not to solicit Energy customers or employees, and to grant Energy an option to purchase from the Company (on terms substantially equivalent to the terms on which the Company acquired the business) any business the Company acquires in violation of the Non-Competition Agreement. The same restrictions apply to Energy under the Non-Competition Agreement. See "The Transaction" and "Certain Relationships and Related Transactions -- The Transaction." No assurance can be given as to the extent to which acquisitions or new retail service centers will contribute to the Company's cash flows or results of operations. DEPENDENCE ON CONTROLLING SHAREHOLDER AND CONFLICT OF INTERESTS Upon consummation of the Transaction, Empire Gas will be dependent on the efforts of Paul S. Lindsey, Jr. who will serve as the Company's Chief Executive Officer, President, and Chairman of the Board. Mr. Lindsey and his wife, Kristin L. Lindsey, will hold approximately 96% of the Company's Common Stock and generally will be able to control the Company's operations. Although the Company will purchase a key man life insurance policy in the amount of $30 million, the loss of Mr. Lindsey's services could have a material adverse effect on the business of the Company. As the holder of a majority of the Company's outstanding Common Stock, Mr. Lindsey may have interests different from those of holders of the Units. In case of such a conflict of interests, there can be no assurance that the Company will take actions in the best interests of the holders of the Units. FRAUDULENT TRANSFER CONSIDERATIONS ASSOCIATED WITH THE STOCK REPURCHASE AND DEBT REFINANCING Under fraudulent transfer provisions of the Bankruptcy Code or comparable provisions of state fraudulent transfer law, a transfer of property made within a year before a bankruptcy filing (or within the applicable state law period) can be avoided if a company or a subsidiary thereof (a) made such transfer with the intent of hindering, delaying, or defrauding current or future creditors, or (b)(i) received less than reasonably equivalent value or fair consideration therefor and (ii) at the time of such transfer (A) was insolvent or was rendered insolvent by such transfer, (B) was engaged or was about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on such business, or (C) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. If a court were to find that, in substance, the Senior Secured Notes were issued to repurchase the Common Stock of Mr. Plaster and the departing officers, the court could find that the Company did not receive fair consideration or reasonably equivalent value for the issuance of the Senior Secured Notes. In addition, to the extent the proceeds are being used to repay (i) the Company's 12% Senior Subordinated Debentures due 2002 (the "12% Senior Subordinated Debentures") which were incurred in repaying certain indebtedness incurred in the 1983 leveraged buy-out of Empire Gas Corporation (the "LBO"), and (ii) $13.7 million principal amount of the Company's 9% Subordinated Debentures due 2007 (the "2007 9% Subordinated Debentures"), which were incurred in the LBO, of which $4.7 million principal amount will be purchased from Mr. Plaster, a court could find that the Company did not receive fair consideration or reasonably equivalent value for the issuance of the Senior Secured Notes. If a court found a lack of fair consideration for the Senior Secured Notes and also concluded that one or more of the financial conditions described above was satisfied at the time Empire Gas incurred the debt to the holders of the Senior Secured Notes, or if the court found that the transaction was entered into with the intent of hindering, delaying, or defrauding creditors, the court could set aside the transaction as a fraudulent transfer and void the Senior Secured Notes and order the return of any payments of principal and interest made on the Senior Secured Notes. To the extent any Senior Secured Note was avoided as a fraudulent transfer, the holder of that Senior Secured Note would cease to have any claim in respect of the Company. In addition, the avoidance of the Senior Secured Notes could result in an event of default with respect to the other indebtedness of the Company and could result in the acceleration of such indebtedness, a change in control of the Company, or otherwise adversely affect the Company. The obligations of the Company's existing subsidiaries to guarantee the Company's obligations under the Senior Secured Notes pursuant to the Subsidiary Guarantees may also be avoidable as fraudulent transfers. In the event that a court finds that (a) any such subsidiary did not receive reasonably equivalent value or fair consideration in exchange for such subsidiary's incurrence of the obligations under its respective Subsidiary Guaranty, and (b) that such subsidiary was insolvent or rendered insolvent by such Subsidiary Guaranty, had unreasonably small capital, or intended to or believed that it would incur debt beyond its ability to repay, such Subsidiary Guaranty could be avoided. The Subsidiary Guarantees could also be subject to avoidance as a fraudulent transfer if a court finds that such obligations were incurred with actual intent to delay, hinder or defraud any of the subsidiaries' creditors. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any such proceeding. Generally, however, a company will be considered insolvent if the sum of its debts, including estimated contingent liabilities, was greater than all of its assets at a fair valuation or if the present fair saleable value of its assets is less than the amount that would be required to pay its probable liability on its existing debts, including estimated contingent liabilities, as they become absolute and mature. The Company believes that the indebtedness represented by the Senior Secured Notes and the Subsidiary Guarantees is being incurred for proper purposes and in good faith, and without any actual intent to delay, hinder, or defraud the Company's creditors. Furthermore, the Company believes, based on analyses of internal cash flow, that it (i) will not be considered insolvent, at the time of or as a result of the issuance of the Senior Secured Notes, under any of the foregoing standards, (ii) will have sufficient capital to meet the needs of the business in which it is engaged, and (iii) will not have incurred debts beyond its ability to pay such debts as they mature. Furthermore, as a condition to the consummation of the Stock Purchase, the Company will receive a solvency opinion that the Stock Purchase and this Offering will not render the Company insolvent, leave the Company with inadequate or unreasonably small capital or result in the Company incurring indebtedness beyond its ability to repay such indebtedness as it matures. There can be no assurance, however, that a court passing on such questions would agree with the Company. ABSENCE OF PUBLIC MARKET There is currently no established trading market for the Units, the Senior Secured Notes, the Warrants or shares of Common Stock and the Company does not intend to have the Units, the Senior Secured Notes, the Warrants or the shares of Common Stock listed for trading on any securities exchange or on any automated dealer quotation system. The Underwriter has advised the Company that it presently intends to make a market in the Units, the Senior Secured Notes and the Warrants, but the Underwriter is not obligated to make such markets and any such market making may be discontinued at any time at the sole discretion of the Underwriter. Accordingly, no assurance can be given as to the prices or liquidity of, or trading markets for, the Units, the Senior Secured Notes, the Warrants or shares of Common Stock. The liquidity of any market for the Units, the Senior Secured Notes, the Warrants or shares of Common Stock will depend upon the number of holders of such securities, the interest of securities dealers in making a market in such securities, and other factors. The absence of an active market for the Units, the Senior Secured Notes, the Warrants or shares of Common Stock would adversely affect the liquidity of such securities. The liquidity of, and trading markets for, the Senior Secured Notes may also be adversely affected by the liquidity of, and market for high yield securities generally. Such a decline may adversely affect the liquidity of, and trading markets for, the Senior Secured Notes, independent of the financial performance of, and prospects for, the Company.

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+RISK FACTORS Prospective investors in the New Notes should consider carefully the factors set forth below as well as the other information contained in this Prospectus before making an investment in the New Notes. REAL ESTATE, ECONOMIC AND CERTAIN OTHER CONDITIONS The Company is affected by real estate market conditions in areas where its development projects are located and in areas where its potential customers reside. The residential homebuilding industry is cyclical and sensitive to changes in general national and regional economic conditions, such as: levels of employment; consumer confidence and income; availability of financing to homebuilders for acquisitions, development and construction; availability of financing to homebuyers for permanent mortgages; interest rate levels; the condition of the resale market for used homes; and the general demand for housing. Housing demand is particularly sensitive to changes in interest rates. If mortgage interest rates increase significantly, thus affecting prospective buyers' ability to obtain affordable financing for their home purchases, the Company's sales and operating results may be adversely affected. The residential homebuilding industry has, from time to time, experienced fluctuating lumber prices and supply and serious shortages of labor and materials, including shortages of insulation, drywall, certain carpentry work and cement. Delays in construction of homes due to these shortages or to inclement weather conditions could have an adverse effect upon the Company's homebuilding operations. Historically, the Company has experienced shortages of material and labor but such shortages have not adversely affected the Company's ability to deliver homes on a timely schedule. However, this may not be true with respect to any future shortages of material or labor. Several of the Company's projects are in master-planned developments. In these projects, the Company attempts to minimize its development costs and entitlement risks by relying upon the master-plan developer for substantially all of the necessary infrastructure development (such as roads and utilities) and sometimes common facilities (such as parks, pools and other recreation facilities) outside the confines of the Company's project. Although this approach results in a substantial reduction in the capital investment required of the Company in a project, the Company may experience difficulty in obtaining permits or approvals from governmental authorities or in marketing homes in a project in the event the master-plan developer fails to complete the required facilities on a timely basis. The master-plan developer's performance of its obligations in this respect are generally bonded, but failure by the developer to perform may result in a significant increase in costs and/or difficulty or delays in marketing finished homes in the affected project. See "Business -- Developments in Process -- California," and "Business-- Developments in Process -- Nevada." California Risks. While the Company recently has diversified its operations into Nevada, where the market for new housing has remained strong, the Company currently conducts approximately 60% of its business (on an annual revenue basis) in Southern California and intends to continue to conduct a substantial portion of its future homebuilding activities in that region. California real estate in general, and Southern California in particular, is currently adversely impacted by a weak economy, resulting in reduced demand for new homes and lower home selling prices than in the recent past. A substantial amount of real estate in Southern California acquired upon foreclosure or in satisfaction of loans is held for sale by banks and other financial institutions, as well as by the RTC and the Federal Deposit Insurance Corporation (the "FDIC"), or has been purchased recently from such agencies by financial buyers. Efforts to sell such assets may further depress markets generally, including markets in which the Company is developing and selling homes or in which the Company holds property for development. The average sale price of homes in most of the areas in Southern California in which the Company does business has decreased over the past three years and there can be no assurance that home sale prices will not decline more in the future. Since mid-1990, California's job base has declined, predominantly in Southern California, due in part to cutbacks in the defense industry and to the high cost of doing business in the region. There can be no assurance that there will be any significant recovery in the California economy in the near term and a continued weak economy in Southern California would have a material adverse effect on the Company. The climate and geology of the markets in Southern California in which the Company operates present certain risks of natural disasters. To the extent that earthquakes, floods, droughts, wildfires or other natural disasters or similar events occur, the homebuilding industry in general, and the Company's business in particular, may be adversely affected. The Company has substantial operations in Southern California. Based upon its assessment, none of the Company's projects was materially adversely affected by the Northridge, California earthquake in January 1994. Nevada Risks. Las Vegas is located in a desert environment and the continued availability of property for development is materially affected by the continued availability of an adequate water supply. For a short period beginning in 1991, the Las Vegas Valley Water District imposed a moratorium on the issuance of new water commitments to correct a then projected over-allocation of water commitments. The moratorium was lifted in 1992 and, based on current population growth forecasts, the Water District estimates that the Las Vegas community's total supply of water for new commitments will not be exhausted prior to the year 2007. Until recently, the gaming industry was principally limited to the Nevada and New Jersey markets. In an effort to raise revenues without increasing taxes, however, a number of states have recently legalized casino gaming and other forms of gaming. These additional gaming venues create alternative destinations for gamblers and tourists who might otherwise visit Nevada, the result of which may be fewer jobs in the gaming industry in Nevada. Legalization of casino gaming in California would have a particularly adverse impact on the gaming market in Nevada. Given the reliance of the Nevada economy in general, and the Las Vegas economy in particular, on gaming, a material adverse change for the Nevada gaming industry may have a material adverse effect on the Company's Nevada operations. The Las Vegas population has undergone significant growth in recent years. While the population growth has had a positive impact on the demand for housing, there has been a corresponding increase in the demand for infrastructure to support the increased population and housing. If the infrastructure is unable to keep pace with the growth in demand for services, additional development may be limited, which may have an adverse effect on the Company's business. RECENT OPERATING RESULTS AND CHANGE IN BUSINESS STRATEGY Recent Losses. The Company had significant operating losses during the 1991, 1992 and 1993 fiscal years, which included the 22-month period of RTC control (November 1990 to August 1992). During much of the period of RTC control, the operations of the Company essentially were limited to liquidating standing inventory and, at the direction of its RTC-controlled board of directors, the Company did not start any new projects or acquire land or options for land for new projects. The Company was profitable during the 1994 fiscal year, but it did incur losses during the first two quarters of such fiscal year. The Company was profitable for the first quarter of fiscal 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Change in Business Strategy. As described above, during the period of RTC control, operations of the Company were essentially limited to liquidating standing inventory. Since the Acquisition, the Company's strategy has focused on: (i) recommencing California building operations; (ii) diversifying its geographic markets to include areas outside of Southern California; (iii) diversifying its product offerings to include both entry level and move-up homes in order to appeal to a broad customer base; (iv) improving and broadening its capital base and sources of financial liquidity; (v) controlling costs while increasing operational efficiency; and (vi) reducing land and inventory risk by avoiding speculative building, constraining project sizes, avoiding entitlement risks and acquiring land through the use of options, purchase contracts, development agreements and joint ventures. While the Company believes that it has made progress toward implementing these strategies, there can be no assurance that the Company will continue to be successful in implementing its strategies or that such strategies, once implemented, will be successful. LEVERAGE AND ABILITY TO SERVICE DEBT The Company has and will continue to have significant indebtedness. At May 31, 1994 the Company had total consolidated debt of $110.0 million, the Company's ratio of total consolidated debt to stockholders' equity was approximately 1.8 to 1.0 and its total consolidated debt as a percentage of total debt and stockholders' equity was 63%. In addition, the Company may borrow additional amounts under credit lines and project construction loans available to the Company and its subsidiaries as required for its business and as permitted by the Indenture. See "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The ability of the Company to meet its debt service obligations will be dependent upon the future performance of the Company, which in turn will be subject to general economic and financial conditions, competition and other factors, including factors beyond the Company's control. The level of the Company's indebtedness, as well as certain covenants described under "Description of the Notes -- Certain Covenants," could restrict its flexibility in responding to changing business and economic conditions. The Company believes that its cash flow will be sufficient to cover its debt service requirements. However, if the Company is at any time unable to generate sufficient cash flow from operations to service its debt, it may be required to seek refinancing for all or a portion of that debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The credit agreements and certain joint venture agreements of the Company impose restrictions on the Company's operations and require the Company to achieve and maintain certain financial ratios. Such restrictions include, among other things, limitations on the ability of the Company to incur additional indebtedness, to pay dividends or make other distributions, to acquire unentitled land and to enter into mergers and certain other transactions. Obligations under the credit agreements of the Company are secured by liens on a substantial portion of the Company's housing inventory and a portion of its finished building lots. For information on the covenants and events of default contained in the credit agreements and certain joint venture agreements of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Joint Ventures." ABILITY TO FUND FUTURE GROWTH The Company's homebuilding operations are dependent on the availability and cost of construction and development financing and may be adversely affected by any shortage or increased cost of such financing. The availability and cost of financing may also be affected by the net worth of the Company and the amount the Company can invest in a given project. If the Company is at any time unsuccessful in obtaining capital to fund its planned project expenditures, its projects at that time may be significantly delayed, as was the case in most of fiscal years 1992 and 1993 while the Company was under the control of the RTC. Any such delay could result in cost increases and adversely affect the Company's future results of operations and cash flows. Moreover, any financing that is available may be more difficult and costly to obtain than that which has been available in the past because, among other reasons, traditional sources of capital (savings and loan institutions, banks and insurance companies) are currently restricting loans for the acquisition and development of real estate. The Company believes that the enactment of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") in 1989 which, among other things, imposed additional limitations and requirements upon the lending activities of financial institutions, has adversely affected the availability and cost of borrowed funds for acquisition, development and construction. In addition, the Company believes that increased regulations have caused delays in completing financing, increased borrower equity requirements and increased financing costs for the Company. Cash flow management is crucial due to the high leverage and seasonal cycle of home sales, particularly as the number of the Company's real estate projects increases, as is expected, for the Company. The need to stage raw materials such as land and finished lots ahead of the start of home construction requires homebuilders to commit working capital for longer periods than traditional manufacturing companies. LAND ACQUISITION AND HOUSING INVENTORIES The Company acquires land for new projects in its geographic market areas. The Company generally seeks to reduce its land risk by not purchasing land without the necessary entitlements to build. Excess landholdings can have a negative impact on earnings and liquidity due to the payment of required carrying charges such as interest and real property taxes. Market conditions may adversely affect the value of land owned by the Company, resulting in lower margins or charges against earnings. The Company attempts to reduce these risks through constraining project size and acquiring lots and land through the use of options, development agreements and joint ventures where possible, thereby enabling the Company to control lots with a smaller capital investment and to reduce land holding periods. However, there can be no assurance that such efforts will be successful. In addition, the Company believes that the supply of home sites in the California market is constrained by, among other things, reduced availability of financing, a burdensome regulatory environment, infrastructure limitations in certain areas and a scarcity of available land near employment centers. This constrained supply of home sites, coupled with the Company's efforts to reduce inventory risk, could result in fewer home sites being available to the Company. In addition to land risk, the risk of holding completed housing inventory is substantial for homebuilders due to the high inventory carrying costs. The market value of housing inventories can change significantly over the life of a project, reflecting shifting market conditions, and such changes can result in material losses to the Company. VARIABILITY OF RESULTS The Company historically has experienced, and in the future expects to continue to experience, variability in its unit sales and revenues on a quarterly basis. Factors expected to contribute to this variability include, among others: (i) the timing of home closings; (ii) the Company's ability to continue to acquire land and options thereon on acceptable terms; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and general economic conditions in California and Nevada, especially in the Company's Southern California and Las Vegas markets; (v) the cyclical nature of the homebuilding industry; (vi) prevailing interest rates and the availability of mortgage financing; and (vii) the cost and availability of materials and labor. The Company expects its financial results to vary from project to project and from quarter to quarter. COMPETITION The residential homebuilding industry is highly competitive, with homebuilders competing for desirable properties, financing, raw materials and skilled labor. The Company currently competes with a number of homebuilding companies, as well as resales of existing residential housing by individuals, financial institutions and government agencies. Some of these companies are larger than the Company and have greater financial resources. Additionally, several large homebuilders have begun, or announced their intention to begin, operations in the Company's Southern California and Las Vegas markets. Many homebuilders have also begun to refocus their efforts towards the entry level market. REGULATORY AND ENVIRONMENTAL MATTERS The Company and its competitors are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation that imposes restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. Governmental agencies have broad discretion in administering such requirements. The Company may also be subject to periodic delays in its homebuilding projects due to building moratoria in the areas in which it operates. In recent years, several cities and counties in California and Nevada in which the Company has projects have approved the inclusion of "slow growth" initiatives and other election ballot measures that could impact the affordability and availability of homes and land within those cities and counties. Although the majority of these initiatives have been defeated, the Company believes that if similar initiatives are introduced and approved in the future, residential construction by the Company and its competitors could be negatively impacted in California and Nevada. Periodically, the states of California and Nevada have experienced drought conditions, resulting in certain water conservation measures and, in some cases, rationing by local municipalities with which the Company does business. Although curtailments of construction activity as a result of drought conditions have not had a material impact on the Company's operations, restrictions on future construction activity could have an adverse effect upon the Company's homebuilding operations. The Company and its competitors are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws that apply to any given homebuilding site vary according to the site's location, the site's environmental conditions and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and may prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. CONTROL OF THE COMPANY At May 31, 1994, CPH owned 80.0% of the Company's Common Stock. CPH is wholly-owned by Messrs. Makarechian and Dowers, executive officers of the Company. Due to this ownership position, CPH (and, indirectly, Messrs. Makarechian and Dowers) has, and following exercise of all of the Warrants will continue to have, the ability to control the affairs and policies of the Company. It has the ability to elect a sufficient number of directors to control the Company's Board of Directors and to approve or disapprove any matters submitted to a vote by stockholders. The Company's policy is that any material transactions between the Company and CPH or any affiliate thereof are required to be on terms no less favorable to the Company than could reasonably be obtained in arms'-length transactions with independent third parties and must be approved by a majority of the Company's outside directors who do not have a financial interest in the transaction. The Indenture will impose certain restrictions on the Company's and its Restricted Subsidiaries' ability to enter into transactions with affiliates. See "Certain Relationships and Related Transactions" and "Description of the Notes -- Certain Covenants -- Limitations on Transactions with Shareholders and Affiliates." POTENTIAL CONFLICTS OF INTEREST Certain decisions concerning the operations or financial structure of the Company may present conflicts of interest between the owners of the Company's stock and the holders of the New Notes. For example, if the Company encounters financial difficulties or is unable to pay its debts as they mature, the interests of the Company's equity investors might conflict with those of the holders of the New Notes. In addition, the equity investors may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risk to the holders of the Notes. POTENTIAL ADVERSE TAX CONSEQUENCES OF DECONSOLIDATION CPH and the Company file consolidated state and federal income tax returns. If at any time CPH's ownership of the Company is diluted to below 80%, such dilution would result in a deconsolidation for tax purposes. While such a deconsolidation would not necessarily have an adverse effect on the Company, it may trigger a significant tax liability to CPH. Thus, the Company will be unlikely to issue any equity securities (including shares of Common Stock issuable upon exercise of the Warrants) prior to an anticipated downstream merger of CPH into the Company. The Indenture requires that CPH use its best efforts to merge into the Company within 180 days after consummation of the Exchange Offer or effectiveness of the Shelf Registration Statement (as defined), as the case may be, and, in any event, to complete such merger by the earlier of (i) one year thereafter or (ii) 18 months after the initial issuance of the Old Notes. See "Description of the Notes -- Consolidation, Merger and Sale of Assets." DEPENDENCE ON SENIOR MANAGEMENT The Company's future performance will depend to a significant extent upon the efforts and abilities of certain members of senior management, in particular those of Messrs. Makarechian and Dowers, who serve as Chairman of the Board and Chief Executive Officer and President and Chief Operating Officer, respectively. The loss of the services of one or more of its senior management could have a material adverse effect on the Company's business. The Company does not have employment contracts with any of its senior executives. AMOUNT OF SECURED DEBT; STRUCTURAL SUBORDINATION The New Notes will be unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future unsecured indebtedness of the Company that is not, by its terms, expressly subordinated in right of payment to the New Notes. Any current and future secured indebtedness of the Company will have priority over the New Notes with respect to the assets pledged as collateral therefor. The Indenture permits the Company to grant liens to secure additional Indebtedness permitted by the Indenture so long as such Indebtedness (other than Non-Recourse Indebtedness) does not exceed 40% of the Adjusted Consolidated Net Tangible Assets of the Company and to grant certain other liens. See "Description of the Notes -- Certain Covenants -- Limitation on Liens." At May 31, 1994, the Company had no indebtedness junior to the Old Notes and $10 million of secured indebtedness senior to the Old Notes. In addition, many of the operations of the Company, including its joint venture building operations, are conducted through subsidiaries and therefore the Company is dependent on the cash flow of its subsidiaries to meet its debt obligations, including its obligations under the New Notes. Except to the extent the Company or the holders of the New Notes may be creditors with recognized claims against such subsidiaries (including claims under the subsidiary guarantees), the claims of creditors of the subsidiaries will have priority with respect to the assets and earnings of the subsidiaries over the claims of creditors of the Company, including holders of the New Notes. At May 31, 1994 the Company's subsidiaries had liabilities aggregating $10.9 million (primarily consisting of trade payables), none of which constituted Indebtedness. POSSIBLE UNENFORCEABILITY OF AND LIMITS ON GUARANTEES BY SUBSIDIARIES Certain subsidiaries of the Company will guarantee the New Notes. As a matter of law, a guarantee by a subsidiary of the obligation of its parent corporation will be unenforceable, in whole or in part, if, among other things, (i) the subsidiary received less than a reasonably equivalent value in exchange for the guarantee and the subsidiary was insolvent on the date the guarantee was made or became insolvent as a result of the guarantee or (ii) the subsidiary was engaged or was about to engage in a business or transaction for which its remaining property constituted unreasonably small capital. Whether either of these tests are met as to any subsidiary of the Company is a question of fact, as to the ultimate determination of which no assurance can be given. Certain of the Company's subsidiaries have incurred and, to the extent permitted under the Indenture, may in the future incur indebtedness that is secured. Holders of such indebtedness will have a claim against the assets of the subsidiary that secure such indebtedness which is prior to the claim of the holders of the New Notes under the guarantees. At May 31, 1994 the Company's subsidiaries that will guarantee the New Notes had no secured debt. Certain recent decisions by federal courts have required that recipients of guarantees from "insiders" be treated as "insiders" for bankruptcy purposes. Under current judicial interpretations, the subsidiary guarantees may constitute guarantees by insiders. As a result, holders of the New Notes may be treated as "insiders" in a bankruptcy proceeding and would thus be subject to a one-year preference period applicable to insiders rather than a 90-day preference period applicable to general creditors. The "preference period" is the period of time prior to the filing of the bankruptcy petition for which payments to the affected creditor may be challenged as preferential payments. Thus, because of the subsidiary guarantees, payments made to holders of the New Notes within one year prior to the filing of any bankruptcy petition may be subject to challenge. ORIGINAL ISSUE DISCOUNT CONSEQUENCES Under certain circumstances described in more detail below, a holder of a New Note might be required to include in such holder's income for federal income tax purposes the original issue discount with respect to the New Note as it accrues. If a bankruptcy case is commenced by or against the Company under the United States Bankruptcy Code after the issuance of the New Notes, the claim of a holder of New Notes may be limited to an amount equal to the sum of the issue price as determined by the bankruptcy court and that portion of the original issue discount which is deemed to accrue from the issue date to the date of any such bankruptcy filing. See "Certain Federal Income Tax Considerations."

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+RISK FACTORS Prospective investors in the New Notes should consider carefully the factors set forth below as well as the other information contained in this Prospectus before making an investment in the New Notes. REAL ESTATE, ECONOMIC AND CERTAIN OTHER CONDITIONS The Company is affected by real estate market conditions in areas where its development projects are located and in areas where its potential customers reside. The residential homebuilding industry is cyclical and sensitive to changes in general national and regional economic conditions, such as: levels of employment; consumer confidence and income; availability of financing to homebuilders for acquisitions, development and construction; availability of financing to homebuyers for permanent mortgages; interest rate levels; the condition of the resale market for used homes; and the general demand for housing. Housing demand is particularly sensitive to changes in interest rates. If mortgage interest rates increase significantly, thus affecting prospective buyers' ability to obtain affordable financing for their home purchases, the Company's sales and operating results may be adversely affected. The residential homebuilding industry has, from time to time, experienced fluctuating lumber prices and supply and serious shortages of labor and materials, including shortages of insulation, drywall, certain carpentry work and cement. Delays in construction of homes due to these shortages or to inclement weather conditions could have an adverse effect upon the Company's homebuilding operations. Historically, the Company has experienced shortages of material and labor but such shortages have not adversely affected the Company's ability to deliver homes on a timely schedule. However, this may not be true with respect to any future shortages of material or labor. Several of the Company's projects are in master-planned developments. In these projects, the Company attempts to minimize its development costs and entitlement risks by relying upon the master-plan developer for substantially all of the necessary infrastructure development (such as roads and utilities) and sometimes common facilities (such as parks, pools and other recreation facilities) outside the confines of the Company's project. Although this approach results in a substantial reduction in the capital investment required of the Company in a project, the Company may experience difficulty in obtaining permits or approvals from governmental authorities or in marketing homes in a project in the event the master-plan developer fails to complete the required facilities on a timely basis. The master-plan developer's performance of its obligations in this respect are generally bonded, but failure by the developer to perform may result in a significant increase in costs and/or difficulty or delays in marketing finished homes in the affected project. See "Business -- Developments in Process -- California," and "Business-- Developments in Process -- Nevada." California Risks. While the Company recently has diversified its operations into Nevada, where the market for new housing has remained strong, the Company currently conducts approximately 60% of its business (on an annual revenue basis) in Southern California and intends to continue to conduct a substantial portion of its future homebuilding activities in that region. California real estate in general, and Southern California in particular, is currently adversely impacted by a weak economy, resulting in reduced demand for new homes and lower home selling prices than in the recent past. A substantial amount of real estate in Southern California acquired upon foreclosure or in satisfaction of loans is held for sale by banks and other financial institutions, as well as by the RTC and the Federal Deposit Insurance Corporation (the "FDIC"), or has been purchased recently from such agencies by financial buyers. Efforts to sell such assets may further depress markets generally, including markets in which the Company is developing and selling homes or in which the Company holds property for development. The average sale price of homes in most of the areas in Southern California in which the Company does business has decreased over the past three years and there can be no assurance that home sale prices will not decline more in the future. Since mid-1990, California's job base has declined, predominantly in Southern California, due in part to cutbacks in the defense industry and to the high cost of doing business in the region. There can be no assurance that there will be any significant recovery in the California economy in the near term and a continued weak economy in Southern California would have a material adverse effect on the Company. The climate and geology of the markets in Southern California in which the Company operates present certain risks of natural disasters. To the extent that earthquakes, floods, droughts, wildfires or other natural disasters or similar events occur, the homebuilding industry in general, and the Company's business in particular, may be adversely affected. The Company has substantial operations in Southern California. Based upon its assessment, none of the Company's projects was materially adversely affected by the Northridge, California earthquake in January 1994. Nevada Risks. Las Vegas is located in a desert environment and the continued availability of property for development is materially affected by the continued availability of an adequate water supply. For a short period beginning in 1991, the Las Vegas Valley Water District imposed a moratorium on the issuance of new water commitments to correct a then projected over-allocation of water commitments. The moratorium was lifted in 1992 and, based on current population growth forecasts, the Water District estimates that the Las Vegas community's total supply of water for new commitments will not be exhausted prior to the year 2007. Until recently, the gaming industry was principally limited to the Nevada and New Jersey markets. In an effort to raise revenues without increasing taxes, however, a number of states have recently legalized casino gaming and other forms of gaming. These additional gaming venues create alternative destinations for gamblers and tourists who might otherwise visit Nevada, the result of which may be fewer jobs in the gaming industry in Nevada. Legalization of casino gaming in California would have a particularly adverse impact on the gaming market in Nevada. Given the reliance of the Nevada economy in general, and the Las Vegas economy in particular, on gaming, a material adverse change for the Nevada gaming industry may have a material adverse effect on the Company's Nevada operations. The Las Vegas population has undergone significant growth in recent years. While the population growth has had a positive impact on the demand for housing, there has been a corresponding increase in the demand for infrastructure to support the increased population and housing. If the infrastructure is unable to keep pace with the growth in demand for services, additional development may be limited, which may have an adverse effect on the Company's business. RECENT OPERATING RESULTS AND CHANGE IN BUSINESS STRATEGY Recent Losses. The Company had significant operating losses during the 1991, 1992 and 1993 fiscal years, which included the 22-month period of RTC control (November 1990 to August 1992). During much of the period of RTC control, the operations of the Company essentially were limited to liquidating standing inventory and, at the direction of its RTC-controlled board of directors, the Company did not start any new projects or acquire land or options for land for new projects. The Company was profitable during the 1994 fiscal year, but it did incur losses during the first two quarters of such fiscal year. The Company was profitable for the first quarter of fiscal 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Change in Business Strategy. As described above, during the period of RTC control, operations of the Company were essentially limited to liquidating standing inventory. Since the Acquisition, the Company's strategy has focused on: (i) recommencing California building operations; (ii) diversifying its geographic markets to include areas outside of Southern California; (iii) diversifying its product offerings to include both entry level and move-up homes in order to appeal to a broad customer base; (iv) improving and broadening its capital base and sources of financial liquidity; (v) controlling costs while increasing operational efficiency; and (vi) reducing land and inventory risk by avoiding speculative building, constraining project sizes, avoiding entitlement risks and acquiring land through the use of options, purchase contracts, development agreements and joint ventures. While the Company believes that it has made progress toward implementing these strategies, there can be no assurance that the Company will continue to be successful in implementing its strategies or that such strategies, once implemented, will be successful. LEVERAGE AND ABILITY TO SERVICE DEBT The Company has and will continue to have significant indebtedness. At May 31, 1994 the Company had total consolidated debt of $110.0 million, the Company's ratio of total consolidated debt to stockholders' equity was approximately 1.8 to 1.0 and its total consolidated debt as a percentage of total debt and stockholders' equity was 63%. In addition, the Company may borrow additional amounts under credit lines and project construction loans available to the Company and its subsidiaries as required for its business and as permitted by the Indenture. See "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The ability of the Company to meet its debt service obligations will be dependent upon the future performance of the Company, which in turn will be subject to general economic and financial conditions, competition and other factors, including factors beyond the Company's control. The level of the Company's indebtedness, as well as certain covenants described under "Description of the Notes -- Certain Covenants," could restrict its flexibility in responding to changing business and economic conditions. The Company believes that its cash flow will be sufficient to cover its debt service requirements. However, if the Company is at any time unable to generate sufficient cash flow from operations to service its debt, it may be required to seek refinancing for all or a portion of that debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The credit agreements and certain joint venture agreements of the Company impose restrictions on the Company's operations and require the Company to achieve and maintain certain financial ratios. Such restrictions include, among other things, limitations on the ability of the Company to incur additional indebtedness, to pay dividends or make other distributions, to acquire unentitled land and to enter into mergers and certain other transactions. Obligations under the credit agreements of the Company are secured by liens on a substantial portion of the Company's housing inventory and a portion of its finished building lots. For information on the covenants and events of default contained in the credit agreements and certain joint venture agreements of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Joint Ventures." ABILITY TO FUND FUTURE GROWTH The Company's homebuilding operations are dependent on the availability and cost of construction and development financing and may be adversely affected by any shortage or increased cost of such financing. The availability and cost of financing may also be affected by the net worth of the Company and the amount the Company can invest in a given project. If the Company is at any time unsuccessful in obtaining capital to fund its planned project expenditures, its projects at that time may be significantly delayed, as was the case in most of fiscal years 1992 and 1993 while the Company was under the control of the RTC. Any such delay could result in cost increases and adversely affect the Company's future results of operations and cash flows. Moreover, any financing that is available may be more difficult and costly to obtain than that which has been available in the past because, among other reasons, traditional sources of capital (savings and loan institutions, banks and insurance companies) are currently restricting loans for the acquisition and development of real estate. The Company believes that the enactment of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") in 1989 which, among other things, imposed additional limitations and requirements upon the lending activities of financial institutions, has adversely affected the availability and cost of borrowed funds for acquisition, development and construction. In addition, the Company believes that increased regulations have caused delays in completing financing, increased borrower equity requirements and increased financing costs for the Company. Cash flow management is crucial due to the high leverage and seasonal cycle of home sales, particularly as the number of the Company's real estate projects increases, as is expected, for the Company. The need to stage raw materials such as land and finished lots ahead of the start of home construction requires homebuilders to commit working capital for longer periods than traditional manufacturing companies. LAND ACQUISITION AND HOUSING INVENTORIES The Company acquires land for new projects in its geographic market areas. The Company generally seeks to reduce its land risk by not purchasing land without the necessary entitlements to build. Excess landholdings can have a negative impact on earnings and liquidity due to the payment of required carrying charges such as interest and real property taxes. Market conditions may adversely affect the value of land owned by the Company, resulting in lower margins or charges against earnings. The Company attempts to reduce these risks through constraining project size and acquiring lots and land through the use of options, development agreements and joint ventures where possible, thereby enabling the Company to control lots with a smaller capital investment and to reduce land holding periods. However, there can be no assurance that such efforts will be successful. In addition, the Company believes that the supply of home sites in the California market is constrained by, among other things, reduced availability of financing, a burdensome regulatory environment, infrastructure limitations in certain areas and a scarcity of available land near employment centers. This constrained supply of home sites, coupled with the Company's efforts to reduce inventory risk, could result in fewer home sites being available to the Company. In addition to land risk, the risk of holding completed housing inventory is substantial for homebuilders due to the high inventory carrying costs. The market value of housing inventories can change significantly over the life of a project, reflecting shifting market conditions, and such changes can result in material losses to the Company. VARIABILITY OF RESULTS The Company historically has experienced, and in the future expects to continue to experience, variability in its unit sales and revenues on a quarterly basis. Factors expected to contribute to this variability include, among others: (i) the timing of home closings; (ii) the Company's ability to continue to acquire land and options thereon on acceptable terms; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and general economic conditions in California and Nevada, especially in the Company's Southern California and Las Vegas markets; (v) the cyclical nature of the homebuilding industry; (vi) prevailing interest rates and the availability of mortgage financing; and (vii) the cost and availability of materials and labor. The Company expects its financial results to vary from project to project and from quarter to quarter. COMPETITION The residential homebuilding industry is highly competitive, with homebuilders competing for desirable properties, financing, raw materials and skilled labor. The Company currently competes with a number of homebuilding companies, as well as resales of existing residential housing by individuals, financial institutions and government agencies. Some of these companies are larger than the Company and have greater financial resources. Additionally, several large homebuilders have begun, or announced their intention to begin, operations in the Company's Southern California and Las Vegas markets. Many homebuilders have also begun to refocus their efforts towards the entry level market. REGULATORY AND ENVIRONMENTAL MATTERS The Company and its competitors are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation that imposes restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. Governmental agencies have broad discretion in administering such requirements. The Company may also be subject to periodic delays in its homebuilding projects due to building moratoria in the areas in which it operates. In recent years, several cities and counties in California and Nevada in which the Company has projects have approved the inclusion of "slow growth" initiatives and other election ballot measures that could impact the affordability and availability of homes and land within those cities and counties. Although the majority of these initiatives have been defeated, the Company believes that if similar initiatives are introduced and approved in the future, residential construction by the Company and its competitors could be negatively impacted in California and Nevada. Periodically, the states of California and Nevada have experienced drought conditions, resulting in certain water conservation measures and, in some cases, rationing by local municipalities with which the Company does business. Although curtailments of construction activity as a result of drought conditions have not had a material impact on the Company's operations, restrictions on future construction activity could have an adverse effect upon the Company's homebuilding operations. The Company and its competitors are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws that apply to any given homebuilding site vary according to the site's location, the site's environmental conditions and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and may prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. CONTROL OF THE COMPANY At May 31, 1994, CPH owned 80.0% of the Company's Common Stock. CPH is wholly-owned by Messrs. Makarechian and Dowers, executive officers of the Company. Due to this ownership position, CPH (and, indirectly, Messrs. Makarechian and Dowers) has, and following exercise of all of the Warrants will continue to have, the ability to control the affairs and policies of the Company. It has the ability to elect a sufficient number of directors to control the Company's Board of Directors and to approve or disapprove any matters submitted to a vote by stockholders. The Company's policy is that any material transactions between the Company and CPH or any affiliate thereof are required to be on terms no less favorable to the Company than could reasonably be obtained in arms'-length transactions with independent third parties and must be approved by a majority of the Company's outside directors who do not have a financial interest in the transaction. The Indenture will impose certain restrictions on the Company's and its Restricted Subsidiaries' ability to enter into transactions with affiliates. See "Certain Relationships and Related Transactions" and "Description of the Notes -- Certain Covenants -- Limitations on Transactions with Shareholders and Affiliates." POTENTIAL CONFLICTS OF INTEREST Certain decisions concerning the operations or financial structure of the Company may present conflicts of interest between the owners of the Company's stock and the holders of the New Notes. For example, if the Company encounters financial difficulties or is unable to pay its debts as they mature, the interests of the Company's equity investors might conflict with those of the holders of the New Notes. In addition, the equity investors may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risk to the holders of the Notes. POTENTIAL ADVERSE TAX CONSEQUENCES OF DECONSOLIDATION CPH and the Company file consolidated state and federal income tax returns. If at any time CPH's ownership of the Company is diluted to below 80%, such dilution would result in a deconsolidation for tax purposes. While such a deconsolidation would not necessarily have an adverse effect on the Company, it may trigger a significant tax liability to CPH. Thus, the Company will be unlikely to issue any equity securities (including shares of Common Stock issuable upon exercise of the Warrants) prior to an anticipated downstream merger of CPH into the Company. The Indenture requires that CPH use its best efforts to merge into the Company within 180 days after consummation of the Exchange Offer or effectiveness of the Shelf Registration Statement (as defined), as the case may be, and, in any event, to complete such merger by the earlier of (i) one year thereafter or (ii) 18 months after the initial issuance of the Old Notes. See "Description of the Notes -- Consolidation, Merger and Sale of Assets." DEPENDENCE ON SENIOR MANAGEMENT The Company's future performance will depend to a significant extent upon the efforts and abilities of certain members of senior management, in particular those of Messrs. Makarechian and Dowers, who serve as Chairman of the Board and Chief Executive Officer and President and Chief Operating Officer, respectively. The loss of the services of one or more of its senior management could have a material adverse effect on the Company's business. The Company does not have employment contracts with any of its senior executives. AMOUNT OF SECURED DEBT; STRUCTURAL SUBORDINATION The New Notes will be unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future unsecured indebtedness of the Company that is not, by its terms, expressly subordinated in right of payment to the New Notes. Any current and future secured indebtedness of the Company will have priority over the New Notes with respect to the assets pledged as collateral therefor. The Indenture permits the Company to grant liens to secure additional Indebtedness permitted by the Indenture so long as such Indebtedness (other than Non-Recourse Indebtedness) does not exceed 40% of the Adjusted Consolidated Net Tangible Assets of the Company and to grant certain other liens. See "Description of the Notes -- Certain Covenants -- Limitation on Liens." At May 31, 1994, the Company had no indebtedness junior to the Old Notes and $10 million of secured indebtedness senior to the Old Notes. In addition, many of the operations of the Company, including its joint venture building operations, are conducted through subsidiaries and therefore the Company is dependent on the cash flow of its subsidiaries to meet its debt obligations, including its obligations under the New Notes. Except to the extent the Company or the holders of the New Notes may be creditors with recognized claims against such subsidiaries (including claims under the subsidiary guarantees), the claims of creditors of the subsidiaries will have priority with respect to the assets and earnings of the subsidiaries over the claims of creditors of the Company, including holders of the New Notes. At May 31, 1994 the Company's subsidiaries had liabilities aggregating $10.9 million (primarily consisting of trade payables), none of which constituted Indebtedness. POSSIBLE UNENFORCEABILITY OF AND LIMITS ON GUARANTEES BY SUBSIDIARIES Certain subsidiaries of the Company will guarantee the New Notes. As a matter of law, a guarantee by a subsidiary of the obligation of its parent corporation will be unenforceable, in whole or in part, if, among other things, (i) the subsidiary received less than a reasonably equivalent value in exchange for the guarantee and the subsidiary was insolvent on the date the guarantee was made or became insolvent as a result of the guarantee or (ii) the subsidiary was engaged or was about to engage in a business or transaction for which its remaining property constituted unreasonably small capital. Whether either of these tests are met as to any subsidiary of the Company is a question of fact, as to the ultimate determination of which no assurance can be given. Certain of the Company's subsidiaries have incurred and, to the extent permitted under the Indenture, may in the future incur indebtedness that is secured. Holders of such indebtedness will have a claim against the assets of the subsidiary that secure such indebtedness which is prior to the claim of the holders of the New Notes under the guarantees. At May 31, 1994 the Company's subsidiaries that will guarantee the New Notes had no secured debt. Certain recent decisions by federal courts have required that recipients of guarantees from "insiders" be treated as "insiders" for bankruptcy purposes. Under current judicial interpretations, the subsidiary guarantees may constitute guarantees by insiders. As a result, holders of the New Notes may be treated as "insiders" in a bankruptcy proceeding and would thus be subject to a one-year preference period applicable to insiders rather than a 90-day preference period applicable to general creditors. The "preference period" is the period of time prior to the filing of the bankruptcy petition for which payments to the affected creditor may be challenged as preferential payments. Thus, because of the subsidiary guarantees, payments made to holders of the New Notes within one year prior to the filing of any bankruptcy petition may be subject to challenge. ORIGINAL ISSUE DISCOUNT CONSEQUENCES Under certain circumstances described in more detail below, a holder of a New Note might be required to include in such holder's income for federal income tax purposes the original issue discount with respect to the New Note as it accrues. If a bankruptcy case is commenced by or against the Company under the United States Bankruptcy Code after the issuance of the New Notes, the claim of a holder of New Notes may be limited to an amount equal to the sum of the issue price as determined by the bankruptcy court and that portion of the original issue discount which is deemed to accrue from the issue date to the date of any such bankruptcy filing. See "Certain Federal Income Tax Considerations."

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+RISK FACTORS Prospective investors in the New Notes should consider carefully the factors set forth below as well as the other information contained in this Prospectus before making an investment in the New Notes. REAL ESTATE, ECONOMIC AND CERTAIN OTHER CONDITIONS The Company is affected by real estate market conditions in areas where its development projects are located and in areas where its potential customers reside. The residential homebuilding industry is cyclical and sensitive to changes in general national and regional economic conditions, such as: levels of employment; consumer confidence and income; availability of financing to homebuilders for acquisitions, development and construction; availability of financing to homebuyers for permanent mortgages; interest rate levels; the condition of the resale market for used homes; and the general demand for housing. Housing demand is particularly sensitive to changes in interest rates. If mortgage interest rates increase significantly, thus affecting prospective buyers' ability to obtain affordable financing for their home purchases, the Company's sales and operating results may be adversely affected. The residential homebuilding industry has, from time to time, experienced fluctuating lumber prices and supply and serious shortages of labor and materials, including shortages of insulation, drywall, certain carpentry work and cement. Delays in construction of homes due to these shortages or to inclement weather conditions could have an adverse effect upon the Company's homebuilding operations. Historically, the Company has experienced shortages of material and labor but such shortages have not adversely affected the Company's ability to deliver homes on a timely schedule. However, this may not be true with respect to any future shortages of material or labor. Several of the Company's projects are in master-planned developments. In these projects, the Company attempts to minimize its development costs and entitlement risks by relying upon the master-plan developer for substantially all of the necessary infrastructure development (such as roads and utilities) and sometimes common facilities (such as parks, pools and other recreation facilities) outside the confines of the Company's project. Although this approach results in a substantial reduction in the capital investment required of the Company in a project, the Company may experience difficulty in obtaining permits or approvals from governmental authorities or in marketing homes in a project in the event the master-plan developer fails to complete the required facilities on a timely basis. The master-plan developer's performance of its obligations in this respect are generally bonded, but failure by the developer to perform may result in a significant increase in costs and/or difficulty or delays in marketing finished homes in the affected project. See "Business -- Developments in Process -- California," and "Business-- Developments in Process -- Nevada." California Risks. While the Company recently has diversified its operations into Nevada, where the market for new housing has remained strong, the Company currently conducts approximately 60% of its business (on an annual revenue basis) in Southern California and intends to continue to conduct a substantial portion of its future homebuilding activities in that region. California real estate in general, and Southern California in particular, is currently adversely impacted by a weak economy, resulting in reduced demand for new homes and lower home selling prices than in the recent past. A substantial amount of real estate in Southern California acquired upon foreclosure or in satisfaction of loans is held for sale by banks and other financial institutions, as well as by the RTC and the Federal Deposit Insurance Corporation (the "FDIC"), or has been purchased recently from such agencies by financial buyers. Efforts to sell such assets may further depress markets generally, including markets in which the Company is developing and selling homes or in which the Company holds property for development. The average sale price of homes in most of the areas in Southern California in which the Company does business has decreased over the past three years and there can be no assurance that home sale prices will not decline more in the future. Since mid-1990, California's job base has declined, predominantly in Southern California, due in part to cutbacks in the defense industry and to the high cost of doing business in the region. There can be no assurance that there will be any significant recovery in the California economy in the near term and a continued weak economy in Southern California would have a material adverse effect on the Company. The climate and geology of the markets in Southern California in which the Company operates present certain risks of natural disasters. To the extent that earthquakes, floods, droughts, wildfires or other natural disasters or similar events occur, the homebuilding industry in general, and the Company's business in particular, may be adversely affected. The Company has substantial operations in Southern California. Based upon its assessment, none of the Company's projects was materially adversely affected by the Northridge, California earthquake in January 1994. Nevada Risks. Las Vegas is located in a desert environment and the continued availability of property for development is materially affected by the continued availability of an adequate water supply. For a short period beginning in 1991, the Las Vegas Valley Water District imposed a moratorium on the issuance of new water commitments to correct a then projected over-allocation of water commitments. The moratorium was lifted in 1992 and, based on current population growth forecasts, the Water District estimates that the Las Vegas community's total supply of water for new commitments will not be exhausted prior to the year 2007. Until recently, the gaming industry was principally limited to the Nevada and New Jersey markets. In an effort to raise revenues without increasing taxes, however, a number of states have recently legalized casino gaming and other forms of gaming. These additional gaming venues create alternative destinations for gamblers and tourists who might otherwise visit Nevada, the result of which may be fewer jobs in the gaming industry in Nevada. Legalization of casino gaming in California would have a particularly adverse impact on the gaming market in Nevada. Given the reliance of the Nevada economy in general, and the Las Vegas economy in particular, on gaming, a material adverse change for the Nevada gaming industry may have a material adverse effect on the Company's Nevada operations. The Las Vegas population has undergone significant growth in recent years. While the population growth has had a positive impact on the demand for housing, there has been a corresponding increase in the demand for infrastructure to support the increased population and housing. If the infrastructure is unable to keep pace with the growth in demand for services, additional development may be limited, which may have an adverse effect on the Company's business. RECENT OPERATING RESULTS AND CHANGE IN BUSINESS STRATEGY Recent Losses. The Company had significant operating losses during the 1991, 1992 and 1993 fiscal years, which included the 22-month period of RTC control (November 1990 to August 1992). During much of the period of RTC control, the operations of the Company essentially were limited to liquidating standing inventory and, at the direction of its RTC-controlled board of directors, the Company did not start any new projects or acquire land or options for land for new projects. The Company was profitable during the 1994 fiscal year, but it did incur losses during the first two quarters of such fiscal year. The Company was profitable for the first quarter of fiscal 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Change in Business Strategy. As described above, during the period of RTC control, operations of the Company were essentially limited to liquidating standing inventory. Since the Acquisition, the Company's strategy has focused on: (i) recommencing California building operations; (ii) diversifying its geographic markets to include areas outside of Southern California; (iii) diversifying its product offerings to include both entry level and move-up homes in order to appeal to a broad customer base; (iv) improving and broadening its capital base and sources of financial liquidity; (v) controlling costs while increasing operational efficiency; and (vi) reducing land and inventory risk by avoiding speculative building, constraining project sizes, avoiding entitlement risks and acquiring land through the use of options, purchase contracts, development agreements and joint ventures. While the Company believes that it has made progress toward implementing these strategies, there can be no assurance that the Company will continue to be successful in implementing its strategies or that such strategies, once implemented, will be successful. LEVERAGE AND ABILITY TO SERVICE DEBT The Company has and will continue to have significant indebtedness. At May 31, 1994 the Company had total consolidated debt of $110.0 million, the Company's ratio of total consolidated debt to stockholders' equity was approximately 1.8 to 1.0 and its total consolidated debt as a percentage of total debt and stockholders' equity was 63%. In addition, the Company may borrow additional amounts under credit lines and project construction loans available to the Company and its subsidiaries as required for its business and as permitted by the Indenture. See "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The ability of the Company to meet its debt service obligations will be dependent upon the future performance of the Company, which in turn will be subject to general economic and financial conditions, competition and other factors, including factors beyond the Company's control. The level of the Company's indebtedness, as well as certain covenants described under "Description of the Notes -- Certain Covenants," could restrict its flexibility in responding to changing business and economic conditions. The Company believes that its cash flow will be sufficient to cover its debt service requirements. However, if the Company is at any time unable to generate sufficient cash flow from operations to service its debt, it may be required to seek refinancing for all or a portion of that debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The credit agreements and certain joint venture agreements of the Company impose restrictions on the Company's operations and require the Company to achieve and maintain certain financial ratios. Such restrictions include, among other things, limitations on the ability of the Company to incur additional indebtedness, to pay dividends or make other distributions, to acquire unentitled land and to enter into mergers and certain other transactions. Obligations under the credit agreements of the Company are secured by liens on a substantial portion of the Company's housing inventory and a portion of its finished building lots. For information on the covenants and events of default contained in the credit agreements and certain joint venture agreements of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Joint Ventures." ABILITY TO FUND FUTURE GROWTH The Company's homebuilding operations are dependent on the availability and cost of construction and development financing and may be adversely affected by any shortage or increased cost of such financing. The availability and cost of financing may also be affected by the net worth of the Company and the amount the Company can invest in a given project. If the Company is at any time unsuccessful in obtaining capital to fund its planned project expenditures, its projects at that time may be significantly delayed, as was the case in most of fiscal years 1992 and 1993 while the Company was under the control of the RTC. Any such delay could result in cost increases and adversely affect the Company's future results of operations and cash flows. Moreover, any financing that is available may be more difficult and costly to obtain than that which has been available in the past because, among other reasons, traditional sources of capital (savings and loan institutions, banks and insurance companies) are currently restricting loans for the acquisition and development of real estate. The Company believes that the enactment of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") in 1989 which, among other things, imposed additional limitations and requirements upon the lending activities of financial institutions, has adversely affected the availability and cost of borrowed funds for acquisition, development and construction. In addition, the Company believes that increased regulations have caused delays in completing financing, increased borrower equity requirements and increased financing costs for the Company. Cash flow management is crucial due to the high leverage and seasonal cycle of home sales, particularly as the number of the Company's real estate projects increases, as is expected, for the Company. The need to stage raw materials such as land and finished lots ahead of the start of home construction requires homebuilders to commit working capital for longer periods than traditional manufacturing companies. LAND ACQUISITION AND HOUSING INVENTORIES The Company acquires land for new projects in its geographic market areas. The Company generally seeks to reduce its land risk by not purchasing land without the necessary entitlements to build. Excess landholdings can have a negative impact on earnings and liquidity due to the payment of required carrying charges such as interest and real property taxes. Market conditions may adversely affect the value of land owned by the Company, resulting in lower margins or charges against earnings. The Company attempts to reduce these risks through constraining project size and acquiring lots and land through the use of options, development agreements and joint ventures where possible, thereby enabling the Company to control lots with a smaller capital investment and to reduce land holding periods. However, there can be no assurance that such efforts will be successful. In addition, the Company believes that the supply of home sites in the California market is constrained by, among other things, reduced availability of financing, a burdensome regulatory environment, infrastructure limitations in certain areas and a scarcity of available land near employment centers. This constrained supply of home sites, coupled with the Company's efforts to reduce inventory risk, could result in fewer home sites being available to the Company. In addition to land risk, the risk of holding completed housing inventory is substantial for homebuilders due to the high inventory carrying costs. The market value of housing inventories can change significantly over the life of a project, reflecting shifting market conditions, and such changes can result in material losses to the Company. VARIABILITY OF RESULTS The Company historically has experienced, and in the future expects to continue to experience, variability in its unit sales and revenues on a quarterly basis. Factors expected to contribute to this variability include, among others: (i) the timing of home closings; (ii) the Company's ability to continue to acquire land and options thereon on acceptable terms; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and general economic conditions in California and Nevada, especially in the Company's Southern California and Las Vegas markets; (v) the cyclical nature of the homebuilding industry; (vi) prevailing interest rates and the availability of mortgage financing; and (vii) the cost and availability of materials and labor. The Company expects its financial results to vary from project to project and from quarter to quarter. COMPETITION The residential homebuilding industry is highly competitive, with homebuilders competing for desirable properties, financing, raw materials and skilled labor. The Company currently competes with a number of homebuilding companies, as well as resales of existing residential housing by individuals, financial institutions and government agencies. Some of these companies are larger than the Company and have greater financial resources. Additionally, several large homebuilders have begun, or announced their intention to begin, operations in the Company's Southern California and Las Vegas markets. Many homebuilders have also begun to refocus their efforts towards the entry level market. REGULATORY AND ENVIRONMENTAL MATTERS The Company and its competitors are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation that imposes restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. Governmental agencies have broad discretion in administering such requirements. The Company may also be subject to periodic delays in its homebuilding projects due to building moratoria in the areas in which it operates. In recent years, several cities and counties in California and Nevada in which the Company has projects have approved the inclusion of "slow growth" initiatives and other election ballot measures that could impact the affordability and availability of homes and land within those cities and counties. Although the majority of these initiatives have been defeated, the Company believes that if similar initiatives are introduced and approved in the future, residential construction by the Company and its competitors could be negatively impacted in California and Nevada. Periodically, the states of California and Nevada have experienced drought conditions, resulting in certain water conservation measures and, in some cases, rationing by local municipalities with which the Company does business. Although curtailments of construction activity as a result of drought conditions have not had a material impact on the Company's operations, restrictions on future construction activity could have an adverse effect upon the Company's homebuilding operations. The Company and its competitors are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws that apply to any given homebuilding site vary according to the site's location, the site's environmental conditions and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and may prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. CONTROL OF THE COMPANY At May 31, 1994, CPH owned 80.0% of the Company's Common Stock. CPH is wholly-owned by Messrs. Makarechian and Dowers, executive officers of the Company. Due to this ownership position, CPH (and, indirectly, Messrs. Makarechian and Dowers) has, and following exercise of all of the Warrants will continue to have, the ability to control the affairs and policies of the Company. It has the ability to elect a sufficient number of directors to control the Company's Board of Directors and to approve or disapprove any matters submitted to a vote by stockholders. The Company's policy is that any material transactions between the Company and CPH or any affiliate thereof are required to be on terms no less favorable to the Company than could reasonably be obtained in arms'-length transactions with independent third parties and must be approved by a majority of the Company's outside directors who do not have a financial interest in the transaction. The Indenture will impose certain restrictions on the Company's and its Restricted Subsidiaries' ability to enter into transactions with affiliates. See "Certain Relationships and Related Transactions" and "Description of the Notes -- Certain Covenants -- Limitations on Transactions with Shareholders and Affiliates." POTENTIAL CONFLICTS OF INTEREST Certain decisions concerning the operations or financial structure of the Company may present conflicts of interest between the owners of the Company's stock and the holders of the New Notes. For example, if the Company encounters financial difficulties or is unable to pay its debts as they mature, the interests of the Company's equity investors might conflict with those of the holders of the New Notes. In addition, the equity investors may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risk to the holders of the Notes. POTENTIAL ADVERSE TAX CONSEQUENCES OF DECONSOLIDATION CPH and the Company file consolidated state and federal income tax returns. If at any time CPH's ownership of the Company is diluted to below 80%, such dilution would result in a deconsolidation for tax purposes. While such a deconsolidation would not necessarily have an adverse effect on the Company, it may trigger a significant tax liability to CPH. Thus, the Company will be unlikely to issue any equity securities (including shares of Common Stock issuable upon exercise of the Warrants) prior to an anticipated downstream merger of CPH into the Company. The Indenture requires that CPH use its best efforts to merge into the Company within 180 days after consummation of the Exchange Offer or effectiveness of the Shelf Registration Statement (as defined), as the case may be, and, in any event, to complete such merger by the earlier of (i) one year thereafter or (ii) 18 months after the initial issuance of the Old Notes. See "Description of the Notes -- Consolidation, Merger and Sale of Assets." DEPENDENCE ON SENIOR MANAGEMENT The Company's future performance will depend to a significant extent upon the efforts and abilities of certain members of senior management, in particular those of Messrs. Makarechian and Dowers, who serve as Chairman of the Board and Chief Executive Officer and President and Chief Operating Officer, respectively. The loss of the services of one or more of its senior management could have a material adverse effect on the Company's business. The Company does not have employment contracts with any of its senior executives. AMOUNT OF SECURED DEBT; STRUCTURAL SUBORDINATION The New Notes will be unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future unsecured indebtedness of the Company that is not, by its terms, expressly subordinated in right of payment to the New Notes. Any current and future secured indebtedness of the Company will have priority over the New Notes with respect to the assets pledged as collateral therefor. The Indenture permits the Company to grant liens to secure additional Indebtedness permitted by the Indenture so long as such Indebtedness (other than Non-Recourse Indebtedness) does not exceed 40% of the Adjusted Consolidated Net Tangible Assets of the Company and to grant certain other liens. See "Description of the Notes -- Certain Covenants -- Limitation on Liens." At May 31, 1994, the Company had no indebtedness junior to the Old Notes and $10 million of secured indebtedness senior to the Old Notes. In addition, many of the operations of the Company, including its joint venture building operations, are conducted through subsidiaries and therefore the Company is dependent on the cash flow of its subsidiaries to meet its debt obligations, including its obligations under the New Notes. Except to the extent the Company or the holders of the New Notes may be creditors with recognized claims against such subsidiaries (including claims under the subsidiary guarantees), the claims of creditors of the subsidiaries will have priority with respect to the assets and earnings of the subsidiaries over the claims of creditors of the Company, including holders of the New Notes. At May 31, 1994 the Company's subsidiaries had liabilities aggregating $10.9 million (primarily consisting of trade payables), none of which constituted Indebtedness. POSSIBLE UNENFORCEABILITY OF AND LIMITS ON GUARANTEES BY SUBSIDIARIES Certain subsidiaries of the Company will guarantee the New Notes. As a matter of law, a guarantee by a subsidiary of the obligation of its parent corporation will be unenforceable, in whole or in part, if, among other things, (i) the subsidiary received less than a reasonably equivalent value in exchange for the guarantee and the subsidiary was insolvent on the date the guarantee was made or became insolvent as a result of the guarantee or (ii) the subsidiary was engaged or was about to engage in a business or transaction for which its remaining property constituted unreasonably small capital. Whether either of these tests are met as to any subsidiary of the Company is a question of fact, as to the ultimate determination of which no assurance can be given. Certain of the Company's subsidiaries have incurred and, to the extent permitted under the Indenture, may in the future incur indebtedness that is secured. Holders of such indebtedness will have a claim against the assets of the subsidiary that secure such indebtedness which is prior to the claim of the holders of the New Notes under the guarantees. At May 31, 1994 the Company's subsidiaries that will guarantee the New Notes had no secured debt. Certain recent decisions by federal courts have required that recipients of guarantees from "insiders" be treated as "insiders" for bankruptcy purposes. Under current judicial interpretations, the subsidiary guarantees may constitute guarantees by insiders. As a result, holders of the New Notes may be treated as "insiders" in a bankruptcy proceeding and would thus be subject to a one-year preference period applicable to insiders rather than a 90-day preference period applicable to general creditors. The "preference period" is the period of time prior to the filing of the bankruptcy petition for which payments to the affected creditor may be challenged as preferential payments. Thus, because of the subsidiary guarantees, payments made to holders of the New Notes within one year prior to the filing of any bankruptcy petition may be subject to challenge. ORIGINAL ISSUE DISCOUNT CONSEQUENCES Under certain circumstances described in more detail below, a holder of a New Note might be required to include in such holder's income for federal income tax purposes the original issue discount with respect to the New Note as it accrues. If a bankruptcy case is commenced by or against the Company under the United States Bankruptcy Code after the issuance of the New Notes, the claim of a holder of New Notes may be limited to an amount equal to the sum of the issue price as determined by the bankruptcy court and that portion of the original issue discount which is deemed to accrue from the issue date to the date of any such bankruptcy filing. See "Certain Federal Income Tax Considerations."

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+RISK FACTORS Persons receiving Common Units should consider each of the factors described under "Risk Factors" in evaluating an investment in the Partnership, including, but not limited to, the following: . Future Partnership performance will depend upon the success of the Partnership in maximizing profit from retail propane sales. Propane sales are affected by weather patterns, product prices and competition, including competition from other energy sources. . Cash distributions will depend on future Partnership performance and will be affected by the funding of reserves, expenditures and other matters within the discretion of the General Partner. . Potential conflicts of interest could arise between the General Partner and its affiliates, on the one hand, and the Partnership or any partner thereof, on the other. . Holders of Common Units have limited voting rights and the General Partner manages and controls the Partnership. . The Partnership Agreement limits the liability and modifies the fiduciary duties of the General Partner; holders of Common Units are deemed to have consented to certain actions and conflicts of interest that might otherwise be deemed a breach of fiduciary or other duties under state law. . The issuance of all 2,400,000 Common Units offered hereby immediately after the date hereof might dilute the interests of holders of Common Units in distributions by the Partnership.

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+RISK FACTORS AN INVESTMENT IN THE SHARES BEING OFFERED HEREBY INVOLVES A SIGNIFICANT DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PROSPECTIVE PURCHASERS OF THE SHARES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING AN INVESTMENT IN THE COMPANY. CONTROL OF THE COMPANY. H. Wayne Huizenga, Chairman of the Board and Chief Executive Officer of the Company, Michael G. DeGroote, Vice Chairman of the Board of the Company, Harris W. Hudson, a Director and the President of the Company (and Mr. Huizenga's brother-in-law), and John J. Melk, a Director of the Company, beneficially own 14,000,000, 16,750,000, 9,800,000, and 1,350,000 shares of Common Stock (including presently exercisable warrants and options for an aggregate of 12,900,000 shares of Common Stock), respectively, as of September 21, 1995, or an aggregate of 59.1% of the issued and outstanding shares of Common Stock as of September 21, 1995 assuming all of such warrants and options are exercised. Although there is no agreement among any of Messrs. Huizenga, DeGroote, Hudson or Melk to vote together on any matters submitted to a vote of the Company's stockholders, if Messrs. Huizenga, Hudson, DeGroote and Melk vote together, they would have the ability to control the outcome of most matters submitted to a vote of the Company's stockholders, especially with respect to the election of directors. DEPENDENCE ON KEY PERSONNEL. The Company believes that the experience and success that its management team has had in operating and growing public and private service companies, in general, and public and private companies in the waste management industry, in particular, is important to the Company's future success. However, there can be no assurance that its management team will have the same success in operating and growing the Company as it has had with other companies in the past. Furthermore, the Company has not entered into non-competition agreements or employment agreements with any of Messrs. Huizenga, Hudson or Gregory K. Fairbanks, the Company's Chief Financial Officer and an Executive Vice President. The loss of the services of any of the members of its management team, in general, or Mr. Huizenga in particular (whether such loss is through resignation or otherwise), could have a material adverse effect on the operations and future success of the Company. POSSIBLE DEPRESSING EFFECT OF FUTURE SALES OF COMMON STOCK. Future sales of the Shares or the perception that such sales could occur could adversely affect the market price of the Common Stock. There can be no assurance as to when, and how many of, the Shares will be sold and the effect such sales may have on the market price of the Common Stock. On August 11, 1995, the Company registered for sale, from time to time on a continuous basis under a shelf registration statement, by certain selling stockholders an aggregate of 54,458,375 shares of Common Stock, of which 36,313,375 were issued and outstanding and 18,145,000 were reserved for issuance pursuant to certain outstanding options and warrants. On September 22, 1995, the Company registered for sale, from time to time on a continuous basis under a shelf registration statement, by certain selling stockholders an aggregate of 6,090,000 shares of Common Stock. In addition, the Company has issued and intends to issue in the future Common Stock and/or options or warrants to purchase Common Stock pursuant to exemptions from registration available under the Securities Act in connection with certain of its acquisitions. Such securities are subject to resale in accordance with the Securities Act and the regulations promulgated thereunder. As such restrictions lapse or if such shares are registered for sale to the public, such securities may be sold into the public market. To facilitate the issuance of Common Stock in making acquisitions, the Company is registering the Shares hereunder. In the event of the issuance and subsequent resale of a substantial number of shares of Common Stock, or a perception that such sales could occur, there could be a material adverse effect on the prevailing market price of the Common Stock. DILUTION. The issuance of additional shares of Common Stock upon exercise of outstanding and presently exercisable warrants, or upon the Company's completion of any acquisitions and business combinations, may have a dilutive effect on earnings per share and will have a dilutive effect on the voting rights of the holders of Common Stock. ABSENCE OF OPERATING HISTORY IN POSSIBLE EXPANSION OF EXISTING OPERATIONS. Management currently contemplates expanding the Company's operations outside of solid waste management and related lines of business and, in connection therewith, changing the name of the Company. On August 28, 1995, the Company entered the electronic security services industry through the acquisition of an existing business which provides electronic security services. The Company has no history of operations in the electronic security services industry or any industry other than solid waste management and related lines of business. There can be no assurance that the Company will be successful in the electronic security services industry or in any other industry which it enters. There can be no assurance that the Company will enter into any additional industries unrelated to the solid waste services industry or, if it does enter into any such industries, that it will achieve the results anticipated by management. NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL. The Company's current business strategy is to act aggressively in growing as an integrated solid waste management company by acquiring and integrating existing solid waste companies and recycling businesses, and to expand its recently acquired electronic security services business by internal growth and by making additional acquisitions in that industry. Further, the Company currently anticipates expanding the Company's operations outside of solid waste management, electronic security services and related lines of business. Although the Company has substantially no debt and has approximately $206 million in cash available for general corporate purposes, principally to finance acquisitions, the Company believes that substantial additional capital will be necessary to fully capitalize on acquisition and expansion opportunities that may become available to the Company. Accordingly, the Company intends to replace the Company's existing credit facility (which was reduced by the Company in the third quarter of 1995 to a $10 million letter of credit facility and currently has approximately $5.3 million of available borrowing capacity) with a substantially larger credit facility. However, there can be no assurance that such additional financing will be available, or, in the event that it is, that it will be available on terms acceptable to the Company. In the event that such financing is not available or is not available in the amounts or on terms currently contemplated by management, the implementation of the Company's acquisition strategy could be materially and adversely affected. IMPEDIMENTS TO COMPLETING FUTURE ACQUISITIONS. The Company's acquisition strategy depends on its ability to identify and acquire appropriate solid waste collection operations and landfills, electronic security systems businesses, and other unrelated service businesses, to integrate the acquired operations effectively and to increase its market share. A number of the Company's competitors for such acquisitions are larger, better known companies than the Company with significantly greater financial resources. There can be no assurance that the Company will be able to locate acquisition candidates in markets or on terms the Company deems attractive, that any identified candidates will be acquired, or that acquired operations will be effectively integrated to realize expected efficiencies and economies of scale or prove profitable. The completion of acquisitions requires the expenditure of sizeable amounts of capital, and the intense competition among companies pursuing similar acquisition strategies may increase capital requirements. The Company could be forced to alter its strategy in the future if such candidates become unavailable or too costly. As the Company continues to pursue its acquisition strategy in the future, its financial position and results of operations may fluctuate significantly from period to period. RISKS ASSOCIATED WITH ACQUISITIONS. Although the Company investigates each business that it acquires, there may be liabilities that the Company fails or is unable to discover, including liabilities arising from non-compliance with environmental laws by prior owners, and for which the Company, as a successor owner, may be responsible. The Company seeks to minimize the impact of these liabilities by obtaining indemnities and warranties from the seller which may be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to their limited scope, amounts, or duration, the financial limitations of the indemnitor or warrantor, or other reasons. ENVIRONMENTAL REGULATION. The collection and disposal of solid wastes, operation of landfills and rendering of related environmental services are subject to federal, state and local requirements which regulate health, safety, the environment, zoning and land-use. Operating permits are generally required for landfills and certain collection vehicles, and these permits are subject to revocation, modification and renewal. Federal, state and local regulations vary, but generally govern disposal activities and the location and use of facilities and also impose restrictions to prohibit or minimize soil, air and water pollution. In connection with landfills, it often may be necessary to expend considerable time, effort and money to bring the Company's existing or acquired facilities into compliance with applicable requirements and to obtain the permits and approvals necessary to increase their capacity. In addition, governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose fines in the case of violations, including criminal penalties. These regulations are administered by the United States Environmental Protection Agency (the "EPA") and various other federal, state and local environmental and health and safety agencies and authorities, including the Occupational Safety and Health Administration of the United States Department of Labor. Certain of the Company's waste disposal operations traverse state boundaries. Although such operations currently constitute an immaterial portion of the Company's business, their importance may increase as the Company completes future acquisitions. Such operations could be adversely affected if the federal government or a state in which a landfill is located limits or prohibits, imposes discriminatory fees on or otherwise seeks to discourage the disposal, within state boundaries, of waste collected outside of the state. Subtitle D of the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), establishes a framework for regulating the storage, collection and disposal of non-hazardous solid wastes. In the past, the Subtitle D framework has left the regulation of non-hazardous waste storage, collection and disposal largely to the states. However, in October 1991, the EPA promulgated a final rule which imposes minimum federal comprehensive solid waste management criteria and guidelines for disposal facilities and operations, including location restrictions, facility design and operating criteria, closure and post-closure requirements, financial assurance standards, groundwater monitoring requirements and corrective action standards, many of which have not commonly been in effect or enforced in connection with solid waste landfills. States are required to revise their landfill regulations to meet these requirements. Because some parts of the new regulations will be phased in over time, the full effect of these regulations may not be felt for several years. However, other than for groundwater monitoring and financial assurance requirements, all provisions of the final rule became effective in October 1993. All of the Company's planned landfill expansions or new landfill development projects have been engineered to meet or exceed these requirements. Operating and design criteria for existing operations have been modified to comply with these new regulations. There can be no assurance that the EPA will not promulgate similar regulations under Subtitle D in connection with the collection of non-hazardous solid waste. HAZARDOUS SUBSTANCES LIABILITY. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("Superfund" or "CERCLA"), has been interpreted by some courts to impose strict, joint and several liability on current and former owners or operators of facilities at which there has been a release or a threatened release of a "hazardous substance" and on persons who generate, transport or arrange for the disposal of such substances at the facility. Thousands of substances are defined as "hazardous" under CERCLA and their presence, even in minute amounts, can result in substantial liability. The statute provides for the remediation of contaminated facilities and imposes costs on the responsible parties. The expense of conducting such a cleanup and the damages can be very significant and, given the limitations in insurance coverage for these risks, could have a material adverse impact on the Company's business and financial condition. Notwithstanding its efforts to comply with applicable regulations and to avoid transporting and receiving hazardous substances, such substances may be present in waste collected by the Company or disposed in its landfills, or in waste collected, transported or disposed in the past by acquired companies. More than 20% of the sites on the EPA's National Priorities List of Hazardous Waste Sites are solid waste landfills that ostensibly never received any "hazardous wastes." The Company intends to continue to focus on the non-hazardous waste disposal market and does not intend to acquire or develop hazardous waste disposal operations. As used in this Prospectus, "non-hazardous waste" means substances, including asbestos, that are not defined as hazardous wastes under federal regulations. LACK OF ENVIRONMENTAL LIABILITY INSURANCE. The majority of the Company's facilities currently carry site-specific pollution legal liability insurance, which may provide coverage under certain circumstances for pollution damage to third parties. In addition, the Company has certain contractors' pollution liability insurance and professional liability insurance, which may provide coverage under certain circumstances for damage to third parties. However, both of these coverages are restrictive in nature, as they are subject to certain exclusions and effective dates, consistent with insurance industry requirements. In addition, such coverage is subject to specific and aggregate limits which may not be sufficient to cover claims, if they should arise. In certain prior years, consistent with industry experience, the Company was not able to obtain broad pollution insurance at reasonable costs and, therefore, carried only such coverage as was required by regulatory permits. In addition, the extent of insurance coverage under certain forms of policies has been the subject in recent years of litigation in which insurance companies have, in some cases, successfully taken the position that certain risks are not covered by such policies. If, in the absence of such insurance, the Company were to incur liability for environmental damages of sufficient magnitude, it could have a material adverse effect on the Company's business and financial condition. RISKS OF PENDING AND FUTURE LEGAL PROCEEDINGS. In addition to the costs of complying with environmental regulations, waste management companies will continue to be involved in legal proceedings in the ordinary course of business. Government agencies may seek to impose fines on the Company for alleged failure to comply with laws and regulations or to deny, revoke or impede the renewal of the Company's permits and licenses. In addition, such governmental agencies, as well as surrounding landowners, may claim the Company is liable for environmental damage. Citizen's groups have become increasingly active in challenging the grant or renewal of permits and licenses, and responding to such challenges has further increased the costs associated with permitting new facilities or expanding current facilities. A significant judgment against the Company, the loss of a significant permit or license or the imposition of a significant fine could have a material adverse effect on the Company's financial condition. The Company is currently a party to various legal proceedings as well as environmental proceedings which have arisen in the ordinary course of its business. No assurance can be given with respect to the outcome of these legal and environmental proceedings and the effect such outcomes may have on the Company. Unfavorable resolution of any matter individually or in the aggregate could adversely affect the results of operations for the quarterly periods in which they are resolved. SEASONALITY. The Company believes that its collection and landfill operations can be adversely affected by protracted periods of inclement weather which could delay the development of landfill capacity or the transfer of waste and/or reduce the volume of waste generated. There can be no assurance that protracted periods of inclement weather will not have a material adverse effect on the Company's future results of operations. COMPETITION IN THE SOLID WASTE INDUSTRY; LANDFILL ALTERNATIVES. The waste industry is highly competitive. Entry into the industry and ongoing operations within the industry require substantial technical, managerial and financial resources. The non-hazardous waste industry is led by three large national waste management companies and numerous regional and local companies, all of which contribute to the high level of competition that characterizes the industry. Some of these companies have significantly greater financial and operational resources and more established market positions than the Company. In addition, the Company must often compete with municipalities that maintain their own waste collection and landfill operations and often have financial advantages due to the availability of tax revenues and tax-exempt financing. Further, alternatives to landfill disposal (such as recycling, composting and waste-to-energy) are increasingly competing with landfills. There also has been an increasing trend at the state and local levels to mandate waste reduction at the source and to prohibit the disposal of certain types of wastes, such as yard wastes, at landfills. This may result in the volume of waste going to landfills being reduced in certain areas, which may affect the Company's ability to operate its landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. In addition, most of the states in which the Company operates landfills have adopted plans or requirements which set goals for specified percentages of certain solid waste items to be recycled. To the extent these are not yet in place, these recycling goals will be phased in over the next few years. COMPETITION IN THE ELECTRONIC SECURITY SERVICE INDUSTRY. The security alarm industry is highly competitive and highly fragmented. The Company's electronic security systems business competes with five large national companies, as well as smaller regional and local companies, in all of its operations. Furthermore, new competitors are continuing to enter the industry and the Company may encounter additional competition from such future industry entrants. Certain of the Company's competitors have greater financial and other resources than the Company. There can be no assurance that the Company will be able to compete effectively in the future. "FALSE" ALARM ORDINANCES. The Company believes that approximately 95% of alarm activations that result in the dispatch of police or fire department personnel are not emergencies, and thus are "false" alarms. Significant concern has arisen in certain municipalities about this high incidence of "false" alarms. This concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services. Recently, a trend has emerged on the part of local governmental authorities to consider or adopt various measures aimed at reducing the number of "false" alarms. Such measures include (i) subjecting alarm monitoring companies to fines or penalties for transmitting "false" alarms, (ii) licensing individual alarm systems and the revocation of such licenses following a specified number of "false" alarms, (ii) imposing fines on alarm subscribers for "false" alarms, (iv) imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of "false" alarms, and/or (v) requiring further verification of an alarm signal before the police will respond. Enactment of such measures could adversely affect the Company's electronic security services business and operations. GEOGRAPHIC CONCENTRATION OF COMPANY'S ELECTRONIC SECURITY SYSTEMS BUSINESS; RISKS OF POTENTIAL EXPANSION. The existing subscriber base of the Company's two subsidiaries in the electronic security system business is geographically concentrated in certain metropolitan areas of Florida. Accordingly, their performance may be adversely affected by regional or local economic conditions, regulation or other factors. The Company may from time to time make acquisitions in regions outside of its current operating areas. In order for the Company to expand successfully into a new area, the Company must obtain a sufficient number, and density, of subscriber accounts in such area to support the additional investment. There can be no assurance that an expansion into new geographic areas would generate operating profits.

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+RISK FACTORS Prospective investors should carefully consider the factors set forth below, in addition to the other information contained in this Prospectus, in evaluating an investment in the Common Stock offered hereby. HISTORY OF OPERATING LOSSES For the six month period ended June 30, 1995 the Company returned to profitability after sustaining net losses from fiscal 1987 through fiscal 1994 totalling approximately $21.4 million. The Company's operating losses resulted from a number of factors, including a decline in revenues due in part to reduced government spending on defense related products, which historically have represented the majority of the Company's business and are expected to represent a substantial portion of the Company's business in the foreseeable future. Also contributing to the Company's losses was a decline in sales of the Company's translucent ceramic orthodontic bracket, from peak revenues of $6.2 million in fiscal 1988 to $.4 million in fiscal 1994, due in part to excess inventory levels accumulated by the Company's exclusive distributor of this product, Unitek Corporation, a subsidiary of Minnesota Mining & Mfg. Co. ("3M/Unitek"), and also in part to resistance by some orthodontists to use the product because of technical problems experienced with earlier versions of the bracket. To maintain profitability and achieve revenue growth, the Company must, among other things, successfully address new opportunities for armor applications, including the development of capacity to successfully manufacture ceramic body armor in volume; achieve significant sales of a new version of its transluscent orthodontic bracket product, which is currently under development; and continue to upgrade its technologies and commercialize products and services incorporating such technologies. There can be no assurance, however, that the Company will be able to sustain or improve its level of profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." IMPORTANCE OF NEW PRODUCTS; LIMITED VOLUME MANUFACTURING EXPERIENCE FOR PRODUCTS UNDER DEVELOPMENT The Company believes that its future prospects will depend to a large extent on the success of products which currently provide little revenue or which are still under development. These products include, in particular, lightweight ceramic armor vests for military personnel, the Company's ceramic-impregnated dispenser cathode for television and other cathode ray tube ("CRT") applications, improved versions of the Company's translucent ceramic orthodontic bracket, and ceramic components for automobile and diesel engines. Although the Company received its initial production order in January 1995 for lightweight ceramic armor vests, the Company has previously produced only prototype quantities of this vest and has never manufactured it in the volumes required to fulfill this order. As a result, there can be no assurance that the Company will be able to manufacture these vests in a timely manner or on a profitable basis. Wide customer acceptance of the Company's CRT cathode and the Company's ability to manufacture this cathode profitably will depend in part on achieving significant manufacturing cost reductions, the Company's ability to manufacture these components in high volumes at acceptable production yields, and satisfying extensive customer testing and qualification procedures, which often take many months or years to complete. Should the Company be unable to achieve such cost reductions, manufacture with acceptable product yields or satisfy customer testing and qualification procedures, the Company's prospects and operating results may be materially and adversely affected. The Company has recently introduced a metal-lined version of its translucent ceramic orthodontic bracket and plans to introduce another version of this product in early 1996, both of which are designed to improve the performance and market acceptance of this product. The metal-lined bracket is more difficult and costly to produce than earlier versions of this bracket and there can be no assurance that the Company will be able to produce this version in high volume at acceptable yields or that either of these new designs will achieve market acceptance or result in increased sales of this product. The Company's efforts in producing ceramic components for automobile and diesel engines are still in the experimental stage, with future success substantially dependent on achieving significant cost reductions and developing high volume manufacturing capability while maintaining high quality levels. Furthermore, lead times for the introduction of new materials and components into production automobiles are typically several years. The market for ceramic automotive and diesel components is new and evolving, and advanced technical ceramics are not currently used in any significant automotive applications. Accordingly, demand and market acceptance for such products are subject to a high level of uncertainty. As a result of these factors, the Company believes that the use of ceramic components in high volume production automobile or diesel engines cannot be predicted and will not occur for several years, if at all. See "Business--Market Applications." MANAGEMENT OF GROWTH The Company is experiencing a period of new product introductions that have placed, and will continue to place, a significant strain on its resources, including personnel. A significant portion of the Company's backlog relates to a single order for ceramic armor vests for the United States military, and fulfillment of such order will require the Company to manufacture the product in volumes significantly greater than the Company has historically achieved for such products. In addition, the Company believes that future growth is significantly dependent on introductions of other new products applying the Company's core advanced technical ceramics technologies. The Company expects that management of this transition will continue to place a strain on the Company's management, operational and financial resources. The Company's ability to manage growth effectively, particularly given the increasingly international scope of its operations, will require it to add manufacturing capacity and personnel, continue to implement and improve its operational, financial and management information systems as well as to develop the management skills of its managers and supervisors and to train, motivate and manage its employees. These demands are expected to require the addition of new management personnel and the development of additional expertise by existing management personnel. The Company's failure to effectively manage growth could have a material adverse effect on the Company's results of operations. See "Business--Market Applications," "--Backlog" and "Management." DEPENDENCE ON KEY PERSONNEL The Company's future success depends in large part on the continued service of Joel P. Moskowitz, its Chairman, Chief Executive Officer and President, and a principal stockholder of the Company, as well as other principal members of its management, the loss of whose services could have a material adverse effect upon the business and financial condition of the Company. The Company is also dependent on other key personnel, and on its ability to continue to attract, retain and motivate highly qualified personnel. The competition for such employees is intense, and there can be no assurance that the Company will be able to recruit and retain such personnel. Mr. Moskowitz has an employment agreement with the Company which expires in July 1999, but no other employee has an agreement for a specified term of employment with the Company. See "Management." COMPETITION The markets for applications of advanced technical ceramics are competitive. The Company believes the principal competitive factors in these markets are product performance, material's specifications, application engineering capabilities, customer support, reputation and price. Many of the Company's competitors, both domestic and international, have greater financial, marketing and technical resources than Ceradyne. The Company's competitors often are divisions of larger companies with each of Ceradyne's product lines subject to completely different competitors. Some of the competitors of the Company include Kyocera Corporation's Industrial Ceramics Group in industrial ceramic products, Vesuvius McDaniel Co. in fused silica ceramics, and Simula Inc. and Brunswick Corp. in defense products. In many applications the Company also competes with manufacturers of non-ceramic materials. The principal competition for the Company's new CRT cathode are oxide cathodes manufactured in-house by the television manufacturers who are the Company's targeted customers for this product. There can be no assurance that the Company will be able to compete successfully against its current or future competitors or that competition will not have a material adverse effect on the Company's results of operations and financial condition. See "Business--Competition." ENVIRONMENTAL CONCERNS The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials. Certain of the Company's products are produced using beryllium oxide, which is highly toxic in powder form. This powder, if inhaled, can cause chronic beryllium disease ("CBD") in a small percentage of the population. In recent years the Company has been sued by several former employees and a family member of one such former employee alleging that they had contracted CBD as a result of exposure to beryllium oxide powders used in the Company's products. Although these claims have been settled without material liability to the Company, a current employee of the Company and his wife have sued the Company, alleging the employee contracted CBD as a result of exposure to beryllium oxide powder during the course of his employment. There can be no assurance that the Company will avoid liability to persons who contract CBD as a result of exposure to beryllium oxide while employed with the Company. While the Company believes that it is in material compliance with all existing applicable environmental statutes and regulations, any failure by the Company to comply with statutes and regulations presently existing or enacted in the future could subject it to liabilities or the suspension of production. Furthermore, there can be no assurance that claims against the Company related to exposure to beryllium oxide powder will be covered by insurance or that, if covered, the amount of insurance will be sufficient to cover any potential adverse judgment. See "Business--Environmental Concerns and Litigation." DEPENDENCE ON UNITED STATES GOVERNMENT AND RISK OF CONTRACT TERMINATION Of the Company's $24.8 million total backlog at June 30, 1995, approximately $18.0 million, or 73%, represents orders for lightweight ceramic armor for defense applications. This amount includes unfilled firm orders and unexercised options for lightweight ceramic armor for military helicopters of approximately $5.3 million and $3.1 million, respectively, or a total of approximately $8.4 million, and unfilled firm orders and unexercised options for lightweight ceramic armor vests for military personnel of approximately $3.5 million and $6.1 million, respectively, or a total of approximately $9.6 million. The contract for armor vests and some of the contracts for helicopter armor are directly or indirectly with agencies of the United States government. The Company anticipates that it will continue to depend heavily on direct or indirect sales to government agencies for a significant percentage of the Company's revenues for the foreseeable future. In recent years, budgets of many government agencies have been reduced, causing certain customers and potential customers for the Company's products to re-evaluate their needs. Such budget reductions are expected to continue over at least the next several years. Future reductions in United States government spending on defense- related products could have a material adverse effect on the Company's prospects and operating results. Under U.S. law, the Company's defense-related contracts may be cancelled for convenience at any time without cause by the government, with reimbursement to the Company only for its actual expenses incurred. The Company has in the past experienced the cancellation of a significant government order, which had a material adverse effect on the Company's operating results. There can be no assurance that the Company will not experience similar cancellations in the future, and any such cancellations could adversely affect the Company's operating results. See "Backlog." RELIANCE ON 3M/UNITEK RELATIONSHIP The Company developed its translucent ceramic orthodontic bracket pursuant to a joint development agreement with 3M/Unitek, and sells this product only to 3M/Unitek pursuant to an exclusive marketing agreement which expires in 2007. Consequently, the Company depends entirely on the marketing and sales efforts of 3M/Unitek for the sales of this product. The Company also depends on customer and technical feedback from 3M/Unitek for the design of improvements to the bracket. Early versions of this product were not well accepted by some orthodontists due in part to resistance to change from using traditional stainless steel brackets and to certain technical problems experienced by some users of the earlier versions of the Company's translucent ceramic orthodontic bracket. These problems included difficulty in the removal, or debonding, of the bracket from the tooth, breakage of brackets during the treatment process more often than experienced with stainless steel brackets, and slower movement of the metal arch wire through the ceramic bracket, resulting in longer treatment times than with stainless steel brackets. Designs recently introduced and designs scheduled for early 1996 introduction are intended to improve certain features of earlier versions of the bracket, but there can be no assurance that these new products will completely eliminate the previous problems or receive wide market acceptance. Furthermore, no assurance can be given that 3M/Unitek will devote substantial marketing efforts to sales of the Company's orthodontic products, or that it will not re-assess its commitment to the Company's technologies or develop its own competitive technology. Any failure by 3M/Unitek to actively market the Company's orthodontic product, or any failure of such product to achieve market acceptance, would materially and adversely impact the Company's prospects and results of operations. See "Risk Factors--Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development" and "Business--Strategic Relationships." DEPENDENCE ON INTERNATIONAL SALES Shipments to customers outside of North America accounted for approximately 25% and 26% of the Company's sales in fiscal 1994 and the first six months of fiscal 1995, respectively. The Company anticipates that international shipments will continue to account for a significant portion of its sales. Certain of these revenues have been derived from sales to foreign government agencies and may be subject to risks similar to those set forth in "Risk Factors--Dependence on United States Government and Risk of Contract Termination." There are a number of risks inherent in the Company's international business activities, including unexpected changes in regulatory requirements, tariffs and other trade barriers, longer account receivable payment cycles, potentially adverse tax consequences, and the burdens of compliance with foreign laws. Additionally, the Company does not engage in hedging activities to protect against the risk of currency fluctuations. Fluctuations in currency exchange rates could cause sales denominated in U.S. dollars to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Furthermore, future international activity may result in foreign currency denominated sales which may result in gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable arising from international operations which may contribute significantly to fluctuations in the Company's results of operations. The Company historically has denominated export sales in United States dollars. There can be no assurance, however, that the aforementioned factors will not have an adverse effect on the revenues from the Company's future international sales and, consequently, the Company's results of operations. Some of the Company's products may not be exported to certain foreign countries without an export license obtained from the United States government. The Company has and may in the future experience difficulty in obtaining licenses to export its products to certain countries. Failure to obtain such licenses could have a material adverse effect on the Company's sales and prospects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Ceradyne Strategy" and "-- Marketing and Customers." PROTECTION OF INTELLECTUAL PROPERTY The Company relies on a combination of patents, trade secrets, trademarks, and other intellectual property law, nondisclosure agreements and other protective measures to preserve its proprietary rights pertaining to its products and production processes. Such protection, however, may not preclude competitors from developing products or processes similar or superior to the Company's. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Although the Company continues to implement protective measures and intends to defend its proprietary rights, there can be no assurance that these efforts will be successful. Furthermore, there can be no assurance that the Company's products or processes are not in violation of the patent rights of third parties, or that any of the Company's patents will not be challenged, invalidated or circumvented. See "Business--Patents, Licenses and Trademarks." SIGNIFICANT FLEXIBILITY IN APPLYING NET PROCEEDS OF OFFERING The Company has not designated any specific use for a substantial portion of the net proceeds from the sale of the Common Stock offered hereby. Rather, the Company currently intends to use the net proceeds primarily for general corporate purposes. See "Use of Proceeds." Accordingly, management will have significant flexibility in applying the net proceeds of this offering. Failure to utilize the net proceeds within a reasonable period of time may result in a dilution of the Company's earnings per share, which could have a material adverse effect on the price of the Company's Common Stock. CONCENTRATION OF STOCK OWNERSHIP; ANTITAKEOVER EFFECTS OF DELAWARE LAW Upon completion of this offering, the Company's directors and executive officers and Ford will, in the aggregate, beneficially own approximately 37.5% of the outstanding Common Stock. As a result, these stockholders, acting together, would be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "Principal Stockholders." In addition, Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders, as defined by statute. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders, and therefore could adversely affect the price of the Company's Common Stock. See "Description of Capital Stock--Delaware Law." VOLATILITY OF STOCK PRICE The Company's Common Stock has experienced substantial price volatility and such volatility may occur in the future, particularly as a result of quarter to quarter variations in the actual or anticipated financial results of the Company, announcements by the Company, its competitors or its customers, actual or anticipated changes in government defense spending, or reports or recommendations by securities industry analysts. In addition, the stock market has experienced extreme price and volume fluctuations which have affected the market price of the common stock of many technology companies in particular and which have at times been unrelated to operating performance of the specific companies whose stock is traded. Broad market fluctuations, as well as economic conditions generally, may adversely affect the market price of the Company's Common Stock. In addition, in the past the Company has not experienced significant trading volume in its Common Stock, has not been actively followed by stock market analysts and has limited market-making support from broker-dealers. If greater market-making support is not generated, supported by broader analyst coverage, resulting in greater average trading volume in the Company's Common Stock, there can be no assurance that an adequate trading market will exist to sell large positions in the Company's Common Stock. See "Price Range of Common Stock and Dividend Policy."

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+CERTAIN RISK FACTORS In evaluating an investment in the Common Stock, purchasers of the Common Stock should carefully consider the following factors as well as the other information set forth in this Prospectus. PRICING Prices for tissue paper products are significantly affected by the levels of industry capacity and operating rates, demand, general economic conditions and competitive conduct, all of which are beyond the Company's control. The high level of growth in tissue industry capacity from 1990 through 1992, coupled with weakening commercial demand resulting from the recession and competitive new product introductions in the consumer market, caused industry operating rates and pricing to fall. The Company's average domestic net selling prices declined by approximately 5% in each of 1991 and 1992 and by 1.2% in 1993 which adversely affected the Company's operating results. Due to the impact of industry conditions on the Company's then projected operating results, which assumed that net selling prices and cost increases would approximate 1% per year and that further capacity expansion would not be justifiable given the Company's high leverage and adverse tissue industry operating conditions, the Company wrote off its remaining goodwill balance of $1.98 billion in the third quarter of 1993. As discussed in "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," although the Company believes that the adverse economic and industry operating conditions which persisted from 1991 and into 1994 are beginning to improve, there can be no assurance that the improvement in industry operating conditions, including industry operating rates and pricing, which is not within the Company's control, will continue. In addition, beginning in the third quarter of 1994, the Company's wastepaper costs increased significantly and there can be no assurance that the improvement in industry operating conditions will enable the Company to recover increases in wastepaper costs through price increases for its products. See "--Increasing Wastepaper Prices," "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and "Business--Industry Overview." INCREASING WASTEPAPER PRICES Fort Howard uses wastepaper for substantially all its fiber requirements. The price of wastepaper is affected by demand which is primarily dependent upon de-inking and recycling capacity levels in the paper industry overall and by the price of market pulp. Prices for de-inking grades of wastepaper used by tissue producers increased sharply beginning in the third quarter of 1994. Wastepaper prices for the grades of wastepaper used in Fort Howard's products more than doubled from July 1994 to January 1995. Such wastepaper prices may increase further because of increased demand resulting from substantial additions of de-inking and recycling capacity in the paper industry which are expected to come on line during 1995 and 1996, increasing market pulp prices and other factors. If the current trend in the Company's wastepaper costs continues, there can be no assurance that the Company will be able to recover increases in the cost of wastepaper through price increases for its products and the Company's earnings could be materially adversely affected. Further, a reduction in supply of wastepaper due to increased demand or other factors could have an adverse effect on the Company's business. See "Business--Industry Overview." COMPETITION The manufacture and sale of tissue products are highly competitive. The Company's tissue products compete directly with those of a number of large diversified paper companies, including Chesapeake Corporation, Georgia-Pacific Corporation, James River Corporation of Virginia, Kimberly-Clark Corporation, Pope & Talbot, Inc., Scott Paper Company and The Procter & Gamble Company, as well as regional manufacturers, including converters of tissue into finished products who buy tissue directly from tissue mills. Over the last four years, price has become a more important competitive factor affecting tissue producers. Many of the Company's competitors are larger and more strongly capitalized than the Company which may enable them to better withstand periods of declining prices and adverse operating conditions in the tissue industry. See "Business--Competition." RECENT NET LOSSES AND DEFICIT IN SHAREHOLDERS' EQUITY The Company has experienced net losses for the fiscal years ended December 31, 1994, 1993 and 1992 of $70 million, $2,052 million (including the write-off in 1993 of the Company's then remaining goodwill) and $80 million, respectively. If the current trend in the Company's wastepaper costs continues, there can be no assurance that the Company will be able to recover increases in the cost of wastepaper through price increases for its products; accordingly, there can be no assurance as to the Company's ability to generate net income in future periods. See "--Pricing," "--Increasing Wastepaper Prices" and "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations." The Company has a substantial common shareholders' deficit. At December 31, 1994, the Company's common shareholders' deficit was approximately $2,148 million. On a pro forma basis after giving effect to the Recapitalization, the Company's common shareholders' deficit would have been approximately $1,872 million at December 31, 1994. See "Capitalization." HIGHLY LEVERAGED POSITION AND ABILITY TO SERVICE DEBT The Company has substantial consolidated indebtedness. At December 31, 1994, the Company's consolidated debt was approximately $3,318 million. On a pro forma basis after giving effect to the Recapitalization, the Company's consolidated debt would have been approximately $3,078 million at December 31, 1994. See "Capitalization." For the year ended December 31, 1994, the Company's earnings before fixed charges were inadequate to cover its fixed charges by $65 million. On a pro forma basis after giving effect to the Recapitalization and the 1994 Refinancing, the deficiency of earnings to fixed charges would have been $17 million for the year ended December 31, 1994. For purposes of the computation of the deficiency of earnings to fixed charges, earnings consist of consolidated income (loss) before taxes plus fixed charges (excluding capitalized interest and amortization of deferred loan costs) plus that portion (deemed to be one-fourth) of operating lease rental expense representative of the interest factor. Although the consummation of the Recapitalization will reduce the Company's consolidated interest expense over the next several years, the Company will remain obligated to make substantial interest and principal payments on its indebtedness. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Financial Condition" and "Description of Certain Indebtedness." The ability of the Company to meet its obligations and to comply with the financial covenants contained in the agreements relating to the Company's indebtedness is largely dependent upon the future performance of the Company, which is subject to financial, business and other factors affecting it. Many of these factors, such as economic conditions, interest rate levels, job formation, demand for and selling prices of its products, costs of its raw materials, environmental regulation and other factors relating to its industry generally or to specific competitors are beyond the Company's control. There can be no assurance that the Company will generate sufficient cash flow to meet its obligations under its indebtedness, which include estimated repayment obligations, assuming consummation of the Recapitalization, of $9 million in 1995, $60 million in 1996, $115 million in 1997, $138 million in 1998 and $153 million in 1999 (and increasing thereafter). If the Company is unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on its indebtedness, or if the Company fails to comply with the various covenants in such indebtedness, it would be in default under the terms thereof, which would permit the lenders thereunder to accelerate the maturity of such indebtedness and could cause defaults under other indebtedness of the Company or result in a bankruptcy of the Company. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Financial Condition" and "Description of Certain Indebtedness." SENSITIVITY TO INTEREST RATES At December 31, 1994, the Company's indebtedness had a weighted average interest rate of 10.16% and approximately $868 million of the Company's indebtedness bore interest at a floating rate. Pursuant to the Recapitalization, the Company will become more sensitive to prevailing interest rates, as $1.5 billion (or 46%) of its outstanding indebtedness will bear interest at a floating rate (assuming the Recapitalization is completed in March 1995). Of this amount, $500 million will be subject to LIBOR-based interest rate cap agreements which effectively limit the interest cost to the Company to 6% plus the Company's borrowing margin until June 1, 1996 and to 8% plus the Company's borrowing margin from June 1, 1996 until June 1, 1999. Interest rates were at comparatively low levels in 1993 and began to increase in 1994. If interest rates continue to increase in 1995, the Company may be less able to meet its debt service obligations. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Financial Condition" and "Description of Certain Indebtedness." COVENANT RESTRICTIONS MAY LIMIT COMPANY'S OPERATING FLEXIBILITY The limitations contained in the agreements relating to the Company's indebtedness, together with the highly leveraged position of the Company could limit the ability of the Company to effect future debt or equity financings and may otherwise restrict corporate activities, including its ability to avoid defaults and to respond to competitive market conditions, to provide for capital expenditures beyond those permitted or to take advantage of business opportunities. If the Company cannot generate sufficient cash flow from operations to meet its obligations, then its indebtedness might have to be refinanced. There can be no assurance that any such refinancing could be effected successfully or on terms that are acceptable to the Company. In the absence of such refinancing, the Company could be forced to dispose of assets in order to make up for any shortfall in the payments due on its indebtedness under circumstances that might not be favorable to realizing the best price for such assets. Further, there can be no assurance that any assets could be sold quickly enough, or for amounts sufficient, to enable the Company to make any such payments. See "Description of Certain Indebtedness." ENVIRONMENTAL MATTERS The Company is subject to substantial regulation by various federal, state and local authorities in the U.S. and national and local authorities in the U.K. concerned with the impact of the environment on human health, the limitation and control of emissions and discharges to the air and waters, the quality of ambient air and bodies of water and the handling, use and disposal of specified substances and solid waste at, among other locations, the Company's process waste landfills. Financial responsibility for the clean-up or other remediation of contaminated property or for natural resource damages can extend to previously owned or used properties, waterways and properties owned by third parties, as well as to properties currently owned and used by the Company even if contamination is attributable entirely to prior owners. The Company is involved in a voluntary investigation and potential clean-up of the Lower Fox River in Wisconsin and has been named as a potentially responsible party ("PRP") for alleged natural resource damages related to the Lower Fox River and Green Bay system. In addition, the Company makes capital expenditures and incurs operating expenses for clean-up obligations and other environmental matters arising in its on-going operations. Based upon currently available information and analysis, the Company recorded a $20 million charge in the fourth quarter of 1994 for estimated or anticipated liabilities and legal and consulting costs relating to environmental matters arising from past operations. While the charge reflects the Company's current estimates of the costs of these environmental matters, there can be no assurance that the amount accrued will be adequate. In addition, there can be no assurance that the Company will not be named a PRP at other sites in the future or that the costs associated with such future sites would not be material. Environmental legislation and regulations and the interpretation and enforcement thereof are expected to become increasingly stringent and to further limit emission and discharge levels and may increase the likelihood and cost of environmental clean-ups or related costs, all of which are likely to increase certain operating expenses, require continuing capital expenditures and adversely affect the operating flexibility of the Company's manufacturing operations. While the Company has budgeted for future capital and operating expenditures to maintain compliance with environmental legislation and regulations, indeterminable significant expenditures in connection with such compliance or other environmental matters could have a material adverse effect on the Company's financial condition and results of operations. See "Business--Environmental Matters" and "--Legal Proceedings." PRINCIPAL SHAREHOLDERS Upon consummation of the Offering, Morgan Stanley Group, directly and through certain affiliated entities which it controls, including MSLEF II, collectively will beneficially own 37.9% of the outstanding shares of Common Stock (35.8% if the U.S. Underwriters' over-allotment option is exercised in full). Currently, three of the six directors of the Company are officers of MS&Co, a subsidiary of Morgan Stanley Group. Pursuant to the terms of the Stockholders Agreement (as defined), MSLEF II and Fort Howard Equity Investors II, L.P., a Delaware limited partnership ("Fort Howard Equity Investors II"), each have the right to have a designee nominated for election to the Company's Board of Directors at any annual meeting of the Company's shareholders, so long as MSLEF II or Fort Howard Equity Investors II, as the case may be, does not already have a designee as a member of the Board of Directors at the time of such annual meeting. In addition, in the event of a vacancy on the Board of Directors created by the resignation, removal or death of a director nominated by MSLEF II or Fort Howard Equity Investors II, such shareholders have the right to have a designee nominated for election to fill such vacancy. As a result of their large share holdings, Morgan Stanley Group and its affiliates will continue to have significant influence over the management policies of the Company and over matters requiring shareholder approval, including the election of all directors, the adoption of amendments to the Company's Restated Certificate of Incorporation and the approval of mergers and sales of all or substantially all of the Company's assets, which may deter a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, even if such events might be favorable to the Company's shareholders. See "--Anti-Takeover Effects of Provisions of the Restated Certificate of Incorporation and By-laws" and "Certain Transactions--Stockholders Agreement." Since the Acquisition, MS&Co has acted as lead underwriter in connection with the public offerings of the Company's various debt securities and as financial advisor to the Company. Since 1992, MS&Co has received an aggregate of $43.7 million of underwriting and financial advisory fees in connection therewith. See "Certain Transactions--Other Transactions." RESTRICTIONS ON DIVIDENDS Since the Acquisition, the Company has not declared or paid any cash dividends on any class of its capital stock, and currently does not intend to pay dividends on the Common Stock. The New Bank Credit Agreement, the 1995 Receivables Facility and the indentures and other agreements governing the Company's indebtedness limit the payment of cash dividends on the Common Stock. See "Dividend Policy" and "Description of Certain Indebtedness." EFFECT ON PUBLIC MARKET OF SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, there will be 63,101,239 shares of Common Stock outstanding, of which the 25,000,000 shares sold pursuant to the Offering will be tradeable without restrictions by persons other than "affiliates" of the Company. The remaining shares of Common Stock will be "restricted" securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and may not be sold in the absence of registration under the Securities Act or an exemption therefrom, including the exemptions contained in Rule 144 under the Securities Act. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock, or the availability of such shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of stock options) in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock or the ability of the Company to raise capital through a public offering of its equity securities. Pursuant to the Underwriting Agreement the Company has agreed, and pursuant to the Stockholders Agreement all current shareholders of the Company are subject to an agreement, with certain limited exceptions, not to offer, pledge, sell, contract to sell, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period beginning 7 days before and ending 180 days after the effective date of the Registration Statement in the case of current and former officers and other key employees of the Company (who beneficially own an aggregate of 791,358 shares of Common Stock), and ending one year after the effective date of the Registration Statement in the case of the remaining shareholders (who beneficially own an aggregate of 37,309,881 shares of Common Stock), without the prior written consent of certain of the representatives of the U.S. Underwriters in the case of Morgan Stanley Group, MSLEF II, Fort Howard Equity Investors, L.P., a Delaware limited partnership ("Fort Howard Equity Investors"), and Fort Howard Equity Investors II, or of MS&Co, in the case of the remaining shareholders. See "Shares Eligible for Future Sale" and "Underwriters." Pursuant to the Stockholders Agreement, Morgan Stanley Group, MSLEF II and other shareholders of the Company have certain registration rights with respect to the shares of Common Stock that they currently own. Subject to the one year lock-up period described above, Morgan Stanley Group, MSLEF II, Fort Howard Equity Investors and Fort Howard Equity Investors II may choose to dispose of the Common Stock owned by them. The timing of such sales or other dispositions by such shareholders (which could include distributions to MSLEF II's, Fort Howard Equity Investors' and Fort Howard Equity II's partners) will depend on market and other conditions, but could occur relatively soon after the one year lock-up period described above, including pursuant to the exercise of their registration rights. MSLEF II, Fort Howard Equity Investors and Fort Howard Equity Investors II are unable to predict the timing of sales by any of their limited partners in the event of a distribution to them. Such dispositions could be privately negotiated transactions or public sales. DILUTION The deficit in net tangible book value of the Company at December 31, 1994 was $2,225 million or $58.40 per share. Assuming an initial public offering price of $12.00 per share, purchasers of the Common Stock offered hereby will incur immediate dilution in net tangible book value of $43.29 per share of Common Stock purchased. See "Dilution." ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS Certain provisions of the Restated Certificate of Incorporation (the "Certificate of Incorporation") and the Restated By-laws (the "By-laws") of the Company that will become operative immediately prior to consummation of the Offering may be deemed to have anti-takeover effects and may discourage or make more difficult a takeover attempt that a shareholder might consider in its best interest. Such provisions also may adversely affect prevailing market prices for the Common Stock. These provisions, among other things: (i) classify the Company's Board of Directors into three classes, each of which will serve for different three-year periods; (ii) provide that only the Board of Directors or the Chief Executive Officer of the Company may call special meetings of the shareholders; (iii) eliminate the ability of the shareholders to take any action without a meeting; (iv) permit the adjournment of shareholder meetings in certain circumstances and (v) limit the ability of the shareholders to amend or repeal the By-laws or any of the foregoing provisions of the Certificate of Incorporation, except with the consent of holders of at least 80% of the Company's outstanding Common Stock. In addition, the By-laws establish certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at shareholders' meetings. See "Description of Capital Stock--Anti-Takeover Effects of Provisions of the Company's Restated Certificate of Incorporation and By-laws." ABSENCE OF PRIOR PUBLIC MARKET FOR THE COMMON STOCK Since the Acquisition, there has been no public market for the Common Stock. Although the Common Stock has been approved for listing on the Nasdaq National Market, there can be no assurance that an active trading market will develop for the Common Stock. Following consummation of the Offering, MS&Co will be prohibited by the rules of the New York Stock Exchange from making a market in the Common Stock. The initial public offering price for the Common Stock will be determined by negotiations among the Company and the representatives of the Underwriters in accordance with the recommendation of CS First Boston Corporation ("CS First Boston"), the "qualified independent underwriter," as is required by the by-laws of the National Association of Securities Dealers, Inc. (the "NASD"), and may not be indicative of the market price for the Common Stock after the Offering.

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+RISK FACTORS Prospective investors in the New Notes should evaluate the following factors, which may affect a decision to acquire the New Notes. RISKS ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS The Company is highly leveraged. After giving effect to the Transactions, on a pro forma basis as of June 30, 1995, the Company would have had total outstanding indebtedness of approximately $91.8 million, of which $90.0 million would have been outstanding under the Notes, and the Company would have had total stockholders' equity of $45.0 million. In addition, the Company has the ability to borrow an additional $20.0 million under the Senior Credit Facility. This high level of indebtedness will result in significant interest expense and eventual principal repayment obligations. Under the Senior Credit Facility, all borrowings are required to be repaid in full for at least 45 consecutive days during the period from July 1 to November 1 of each year. Under the Senior Credit Facility, substantially all of the Company's assets (other than real estate), including the capital stock of its subsidiaries, are pledged to secure borrowings thereunder. By virtue of these security interests, in the event of a default under the Senior Credit Facility or bankruptcy proceedings involving the Company, the lenders thereunder will have a claim upon the assets so pledged prior in right to the Noteholders. See "Capital Structure--Senior Credit Facility." The Company believes that its cash flow, together with the proceeds from the Transactions and the borrowings under the Senior Credit Facility, will be adequate to fund its currently anticipated requirements for working capital, capital expenditures and scheduled principal and interest payments. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required to refinance all or a portion of its existing debt, sell certain of its assets or obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The financial covenants and other restrictions contained in the Senior Credit Facility require the Company to satisfy certain financial tests, and the financial covenants and other restrictions contained in the Senior Credit Facility and in the Indenture limit the Company's ability to borrow additional funds and to dispose of certain assets. See "Capital Structure--Senior Credit Facility" and "Description of the New Notes." The Company's high degree of leverage could significantly limit its ability to withstand competitive pressures and adverse economic conditions or to take advantage of significant business opportunities that may arise or to meet its obligations. RISKS OF ACCIDENTS AND DISTURBANCES AT PARKS Because all the Company's parks feature "thrill rides," attendance at the parks and, consequently, revenues may be adversely affected by any serious accident or similar occurrence with respect to a ride. The Company liability insurance policies provide coverage of up to $15 million per loss occurrence and require the Company to pay the first $25,000 of loss per occurrence. In addition, in view of the proximity of certain of the Company's parks to major urban areas and the appeal of the parks to teenagers and young adults, the Company's parks could experience disturbances that could adversely affect the image of and attendance levels at its parks. Working together with local police authorities, the Company has taken certain security-related precautions designed to prevent disturbances in its parks. EFFECTS OF INCLEMENT WEATHER Because the great majority of a theme park's attractions are outdoor activities, attendance at parks and, accordingly, the Company's revenues are significantly affected by the weather. Unfavorable weekend weather and unusual weather of any kind can adversely affect park attendance. NEW NOTES EFFECTIVELY SUBORDINATED TO SECURED INDEBTEDNESS The New Notes are not secured and therefore will be effectively subordinated to borrowings under the Senior Credit Facility and other secured indebtedness permitted under the terms of the Indenture, to the extent of the value of the assets securing such indebtedness. The indebtedness under the Senior Credit Facility is secured by liens on substantially all of the Company's assets (other than real estate). On the date of this Prospectus, the Company had $20.0 million of revolving credit available under the Senior Credit Facility. Subject to certain conditions specified therein, the Indenture permits the Company and its subsidiaries to incur additional indebtedness, including capital lease obligations and secured purchase money indebtedness, which obligations and secured indebtedness will effectively rank senior to the New Notes. See "Capital Structure-- Senior Credit Facility" and "Description of the New Notes--Certain Covenants." ABILITY TO PAY NEW NOTES DEPENDENT ON FUNDS FROM SUBSIDIARIES The Company is a holding company that derives all of its operating income from its subsidiaries. The Company must rely upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations, including the payment of principal of, premium, if any, and interest on the New Notes. The ability of the Company's subsidiaries to make such payments may be restricted by, among other things, applicable corporate laws and other laws and regulations. POTENTIAL SUBORDINATION OR VOIDING OF NEW NOTES BASED ON FRAUDULENT CONVEYANCE The incurrence of indebtedness (such as the Notes) in connection with the Merger is subject to review under relevant federal and state fraudulent conveyance and similar statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of the Company. Under these statutes, if a court were to find that obligations (such as the Notes) were incurred with the intent of hindering, delaying or defrauding present or future creditors, that the Company received less than a reasonably equivalent value or fair consideration for those obligations, or that the Company contemplated insolvency with a design to prefer one or more creditors to the exclusion, in whole or in part, of other creditors and, at the time of the incurrence of the obligations, the obligor either (i) was insolvent or rendered insolvent by reason thereof, (ii) was engaged or was about to engage in a business or transaction for which its remaining unencumbered assets constituted unreasonably small capital, or (iii) intended to incur or believed that it was incurring debts beyond its ability to pay such debts as they matured or became due, such court could void the Company's obligations under the Notes, subordinate the Notes to other indebtedness of the Company or take other action detrimental to the holders of the Notes. The measure of insolvency for purposes of a fraudulent conveyance or other similar claim will vary depending upon the law of the jurisdiction being applied. Generally, however, a company will be considered insolvent at a particular time if the sum of its debts at that time is greater than the then fair value of its assets or if the fair salable value of its assets at that time is less than the amount that would be required to pay its probable liability on its existing debts as they become absolute and mature. The Company believes that, after giving effect to the Transactions, the Company was (i) neither insolvent nor rendered insolvent by the incurrence of indebtedness in connection with the Merger, (ii) in possession of sufficient capital to run its business effectively, and (iii) incurring debts within its ability to pay as the same mature or become due. In addition, the Note Guarantees may be subject to review under relevant federal and state fraudulent conveyance and similar statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of any of the Note Guarantors. In such a case, the analysis set forth above would generally apply, except that the Note Guarantees could also be subject to the claim that, since the Note Guarantees were incurred for the benefit of the Company (and only indirectly for the benefit of the Note Guarantors), the obligations of the Note Guarantors thereunder were incurred for less than reasonably equivalent value or fair consideration. A court could void a Note Guarantor's obligation under the Note Guarantees, subordinate the Note Guarantees to other indebtedness of a Note Guarantor or take other action detrimental to the holders of the New Notes. HIGHLY COMPETITIVE BUSINESS The Company's theme parks compete directly with other theme parks and amusement parks and indirectly with all other types of recreational facilities and forms of entertainment within their market areas, including movies, sports attractions and vacation travel. Accordingly, the Company's business is and will continue to be subject to factors affecting the recreation and leisure time industries generally, such as general economic conditions and changes in discretionary consumer spending habits. Within each park's regional market area, the principal factors affecting competition include location, price, the uniqueness and perceived quality of the rides and attractions in a particular park, the atmosphere and cleanliness of a park and the quality of its food and entertainment. Certain of the Company's direct competitors have substantially greater financial resources than the Company. CONTROL BY PRINCIPAL STOCKHOLDERS; CHANGE OF CONTROL After consummation of the Transactions, approximately 87% of the aggregate voting power of the Company's Common Stock and Convertible Preferred Stock was held by a small number of stockholders. Accordingly, such stockholders collectively have the ability to elect the entire Board of Directors and generally to direct the business and affairs of the Company. See "Stock Ownership of Management and Certain Beneficial Holders." A Change of Control could require the Company to refinance substantial amounts of indebtedness, including indebtedness under the Senior Credit Facility. In addition, upon the occurrence of a Change of Control, the holders of the New Notes would be entitled to require the Company to repurchase the New Notes at a purchase price equal to 101% of the principal amount of such New Notes, plus accrued and unpaid interest, if any, to the date of repurchase. The Company's failure to repurchase the New Notes would result in a default under the Indenture and the Senior Credit Facility. In the event of a Change of Control, there can be no assurance that the Company would have sufficient assets to satisfy its obligations under the New Notes. In addition, a Change of Control permits acceleration of the indebtedness outstanding under the Senior Credit Facility. See "Capital Structure--Senior Credit Facility" and "Description of the Notes--Change of Control."

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+RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. CYCLICAL BUSINESS The truck trailer industry is dependent on the trucking industry in general and the automotive parts industry is dependent on the automotive industry. Poor economic conditions in either industry could have a material adverse effect on the Company. In addition to dependence on general economic conditions, sales of new truck trailers have historically been subject to cyclical variations based on a five to seven-year replacement cycle. The poor economic conditions in the United States in 1990 and 1991 had an adverse effect on demand for the Company's products. Although sales have rebounded, there can be no assurance that such growth will continue. PRIOR LOSSES AND SUBSTANTIAL LEVERAGE The Company incurred losses before extraordinary items and accounting changes of approximately $20.3 million, $27.0 million and $7.6 million in 1990, 1991 and 1992, respectively. Although the Company had net income for the year ended December 31, 1994, and had income before extraordinary items and accounting changes for the year ended December 31, 1993, there can be no assurance that the Company will not sustain losses in the future. See "Management's Discussion and Analysis of Financial Condition and the Results of Operations." The Company currently is and, following the completion of this Offering, will continue to be substantially leveraged. After giving effect to (i) this Offering and the application of the net proceeds therefrom at an assumed initial public offering price of $11.00 per share, (ii) the Refinancing and (iii) the Note Repayment, the Company's consolidated indebtedness would have been approximately $260.2 million at December 31, 1994. See "Use of Proceeds," "Capitalization," and "Selected Consolidated Financial Data." The degree to which the Company is leveraged could have important consequences to holders of the Common Stock, including, but not limited to, the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes, refinancing of indebtedness or other purposes may be impaired, thereby limiting its ability to grow; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of the principal of and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) the Company is more highly leveraged than certain of its competitors, which may place the Company at a competitive disadvantage; (iv) certain of the Company's borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates; and (v) the Company's high degree of leverage may make it more vulnerable to economic downturns and may limit its ability to withstand competitive pressures. COMPETITION The Company's primary businesses, truck trailer manufacturing and automotive products manufacturing, are highly competitive. The Company competes with other truck trailer manufacturers and automotive stamping companies of varying sizes (including the in-house capabilities of certain automotive manufacturers), some of which have greater financial resources than the Company. In addition, barriers to entry in the truck trailer manufacturing industry are low and, therefore, it is possible that additional competitors could enter the market at any time. Great Dane is, and believes that several of its competitors are, in the process of adding manufacturing capacity, which may have an adverse effect on order backlog and pricing throughout the industry. Although Great Dane is presently one of the largest manufacturers in the truck trailer industry, there can be no assurance that it will be able to maintain or increase its market share. RELIANCE ON MAJOR CUSTOMERS The Company's automotive products operations rely heavily on sales to GM. For the year ended December 31, 1994, sales to GM accounted for approximately 93% of the automotive products operations' revenues and approximately 13% of the Company's total revenues. Suppliers of automotive products have experienced increased pricing pressure from OEMs which are taking aggressive measures to reduce their operating costs, including significant price reductions from suppliers. Although opportunities for new business may arise for the automotive segment as a result of GM's pressure on other suppliers, future earnings of this segment of the Company's business may be materially adversely affected by the price reductions required or requested by GM, by decisions by GM to utilize its own facilities to manufacture these products or by work stoppages at GM plants. Although GM provides 13 week forecasts of its purchasing requirements, changes in its production may result in changes to these requirements. In addition, although the automotive segment is attempting to diversify its customer base, there can be no assurance that it will be able to reduce its reliance on GM in the foreseeable future. The Company does not expect that the strike at the GM plant in Pontiac, Michigan will have a material adverse effect on its automotive products operations. Great Dane entered the intermodal container manufacturing business in reliance on a large order from J.B. Hunt. There can be no assurance that Great Dane will be able to attract other substantial customers for these products. For the year ended December 31, 1994, J.B. Hunt accounted for approximately 10% of Great Dane's revenues. GOVERNMENT REGULATION OF TRUCK TRAILERS The federal and state governments regulate certain safety features incorporated in the design of truck trailers. Changes or anticipation of changes in these regulations can have a material impact on the cost of manufacturing truck trailers and on the purchasing policies of Great Dane's customers. These factors may adversely affect the financial condition of the Company. ENVIRONMENTAL MATTERS The Company's operations are subject to numerous federal, state and local laws and regulations pertaining to the discharge of materials into the environment. The Company has taken steps related to such matters in order to minimize the risks to the environment from potentially harmful aspects of its operations. From time to time, the Company has incurred expenses to improve its facilities in accordance with applicable laws and may be required to do so again in the future. Certain of Great Dane's manufacturing processes formerly involved the emission of chlorofluorocarbons, but Great Dane has changed those processes to comply with new regulations. The Company also remains obligated to indemnify purchasers of certain of its prior subsidiaries and purchasers of properties sold by prior subsidiaries for environmental contamination, if any, of properties owned by such subsidiaries. The Company's expenditures related to the foregoing environmental matters and indemnification obligations have not had, and the Company does not currently anticipate that such expenditures will have, a material adverse effect on the Company's financial condition, although there can be no assurance that this will remain the case. IMPACT OF CITY REGULATION AND EXPIRATION OF ANNUAL LIMIT ON NEW MEDALLION ISSUANCE Chicago regulates Yellow Cab's operations through maintenance, lease rate, insurance and inspection requirements, as well as through taxes, license fees and other means. In 1993, Chicago gave the Commissioner of Consumer Services broad powers to set maximum lease rates, which, in certain instances, have been set at lower rates than those currently charged by Yellow Cab. Although Yellow Cab has filed a petition for higher rates than those set by the Commissioner and is allowed to continue charging its current rates pending action on its petition, there can be no assurance that it will be successful or that in the future it will be able to pass through any increased costs by lease rate increases or other means. The agreement between Yellow Cab and Chicago, pursuant to which increases in the total number of outstanding medallions in Chicago are limited to a maximum of 100 annually, expires on December 31, 1997. There can be no assurance as to how many medallions Chicago will issue after the expiration of the agreement, nor as to the effect, if any, on the Company, of such issuance, including the effect on medallion values. Although Yellow Cab has sold medallions during the past year at selling prices of approximately $38,000 per medallion, there can be no assurance that such values will continue to prevail in the market, especially after December 31, 1997. See "Business -- Other Operations -- Vehicular --The Medallions" and "-- Regulatory Issues." CONTROL OF THE COMPANY Upon consummation of this Offering, the four current stockholders of Holdings will own 80.8% of the outstanding Common Stock (78.5% if the Over-Allotment Option is exercised in full). Therefore, these stockholders, acting together, effectively will have control of the Company and will have sufficient voting power to determine the outcome of any corporate transaction or other matter requiring stockholder approval, including, among other things, the election of directors. See "Ownership of Common Stock." NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE Prior to this Offering, there has been no public market for the Common Stock. Although the Common Stock has been approved for quotation on the Nasdaq Stock Market (National Market), subject to official notice of issuance, there can be no assurance that an active trading market will develop or be sustained after this Offering or that the market price for the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock will be determined solely by negotiations between the Company and the Underwriters and may not bear any relationship to the market price for the Common Stock following this Offering. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. DILUTION Purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution of $18.31 in net tangible book value per share of Common Stock from the initial public offering price (at an assumed initial public offering price of $11.00 per share). SHARES ELIGIBLE FOR FUTURE SALE Currently, all of the outstanding capital stock of the Company is owned by four persons. Upon completion of this Offering, 20,800,000 shares of Common Stock will be issued and outstanding, 16,800,000 of which will be owned by these four persons. The Company and these stockholders have each agreed not to offer, sell, contract to sell, or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus (other than shares acquired in this Offering) without the prior written consent of the Representatives of the Underwriters. After expiration of that time period, shares owned by such stockholders may only be sold pursuant to an effective registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), or an applicable exemption from the registration requirements thereunder. The Company has also (i) adopted a stock option plan for key employees and directors (the "1994 Option Plan"), subject to stockholder approval and approval of the Compensation Committee of the Board of Directors (the "Compensation Committee"), (ii) adopted a stock option plan for its independent directors who will serve on the Board of Directors after the consummation of this Offering (the "Outside Directors Option Plan") and (iii) granted an option to Jay H. Harris, the Executive Vice President and Chief Operating Officer of the Company (the "Harris Option"). A total of 1,792,500 shares of common stock have been reserved for issuance upon exercise of options. See "Management -- Compensation Pursuant to Plans" and "-- Employment Agreements ." No prediction can be made as to the effect, if any, that future sales of shares of Common Stock, or the availability of shares of Common Stock for future sales, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of stock options to be granted under the 1994 Option Plan, the Outside Directors Option Plan and the Harris Option), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. See "Shares Eligible for Future Sale."

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+RISK FACTORS An investment in the Securities offered hereby involves a high degree of risk. Prospective purchasers of the Securities should consider carefully the following matters, as well as the other information in this Prospectus, in evaluating an investment in such Securities. LACK OF COMPARABLE OPERATING HISTORY As part of the pre-petition restructuring which commenced in 1989 and while the Chapter 11 Cases were pending, the Company disposed of a significant amount of assets (including substantially all partnership, joint venture and foreign interests). In connection with the Reorganization, the Company was reorganized around its core domestic operations, while non-core assets and operations were transferred to Rosebud. Certain assets that had been held for sale under the 1989 restructuring program were included as part of the reorganized entity and other assets that were identified to be sold during the Chapter 11 proceedings as being for sale but had not been sold prior to the conclusion of the Reorganization were transferred to Rosebud for ultimate disposition. In addition, the Company adopted Fresh-Start Reporting, which assumes that a new reporting entity has been formed as of the Plan Effective Date, which was deemed to be March 31, 1994 for accounting purposes, and requires assets and liabilities be adjusted to their fair values as of the effective date. Accordingly, there is no comparable historical financial information available for the assets and businesses that constitute the reorganized Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." CONSTRUCTION INDUSTRY CONDITIONS Cyclical, Seasonal and Regional Industry. Construction spending and cement consumption historically have fluctuated widely. Demand for cement is correlated to cyclical construction activity, which, in turn, is influenced largely by economic conditions, including (particularly in the case of residential construction) prevailing interest rates and availability of public funds for infrastructure construction projects. The demand for cement also is seasonal, particularly in the northern markets where colder weather affects construction activity. Cement manufacturing is largely a regional business due to the low value-to-weight ratio of cement. As such, cement prices differ geographically, depending on plant efficiency, domestic and foreign competition within each market, energy costs, proximity and costs of materials and regional demand. The demand for cement is subject to regional economic fluctuations which may be greater or less than the fluctuations in the economy of the United States as a whole. As a result, the Company's operating results are subject to significant fluctuation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Industry Overview." Commodity Product. The markets for the Company's products are highly competitive. Due to the lack of product differentiation, competition in the cement industry is based largely on price. Accordingly, the Company's profitability is dependent on levels of cement demand and on the Company's ability to manage operating costs, and is very sensitive to small shifts in the balance between supply and demand. These factors can significantly impact selling prices and the Company's profitability. Although the Company was able to implement price increases in most of its markets in 1993 and 1994, the maintenance of current price levels cannot be guaranteed and any price deterioration will reduce the Company's level of profitability. See "Business -- Competitive Conditions." Imports. During the 1980's, cement imports rose to record levels, reaching 19% of total domestic consumption in 1987, according to statistics prepared by the United States Bureau of Mines. This high level of imports, caused in large part by low ocean shipping rates and excess foreign capacity, was a contributing factor in the decline in selling price of cement in many regional markets during this period. As a result of anti-dumping petitions filed by a group of domestic cement producers beginning in 1990, substantial import duties were levied on cement imported from Mexico and Japan. The duties are subject to annual reviews and revision by the United States Department of Commerce. Although existing anti-dumping orders and the ability to bring anti-dumping actions against importers remain in effect under the North American Free Trade Agreement ("NAFTA"), the anti-dumping provisions would be substantially altered under the Uruguay round of world trade negotiations under the General Agreement on Tariffs and Trade ("GATT"). GATT, which was recently enacted, could make anti-dumping orders more difficult to obtain and "sunset" reviews of anti-dumping orders would be required to determine if the orders should remain in effect or be eliminated. The level of cement imports is also affected by other factors, including world economic conditions influencing levels of construction activity, and shipping costs. Governmental Regulation. The Company's operations, like others in the cement industry, are subject to extensive, stringent and complex federal, state and local laws and regulations pertaining to the protection of the environment and human health and safety, which require the Company to devote substantial time and resources to ensure continued compliance with these statutory and regulatory requirements. It is not possible to predict with accuracy the environmental requirements that may be imposed on the Company's operations in the future or the range of future costs for compliance by the Company with current or future environmental laws and regulations. There can be no assurances that changes in or additions to the environmental and health and safety laws and regulations or judicial or administrative interpretations thereof will not adversely affect the Company's ability to continue its operations. Moreover, there can be no assurances that the capital, operating and other costs of maintaining compliance with applicable environmental requirements, which could be substantial, will not adversely affect the Company's financial condition or that judicial or administrative proceedings, seeking penalties or injunctive relief, will not be brought against the Company for alleged non-compliance with applicable environmental laws and regulations. See "Business -- Environmental Regulation." FINANCIAL RESTRICTIONS The indenture governing the Senior Notes (the "Senior Note Indenture") and the Financing Agreement, dated as of April 13, 1994 (the "Credit Agreement"), and other agreements entered into in connection with the Reorganization, impose certain operating and financial restrictions on the Company. Such restrictions affect, and in some respects significantly limit or prohibit, among other things, the ability of the Company to incur additional indebtedness, repay certain indebtedness prior to its stated maturity, create liens, apply proceeds from asset sales, engage in mergers or acquisitions, make certain capital expenditures, redeem the Senior Notes on an optional basis or pay dividends. In addition, pursuant to the Credit Agreement, and other agreements entered into in connection with the Reorganization, certain of the Company's assets are subject to liens or negative pledges, including those issued to the Pension Benefit Guaranty Corporation ("PBGC") to secure future pension obligations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." These restrictions may pose substantial risks to holders of the Securities, and could have material adverse effects on the marketability, price and future value of such Securities. Among other consequences, the restrictions may result in the impairment of the Company's ability to obtain additional financing in the future, to make acquisitions and to take advantage of significant business opportunities that may arise, and will also increase the vulnerability of the Company to adverse general economic and industry conditions. The Company's ability to meet its debt service and other obligations or to refinance the unpaid balance of its indebtedness at maturity, if appropriate, depends on its future performance, which, in turn, depends on general economic conditions and on financial business, weather, competition (including level of imports) and other factors beyond the Company's control, or on its ability to obtain additional funding, if required, whether through the issuance of equity or other arrangements. There can be no assurance that the Company's cash flow will be sufficient to satisfy its debt service and other obligations, that any refinancing of indebtedness, if appropriate, will be obtained or be sufficient to pay such obligations, or that any equity financing will be available when needed or on terms acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." ENVIRONMENTAL MATTERS General. Liabilities to federal or state governmental authorities or third parties may be imposed jointly or severally upon the Company for the investigation and remediation of facilities or sites at which contamination is present or hazardous substances have been or may be released into the environment under certain federal and state laws, including the federal Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") and the Resource Conservation and Recovery Act or comparable state laws. Such liability has arisen or may arise in the future because many of the raw materials, by-products and wastes produced, used or disposed of by the Company or its predecessors contain chemical elements or compounds which have been designated as hazardous substances or which otherwise may cause environmental contamination. Hazardous substances are used or produced by the Company in connection with its cement manufacturing operations (e.g., grinding compounds, refractory bricks, cement kiln dust), quarrying operations (e.g., blasting materials), equipment operation and maintenance (e.g., lubricants, solvents, grinding aids, cleaning aids, used oil), and hazardous waste fuel burning operations (e.g., wastes classified as hazardous because they contain one or more hazardous substances). The Company has been named as a party potentially responsible and liable for certain specific Superfund or other contaminated sites. There can be no assurances that in the future the Company will not be named as a potentially responsible party at other sites and be held liable for the costs of the investigation and remediation of such sites, which costs could be substantial. Although the Company may be able to avoid the imposition of such liability predicated upon releases or threatened releases of hazardous substances that occurred prior to the commencement of the Chapter 11 Cases or the Reorganization, there can be no assurances that the Company's defenses will prevail in any litigation respecting the foregoing or that the Company's financial condition will not be adversely affected by the imposition of liability for Superfund or contaminated sites for which the Company has been, or may in the future be, identified as a potentially responsible party. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Environmental Regulation" and "Business -- Legal Proceedings." Hazardous Waste Fuels. Two of the Company's cement manufacturing facilities (the Cape Girardeau and Greencastle cement plants) use hazardous waste fuels ("HWF") as cost saving energy sources. They are thus subject to stringent regulation pursuant to federal, state and local requirements governing hazardous waste treatment, storage and disposal facilities, including those contained in the federal Boiler and Industrial Furnace regulations (the "BIF Rules") promulgated under the Resource Conservation and Recovery Act ("RCRA"). While the Company believes that the operations at these two HWF burning cement plants (which currently conduct their HWF operations under "interim status" pursuant to RCRA) are currently in compliance with the extensive and technically complex requirements of the BIF Rules and applicable state requirements, the Company has been, or is presently, involved in certain environmental enforcement proceedings seeking civil penalties and injunctive relief for past non-compliances. There can be no assurance that the Company's HWF operations will be able to maintain compliance with the BIF Rules and state requirements or that changes to such rules or requirements or their interpretation by the relevant agencies or courts will not make it more difficult or cost prohibitive to maintain regulatory compliance or to continue to burn HWF. For example, because of technical difficulties in meeting certain of the BIF Rules emission standards, the Company has curtailed its HWF operations at the Greencastle cement plant unless and until costly plant upgrades are implemented, which the Company believes will partially or completely resolve these difficulties. Moreover, the Company currently is engaged in the lengthy and technically complex process of applying for and securing the permit required under RCRA and the BIF Rules for each of its HWF burning cement plants. There can be no assurance that the Company will succeed in securing a final RCRA permit for either or both of its HWF burning cement plants, or, if it is able to secure such permits, that such permits will contain terms and conditions with which the Company will be able to comply or which will not require cost prohibitive upgrades to the facilities to enable the Company to achieve and maintain compliance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations," "Business -- Environmental Regulation," "Business -- Legal Proceedings -- Environmental Matters" and Note 32 of the Notes to Consolidated Financial Statements. NO PROCEEDS TO THE COMPANY The Company will not receive any proceeds or additional capital from the sale of the Securities being offered hereby by the Selling Securityholders. The Company will, however, receive proceeds from any exercises of the Warrants included in such Securities. The Company could receive up to approximately $16.7 million in gross proceeds if such currently exercisable Warrants are exercised; however, there can be no assurance that the Warrants will be exercised or, if exercised, when prior to their expiration on December 31, 2000 they will be exercised. See "Use of Proceeds" and "Description of Securities -- Warrants." ANTI-TAKEOVER EFFECTS OF THE COMMON STOCK PURCHASE RIGHTS AND THE DELAWARE BUSINESS COMBINATION STATUTE On November 10, 1994, the Board of Directors of the Company declared a dividend of one right to purchase one one-tenth of a share of Common Stock (a "Right") for each outstanding share of Common Stock, payable to the stockholders of record on December 19, 1994. Each Right entitles the holder to purchase one one-tenth of a share of Common Stock at an exercise price of $70 per whole share, subject to adjustment to prevent dilution. Upon the occurrence of an acquisition by a person or group of 15% or more of the Common Stock (except under certain circumstances) or 10 days after a person or group announces a tender or exchange offer for 15% or more of the Common Stock (or such later date as the Board of Directors may determine), the holders of the Rights (other than the acquiring person or its affiliates) will have the right (i) to purchase shares of Common Stock having a market value twice the then per share exercise price and (ii) if the Company is thereafter acquired in a merger or other business combination, to purchase common stock of the acquiring entity having a market value twice the then per share exercise price, subject to prior redemption at the option of the Company. The Rights may be redeemed by the Company at $.01 per right and expire on November 10, 2004. Such Rights may, under certain circumstances, render more difficult or tend to discourage attempts to acquire the Company. See "Description of Securities -- Common Stock -- Common Stock Purchase Rights." In addition, Section 203 of the Delaware General Corporation Law which prohibits for a period of time certain "business combinations" between interested stockholders and corporations (including the Company) which are subject to the statute, could prohibit or delay the consummation of mergers or other takeover or change of control attempts with respect to the Company. Such Rights and provisions of Delaware Law may have an adverse effect on the market price of the Common Stock and may discourage bids at prices above the then existing market price for the Company's securities. PUBLIC MARKET FOR THE SECURITIES; LIMITED LIQUIDITY The Securities trade on the NYSE. As of December 31, 1994, approximately 37% of the outstanding Common Stock, 22% of the outstanding Warrants and 27% of the outstanding Senior Notes were beneficially owned by the Selling Securityholders. Therefore, the amount of the Securities which is available for trading by securityholders other than the Selling Securityholders is relatively low. Accordingly, there can be no assurance as to the market for, trading in or liquidity of the Securities. See "Price Range of Common Stock and Warrants" and "Principal Stockholders." No prediction can be made as to the effect, if any, that future sales of the Securities or the availability of the Securities for future sales, will have on the market price of the Securities prevailing from time to time. Sales of substantial amounts of the Securities, or the perception that such sales could occur, could adversely affect prevailing market prices for the Securities. The Securities being registered hereunder (or exempt from registration under Section 1145 of the Bankruptcy Code) may be sold in the public market from time to time by their beneficial owners. The sale by any such beneficial owner of a significant amount of such Securities could adversely affect prevailing market prices for the Securities. See "Plan of Distribution." RESTRICTIONS ON PAYMENT OF DIVIDENDS The Senior Note Indenture and the Credit Agreement restrict or prohibit the payment of dividends. The Company does not currently anticipate paying cash dividends on the Common Stock at any time in the foreseeable future. See "Dividend Policy."

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+RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating the CI Notes. LOSS RESERVE DEVELOPMENT AND OTHER CONTINGENCIES The actual amount of the Contingent Interest portion of the CI Notes will depend on certain significant contingencies. As a result, there can be no assurance as to what amount, if any, will be paid with respect to the Contingent Interest. The principal contingency affecting the amount of Contingent Interest is the development over time of the reserves for losses and loss adjustment expenses recorded by RECO, Piedmont's principal insurance subsidiary, as of March 31, 1995. In general, if as of the determination date for the Contingent Interest, the total of the amount paid and remaining reserves for losses and loss adjustment expenses with respect to business as to which earned premiums had been recorded by RECO as of March 31, 1995, exceeds the sum of the March 31, 1995 reserves and $25 million, then the Contingent Interest will be reduced by such excess, as offset by certain actual and deferred tax benefits realized or recorded by the Company related to such excess adverse development. Loss reserves are established by an insurer or reinsurer based upon its estimate of what it expects to pay on claims based on facts and circumstances then known and estimates of future trends and experience (including inflation, judicial decisions and other variable factors). As a result, the process of estimating loss and loss adjustment expense reserves is inherently imprecise. The inherent uncertainties of estimating such reserves are increased for reinsurers, as compared to primary insurers, because of the significant lapse of time which may occur between the occurrence of an insured loss, the reporting of the loss to the primary insurer and, thus, to the reinsurer, and the primary insurer's payment of that loss and subsequent indemnification by the reinsurer. Consequently, ultimate losses to a reinsurer may vary significantly from established reserves. In addition, RECO continues to receive claims for losses asserting injury from asbestos, toxic waste and other environmental pollutants for periods prior to 1985, when standard exclusionary clauses for such injuries were written into insurance policies. Estimates of liability for such claims are particularly difficult to calculate since they involve disputes between the insured party and its insurer, substantial legal defense costs, and questions as to occurrences and aggregation of claims and "late notice" issues. Environmental suits often contain multiple parties and multiple sites that result in an array of litigations among insureds and their insurers and require the parties to agree on a reasonable basis for settling the claims. The wide variety of settlements involving primary insurers challenges the reinsurers in determining the extent to which they should follow the settlements of their ceding companies. As a result in part of the foregoing, exposures for environmental impairment, asbestos-related and other latent injuries do not lend themselves to traditional actuarial reserving techniques. Among other contingencies, the amount of Contingent Interest payable will also depend on the recoverability of RECO's receivables from reinsurers recorded as of March 31, 1995. In general, in the event that, as of the determination date for the Contingent Interest, the sum of then-current reserves for uncollectible reinsurance and write-offs taken since March 31, 1995 exceeds the reserve for uncollectible reinsurance as of March 31, 1995, the Contingent Interest will be reduced. The establishment of reserves for uncollectible reinsurance is also inherently imprecise, since it may involve questions as to the scope of coverage and an assessment of the financial health of the reinsurer involved. The amount of certain actual and deferred tax benefits realized or recorded by the Company as a result of any adverse reserve development in general will increase the amount of Contingent Interest. However, these benefits will not be realized or recorded on settlement of the CI Notes at maturity unless the Company has had adequate taxable income on a consolidated basis during the term of the CI Notes to take advantage of such benefits. The value of tax benefits will also depend on corporate income tax rates prevailing from time to time. Therefore, the amount of tax benefits that would result from any particular level of adverse development cannot be predicted with certainty. TRANSFER RESTRICTIONS; ABSENCE OF PUBLIC MARKET During the first 90 days following the issuance of the CI Notes (the "Initial Period"), the CI Notes may be transferred without restrictions of any kind by the holders thereof, subject to compliance with the Securities Act and other applicable law. Following the Initial Period, the CI Notes will be transferable only to certain permitted transferees, such as to affiliates or family members of such holders, by gift without consideration, to an entity offering to acquire at least 25% of the CI Notes then outstanding, and, in certain instances, to other holders of CI Notes. Transfers after the Initial Period to certain of such transferees may be made only during specified periods of time. As a result, following the Initial Period, holders of the CI Notes may have to bear the risk of holding the CI Notes through the maturity date. See "DESCRIPTION OF CONTINGENT INTEREST NOTES--Transfer Restrictions." The CI Notes will not be listed on any stock exchange or on NASDAQ. It is currently anticipated that during the Initial Period, Smith Barney Inc. ("Smith Barney") will maintain a list of any indications of interest to purchase or sell CI Notes that Smith Barney may receive from time to time, provide recent price quotations based on such list and will make a reasonable effort to intermediate as agent any such purchase or sale of CI Notes, although such activity may be discontinued by Smith Barney at any time. There can be no assurance that any market for the CI Notes will develop during the Initial Period or, if any such market does develop, as to the liquidity of any such market, nor can there be any assurance as to the values at which the CI Notes will trade in any such market. Persons interested in purchasing or selling CI Notes during the Initial Period may contact the Special Equity Transactions Group of Smith Barney. LEVERAGE As of September 30, 1995, after giving pro forma effect to the Merger and related transactions, the Company would have had long term indebtedness of $95.0 million, not including the CI Notes. In addition, the Company may incur additional indebtedness from time to time, in connection with acquisitions or otherwise. The degree to which the Company is leveraged could have important consequences, including the following: (i) a substantial portion of the Company's cash flow from operations may be dedicated to the payment of principal and interest on its indebtedness and would not be available for other purposes; (ii) the Company's ability to obtain additional financing in the future may be impaired; (iii) the Company may be more leveraged than certain of its competitors, which may place it at a disadvantage; (iv) the Company's loan and other debt agreements may or will impose significant financial and operating restrictions; and (v) the Company's degree of leverage could make it more vulnerable to changes in general economic conditions. HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS Because Chartwell is a holding company which conducts its operations principally through its insurance company subsidiaries, following the Merger Chartwell will be largely dependent upon dividend payments from Chartwell Reinsurance and RECO to meet its obligations, including interest and principal on the Senior Notes and other debt of Chartwell and its subsidiaries, and the payment of the Fixed Amount of and Contingent Interest on the CI Notes in the event Chartwell elects not to or is unable to settle the CI Notes in Chartwell Common Stock. Chartwell and Chartwell Reinsurance are subject to the insurance holding company laws of the State of Minnesota. Under the applicable provisions of those laws as currently in effect, Chartwell Reinsurance may, upon appropriate notice to the Minnesota Commissioner of Commerce (the "Commissioner"), pay dividends to stockholders without the approval of the Commissioner, unless such dividends, together with other dividends paid within the preceding 12 months, exceed the greater of (i) 10% of Chartwell Reinsurance's policyholder surplus as of the end of the prior calendar year or (ii) Chartwell Reinsurance's statutory net income, excluding realized capital gains, for the prior calendar year. Any dividend in excess of the amount determined pursuant to the foregoing formula would be characterized as an "extraordinary dividend" requiring the prior approval of the Commissioner. In any case, the maximum amount of dividends Chartwell Reinsurance may pay is limited to its earned surplus, also known as unassigned funds. Under current New York law, which is applicable to RECO, the maximum ordinary dividend payable by RECO to Chartwell Reinsurance in any twelve month period without the approval of the Superintendent of Insurance of the New York Insurance Department (the "Superintendent") may not exceed the lesser of (a) 10% of policyholders surplus as shown on the company's last annual statement filed in accordance with SAP or any more recent quarterly statement or (b) the company's adjusted net investment income. Adjusted net investment income is defined as net investment income for the twelve months preceding the declaration of the dividend plus the excess, if any, of net investment income over dividends declared or distributed during the period commencing thirty-six months prior to the declaration or distribution of the current dividend and ending twelve months prior thereto. In any case, New York law permits the payment of an ordinary dividend by an insurer or reinsurer only out of earned surplus. Moreover, notwithstanding the receipt of any dividend from RECO, Chartwell Reinsurance may only make dividend payments to Chartwell to the extent permitted under the provisions described above. In addition to the foregoing limitation, the New York Insurance Department, as a routine matter in any change of control situation such as the Merger, will generally require the acquiring company to commit to not cause the acquired New York-domiciled insurer to pay any ordinary dividends for two years after the change of control without prior regulatory approval. The maximum dividend permitted by law is not indicative of an insurer's actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends. Furthermore, beyond the limits described in the preceding paragraph, the Commissioner and Superintendent have discretion to limit the payment of dividends by insurance companies domiciled in Minnesota and New York, respectively. As of the Effective Time, Chartwell will transfer substantially all of its assets and liabilities to a new subsidiary, which will serve as an intermediate level holding company for Chartwell's operations. See "MANAGEMENT AND OPERATIONS AFTER MERGER." This new subsidiary, to be named Chartwell Re Holdings Corporation ("Chartwell Holdings"), will become the obligor under Chartwell's Senior Notes and will be the borrower under a new $20 million principal amount bank facility to be entered into concurrently with the Merger to refinance Piedmont's existing bank debt. The agreements governing the foregoing debt and future debt which Chartwell Holdings may incur may limit the ability of Chartwell Holdings to make dividend and other payments to the Company. In order to pay the CI Notes in cash on maturity or upon acceleration, or to purchase the CI Notes upon a Change of Control, the Company could be required to seek additional financing or engage in asset sales or similar transactions. There can be no assurance that sufficient funds for any of the foregoing purposes would be available to the Company at such time. RANKING OF THE CI NOTES Following the assumption by Chartwell of the CI Notes upon the Merger, the CI Notes will rank pari passu in right of payment with all existing and future indebtedness of Chartwell that is not designated as subordinate or junior in right of payment to the CI Notes. The CI Notes are unsecured and thus, in effect, will rank junior to any secured indebtedness of Chartwell. Since Chartwell is a holding company, the Notes will be effectively subordinated to all indebtedness and other liabilities of Chartwell's subsidiaries, including reinsurance and other trade obligations and obligations to holders of preferred stock, if any. Upon the liquidation or reorganization of any of Chartwell's subsidiaries, the claims of Chartwell and, indirectly, of its creditors, including the holders of the CI Notes, to the assets of such subsidiary will rank behind the claims of creditors (including reinsureds, other trade creditors and holders of preferred stock, if any) of such subsidiary. The Indenture will, among other things, limit the incurrence of debt by certain subsidiaries of Chartwell and prohibit the incurrence of liens to secure indebtedness of Chartwell. However, these limitations are subject to a number of important exceptions and qualifications. See "DESCRIPTION OF CONTINGENT INTEREST NOTES--Certain Covenants." INDUSTRY FACTORS The property and casualty insurance and reinsurance industry has historically been highly cyclical. Demand for reinsurance is influenced significantly by prevailing market conditions, including the underwriting results of primary insurers. The supply of reinsurance is related primarily to levels of underwriting capacity in the reinsurance industry and the relative cost and terms of reinsurance coverage. The profitability of the industry and the Company and the cyclical trends in the industry can be affected significantly by volatile and unpredictable developments, including the occurrence of natural disasters, other catastrophic events, competitive pressures on pricing (premium rates), fluctuations in interest rates, other variations in the investment environment, changes in the judicial system regarding tort law and general economic conditions and trends, such as inflationary pressures, that may tend to affect the size of profits and losses experienced by ceding primary insurers. Such factors may also reduce the statutory surplus (including earned surplus) of Chartwell Reinsurance or RECO or otherwise limit the growth of such surplus. Many sectors of the industry are in a soft market and management cannot predict if or when market conditions for such sectors will improve or whether other sectors will experience a deterioration in pricing or terms. The reinsurance business is highly competitive. Currently, Chartwell Reinsurance and RECO compete for their business with independent reinsurers, reinsurance subsidiaries or affiliates of insurers, reinsurance departments of primary insurers and underwriting syndicates from the United States and abroad, many of which have greater financial resources than they do. While some competitors have announced their intention to cease engaging in the reinsurance business, the announcement of new capitalization plans by other competitors suggests that, in the future, Chartwell Reinsurance and RECO may experience increased competition from other well-capitalized reinsurers. In addition to reinsurance, RECO currently underwrites certain specific types of primary insurance. See "MANAGEMENT AND OPERATIONS AFTER MERGER." In writing primary insurance, RECO is subject to similar competitive factors. See "CHARTWELL RE CORPORATION--Business--Competition." ADEQUACY OF LOSS RESERVES As noted above, the establishment of reserves for losses and loss adjustment expenses is inherently uncertain. In addition, reserves for environmental impairment, asbestos-related and other latent exposures are particularly difficult to calculate. Consequently, ultimate losses to a reinsurer or insurer such as Chartwell Reinsurance or RECO may deviate from established reserves. To the extent reserves are inadequate and are subsequently strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. Adverse reserve development can reduce statutory surplus or otherwise limit the growth of such surplus. INSURANCE REGULATION Chartwell, Chartwell Reinsurance and RECO are subject to regulation by state insurance authorities of various states in which they transact business, including Minnesota and New York. State insurance authorities, among other activities, regulate the payment of dividends and other transactions between affiliates, impose solvency, capital and reserve standards, limit the types of investments permitted and risks assumed, set forth accounting and actuarial standards and require reports of financial condition. Oversight of state regulation by the National Association of Insurance Commissioners (the "NAIC") has resulted recently in the enactment or proposal of a number of significant regulatory changes, including risk-based capital requirements (discussed below), new investment valuation principles, a limitation on offset rights of reinsurers, a revised mechanism for credit for reinsurance and the licensing of reinsurance intermediaries. No assurance can be given as to future legislative or regulatory changes, nor that one or more changes will not have a material adverse effect on the operations or financial condition of RECO, Chartwell Reinsurance or Chartwell. In order to enhance the regulation of insurer solvency, on December 5, 1993 the NAIC adopted risk-based capital ("RBC") requirements for property and casualty insurance and reinsurance companies commencing with filings made in 1995 covering the 1994 year. These RBC requirements are designed to monitor capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The RBC formula measures four major areas of risk facing property and casualty insurers: (i) underwriting risk, which is the risk of errors in pricing and reserves; (ii) asset risk, which is the risk of asset default for fixed income assets and loss in market value for equity assets; (iii) credit risk, which is the risk of losses from unrecoverable reinsurance and the inability of insurers to collect agents' balances and other receivables; and (iv) off-balance sheet risk, which is primarily the risk created by excessive growth. Insurers and reinsurers having less statutory surplus than that required by the RBC formula will be subject to varying degrees of regulatory action depending on the level of capital inadequacy. For further discussion, see "CHARTWELL RE CORPORATION--Business--Insurance Regulation." PRINCIPAL STOCKHOLDERS For information about the principal stockholders of Chartwell following the Merger that are in a position to influence the policies and affairs of Chartwell and the outcome of actions requiring stockholder approval, see "PRINCIPAL STOCKHOLDERS." THE COMPANIES PIEDMONT Piedmont is a financial services holding company, the principal subsidiaries of which are RECO and LMC. Founded in 1936, RECO is one of the oldest reinsurance companies in the United States. It is licensed to underwrite business in all states except Maine and Hawaii and is an approved surety for bonds and undertakings required for United States government contracts. It is also qualified to underwrite business in all U.S. Possessions as well as in Canada where it maintains a resident agent. RECO is engaged in providing reinsurance to ceding insurers of property and casualty risks that purchase reinsurance principally to reduce their liability on individual risks, to protect themselves against catastrophic losses and to enhance their ratio of total net liabilities to capital and surplus. RECO's general policy is to develop business through qualified reinsurance brokers. The business can be underwritten on either a treaty or facultative basis and on either a pro rata or an excess of loss basis. RECO is rated "B++" (Very Good) by A.M. Best. As part of its reinsurance business, RECO maintains underwriting participations in several pools that insure a variety of industrial, marine and aviation risks. The pool contributing the largest amount of net premiums written to RECO, the Somerset Marine Pool, insures hulls of ships owned by international shipping lines and is the foremost insurer of many of the world's passenger fleets. The Somerset Aviation Pool deals with aircraft manufacturers and commercial general aviation. In recent years, RECO has sought to identify market opportunities and has developed a book of "controlled source" direct insurance business. Through the production facilities of two Piedmont affiliated companies, Florida Intracoastal Underwriters and Inter-Reco, Inc. as well as an insurance agency affiliated with Continental National Indemnity Company, RECO has served as an issuing company for selected lines of property and casualty insurance. The companies producing the business do so in accordance with strict guidelines established by RECO. RECO's staff reviews all coverages bound by the agencies and monitors claims administration. In 1994 direct business accounted for 13% of RECO's net premiums written. LMC, established in 1938 and acquired by Piedmont in 1969, is a holding company that offers a variety of asset management and related services to retail investors, institutions and high net worth individuals. LMC manages approximately $3.5 billion in assets, including $1.5 billion in a diversified group of mutual funds. For further information about the business of Piedmont and RECO, see "PIEDMONT MANAGEMENT COMPANY INC." For further information about LMC, Lexington and the other Asset Management Subs, see the Preliminary Information Statement for the Spin-off which is being mailed to stockholders of Piedmont together with this Prospectus. CHARTWELL Chartwell is a holding company, the principal operating subsidiary of which is Chartwell Reinsurance. Chartwell Reinsurance, a Minnesota-domiciled insurance company, underwrites treaty reinsurance through reinsurance brokers for casualty and to a lesser extent property risks. Chartwell Reinsurance provides a broad array of reinsurance coverages to ceding companies, emphasizing working layer casualty coverages. In 1994, casualty risks represented approximately 68.3% of net premiums written. Chartwell Reinsurance is rated "A-" (Excellent) by A.M. Best. Chartwell's strategy is to grow its core businesses through internal growth and through strategic acquisitions. Chartwell believes that the broker market reinsurance business, its historic core business, is becoming increasingly dominated by a smaller number of larger companies which are perceived by reinsurance buyers as being financially strong. Chartwell's goal is to achieve strategic increases in its size in order to continue to compete effectively in this market. Chartwell has raised additional capital of approximately $41 million in December 1992 from a group of U.S. and international investors and $72 million in March 1994 through a public offering of Senior Notes. Due in part to these transactions, the statutory surplus of Chartwell Reinsurance, determined in accordance with SAP, increased from $51 million at June 30, 1992 to over $116 million at September 30, 1995. An additional portion of the proceeds from each of the foregoing transactions was used to repay a portion of the debt incurred in connection with the Acquisition (as defined below). The Merger is Chartwell's next step in effecting this strategy. Following the Merger, Chartwell intends to contribute all of the outstanding stock of RECO to Chartwell Reinsurance. This contribution will increase the statutory surplus of Chartwell Reinsurance and as a result is intended to increase its attractiveness to ceding companies and reinsurance brokers. See "MANAGEMENT AND OPERATIONS AFTER MERGER." At the same time as it has taken these steps to expand its core business, Chartwell has sought to diversify its sources of income by developing opportunities for fee-based income and by pursuing other selected business opportunities in which it can capitalize on its expertise in the insurance and reinsurance business. Chartwell Advisers, which was incorporated in 1993 in the United Kingdom, acts as the exclusive adviser to New London Capital plc ("NLC"), a non-affiliated company formed to underwrite at Lloyd's through a group of wholly-owned subsidiaries that are limited liability corporate members of certain Lloyd's syndicates. Chartwell Advisers earns fee income for these services. Additionally, in 1994, Chartwell and NLC entered into an agreement pursuant to which Chartwell will participate in NLC's syndicate underwriting results for the 1995 year of account. In May 1995, Chartwell acquired Drayton for nominal consideration. Drayton is a Bermuda-domiciled insurer which prior to its acquisition was a captive insurer of the directors and officers liability risks of a group of U.S. savings banks. Drayton is not currently writing new business and is being managed by Chartwell in "run-off." Chartwell was founded in 1979 as a wholly-owned subsidiary of Northwestern National Life Insurance Company ("NWNL"). In March 1992, Chartwell Reinsurance was acquired (the "Acquisition") by an acquisition group led by Wand Partners, Inc., an investment firm specializing in insurance. Such acquisition group also included Amerisure, Inc., an affiliate of Michigan Mutual Insurance Company, and members of Chartwell's senior management. See "PRINCIPAL STOCKHOLDERS--Chartwell." Prior to the Merger, Chartwell will contribute all the stock of Chartwell Reinsurance and substantially all of its other assets to a new wholly-owned subsidiary, Chartwell Re Holdings Corporation, which will serve as an intermediate level holding company for these operations. Chartwell believes that the establishment of Chartwell Holdings will increase its flexibility to obtain future financing. See "THE MERGER--The Merger Agreement--Regulatory and Other Approvals." THE MERGER THE PIEDMONT MEETING At a meeting of Piedmont stockholders to be held at Piedmont's offices on December 8, 1995, such stockholders will be asked to consider and vote on a proposal to approve and adopt the Merger Agreement between Piedmont and Chartwell that provides for the Merger of Piedmont with and into Chartwell, with Chartwell being the Surviving Corporation, and the issuance by Chartwell of its common stock in connection with the Merger. Piedmont stockholders will also be asked to consider and vote upon certain amendments to Piedmont's 1979 and 1988 Employee Stock Option Plans (the "Piedmont Stock Option Amendments"). In addition, the holders of the Piedmont Preferred Stock will be asked to consider and vote upon a proposal to approve and adopt the Piedmont Preferred Stock Amendment to effect the automatic conversion of each outstanding share of such preferred stock into two shares of Piedmont Common Stock prior to the CI Notes Record Date and the Merger. Approval of the Merger Agreement and the Piedmont Stock Option Amendments requires the affirmative vote of a majority of the outstanding shares of Piedmont Common Stock and Piedmont Preferred Stock, voting together as one class. Approval of the Piedmont Preferred Stock Amendment requires the affirmative vote of a majority of outstanding shares of the Piedmont Preferred Stock. Pursuant to a Voting Agreement dated as of August 7, 1995, between Chartwell and certain Piedmont stockholders, holders of shares representing approximately 37.5% of the total combined voting power of the Piedmont Common Stock and Piedmont Preferred Stock have agreed to vote in favor of the Merger Agreement and the transactions contemplated thereby, and holders of shares representing approximately 63.1% of the total voting power of the Piedmont Preferred Stock have agreed to vote in favor of the Piedmont Preferred Stock Amendment. As a result, approval of the Merger Agreement and other related transactions will require the additional affirmative vote of holders of shares representing approximately 12.5% of the total combined voting power of the Piedmont Common Stock and the Piedmont Preferred Stock. Because holders representing in excess of a majority of the Piedmont Preferred Stock outstanding have agreed in the Piedmont Voting Agreement to vote in favor of the Piedmont Preferred Stock Amendment, approval of such amendment is virtually assured. THE MERGER AGREEMENT The following description does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Annex A to the Proxy Statement/Prospectus and is incorporated herein by reference. All Piedmont stockholders are urged to read the Merger Agreement in its entirety. The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions, including but not limited to the receipt of all necessary third party, regulatory and shareholder approvals, Piedmont with be merged with and into Chartwell. As a result of the Merger, the separate corporate existence of Piedmont will cease, and each share of Piedmont Common Stock outstanding prior to the Effective Time (other than shares owned by Piedmont or any of its subsidiaries or Chartwell or any of its subsidiaries, which will be cancelled (the "Cancelled Shares")) will be converted into the right to receive the Conversion Number of shares of Chartwell Common Stock. Subject to adjustment as provided below, the "Conversion Number" shall be the number (rounded to the nearest ten-thousandth of a share) determined by dividing (A) the CWL Shares Issuable (as defined below) by (B) the number of shares of Piedmont Common Stock outstanding immediately prior to the Effective Time (not including the Cancelled Shares) (the "Piedmont Shares Number"). The number of "CWL Shares Issuable" shall be determined by multiplying (A) the number of shares of Chartwell Common Stock outstanding immediately prior to the Effective Time (the "Chartwell Shares Number") by (B) 0.826484. The effect of the foregoing formula is to cause the stockholders of Piedmont to receive in the Merger approximately 45.25% of the aggregate number of shares of Chartwell Common Stock outstanding immediately following the Merger, while the Chartwell stockholders will retain shares representing in the aggregate approximately 54.75% of such stock. However, the exact number of shares that will be issued to each Piedmont stockholder will depend on the number of Piedmont shares outstanding prior to the Effective Time (other than Cancelled Shares), which will in turn depend on the number of such shares that are issued prior to the Effective Time pursuant to outstanding options to purchase shares of Piedmont Common Stock. The Conversion Number is also subject to automatic adjustment in the event that Chartwell or Piedmont or both were to suffer a decrease (a "Financial Adjustment"), as of the fifth business day prior to the Closing Date, in the stockholders' equity of such company and its consolidated subsidiaries (other than, in the case of Piedmont, the Asset Management Subs) of from $2.5 million to $5 million on an after-tax basis from the amount thereof at March 31, 1995 (other than as a result of certain causes and excluding certain items). The Merger Agreement sets forth a formula for recalculating the Conversion Number in the event that either or both parties experiences a Financial Adjustment. If either party were to suffer a decrease in the stockholders' equity of such company and its consolidated subsidiaries (other than, in the case of Piedmont, the Asset Management Subs) of more than $5 million on an after-tax basis from the amount thereof at March 31, 1995, other than as a result of certain causes and excluding certain items, such event would constitute a Material Adverse Change with respect to such party and would permit the other party to refuse to consummate the Merger. See "--Conditions to the Merger." The Merger Agreement contains customary representations and warranties by both Piedmont and Chartwell and, subject to certain exceptions, requires both companies to carry on their respective businesses, prior to the Merger, only in the ordinary course. These exceptions include, in the case of Piedmont, the Spin-off, the issuance of the CI Notes and the payment of dividends on the Piedmont Preferred Stock in an amount not to exceed an aggregate of $1,344,000. The Merger Agreement contains covenants of each party to take specified actions and to cause its subsidiaries to take such actions as may be necessary to consummate the Merger. In addition, Piedmont agreed in the Merger Agreement that RECO would increase by an aggregate of $25 million its reserves for losses incurred but not reported under SAP with respect to certain of its insurance and reinsurance business, and Piedmont would correspondingly increase by an aggregate of $25 million its reserves for losses incurred but not reported under GAAP. The Reserve Addition was recorded in RECO's financial statement in the quarter ended September 30, 1995. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Piedmont--Consolidated Results of Operations." As a result of the Merger, by operation of Delaware law, all of the properties, rights, privileges, powers and franchises of Piedmont will vest in Chartwell as the Surviving Corporation, and all debts, liabilities and duties of Piedmont will become the debts, liabilities and duties of Chartwell. Such liabilities would include, without limitation, any liabilities under federal securities laws, including Section 11 of the Securities Act. No Solicitation; Fiduciary Out; Certain Fees The Merger Agreement prohibits Piedmont and its affiliates, employees, agents and certain others from soliciting or participating in discussions or negotiations regarding a Piedmont Acquisition Proposal (as defined in the Merger Agreement). However, if, prior to the approval at the Piedmont stockholders meeting (the "Piedmont Stockholder Approval") of the Merger Agreement and the Piedmont Preferred Stock Amendment (the "Piedmont Vote Items"), Piedmont receives an unsolicited acquisition proposal, Piedmont or certain of its affiliates, employees and agents may participate in negotiations regarding such Piedmont Acquisition Proposal or furnish information regarding Piedmont and its business to the person making such proposal, subject to an appropriate confidentiality agreement, if the Board of Directors of Piedmont determines in good faith, following consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to stockholders under applicable law. Similarly, the Merger Agreement provides that if Piedmont receives an unsolicited Piedmont Acquisition Proposal and the Board of Directors of Piedmont determines in good faith, following consultation with outside counsel, that it is necessary to do so in order to comply with its fiduciary duties to stockholders under applicable law, prior to the Piedmont Stockholder Approval the Board of Directors may (w) withdraw or modify its approval or recommendation of any of the Piedmont Vote Items, (x) approve or recommend such Piedmont Acquisition Proposal, (y) cause Piedmont to enter into an agreement with respect to such Piedmont Acquisition Proposal or (z) terminate the Merger Agreement. In the event the Board of Directors of Piedmont takes any action described in clause (y) or (z) of the preceding sentence or Chartwell exercises its right to terminate the Merger Agreement based on the Board of Directors of Piedmont having taken any action described in clause (w) or (x) of the preceding sentence, Piedmont shall, concurrently with the taking of such action or such termination, as applicable, pay to Chartwell the fee and the expenses described in the next paragraph. The Merger Agreement requires Piedmont to pay to Chartwell upon demand $3 million plus up to $1 million in reimbursement of Expenses (as defined below) of Chartwell (i) upon the occurrence of any of the events described in the last sentence of the prior paragraph or (ii) if the requisite approval of Piedmont's stockholders of any of the Piedmont Vote Items is not obtained at the Piedmont Meeting. With respect to any person, "Expenses" means all documented reasonable out-of-pocket fees and expenses incurred or paid by or on behalf of such person in connection with the Merger or the consummation of any of the transactions contemplated by the Merger Agreement, including but not limited to all printing costs and fees and expenses of counsel, investment banking firms, accountants, actuaries, experts and consultants. The Merger Agreement contains provisions which are substantially identical to those applicable to Piedmont as described above which (i) limit the ability of Chartwell, its subsidiaries and representatives to solicit any Chartwell Acquisition Proposal (as defined in the Merger Agreement), (ii) restrict the ability of the Board of Directors of Chartwell to withdraw or modify its recommendation of the Merger or enter into an agreement with respect to a Chartwell Acquisition Proposal and (ii) provide for the payment of a $3 million fee plus up to $1 million of Expenses under circumstances with respect to Chartwell that are comparable to the circumstances under which Piedmont must pay such amounts. Regulatory and Other Approvals The consummation of the Merger is subject to, among other approvals, the prior approval of the insurance regulatory authorities in the States of Minnesota and New York, and potentially also those of certain other states, as well as the expiration or termination of the relevant waiting period under the HSR Act. Applications for such approvals are being prepared or have been submitted and the HSR Act notification and report forms were filed on October 17, 1995 and early termination of the waiting period has been granted. The Indenture dated as of March 17, 1994, between Chartwell and Bankers Trust Company, under which Chartwell's Senior Notes in the aggregate principal amount of $75.0 million were issued (the "Senior Notes Indenture"), requires the consent of holders of a majority in principal amount of the Senior Notes to the waiver or modification of certain covenants under the Senior Notes Indenture in connection with certain Merger-related transactions (the "Noteholder Consent"). The Merger Agreement provides, however, that, unless consented to by both Piedmont and Chartwell, Chartwell shall not obtain the Noteholder Consent if, despite Chartwell's using its best efforts to obtain the consent, the cost of obtaining the consent would be prohibitive. The Merger would also require the consent of the lender under Piedmont's existing bank credit facility, under which an aggregate principal amount of $19.5 million is outstanding at September 30, 1995. Chartwell has negotiated with Shawmut Bank Connecticut, N.A., to provide a $20.0 million principal amount facility, under which Chartwell Holdings will be the borrower, to replace Piedmont's existing bank debt at the Effective Time (which eliminates the need for such consent) and an additional $10.0 million revolving credit facility (collectively, the "New Bank Facility"). See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Chartwell--Liquidity and Capital Resources." Conditions to the Merger The obligations of each of Chartwell and Piedmont to consummate the Merger are subject to the satisfaction or waiver of several conditions, including: (i) the obtaining of all necessary stockholder approvals; (ii) the making of all filings with, and the receipt of all required consents, approvals, permits and authorizations from, governmental entities, and such consents, approvals, permits and authorizations not being subject to any conditions other than (A) conditions customarily imposed by insurance regulatory authorities and (B) other conditions that would not reasonably be expected to have a Chartwell Material Adverse Effect (as defined in the Merger Agreement) or a Piedmont Material Adverse Effect (as defined in the Merger Agreement); (iii) the waiting period under the HSR Act having expired or been terminated; (iv) the absence of any injunction, order or other legal restraint or prohibition preventing the Merger or any of the other transactions contemplated by the Merger Agreement; provided that any party invoking this condition shall have used reasonable efforts to have any such order or injunction vacated; (v) all required registration statements having become effective under the Securities Act and the Exchange Act and not being subject to any stop order or related proceedings; (vi) the Noteholder Consent and certain other material consents of third parties having been obtained; (vii) the shares of Chartwell Common Stock to be issued in the Merger having been approved for trading on NASDAQ; (viii) the issuance of the CI Notes having occurred; (ix) the receipt by Piedmont of a legal opinion of Davis Polk & Wardwell with respect to the tax consequences of the Spin-off, and the Spin-off having occurred; (x) the execution and delivery of a supplemental indenture, under which Chartwell will assume as of the Effective Time all obligations under the CI Notes (the "Supplemental Indenture"), by all parties thereto; and (xi) the absence of certain Material Adverse Changes (as defined in the Merger Agreement) with respect to the other party. Subject to satisfaction or waiver of all conditions to the Merger or the earlier termination of the Merger Agreement, the closing of the Merger (the "Closing") will take place at 10:00 a.m. on the date (the "Closing Date") that is the later of (A) the second business day following the date on which the conditions set forth in clauses (i) through (vii) of the preceding paragraph shall be fulfilled or waived and (B) the first business day following the date on which the condition set forth in clause (viii) of the preceding paragraph shall be fulfilled. Amendment and Waiver Subject to applicable law, at any time prior to the Effective Time, the parties may (i) amend the Merger Agreement; provided, however, that after approval of the Merger by the stockholders of Piedmont, no amendment shall be made that by law requires the approval of Piedmont's stockholders without the approval of such stockholders, (ii) extend the time for the performance of any of the obligations or other acts of the other party, (iii) waive any inaccuracies in the representations and warranties of the other parties contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement or (iv) subject to clause (i) above, waive compliance with any of the agreements or conditions of the other parties contained in the Merger Agreement. Any Agreement on the part of a party to any such amendment, extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Termination The Merger Agreement may be terminated at any time prior to the Effective Time: (a) by mutual written consent of Piedmont and Chartwell; (b) by either Piedmont or Chartwell: (i) if, upon a vote at a duly held stockholders meeting or any adjournment thereof, any required approval of the stockholders of Chartwell or Piedmont, as the case may be, shall not have been obtained; (ii) if the Merger shall not have been consummated on or before March 31, 1996, unless the failure to consummate the Merger is the result of a willful and material breach of the Merger Agreement by the party seeking to terminate the Merger Agreement; (iii) if any governmental entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable; or (iv) if the Board of Directors of Chartwell or of Piedmont shall have taken any action described under "--No Solicitation; Fiduciary Out; Certain Fees"; or (c) by Piedmont if the Noteholder Consent shall not have been obtained on or before December 31, 1995, unless the failure to obtain the Noteholder Consent is the result of a willful and material breach of the Merger Agreement by Piedmont; provided, that the effectiveness of the Noteholder Consent may be subject to certain specified conditions and limitations. In addition, in the event that either Chartwell or Piedmont (the "Notifying Party") shall notify the other in writing in a specified form that such Notifying Party has experienced a Chartwell Material Adverse Change (in the case of a notice given by Chartwell) or a Piedmont Material Adverse Change (in the case of a notice given by Piedmont) the party so notified shall have 30 days from its receipt of such notice to elect to terminate the Merger Agreement. In the event that such party does not so elect to terminate the Merger Agreement, it shall be deemed to have waived its right to refuse to consummate the Merger and the other transactions contemplated by the Merger Agreement on the basis of the Material Adverse Change identified in the Notifying Party's notice, without prejudice to its rights with respect to any subsequent Material Adverse Change with respect to the Notifying Party. Any termination may occur before or after the Chartwell Stockholder Approval (as defined in the Merger Agreement) or the Piedmont Stockholder Approval, except that (i) Chartwell shall have no right to terminate the Merger Agreement following the Chartwell Stockholder Approval in exercise of its rights described under "--No Solicitation; Fiduciary Out; Certain Fees" and (ii) Piedmont shall have no right to terminate the Merger Agreement following the Piedmont Stockholder Approval in exercise of its rights described under "--No Solicitation; Fiduciary Out; Certain Fees." THE CI NOTES ISSUANCE Background of the CI Notes Dividend In the negotiations relating to the Merger, Chartwell sought protection against the possibility of adverse development of RECO's reserves for losses and loss adjustment expenses ("LAE"), particularly with respect to RECO's potential exposures for environmental impairment, asbestos-related and latent injury claims and other long-tail casualty exposures. For RECO, as for any insurer or reinsurer, the process of estimating loss and LAE reserves for any type of potential claim is inherently imprecise and involves an evaluation of many variables, including potentially unpredictable social and economic conditions. Moreover, the ultimate liability of an insurer or reinsurer for environmental impairment and other latent injury types of claims is particularly difficult to estimate, and does not lend itself to traditional actuarial reserving techniques. Significant legal issues, primarily with regard to issues of coverage, exist with regard to potential liability under policies issued in the mid-1980's and prior, before absolute exclusions of coverage for environmental and certain other latent exposures were made a part of standard insurance policy forms. RECO was founded in 1936, and continues today to deal with claims made under "occurrence-form" policies written prior to the mid-1980's. Accordingly, there can be no assurance that RECO's ultimate liability for losses and LAE will not vary significantly from amounts reserved. To address Chartwell's concern, Piedmont and Chartwell ultimately agreed to the restructuring of Piedmont through the issuance of the CI Notes prior to the Merger. The issuance of the CI Notes was primarily designed to provide protection against adverse reserve development to Chartwell, while at the same time permitting Piedmont stockholders to receive benefits, in the form of cash or additional Chartwell Common Stock, in the event such protection was not utilized. The CI Notes Dividend was unanimously approved by the Piedmont Board on August 7, 1995. The CI Notes Dividend Prior to the Effective Time, the Board of Directors of Piedmont intends to declare and pay as a dividend to each holder of Piedmont Common Stock as of the CI Notes Record Date, one CI Note for each share of Piedmont Common Stock held by such holder. The CI Notes will be issued in an aggregate principal amount of $1 million, which principal amount will accrete interest at a rate of 8% per annum, compounded annually. Such interest will not be payable until maturity or earlier redemption of the CI Notes. In addition, the CI Notes will entitle the holders thereof to receive at maturity, in proportion to the principal amount of the CI Notes held by them, an aggregate of from $0 up to approximately $55 million in Contingent Interest. The Contingent Interest will be calculated under a complex formula set forth in the CI Notes Indenture. In general, assuming the CI Notes are settled at maturity, the Contingent Interest will be equal to $55 million (a) less an amount equal to (i) the amount of any adverse development of the loss and LAE reserves and related accounts (including certain reinsurance recoverables, commissions and unearned premiums) of RECO recorded as of March 31, 1995, minus (ii) $25 million, (b) plus the amount of certain tax benefits received or recorded by Chartwell as a result of the amount determined pursuant to clause (a) above. The amount so calculated may not be greater than $55 million nor less than a minimum amount equal to the lesser of (a) $10 million less the Fixed Amount and (b) the tax benefits referred to above. The Contingent Interest will in any event be reduced by part of the costs of any Independent Actuary and by part or all of the costs of the Holder Actuary. In the event that the CI Notes are settled prior to maturity, the foregoing formula will in general apply, except that the $55 million maximum amount of the CI Notes will be reduced to an amount equal to $55 million discounted back from June 30, 2006 at a discount rate of 8% per annum, compounded annually, and the tax benefits will be calculated in a prescribed manner. Since the Contingent Interest is subject to significant contingencies, there can be no assurance as to what amount, if any, will be paid under the CI Notes with respect to the Contingent Interest. Manner and Timing of, and Conditions to, the CI Notes Dividend The Board of Directors of Piedmont intends to declare and distribute the CI Notes as a dividend to each holder of record of Piedmont Common Stock on the CI Notes Record Date. The CI Notes Dividend has not yet been declared by the Board of Directors of Piedmont, and, accordingly, the CI Notes Record Date has not yet been established. The CI Notes Record Date will be established by the Board of Directors of Piedmont and is expected to be a date occurring immediately after the conversion of the Piedmont Preferred Stock into Piedmont Common Stock pursuant to the Piedmont Preferred Stock Amendment (which conversion will occur after the Piedmont Meeting) and prior to the record date established for the Spin-off and the Effective Time of the Merger. The CI Notes Dividend is not contingent upon satisfaction of the conditions to the Spin-off or the Merger. The Board of Directors is not obligated to declare the dividend of or distribute the CI Notes, although the CI Notes Dividend is a condition to both the Spin-off and the Merger. The principal amount of the CI Notes to be issued to each holder of Piedmont Common Stock will bear the same relation to the aggregate principal amount of the CI Notes that the number of shares of Piedmont Common Stock held by such holder bears to the aggregate number of shares of Piedmont Common Stock outstanding as of the CI Notes Record Date. As a result of potential exercises of Piedmont stock options prior to the CI Notes Record Date, the number of shares of Piedmont Common Stock that will be outstanding as of the CI Notes Record Date, and therefore the principal amount of the CI Notes to be issued to each Piedmont stockholder, cannot be finally determined until the Option Date. As of June 30, 1995, assuming that all the Piedmont Preferred Stock had been converted into Piedmont Common Stock, there would have been 5,370,972 outstanding shares of Piedmont Common Stock (not counting treasury shares), as well as outstanding options to purchase an additional 785,100 shares of Piedmont Common Stock. Federal Tax Consequences The CI Notes Dividend will be taxable to the stockholders of Piedmont as a dividend. See "FEDERAL INCOME TAX CONSIDERATIONS." Trading of the CI Notes The CI Notes will be freely transferable for the first 90 days after their issue date. Following the Initial Period, the CI Notes will only be transferable to certain specified transferees (for example, to affiliates and certain family members of the holder, and to Chartwell) and with respect to certain of such transferees, only during certain specified periods of time. The CI Notes will not be listed on any stock exchange or on NASDAQ. It is currently anticipated that during the Initial Period, Smith Barney will maintain a list of any indications of interest to purchase or sell CI Notes that Smith Barney may receive from time to time, provide recent price quotations based on such list and will make a reasonable effort to intermediate as agent any such purchase or sale of CI Notes, although such activity may be discontinued by Smith Barney at any time. There can be no assurance that any market for the CI Notes will develop during the Initial Period or, if any such market does develop, as to the liquidity of any such market, nor can there be any assurance as to the values at which the CI Notes will trade in any such market. Persons interested in purchasing or selling CI Notes during the Initial Period may contact the Special Equity Transactions Group of Smith Barney. Further Information For a more complete description of the CI Notes, see "DESCRIPTION OF CONTINGENT INTEREST NOTES." PRO FORMA FINANCIAL INFORMATION The following condensed consolidated pro forma balance sheet at September 30, 1995, and condensed consolidated pro forma statements of operations for the nine months ended September 30, 1995 and the year ended December 31, 1994 reflect the financial position and results of operations of Chartwell after giving effect to the Merger and related transactions as described in the notes hereto. These pro forma statements should be read in conjunction with the historical financial statements of Chartwell and Piedmont and the notes thereto included elsewhere herein. The condensed consolidated pro forma information is not necessarily indicative of the results of operations or financial position of Chartwell that would have been reported if the Merger and related transactions had occurred at the dates assumed for purposes of preparation of such information or of the future results of operations or financial position of Chartwell. CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 1995 (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> PIEDMONT HISTORICAL AS MERGER PRO FORMA FOOTNOTE CHARTWELL ADJUSTED(1) ADJUSTMENTS CONSOLIDATED REFERENCE ---------- ----------- ----------- ------------ --------- <S> <C> <C> <C> <C> <C> ASSETS: Investments...................... $ 288,619 $ 387,287 $ 435 $ 676,341 (2) Cash and cash equivalents........ 24,522 9,947 (1,344) 33,625 (3) 500 (4) ---------- ----------- ----------- ------------ Total investments and cash..... 313,141 397,234 (409) 709,966 Premiums in process of collection........................ 54,195 32,543 86,738 Reinsurance recoverable.......... 37,816 172,765 210,581 Prepaid reinsurance.............. 924 24,219 25,143 Deferred and current income taxes............................. 11,986 24,340 2,358 38,684 (5) Deferred policy acquisition costs............................. 7,035 12,649 (12,649) 7,035 (6) Value of business in force....... 12,649 12,649 (6) Other assets..................... 35,842 30,593 3,424 68,378 (7) (1,481) (8) ---------- ----------- ----------- ------------ Total assets................... $ 460,939 $ 694,343 $ 3,892 $1,159,174 ---------- ----------- ----------- ------------ ---------- ----------- ----------- ------------ LIABILITIES: Loss and loss adjustment expenses.......................... $ 258,295 $ 486,065 $ $ 744,360 Unearned premiums................ 30,837 77,553 108,390 Long term debt................... 75,000 19,500 500 95,000 (4) Contingent interest notes........ 25,034 25,034 Accrued expenses and other liabilities....................... 26,144 9,205 9,515 43,520 (9) (1,344) (3) ---------- ----------- ----------- ------------ Total liabilities.............. 390,276 617,357 8,671 1,016,304 COMMON STOCKHOLDERS' EQUITY: Preferred stock.................. 245 (245) (10) Common stock..................... 38 2,626 (2,595) 69 (10) Additional paid-in capital....... 77,254 28,024 (28,024) 149,430 (10) 72,176 (11) Net unrealized appreciation (depreciation).................... 1,167 (109) 109 1,167 (10) Foreign currency translation adjustment........................ 20 20 Retained earnings (deficit)...... (7,816) 47,923 (47,923) (7,816) (10) Treasury stock................... (1,723) 1,723 (10) ---------- ----------- ----------- ------------ Total common stockholders' equity............................ 70,663 76,986 (4,779) 142,870 ---------- ----------- ----------- ------------ Total liabilities and stockholders' equity......... $ 460,939 $ 694,343 $ 3,892 $1,159,174 ---------- ----------- ----------- ------------ ---------- ----------- ----------- ------------ </TABLE> See notes to unaudited condensed consolidated pro forma financial statements. CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> PIEDMONT HISTORICAL AS MERGER PRO FORMA FOOTNOTE CHARTWELL ADJUSTED(12) ADJUSTMENTS CONSOLIDATED REFERENCE --------- ------------ ----------- ------------ --------- <S> <C> <C> <C> <C> <C> REVENUES: Premiums earned.............. $ 87,355 $ 92,991 $ $ 180,346 Net investment income........ 14,743 15,023 279 30,045 (13) Net realized capital gains... 1,707 3,434 5,141 Other income................. 796 284 1,080 --------- ------------ ----- ------------ Total revenues............. 104,601 111,732 279 216,612 --------- ------------ ----- ------------ LOSSES AND EXPENSES INCURRED: Loss and loss adjustment expenses....................... 63,712 98,177 161,889 Policy acquisition costs..... 20,598 28,798 49,396 Other expenses............... 7,846 4,929 (392) 12,383 (15) Interest and amortization.... 5,750 3,048 188 8,986 (16) --------- ------------ ----- ------------ Total losses and expenses incurred....................... 97,906 134,952 (204) 232,654 --------- ------------ ----- ------------ Income (loss) before income taxes.......................... 6,695 (23,220) 483 (16,042) Income tax expense (benefit)... 2,152 (8,113) 184 (5,777) (17) --------- ------------ ----- ------------ Net income (loss).............. 4,543 (15,107) 299 (10,265) Dividends and accretion on preferred stock................ 144 (144) --------- ------------ ----- ------------ Net income (loss) attributable to common shares............... $ 4,543 $ (15,251) $ 443 $ (10,265) --------- ------------ ----- ------------ --------- ------------ ----- ------------ Income (loss) per common share.......................... $ 1.21 $ (3.06) N/A $ (1.50) --------- ------------ ----- ------------ --------- ------------ ----- ------------ Weighted average number of common shares outstanding...... 3,755,312 4,986,637 N/A 6,859,017 ------------ ----- ------------ ------------ ----- ------------ </TABLE> See notes to unaudited condensed consolidated pro forma financial statements. CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> PIEDMONT PRO HISTORICAL AS MERGER FORMA FOOTNOTE CHARTWELL ADJUSTED(12) ADJUSTMENTS CONSOLIDATED REFERENCE --------- --------- ----------- --------- --------- <S> <C> <C> <C> <C> <C> REVENUES: Premiums earned................ $ 102,698 $ 129,372 $ $ 232,070 Net investment income.......... 14,726 18,871 372 33,969 (13) Net realized capital gains (losses)......................... (3,794) 750 (3,044) Other income................... 1,679 (106) 1,573 --------- --------- ----------- --------- Total revenues............... 115,309 148,887 372 264,568 --------- --------- ----------- --------- LOSSES AND EXPENSES INCURRED: Loss and loss adjustment expenses......................... 78,577 113,725 192,302 Policy acquisition costs....... 24,295 24,384 48,679 (14) Other expenses................. 10,178 21,282 31,460 Interest and amortization...... 7,379 2,440 250 10,069 (16) --------- --------- ----------- --------- Total losses and expenses incurred......................... 120,429 161,831 250 282,510 --------- --------- ----------- --------- Loss before income taxes......... (5,120) (12,944) 122 (17,942) Income tax benefit............... (1,685) (4,697) 67 (6,315) (17) --------- --------- ----------- --------- Net loss before extraordinary item............................. (3,435) (8,247) 55 (11,627) Dividends and accretion on preferred stock.................. 1,078 192 (1,270) --------- --------- ----------- --------- Net loss attributable to common shares........................... ($ 4,513) ($ 8,439) $ 1,325 ($ 11,627) --------- --------- ----------- --------- --------- --------- ----------- --------- Loss per common share............ ($ 0.84) ($ 1.70) N/A ($ 1.65) (18) --------- --------- ----------- --------- --------- --------- ----------- --------- <CAPTION> Weighted average number of common shares outstanding............... 3,760,685 4,969,556 N/A 6,864,390 (18) --------- --------- ----------- --------- --------- --------- ----------- --------- </TABLE> See notes to unaudited condensed consolidated pro forma financial statements. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) The condensed consolidated pro forma financial statements reflect the Merger of Piedmont with Chartwell and related transactions. Pro forma adjustments related to the condensed consolidated pro forma statements of operations have been prepared assuming the Merger and related transactions were consummated as of January 1, 1994. The condensed consolidated pro forma balance sheet was prepared assuming the Merger and related transactions were consummated on September 30, 1995. The historical financial information has been derived from the historical financial statements of Chartwell and Piedmont. The condensed consolidated pro forma financial statements should be read in conjunction with the historical consolidated financial statements of Chartwell and Piedmont and the notes thereto and the other financial information pertaining to Chartwell and Piedmont included elsewhere herein. The condensed consolidated pro forma financial statements have been prepared under the purchase method of accounting for the Merger with Piedmont. Under purchase accounting, the acquired assets and liabilities of Piedmont are recognized at their fair value as of the Effective Time. This value is treated as consideration received for the common stock issued by Chartwell in the Merger. The condensed consolidated pro forma financial statements do not purport to be indicative of the financial position or operating results which would have been achieved had the Merger been consummated as of the dates indicated and should not be construed as representative of future financial position or operating results. The pro forma adjustments are based upon available information and assumptions that Chartwell believes are reasonable under the circumstances. Operating expense savings that may result from the Merger have not been reflected in these pro forma financial statements. The following describes the pro forma adjustments reflected in the accompanying condensed consolidated pro forma financial statements: (1) The Piedmont balance sheet at September 30, 1995 has been adjusted to reflect the Spin-off of Lexington, the CI Notes Dividend and certain other pre-Merger events which will be recorded in the historical financial statements of Piedmont prior to the Merger as if the foregoing occurred on September 30, 1995. <TABLE> <CAPTION> ADJUSTMENT PIEDMONT HISTORICAL TO SPIN-OFF OTHER AS PIEDMONT LEXINGTON(A) ADJUSTMENTS ADJUSTED ---------- ------------ ----------- -------- <S> <C> <C> <C> <C> ASSETS: Investments.................................. $ 392,765 $ (5,478) $ $387,287 Cash and cash equivalents.................... 10,343 (396) 9,947 ---------- ------------ ----------- -------- Total investments and cash................. 403,108 (5,874) 397,234 Premiums in process of collection............ 32,543 32,543 Reinsurance recoverable...................... 172,765 172,765 Prepaid reinsurance.......................... 24,219 24,219 Deferred and current income taxes............ 20,825 (1,657) 5,172(b) 24,340 Deferred policy acquisition costs............ 12,649 12,649 Other assets................................. 36,135 (5,542) 30,593 ---------- ------------ ----------- -------- Total assets............................... $ 702,244 $(13,073) $ 5,172 $694,343 ---------- ------------ ----------- -------- ---------- ------------ ----------- -------- LIABILITIES: Loss and loss adjustment expenses............ $ 486,065 $ $ $486,065 Unearned premiums............................ 77,553 77,553 Long term debt............................... 19,500 19,500 Contingent interest notes.................... 25,034(c) 25,034 Accrued expenses and other liabilities....... 15,150 (16,069) 10,124(d) 9,205 ---------- ------------ ----------- -------- Total liabilities.......................... 598,268 (16,069) 35,158 617,357 COMMON STOCKHOLDERS' EQUITY: Preferred stock.............................. 245 245 Common stock................................. 2,626 2,626 Additional paid-in capital................... 28,024 28,024 Net unrealized depreciation of investments... (109) (109) Retained earnings............................ 74,913 2,996 (29,986) (e) 47,923 Treasury stock............................... (1,723) (1,723) ---------- ------------ ----------- -------- Total common stockholders' equity.......... 103,976 2,996 (29,986) 76,986 ---------- ------------ ----------- -------- Total liabilities and stockholders' equity........................................ $ 702,244 $(13,073) $ 5,172 $694,343 ---------- ------------ ----------- -------- ---------- ------------ ----------- -------- </TABLE> The adjustments to Piedmont's balance sheet at September 30, 1995 are as follows: (a) The "Adjustment to Spin-off Lexington" reflects the deduction of assets, liabilities and equity of Lexington and the distribution from Piedmont to its stockholders of the Lexington Common Stock as if the Spin-off occurred on September 30, 1995. The credit to Piedmont's retained earnings represents the accumulated deficit attributable to Lexington. (b) To record the deferred tax effect of the pro forma adjustments. A deferred tax benefit has been recorded on the excess of the carrying value over the principal amount of the CI Notes. (c) To record the carrying value of the CI Notes computed by discounting the approximately $57 million maturing in 2006 at 8%. During the life of the CI Notes the carrying value will be increased for the accretion of the discount and reduced to the extent the acquired loss and LAE reserves of Piedmont develop adversely subject to the terms of the CI Notes. The changes in the carrying value of the CI Notes will be recognized in the results of operations of the periods in which they occur. The ultimate amount payable to the holders of the CI Notes will depend on several significant contingencies. See "THE CONTINGENT INTEREST NOTES." (d) To eliminate the intercompany balances owed by Lexington to Piedmont or RECO at September 30, 1995. (e) The net effect of the adjustments to total assets and total liabilities. (2) Reflects an adjustment to mark to market Piedmont's held-to-maturity investments at September 30, 1995. (3) Represents the dividend to be paid on each share of Piedmont Preferred Stock. Such amount includes $6.50 per share representing all accrued and unpaid dividends on such shares through April 15, 1995 and an additional $0.50 per share which was declared in the third quarter and will be paid immediately prior to the Option Date. The total payment of dividends shall not exceed $1,344,000. (4) Represents the difference between the New Bank Facility of $20.0 million obtained by Chartwell and the existing bank loan of Piedmont of $19.5 million. (5) To reflect the tax effect of certain pro forma adjustments as described in notes (8), (9) and (15) below. (6) The value of business in force represents the deferred policy acquisition costs (primarily commission and brokerage expenses) paid by RECO. The pro forma statements of operations assume that such amount will be amortized over the period in which the related premiums are earned. (7) To capitalize the estimated transaction costs associated with the Merger and related transactions. Transaction costs related to Chartwell's Senior Notes, the New Bank Facility and the CI Notes will be amortized over approximately ten years. Goodwill will be amortized over forty years. Transaction costs related to the issuance of Chartwell Common Stock have been charged against additional paid-in capital. The above expenses are net of Lexington's share of the transaction costs which it is required to dividend under the Merger Agreement. (8) To write-off the unamortized debt issue costs associated with Piedmont's existing bank loan and other prepaid expenses for which there is no future benefit to Chartwell. The pro forma statements of operations exclude a charge for the write-off of Piedmont's unamortized costs. (9) To accrue the estimated transaction costs as described in note (7) net of the amount paid or accrued as of September 30, 1995. Also included are severance and other employee benefit costs expected to be incurred in connection with the Merger. (10) To reflect the conversion of Piedmont Preferred Stock to Piedmont Common Stock, the cancellation of the Piedmont treasury shares and the conversion of the Piedmont Common Stock to shares of Chartwell Common Stock. The stockholders of Piedmont will receive approximately 45.25% of the aggregate number of outstanding shares of Chartwell Common Stock following the Merger, while the Chartwell stockholders will retain shares representing approximately 54.75% of such stock, subject to adjustment as described elsewhere herein. (11) Adjustment to recognize the excess value of net assets acquired after acquisition adjustments over the par value of the respective Chartwell stock issued. A total of 3,103,705 shares of Chartwell Common Stock will be issued in exchange for all of the outstanding Piedmont Common Stock at the time of the Merger, resulting in receipt by the stockholders of Piedmont (assuming no Financial Adjustment occurs) of approximately 45.25% of the aggregate number of shares of Chartwell Common Stock outstanding immediately following the Merger. In the absence of a quoted market price per share of the Chartwell Common Stock, the value assigned to each share of Chartwell Common Stock for purposes of making this pro forma adjustment, and therefore the resulting purchase price, was based upon the net assets to be received in the Merger. Such purchase price was determined to be $72,207,000 and was allocated to the respective net assets and liabilities received as follows: Historical book value of Piedmont after giving effect to the Spin-off of Lexington, the CI Notes Dividend and certain pre-Merger events........................ $ 76,986,000 Merger adjustments: Deferred taxes.............................................. 2,358,000 Other assets................................................ (1,087,000) Accrued liabilities......................................... (9,515,000) ------------ (8,244,000) ------------ Fair value adjustments: Investments................................................. 435,000 Goodwill (included in other assets)......................... 3,030,000 ------------ 3,465,000 ------------ Total purchase price.................................... $ 72,207,000 ------------ ------------ The book value per common share of the Chartwell Common Stock as of September 30, 1995, after giving pro forma effect to the Merger is $20.83 per share. (12) The Piedmont Statements of Operations for the nine months ended September 30, 1995 and the year ended December 31, 1994 have been adjusted to reflect the Spin-off of Lexington, the CI Notes Dividend and certain other pre-Merger events as if the foregoing were consummated as of January 1, 1994. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> ADJUSTMENT TO HISTORICAL SPIN-OFF PRO FORMA PIEDMONT PIEDMONT LEXINGTON(A) ADUSTMENTS AS ADJUSTED --------- --------- ------------ ----------- <S> <C> <C> <C> <C> REVENUES: Premiums earned............................. $ 92,991 $ $ $ 92,991 Net investment income....................... 15,435 (155) (257)(b) 15,023 Advisory and counseling fees................ 15,356 (15,356) Net realized capital gains.................. 3,434 3,434 Other income................................ 598 (314) 284 --------- --------- ------------ ----------- Total revenues............................ 127,814 (15,825) (257) 111,732 --------- --------- ------------ ----------- LOSSES AND EXPENSES INCURRED: Loss and loss adjustment expenses........... 98,177 98,177 Policy acquisition costs.................... 28,798 28,798 Investment advisory service costs........... 13,682 (13,682) Other expenses.............................. 4,929 4,929 Interest and amortization................... 1,426 1,622(c) 3,048 --------- --------- ------------ ----------- Total losses and expenses incurred........ 147,012 (13,682) 1,622 134,952 --------- --------- ------------ ----------- Income (loss) before income taxes............ (19,198) (2,143) (1,879) (23,220) Income tax expense (benefit)................. (6,997) (679) (437)(d) (8,113) --------- --------- ------------ ----------- Net income (loss)............................ (12,201) (1,464) (1,442) (15,107) Dividends and accretion on preferred stock... 144 144 --------- --------- ------------ ----------- Net income (loss) attributable to common shares....................................... $ (12,345) $ (1,464) $ (1,442) $ (15,251) --------- --------- ------------ ----------- --------- --------- ------------ ----------- Income (loss) per common share............... $ (2.48) $ 0.29 N/A $ (3.06) --------- --------- ------------ ----------- --------- --------- ------------ ----------- <CAPTION> Weighted average number of common shares outstanding.................................. 4,986,637 4,986,637 N/A 4,986,637 </TABLE> FOR THE YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> ADJUSTMENT TO HISTORICAL SPIN-OFF PRO FORMA PIEDMONT PIEDMONT LEXINGTON(A) ADUSTMENTS AS ADJUSTED --------- --------- ------------ ----------- <S> <C> <C> <C> <C> REVENUES: Premiums earned............................. $ 129,372 $ $ $ 129,372 Net investment income....................... 19,384 (153) (360)(b) 18,871 Advisory and counseling fees................ 21,530 (21,530) Net realized capital gains.................. 750 750 Other income................................ 638 (744) (106) --------- --------- ------------ ----------- Total revenues............................ 171,674 (22,427) (360) 148,887 --------- --------- ------------ ----------- LOSSES AND EXPENSES INCURRED: Loss and loss adjustment expenses........... 113,725 113,725 Policy acquisition costs.................... 24,384 24,384 Investment advisory service costs........... 17,898 (17,898) Other expenses.............................. 21,282 21,282 Interest and amortization................... 437 2,003(c) 2,440 --------- --------- ------------ ----------- Total losses and expenses incurred........ 177,726 (17,898) 2,003 161,831 --------- --------- ------------ ----------- Income (loss) before income taxes............ (6,052) (4,529) (2,363) (12,944) Income tax................................... (2,834) (1,310) (553)(d) (4,697) --------- --------- ------------ ----------- Net income (loss)............................ (3,218) (3,219) (1,810) (8,247) Dividends and accretion on preferred stock... 192 192 --------- --------- ------------ ----------- Net income loss attributable to common shares....................................... $ (3,410) $ (3,219) $ (1,810) $ (8,439) --------- --------- ------------ ----------- --------- --------- ------------ ----------- Income (loss) per common share............... $ (0.69) $ 0.65 N/A $ (1.70) --------- --------- ------------ ----------- --------- --------- ------------ ----------- <CAPTION> Weighted average number of common shares outstanding.................................. 4,969,556 4,969,556 N/A 4,969,556 </TABLE> The adjustments to Piedmont's statement of operations are as follows: (a) The "Adjustment to Spin-off Lexington" reflects the separation of Lexington's results of operations from Piedmont as if the Spin-off had occurred on January 1, 1994. (b) To reflect the additional investment advisory costs which would have been incurred had RECO's investments been managed by an unaffiliated investment manager. (c) To reflect accreted interest on the carrying value of the CI Notes at 8%. (d) To reflect the income tax effect of the above adjustments at the statutory rate of 34%. (13) Represents amortization of adjustment to Piedmont's investment portfolio to new cost basis in purchase accounting. (14) Policy acquisition costs include the amortization of the value of business in force acquired in the Merger. (15) To reverse the legal and consulting expenses directly related to this Merger and the related transactions which have been expensed by Piedmont through September 30, 1995. (16) To record the amortization of deferred transaction costs. This pro forma adjustment assumes the transaction was consummated on January 1, 1994. (17) To record the tax effect at the statutory rate of 34% of the pro forma adjustments where applicable. (18) The loss per common share and weighted average number of common shares outstanding of Chartwell for the year ended December 31, 1994 have been calculated assuming the Senior Notes offering by Chartwell on March 17, 1994 and related refinancing transactions were consummated at the beginning of the year. The pro forma consolidated loss per common share has been calculated by adding the net loss before extraordinary item of Piedmont as Adjusted and the net Merger Adjustments to Chartwell's adjusted loss before extraordinary item assuming the Senior Notes offering was consummated at the beginning of the year. Such adjusted loss for Chartwell was approximately $3,141,000. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Chartwell--Liquidity and Capital Resources."

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+RISK FACTORS In evaluating an investment in the Certificates, prospective investors should consider carefully the following factors in addition to the other information presented in this Prospectus. LIMITED LIQUIDITY. The Certificates represent a new issue of securities for which there is currently no market. If a market for the Certificates were to develop, the Certificates may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for other securities and other factors. There can be no assurance that a Certificateholder will be able to sell a Certificate in the future or that any such sale will be at a price equal to or higher than the initial public offering price of such Certificate. Each of the Underwriters of the Certificates, Salomon Brothers Inc and Chemical Securities Inc., has informed the Trust that, subject to applicable laws and regulations, it currently intends to make a market in the Certificates. The Underwriters are not obligated to do so, however, and any market making may be discontinued at any time without notice. LIMITED ASSETS. The Trust does not have, nor is it permitted to have, any significant assets or sources of funds other than the Purchased Assets. The Certificates represent interests solely in the Trust and will not be insured or guaranteed by Puget, the Trustee or any other person or entity. Consequently, Certificateholders will rely solely on collections on the Purchased Assets from the Closing Date through the Final Collection Date for payment. The Tariff and any Revised Tariffs will expire on the Tariff Termination Date, and no amounts will be billed under the Tariff or any Revised Tariff in respect of the Purchased Assets after that date. As a result, if collections through the Final Collection Date on amounts billed through the Tariff Termination Date are, for any reason, insufficient to pay all principal and interest on the Certificates, the Certificates will not have any other source of payment and the Certificateholders will suffer a loss on their investments. POSSIBLE DELAYS IN OR REDUCTIONS OF DISTRIBUTIONS TO CERTIFICATEHOLDERS IN THE EVENT OF A PUGET INSOLVENCY. In the event of an insolvency of Puget subsequent to the transfer of the Purchased Assets to the Trust, Puget would be subject to the United States Bankruptcy Code or other similar state laws ("Insolvency Laws"). If the transfer of the Purchased Assets to the Trust constitutes a "true sale" to the Trust under the Insolvency Laws, the Purchased Assets would not be part of Puget's bankruptcy estate and would not be available to creditors of Puget. However, in the event of Puget's insolvency, it is possible that the bankruptcy trustee, a creditor of Puget or Puget as debtor in possession may argue that under the Insolvency Laws the transaction between Puget and the Trust is a pledge of the Purchased Assets made to secure a borrowing by Puget, rather than a "true sale," thereby resulting in the inclusion of the Purchased Assets within Puget's bankruptcy estate. If a filing were made under any Insolvency Laws by or against Puget and either an attempt were made to litigate the foregoing issue or a court were to recharacterize the transaction under the Insolvency Laws as a pledge rather than a "true sale," delays in distributions to Certificateholders (and possible reductions of such distributions) could occur. The Statute expressly provides that the transfer of the purchased conservation investment assets to the Trust, if made in the manner described herein, constitutes a "true sale" to the Trust. The Rating Agencies who will rate the Certificates will receive a reasoned opinion of counsel on the date of issuance of the Certificates that analyzes the Statute and analogous case law (although there is no precedent based on directly similar facts) and concludes that, subject to certain facts, assumptions and qualifications specified therein, a court in a properly presented and decided case would determine that the transfer pursuant to the Pooling and Servicing Agreement of the purchased conservation investment assets to the Trust will be treated for Insolvency Law purposes as a "sale or other absolute transfer"-- as opposed to a loan -- and, accordingly, the purchased conservation investment assets would not be part of Puget's bankruptcy estate. The legal opinion concludes that the fact that Puget intends to report the transaction as a loan for federal income tax purposes would not prevent true sale treatment for the transfer of the purchased conservation investment assets to the Trust. Such legal opinion is not binding on any court and, notwithstanding the provisions of the Statute, there can be no assurance that a court would not reach a contrary conclusion. To provide for the possibility of the transaction being recharacterized under the Insolvency Laws as a pledge of the Purchased Assets made to secure a borrowing by Puget rather than a "true sale," the Pooling and Servicing Agreement provides for the grant by Puget of a security interest in the Purchased Assets and the proceeds thereof to the Trustee to secure any such borrowing. Puget will take the steps required to perfect that security interest on or prior to the Closing Date and will agree to take the steps required to maintain the perfection of that security interest thereafter. See "Description of the Certificates -- Sale of Purchased Assets to the Trustee; Effect of Insolvency Laws." TRUST'S DEPENDENCE ON THE SERVICER. The Servicer is not obligated to make any payments in respect of the Certificates or the Purchased Assets. The existence of receivables from Customers in respect of the Purchased Assets, however, depends on the continued provision of electric service to such Customers by Puget or a successor to Puget. The Trust also depends on the Servicer for the determination of any Revised Tariffs and for the Customer billing and collection that is necessary to recover payments on the Purchased Assets and, therefore, necessary to make payments on the Certificates. If, as a result of its insolvency or liquidation or otherwise, Puget were to cease servicing the Purchased Assets, determining any Revised Tariffs and collecting payments on the Purchased Assets, it may be difficult to find a substitute Servicer. In such an event, the risk exists that no additional payments would be made on the Certificates. Puget may only be removed as Servicer if (i) it fails to make required remittances, or otherwise fails to perform in all material respects any of its covenants under or in accordance with, or breaches any of its material representations or warranties in, the Pooling and Servicing Agreement (in each case after notice and lapse of the applicable grace period), (ii) a substitute Servicer is appointed, (iii) the Holders (as hereinafter defined) of Certificates representing not less than 75% of the aggregate Certificate balance then outstanding consent to such removal, and (iv) each Rating Agency notifies the Trustee that its rating assigned to the Certificates will not be withdrawn or reduced as a result of appointment of the successor Servicer. As a result of the requirement of such consent and Rating Agency notices, it may be difficult to effect the Servicer's removal. Puget may only resign as Servicer if a successor Servicer is appointed and each Rating Agency notifies the Trustee that such resignation will not cause the rating then assigned to the Certificates to be withdrawn or reduced. Under the Pooling and Servicing Agreement, the Trustee will have only limited oversight responsibility with regard to the Servicer's activities. The Servicer is required to provide annually to the Trustee a report of a firm of independent public accountants with respect to the Servicer's performance and records relating to the servicing of the Purchased Assets. See "Description of the Certificates -- Reports to Certificateholders and Evidence of Compliance." No other party will have oversight over the Servicer's activities under the Pooling and Servicing Agreement. DEPENDENCE OF PURCHASED ASSETS ON PUGET. As of the date of the transfer of the Purchased Assets from Puget to the Trust, the Purchased Assets will not include any currently existing receivables from Customers. The existence of receivables from Customers in respect of the Purchased Assets depends on the continued provision of electric service and the related billing to such Customers by Puget or any successor to Puget during the period from the date of delivery of the Certificates through the Tariff Termination Date. If Puget or any successor to Puget fails to provide electric service and to bill and collect the resulting receivables during such period, the risk exists that no additional payments would be made on the Certificates. COMPETITIVE RISKS FACING THE ELECTRIC UTILITY INDUSTRY. The electric utility industry is experiencing intensifying competitive pressures, particularly in the wholesale generation and industrial customer markets. The National Energy Policy Act of 1992 was designed to increase competition in the wholesale electric generation market by easing regulatory restrictions on producers of wholesale power and by authorizing the Federal Energy Regulatory Commission to mandate access to electric transmission systems by wholesale power generators. The potential for increased competition at the retail level in the electric utility industry through state-mandated retail wheeling has also been the subject of legislative and administrative interest in a number of states, including Washington. Electric utilities, including Puget, now face greater potential competition for resources and customers from a variety of sources, including privately owned independent power producers, exempt wholesale power generators, industrial Customers developing their own generation resources, suppliers of natural gas and other fuels, other investor-owned electric utilities and municipal generators. There can be no assurance that such trends will not have a significant adverse impact on Puget's business in the future. In particular, Puget anticipates increasingly intense competition for service to its large industrial Customers, some of which may receive proposals from competitors for part or all of their energy requirements. If large industrial Customers choose to purchase power from sources other than Puget, and if Termination Fees payable by such Customers under Conservation Repayment Contracts, if any, between Puget and such Customers are not sufficient to reimburse Puget for the Bondable Conservation Investment Balance arising from expenditures on conservation measures for such Customers, it may be necessary for Puget to apply to the Commission for a Revised Tariff to account for the loss of such Customers. See "Risk Factors -- Possible Effect of Inaccurate Forecast of Number of Customers" and "Puget Customers and Collections -- Forecasting Customers." POSSIBLE EFFECT OF INACCURATE FORECAST OF NUMBER OF CUSTOMERS. The Tariff levied on all of Puget's Customers is based in part on calculations by the Servicer that reflect the Servicer's forecasted number of Customers in each Customer category and the anticipated rate of delinquencies. To the extent that the number of Customers in any Customer category is less than the number forecasted by Puget in calculating the Tariff or any Revised Tariff or the aggregate payment due from a Customer is less than the forecasted amount payable by such Customer in respect of the Tariff or any Revised Tariff, the aggregate amount actually billed under the Tariff or any Revised Tariff may be less than the forecasted amount. While the Servicer will make all reasonable efforts to predict such circumstances and incorporate assumptions relating thereto into the determination of the Tariff or any Revised Tariff, there can be no assurance that such determination will not result in a shortfall in the amount billed pursuant to the Tariff or any Revised Tariff. Through March 31, 2004, such shortfalls may be recovered through the filing of a Revised Tariff. Thereafter, any such shortfalls are expected to be recovered from the Overcollateralization Amount. To the extent the Overcollateralization Amount is not sufficient to cover any such shortfalls, amounts in the Collection Account would not be sufficient to pay the principal of and interest on the Certificates in full by the Final Distribution Date and the Certificateholders would suffer a loss on their investments. POSSIBLE SHORTFALLS IN COLLECTIONS. While the aggregate amount billed pursuant to the Tariff or any Revised Tariff may be sufficient to enable interest on the Certificates to be paid on a timely basis and the principal of the Certificates to be repaid in full by the Final Distribution Date, Customers may fail to remit payments of amounts billed pursuant to the Tariff in whole or in part or may remit such payments on a delayed basis. There can be no assurance as to the rate of payment, the timing of the receipt of payments or the rate of delinquencies that will actually occur in any future period. If such shortfalls are sufficient to result in a Variance as of any Calculation Date through March 31, 2004, they may be recovered in subsequent periods through a Revised Tariff. Thereafter, any such shortfalls are expected to be recovered from the Overcollateralization Amount. To the extent the Overcollateralization Amount is not sufficient to cover any such shortfalls, amounts in the Collection Account would not be sufficient to pay the principal of and interest on the Certificates in full by the Final Distribution Date and the Certificateholders would suffer a loss on their investments. The revenues collected under the Tariff will not fluctuate with levels of electric usage unless the aggregate payment due from a Customer for the provision of electric service is less than the amount payable in respect of the Tariff. Any such excess of the amount payable by a Customer in respect of the Tariff over the aggregate payment due from the Customer is not required to be carried forward to subsequent periods. POTENTIAL DELAYS IN COMMISSION APPROVAL OF REVISED TARIFFS. The Statute requires the Commission to approve the Tariff at levels sufficient to recover the Conservation Asset Transaction Amount. Under the Pooling and Servicing Agreement, the Tariff is subject to a Rate Adjustment if a Variance exists as of any Calculation Date, in which case Puget is required to apply with the Commission for a Rate Adjustment within 30 days following any Calculation Date to which a Variance relates. Failure of Puget to make such application within that period would constitute a breach of an obligation under the Pooling and Servicing Agreement to which the limitations on Puget's liability under the Pooling and Servicing Agreement would not apply and which would be enforceable by the Trustee on behalf of the Certificateholders. While the Initial Order requires the Commission to implement a Revised Tariff within 30 days of the application therefor by the Servicer, and the Statute requires the Commission to maintain rates at levels sufficient to fully recover the Conservation Asset Transaction Amount, there can be no assurance that such approval would not require a longer period of time. Under Washington law applicable to rate filings generally, the Commission is obligated to act on a rate application no later than 11 months from the date of filing. However, if a Variance exists at either September 30, 2003 or March 31, 2004 and the Commission fails to approve a Revised Tariff within 30 days after the Servicer's application, the Initial Order provides that the Tariff Termination Date of such Revised Tariff will be extended by such period of time after September 30, 2004 as corresponds to the delay beyond 30 days in approval of the latest such Revised Tariff to be so delayed, but not to be later than July 31, 2005. If the Tariff Termination Date is extended, the Final Collection Date will be the last day of the month that is six months after the month in which the Tariff Termination Date occurs and the Final Distribution Date will be the next succeeding Distribution Date (to be no later than April 11, 2006). To the extent that implementation of a Revised Tariff is delayed either as a result of Puget's failure to apply for a Rate Adjustment in a timely manner or as a result of the Commission's failure to implement the Revised Tariff as required by the Initial Order, the previously existing Tariff would remain unchanged, and the amount collectible thereunder may be lesser or greater than that which would have been collected under the Revised Tariff and may be insufficient to enable interest on the Certificates to be paid on a timely basis or the principal of the Certificates to be repaid in full by the Final Distribution Date, in which case the Certificateholders would suffer a loss on their investments. See "The Tariff and the Trust Assets." ABILITY OF THE SERVICER TO CHANGE PAYMENT TERMS. The Servicer has reserved the right to make any change to the amount or reschedule the due date of any scheduled payment of any billed amount in respect of the Purchased Assets or change any material term of any Purchased Asset if such action would be in accordance with its customary practices or those of any successor Servicer with respect to comparable assets that it services for itself and if such action would not materially adversely affect the Certificateholders. There are no other limitations on the Servicer's ability to change the terms of the Purchased Assets. While Puget has no current intention of taking actions that would change the payment or other terms of the Purchased Assets, there can be no assurance that changes in Puget's customary and usual practices for comparable assets it services for itself might not result in a determination to do so or that a successor Servicer may not make such determination. It is possible that any such changes could delay collections from Customers or result in lower collections. Any change in the amount or timing of scheduled payments on any billed amount in respect of the Purchased Assets or other change in any material term of any Purchased Asset could adversely affect the payment of interest on the Certificates on a timely basis or the payment of the principal of the Certificates in full by the Final Distribution Date. See "Puget Customers and Collections -- Credit Policy and Procedures," "-- Billing Process" and "-- Collection Process." CREDIT POLICY AND PROCEDURES. The ability of Puget to collect amounts billed to Customers under the Tariff or any Revised Tariff will depend in part on the creditworthiness of the Customers. Puget is obligated to provide service to new Customers under Washington law and no outside credit investigations are performed on new Customers. Puget's information regarding the credit status of new Customers is limited to information regarding prior service, if any, by Puget to such Customers. Puget relies on the information provided by Customers and its customer information system audits to indicate whether a new Customer has had previous service from Puget. See "Risk Factors -- Possible Shortfalls in Collections" and "Puget Customers and Collections -- Credit Policy and Procedures." ORDER AND APPLICATION OF FUNDS. Under the Pooling and Servicing Agreement, the Trustee will make distributions from the Collection Account on each Distribution Date, FIRST, to the Trustee in the amount of the Trustee Fee; SECOND, to the Servicer in the amount of the Servicing Fee; THIRD, to the Certificateholders as interest an amount equal to the product of the Certificate Rate and the aggregate Certificate balance as of the first day of the related Distribution Period (calculated on the basis of the number of days in such Distribution Period assuming a 360-day year comprised of twelve 30-day months); and, FOURTH, to the Certificateholders, the balance remaining in the Collection Account as principal to reduce the aggregate Certificate balance. Consequently, Certificateholders will not receive payments of interest or principal on any Distribution Date unless the Trustee Fee and the Servicing Fee due on or prior to such date have been paid in full. LIMITATION ON LIABILITY OF SERVICER AND SELLER. The Pooling and Servicing Agreement provides that none of the Seller, the Servicer or any of their directors, officers, employees or agents, in their capacities as such, will be under any liability to the Trust, the Trustee or the Certificateholders for any action taken, or refrained from being taken, pursuant to the Pooling and Servicing Agreement, other than any liability that would otherwise be imposed by reason of the breach of their respective obligations and duties under the Pooling and Servicing Agreement. As a result, any loss suffered by the Trust or the Certificateholders caused by any action or failure to act by any of such parties may not be recoverable unless the loss resulted from a breach of an obligation under the Pooling and Servicing Agreement. CHALLENGE TO STATUTE, INITIAL ORDER OR TARIFF. The existence of the Purchased Assets and their sufficiency as the source of payment for the Certificates are dependent on the Statute, the Initial Order, the Tariff and any Revised Tariff. As a result, if the Statute, the Initial Order, the Tariff or any Revised Tariff is challenged in a lawsuit and is finally determined to be unenforceable in whole or in part, such determination could adversely affect the ability of Puget to make remittances to the Trustee as required by the Pooling and Servicing Agreement, and Certificateholders could suffer a loss on their investment. The approval of the Initial Order and the Tariff by the Commission is a condition to the issuance of the Certificates. No challenge to the enforceability of the Statute, the Initial Order or the Tariff currently exists and Puget is not aware of any basis for such a challenge. LIMITATION OF RATING AGENCY RATINGS OF THE CERTIFICATES. It is a condition to the issuance of the Certificates that they be rated "AAA" by Standard & Poor's Rating Group, "AAA" by Duff & Phelps Credit Rating Co., "AAA" by Fitch Investors Service, L.P., and "Aa2" by Moody's Investors Service, Inc. The ratings of the Certificates address the likelihood of the ultimate payment of principal and the timely payment of interest on the Certificates. A security rating is not a recommendation to buy, sell or hold securities. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a Rating Agency if, in its judgment, circumstances so warrant. RESTRICTIONS OF BOOK-ENTRY REGISTRATION. The Certificates will be initially represented by one or more Certificates registered in Cede's name, as nominee for DTC, and will not be registered in the names of the Certificate Owners or their nominees. Therefore, unless and until Definitive Certificates are issued, Certificate Owners will not be recognized by the Trustee as Certificateholders. Hence, until such time, Certificate Owners will only be able to receive payments from, and exercise the rights of Certificateholders indirectly through, DTC and participating organizations, and, unless a Certificate Owner requests a copy of any such report from the Trustee or the Servicer, will receive reports and other information provided for under the Pooling and Servicing Agreement only if, when and to the extent provided to Certificate Owners by DTC and its participating organizations. In addition, the ability of Certificate Owners to pledge Certificates to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such Certificates, may be limited due to the lack of physical certificates for such Certificates. See "Description of the Certificates -- Book-Entry Registration" and "-- Definitive Certificates."

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+RISK FACTORS Prospective investors should consider carefully all the information contained in this Prospectus, including the following risk factors. SUBSTANTIAL LEVERAGE As of December 31, 1994, after giving effect to the Refinancing, the Company's total indebtedness would have been approximately $223.7 million, all of which was unsubordinated, and total shareholders' equity would have been approximately $183.5 million, resulting in a pro forma total debt to total capitalization ratio of 54.9%. In addition, at such date approximately $52.4 million of additional borrowing capacity would have been available (pursuant to the borrowing base formula) under the Senior Credit Facility. The Indenture will permit the Company and its subsidiaries to incur certain additional specified indebtedness. See "Description of the Notes." The Company's borrowing needs are seasonal. The maximum amount of indebtedness outstanding at any fiscal month end in 1994 was approximately $308.7 million at October 1, 1994. See " -- Seasonality and Cyclicality." The Company currently has incurred, and after the consummation of the Offering will continue to incur, significant annual cash interest expense. After giving effect to the Refinancing, the pro forma ratio of EBITDA to interest expense would have been 2.35 to 1 for the fiscal year ended December 31, 1994 compared to 2.94 to 1 before the Refinancing. After giving effect to the Offering, the pro forma ratio of earnings to fixed charges for the fiscal year ended December 31, 1994 would have been 1.41 to 1 compared to 1.59 to 1 before the Offering. See "Use of Proceeds and Refinancing" and "Capitalization." The level of the Company's indebtedness could have important consequences to holders of the Notes, including: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, debt service requirements, general corporate purposes or other purposes may be restricted, (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of the Company's interest expense, (iii) the Company is more highly leveraged than certain of its competitors, which may place the Company at a competitive disadvantage and (iv) the Company's borrowings under the Senior Credit Facility will accrue interest at variable rates, which could result in increased interest expense in the event of higher interest rates. The Company's ability to make interest payments on the Notes will be dependent on the Company's future operating performance, which itself is dependent on a number of factors, many of which are beyond the Company's control. The Company's ability to repay the Notes at maturity will depend upon these same factors and the ability of the Company to raise additional funds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." During 1993 and 1994, the Company sought and obtained waivers of violations of, and amendments to, certain financial covenants contained in the instruments relating to the 8 7/8% Notes, the Term Loan and the Company's existing revolving credit facility. During the second quarter of 1994, the Company suspended the payment of dividends on its preferred and common stock. Substantially contemporaneously with the consummation of the Offering, the Company expects to pay existing dividend arrearages on its preferred stock and thereafter to resume paying quarterly dividends thereon. No decision with respect to renewal of common stock dividends has been made. RESTRICTIVE COVENANTS IN THE SENIOR CREDIT FACILITY The Senior Credit Facility is expected to contain material restrictions on the operation of the Company's business, including covenants restricting, among other things, the ability of the Company and certain subsidiaries to incur indebtedness, create liens on the Company's property, guarantee obligations, alter the character of the Company's business, consolidate, merge or purchase or sell the Company's assets, make investments or advance funds, prepay indebtedness and transact business with affiliates. The Senior Credit Facility is also expected to contain certain financial covenants, including covenants that will require the Company to maintain a minimum tangible net worth, leverage ratio and fixed charges coverage ratio, as well as customary representations and warranties, funding conditions and events of default. A breach of one or more covenants under such facility could result in an acceleration of the Company's obligations thereunder, and the inability of the Company to borrow additional amounts under the Senior Credit Facility. In addition, a default under the Notes will constitute an event of default under the Senior Credit Facility. See "Use of Proceeds and Refinancing." RESTRICTIVE COVENANTS IN THE INDENTURE The Indenture contains material restrictions on the Company's operations, including covenants that restrict or limit (i) indebtedness that may be incurred by the Company and its subsidiaries, (ii) the ability of the Company and its subsidiaries to pay dividends or make other distributions, purchase or redeem stock and make other investments, (iii) the creation of liens, (iv) the disposition of assets, (v) sale and leaseback transactions, (vi) the issuance and sale of capital stock of the Company's subsidiaries, (vii) transactions with affiliates, (viii) a change of control of the Company and (ix) mergers, consolidations and certain sales of assets by the Company. A breach of one or more covenants under the Indenture could result in an acceleration of the Company's obligations thereunder. See "Description of the Notes." DOMESTIC COMPETITION The domestic activewear and licensed apparel industries are highly competitive. Since the 1980s, the activewear industry, and in recent years the licensed apparel industry, have been characterized by the acquisition of existing competitors by larger companies with substantial financial resources and manufacturing and distribution capabilities. Certain participants in these industries have greater financial and other resources than the Company. Increased competition from these and future competitors could reduce sales and prices, adversely affecting the Company's results of operations. Because of the Company's high leverage, it may be less able to respond effectively to such competition than other participants. See "Business -- Industry." FOREIGN COMPETITION The Company's products are subject to foreign competition. The extent of import protection afforded to domestic manufacturers has been, and is likely to remain, subject to considerable political deliberation. Beginning in 1995, the General Agreement on Tariffs and Trade ("GATT") will eliminate over a period of 10 years restrictions on imports of apparel. In addition, on January 1, 1994, the North American Free Trade Agreement ("NAFTA") became effective. The implementation of NAFTA could result in an increase in apparel imported from Mexico that would compete against certain of the Company's products. See "Business -- Industry." LICENSES AND TRADEMARKS Professional and collegiate athletic licensors have increased their royalty percentages and minimum guaranteed payments in contracts with licensees, such as the Company's subsidiaries. In addition, the Company's material licenses are nonexclusive, and new or existing competitors may obtain similar licenses. If a significant license or licenses were not renewed or replaced, the Company's sales and results of operations likely would be materially and adversely affected. See "Business -- Licenses." Because of its growing emphasis on branded products, the Company increasingly will rely on the strength of its trademarks. The Company has in the past and may in the future be required to expend significant resources protecting these trademarks, and the loss or limitation of the exclusive right to use them could adversely affect the Company's sales and results of operations. See "Business -- Industry" and " -- Trademarks." MAJOR LEAGUE BASEBALL STRIKE AND NATIONAL HOCKEY LEAGUE LOCKOUT Through its subsidiaries, the Company sells activewear and headwear bearing professional and college sports licensed logos and designs, including Major League Baseball ("MLB") and National Hockey League ("NHL") team logos and designs. The MLB players' strike and NHL lockout, which was settled on January 13, 1995, have adversely affected sales of items bearing these marks, and the MLB players' strike will continue to adversely affect sales of MLB products until this dispute is resolved. The Company expects that consumer demand for NHL products and, once play resumes, MLB products will rebound, but may recover slowly. There can be no assurance that the MLB dispute will be resolved in the near future or that sales of MLB and NHL products will increase or return to prior levels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Fiscal Year 1994 Compared to Fiscal Year 1993." UNIONIZATION OF HOURLY WORKERS AT MARTINSVILLE FACILITIES In August 1994, hourly employees at the Company's Martinsville, Virginia facilities voted for representation by the Amalgamated Clothing and Textile Workers Union. The Company currently is negotiating a labor agreement with the union which would cover all hourly employees at the Martinsville facilities. As of December 31, 1994, the Company's approximately 2,200 hourly employees in Martinsville accounted for approximately 32% of the Company's total employees and approximately 36% of the Company's hourly employees. Failure to reach agreement with the union could materially adversely affect the Company's operations at its Martinsville facilities. None of the Company's other employees are represented by a union. See "Business -- Employees." RAW MATERIALS The principal raw materials used by the Company in the manufacture of its products are cotton of various grades and staple lengths and polyester in staple form. Any shortage in the cotton supply by reason of weather, crop disease or other factors, or significant increase in the price of cotton or polyester, could adversely affect the Company's results of operations. Tultex makes advance purchases of raw cotton based on projected demand. The Company has contracted to purchase substantially all of its raw cotton needs for 1995 and has fixed the price on approximately 50% of its raw cotton needs. To the extent cotton prices increase before the Company fixes the price for the remainder of its raw cotton needs, the Company's results of operations could be adversely affected. See "Business -- Raw Materials." SEASONALITY AND CYCLICALITY Historically, the fleecewear and licensed apparel industries have been seasonal, with peak sales occurring in the third and fourth quarters of the calendar year, coinciding with cooler weather and the playing seasons for some of the most popular professional and college sports, notably football and basketball. The licensed apparel industry also is cyclical, in substantial part because of the changing allegiances of sports fans as their teams win or lose and the fluctuating popularity of a particular sport. The Company's performance may be negatively affected by the foregoing factors and by changing retailer and consumer demands and downturns in consumer spending, such as the downturn that began during the latter part of 1993 and that affected the Company's performance into 1994. See "Business -- Industry" and " -- Seasonality." ENVIRONMENTAL LAWS AND REGULATIONS The Company is subject to various federal, state and local environmental laws and regulations governing the discharge, storage, handling and disposal of a variety of substances and waste used in the Company's operations. The Company returns dyeing waste for treatment to the City of Martinsville, Virginia's municipal wastewater treatment system operated under a permit issued by the state. While the Company believes it is in material compliance with these laws and regulations, there can be no assurance that environmental requirements will not become more stringent in the future or that the Company will not incur substantial costs in the future to comply with such requirements. See "Business - -- Environmental Matters." FRAUDULENT CONVEYANCE CONSIDERATIONS Each Guarantor's Guarantee of the obligations of the Company under the Notes may be subject to review under relevant federal and state fraudulent conveyance statutes in a bankruptcy, reorganization or rehabilitation case or similar proceeding or a lawsuit by or on behalf of unpaid creditors of such Guarantor. If a court were to find under relevant fraudulent conveyance statutes that, at the time the Notes were issued, (a) a Guarantor guaranteed the Notes with the intent of hindering, delaying or defrauding current or future creditors or (b)(i) a Guarantor received less than reasonably equivalent value or fair consideration for guaranteeing the Notes and (ii)(A) was insolvent or was rendered insolvent by reason of such Guarantee, (B) was engaged, or about to engage, in a business or transaction for which its assets constituted unreasonably small capital or (C) intended to incur, or believed that it would incur, obligations beyond its ability to pay as such obligations matured (as all of the foregoing terms are defined in or interpreted under such fraudulent conveyance statutes), such court could avoid or subordinate such Guarantee to presently existing and future indebtedness of such Guarantor and take other action detrimental to the holders of the Notes, including, under certain circumstances, invalidating such Guarantee. See "Description of the Notes -- Guarantees." NO MARKET FOR NOTES The Notes are new securities for which there is no trading market. The Company does not intend to list the Notes on any securities exchange. The Company has been advised by the Underwriters that the Underwriters currently intend to make a market in the Notes; however, the Underwriters are not obligated to do so and may discontinue any such market making at any time without notice. No assurance can be given as to the development or liquidity of any trading market for the Notes. See "Underwriting."

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+RISK FACTORS Member's Share of Proceeds Could be Less Than CMV: Payment for crops is based upon the CMV of such crops, which is the weighted average of the prices paid by other commercial processors for similar crops used for similar or related purposes sold under preseason contracts or in the open market in the same or similar market areas. While Curtice-Burns has agreed to pay to Pro-Fac at least the CMV of Pro-Fac crops, the total proceeds of Pro-Fac depend in large part on the overall profitability of Curtice-Burns. There can be no assurance that payment by Pro-Fac to a member for his crops from the proceeds of Pro-Fac will be equal to or greater than the CMV of those crops. Although the members of Pro-Fac have been paid more than the CMV of their crops in every year of Pro-Fac operations except 1963, 1969, and 1970, the increased indebtedness incurred by Curtice-Burns in connection with the Acquisition has increased the leverage and interest expense of Curtice-Burns, thus increasing the risk that Pro-Fac may, in one or more coming years, pay members less than the CMV of their crops. There is no relationship between the CMV of crops and the cost of producing such crops since CMV is determined by supply and demand in the marketplace. While each year Pro-Fac must, under its bylaws, pay or allocate to each member his pro rata share of the net proceeds of Pro-Fac from patronage business, Pro-Fac may retain whatever portion of such proceeds the Board of Directors may determine to be necessary for the operations of Pro-Fac, allocating the retained portion to the accounts of members. There is thus no assurance that a member of Pro-Fac will receive cash payments for his crops equal to the CMV thereof or that he will receive any cash payments in addition to CMV even if his share of the proceeds of Pro-Fac from patronage business is equal to or greater than CMV. Delayed Payments for Crops: Pro-Fac members receive delayed payment of a portion of the purchase price for their crops. The delay exceeds the industry average in many instances. See 'Business of Pro-Fac - Marketing of Members' Crops - Timing of Payments for Crops' and '- Harvest-Time Advances.' Inclusion of Certain Payments in Taxable Income: A member of Pro-Fac must include in his taxable income for federal income tax purposes his share of the net proceeds of Pro-Fac realized from patronage business which are paid to him in cash or allocated to his account as qualified retains. Non- qualified retains are included in the member's taxable income only upon redemption. See 'Business of Pro-Fac.' Increase in Leverage of Curtice-Burns: As a result of the Acquisition, Curtice-Burns is highly leveraged, and such leverage may increase as a result of further borrowings to fund capital expenditures, working capital needs or for other general corporate purposes. The degree to which the Company is leveraged is important to members of Pro-Fac because the amount paid by Curtice-Burns for crops supplied by Pro-Fac, and the amount of dividends that Curtice-Burns may pay to Pro-Fac, varies depending upon the profitability of Curtice-Burns. Such payments, in turn, affect what Pro-Fac may pay to its members for their crops and the ability of Pro-Fac to pay dividends on, or repurchase, its common and preferred stock. A high degree of leverage may make Curtice-Burns more vulnerable to economic downturns, may limit its ability to withstand competitive pressures, and may impair the Company's ability to obtain financing in the future for working capital, capital expenditures, and general corporate purposes. Non-Transferability of Non-Qualified Retains: Non-qualified retains are non-transferable and do not bear interest. See 'Description of Pro-Fac Securities.' Absence of Market for Preferred Stock and Qualified Retains: The preferred stock and qualified retains of Pro-Fac may be transferred without the consent of Pro-Fac. There were, for several years preceding the Acquisition, broker-dealers making a market in Pro-Fac Non-Cumulative Preferred Stock and qualified retains, but no such market currently exists. There is no assurance that these arrangements, or any other organized market for Pro-Fac preferred stock and qualified retains, will be re-established. The purpose of the Exchange Offer was to provide stockholders with the opportunity to exchange, on a share-for-share basis, shares of Non-Cumulative Preferred Stock (which are highly illiquid) for shares of Cumulative Preferred Stock (which have been accepted for inclusion in the NASDAQ National Market System). There can be no assurance, however, that an established and liquid market for the Cumulative Preferred Stock will develop or that it will continue if one develops. The reduction in the number of outstanding shares of Non-Cumulative Preferred Stock as a result of the Exchange Offer and the Board's intention to issue primarily Cumulative Preferred Stock in the future as retains mature or are redeemed may result in a further reduction in the liquidity of Non-Cumulative Preferred Stock. Qualified retains do not bear interest. See 'Description of Pro-Fac Securities.' Effect of Exchange Offer on Patronage Income in Fiscal 1996: Because dividends on the Non-Cumulative Preferred Stock are payable annually (with the most recent dividend having been paid in July 1995) and dividends on the Cumulative Preferred Stock are paid quarterly (with dividends expected to be paid on October 31, 1995, January 31, 1996 and April 30, 1996), the exchange of Non-Cumulative Preferred Stock for Cumulative Preferred Stock on October 10, 1995 is likely to result in the payment of 1-3/4 years of dividends to the holders of exchanged shares in fiscal 1996. Such dividends will reduce the amount of patronage income allocated to members in fiscal 1996. Possible Changes of Treatment of Retains: The current policy of Pro-Fac with regard to the maturing of qualified retains into preferred stock and the redemption of non-qualified retains for preferred stock and/or cash is described in this Prospectus under 'Description of Securities Offered.' This policy is, however, subject to change, in the discretion of the Board of Directors. Each Member Receives One Vote: Each member of Pro-Fac has one vote, regardless of the number of shares of common stock held. Further, if two or more members are joined in a single farming enterprise, the participating members receive only a single vote. Accordingly, even a member with substantial holdings of common stock will have relatively little control over the election of directors or other matters on which members may vote. See 'Description of Pro-Fac Securities.' Possible Discontinuance of Crop: Pro-Fac continuously reviews the ability of its members to produce high-quality crops, and Curtice Burns continuously reviews its ability to process and market profitably the crops it buys from Pro-Fac. As a result of such reassessment, Pro-Fac may determine to cease marketing a particular crop and terminate the marketing agreements of the members producing that crop for sale through the Cooperative. The members affected would be required to sell all of their common stock supporting that crop to Pro-Fac for cash at its par value, plus any accrued dividends. Pro-Fac may also adjust the quantity of a crop to be marketed for members, either permanently or temporarily, in several ways described herein under 'Business of Pro-Fac - Marketing of Members' Crops - Quantity of Crops Marketed.' Permanent increases or decreases in the quantity of a crop to be marketed would involve, respectively, the purchase of additional common stock by members or other growers, or the sale of common stock by members to Pro-Fac at par value, plus any accrued dividends. Agricultural Risks: Curtice-Burns and Pro-Fac and its members are subject to all the risks generally associated with production and marketing of agricultural commodities. For example, unfavorable growing conditions in the Northeast in 1989, coupled with increased crop levels in competing areas, resulted in increased costs for Curtice-Burns' canned and frozen vegetable businesses in fiscal 1990, while increased national supplies reduced selling prices. Curtice-Burns' reduced earnings on these Pro-Fac products in turn reduced the amount paid by Curtice-Burns to Pro-Fac under the marketing provisions of the Integrated Agreement between them. See 'Relationship with Curtice-Burns.'

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+RISK FACTORS Prospective investors should consider carefully the following factors in addition to the other information set forth in this Prospectus in evaluating an investment in the shares of Class A Common Stock offered hereby. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation on the federal, state and local levels. Many aspects of such regulations are currently the subject of judicial proceedings and administrative or legislative proposals. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") significantly expanded the scope of cable television regulation. The FCC has completed a number of rule-making proceedings under the 1992 Cable Act, including those that permit franchising authorities to set rates for basic service and the provision of cable-related equipment. To the extent that existing rates are found to exceed those permitted by the FCC, franchising authorities will be able to require cable television systems to reduce the rates and provide refunds for up to a one-year period initially calculated from the effective date of the FCC's regulations. The FCC will also, upon a complaint by a customer or franchising authority, determine whether rates for regulated non-basic service tiers (except for services offered on a per-channel or per-program basis) are unreasonable and, if so found, reduce such rates and provide refunds from the date of such complaint. In addition, the FCC's regulations, as they now stand, limit a cable operator's ability to increase rates for regulated services. It is possible that, pursuant to further review by the franchising authorities and the FCC, certain additional rate reductions may be required. In order to resolve a variety of significant regulatory issues and obtain more certainty in the regulatory environment, on August 3, 1995, the FCC adopted a social contract with Continental (the "Social Contract"), which is the first comprehensive rate agreement involving cable television ever approved by the FCC. The Social Contract extends through the year 2000 and settles most of the Company's current rate cases. As part of the resolution of these cases, the Company has agreed to (i) invest at least $1.35 billion in system upgrades in the United States from 1995 through 2000 to expand channel capacity and improve system reliability and picture quality and (ii) make in-kind refunds to affected subscribers totaling approximately $9.5 million. See "Business--U.S. Operating Strategy--Regulatory Strategy; Social Contract" for a more detailed description of the Social Contract and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Various cable operators have initiated litigation challenging certain aspects of the 1992 Cable Act. The constitutionality of the basic scheme of rate regulation under the 1992 Cable Act has been upheld by a federal district court, and the FCC's rate regulation rules were upheld by a federal appeals court in June 1995. The outcome of the balance of this litigation cannot be predicted. The Company believes that the regulation of the cable television industry, including the rates charged for regulated services under present FCC rules and the cable industry's restructuring of rates and services in response to the 1992 Cable Act, remains a matter of interest in Congress, the FCC and other regulatory authorities. The U.S. Senate and House of Representatives recently approved separate bills that would significantly modify the rate regulation provisions of the 1992 Cable Act. If legislation is passed that is more favorable to the Company than the terms of the Social Contract, the Company would be allowed to benefit from such legislation. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legislation and Regulation." COMPETITION Continental's systems compete with other communications and entertainment media, including conventional off-air television broadcasting services, newspapers, movie theaters, live sporting events and home video products. Cable operators also compete with other distribution systems capable of delivering television programming to homes such as Multi-channel Multi-point Distribution Services ("MMDS") and DBS services. Three companies currently provide DBS services in the United States, including PrimeStar, in which Continental owns a 10.4% interest. Recent court and administrative decisions have removed certain of the restrictions that have limited entry into the cable television business by certain potential competitors, such as telephone companies, and bills recently under consideration by Congress and cases currently pending in the courts could result in the elimination of other such restrictions. The U.S. Senate and the House of Representatives recently passed separate bills that would permit telephone companies to provide cable television services, conditioned on the establishment of safeguards to prevent cross-subsidization between telephone and cable television operations. Cable television companies operate under non-exclusive franchises granted by local authorities which are subject to renewal and renegotiation from time to time. The 1992 Cable Act prohibits franchising authorities from granting exclusive cable television franchises and from unreasonably refusing to award additional competitive franchises; it also permits municipal authorities to operate cable television systems in their communities without a franchise. The Company cannot predict the extent to which competition will materialize from potential competitors such as the telephone companies, other distribution systems for delivering television programming to the home or other cable operators, or the extent of its effect on the Company. See "Business--Competition" and "Legislation and Regulation." The Company has not traditionally provided telephony and high-speed data services. The two-way switched voice and high-speed data markets are currently dominated by local telephone companies (or "LECs"), which include RBOCs. Due to historical regulatory constraints, the LECs currently have a virtual monopoly over these markets. As the regulatory barriers have weakened in some states, other "alternate access" carriers have entered these markets. All new entrants to these markets, however, currently depend upon the LECs for interconnection of equipment, access to customers and allocation of telephone numbers. The LECs have financial and other resources that are significantly greater than those of the Company. Moreover, if certain regulatory barriers are eliminated, the LECs may be permitted to provide cable television services, thereby creating potentially significant sources of competition for the Company. SUBSTANTIAL LEVERAGE AND HISTORY OF LOSSES The Company is substantially leveraged due to the indebtedness it has incurred over time primarily to finance acquisitions and expand its operations and, to a lesser extent, to repurchase shares of its capital stock. As of June 30, 1995, the Company's aggregate debt was $3.7 billion. As of June 30, 1995, after giving effect to the 1995 Acquisitions, the closing of the 1995 Credit Facility and the Offering, the Company would have had approximately $4.6 billion of debt and a stockholders' deficiency of approximately $857.8 million. See "Pro Forma Condensed Consolidated Financial Information." The Company may incur additional indebtedness for capital expenditures, investments and acquisitions in the future and to satisfy its obligations in 1998 and 1999 under its stockholder liquidity program, among other things. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources--1998-1999 Share Repurchase Program." The Company anticipates that, in light of the amount of its existing indebtedness, it will continue to have substantial leverage for the foreseeable future. The Company has a history of net losses, which have contributed to its stockholders' deficiency of $1.7 billion as of June 30, 1995. The Company reported net losses from continuing operations, before extraordinary items and the cumulative effect of the change in accounting for income taxes, of $25.8 million and $68.6 million for the years ended December 31, 1993 and 1994, respectively, and $33.1 million for the six months ended June 30, 1995. After giving effect to the New Hampshire Acquisition, the Florida Acquisition, the closing of the 1994 and 1995 Credit Facilities, the redemption of the 12 7/8% Debentures, the 1995 Acquisitions and the Offering, the Company would have reported losses from continuing operations before extraordinary items of $72.3 million and $37.9 million for the year ended December 31, 1994 and the six months ended June 30, 1995, respectively. See "Pro Forma Condensed Consolidated Financial Information." The high level of depreciation and amortization associated with the Company's acquisitions and capital expenditures related to continued construction and upgrading of the Company's systems and interest costs related to its financing activities will cause the Company to continue to report net losses for the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historically, cash generated from the Company's operating activities in conjunction with borrowings and proceeds from private equity issuances has been sufficient to fund its debt service requirements, stock repurchase obligations, capital expenditures, investments and acquisitions. The Company believes that cash generated from operating activities, together with borrowings from existing and future credit facilities and the net proceeds from the Offering and from future equity issuances, will be sufficient to fund its future debt service requirements and stock repurchase obligations, and to make anticipated capital expenditures, investments and acquisitions. However, there can be no assurances in this regard. Furthermore, there can be no assurances that the terms available for any future debt or equity financing would be favorable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." POTENTIAL FOR REDEMPTION OF CERTAIN EQUITY SECURITIES The Company is required to repurchase in late 1998 or early 1999 an aggregate of 16,684,150 shares of Class A Common Stock and Class B Common Stock (collectively, the "Redeemable Common Stock") from certain stockholders at a purchase price, which is equal to the greater of (i) the dollar amount that a holder of Common Stock would receive per share of Common Stock upon a sale of Continental as a whole pursuant to a merger or a sale of stock or, if greater, the dollar amount a holder of Common Stock would then receive per share of Common Stock derived from the sale of Continental's assets and subsequent distribution of the proceeds therefrom (net of corporate taxes, including sales and capital gains taxes in connection with such sale of assets), in either case less a discount of 22.5% or (ii) the dollar amount equal to the net proceeds which would be expected to be received by a stockholder of Continental from the sale of a share of Common Stock in an underwritten public offering at the time the shares are to be repurchased after, under certain circumstances, being reduced by pro forma expenses and underwriting discounts. For illustrative purposes, assuming the dollar amount under clause (ii) above equaled the initial public offering price less underwriting discounts and commissions per share of Class A Common Stock at the date of repurchase, and that such price is higher than the price per share a stockholder would receive if the Company were sold in a private transaction (less a discount of 22.5%), the maximum aggregate redemption price to be paid by the Company for the Redeemable Common Stock in 1998 or 1999 would be $ . See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--1998-1999 Share Repurchase Program." NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this Offering, there has been no public market for the Class A Common Stock. There can be no assurance that an active public market for the Class A Common Stock will develop or be sustained after the Offering or that the initial public offering price will correspond to the price at which the Class A Common Stock will trade in the public market subsequent to the Offering. The initial public offering price for the Class A Common Stock will be determined by negotiations between the Company and the Underwriters based on the factors described under "Underwriters." In addition, the stock market may experience volatility that affects the market prices of companies in ways unrelated to the operating performance of such companies. These market fluctuations could adversely affect the market price of the Class A Common Stock. NO INTENTION TO PAY DIVIDENDS The Company does not intend to pay cash dividends on its Common Stock or Series A Preferred Stock in the foreseeable future. In addition, under the terms of certain of the Company's financing agreements, the Company is subject to certain restrictions on paying cash dividends on its capital stock. See "Credit Arrangements of the Company" and "Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE There will be shares of Class A Common Stock, 109,196,050 shares of Class B Common Stock and 1,142,858 shares of Series A Preferred Stock (28,571,450 shares of Class B Common Stock on a Common Stock equivalent basis) outstanding immediately after this Offering, including the shares of Class A Common Stock offered hereby. Upon the completion of the Offering, all the shares of Class A Common Stock offered hereby will be eligible for public sale without restriction, except for shares purchased by "affiliates" of the Company. The 30,142,732 shares of Class A Common Stock issued in the Merger were subject to a registered exchange offer under the Securities Act of 1933, as amended (the "Securities Act"), and are eligible for public sale without restriction, except that they are subject to contractual restrictions on transfer until October 5, 1996. The remaining 39,411,107 shares of Class A Common Stock and all of the outstanding shares of Class B Common Stock and Series A Preferred Stock are "restricted securities" and may be sold only pursuant to Rule 144 ("Rule 144") promulgated under the Securities Act or another exemption. Only the Class A Common Stock will be included for quotation on the Nasdaq National Market. Treating the restricted Class B Common Stock and the Series A Preferred Stock as if all outstanding shares thereof were converted into Class A Common Stock, there would be approximately 143,662,429 shares of restricted Class A Common Stock outstanding (excluding any unvested shares granted as part of incentive compensation to officers of Continental and its subsidiaries and shares subject to Rule 701 under the Securities Act ("Rule 701 Shares")); of such shares, immediately following the Offering, (x) approximately 47,482,183 shares would be eligible for sale without regard to volume or certain other limitations under Rule 144(k) of the Securities Act ("Rule 144(k) Shares") and (y) approximately 90,282,100 shares would be eligible for sale, subject to compliance with volume and other limitations under Rule 144 ("Rule 144 Shares"). The remaining shares of currently outstanding Class A Common Stock or shares of Class A Common Stock issuable upon conversion of currently outstanding convertible securities (including the outstanding shares of Class B Common Stock) would become eligible for sale at various times thereafter. In addition, certain stockholders of the Company have demand or "piggyback" registration rights with respect to certain of their shares. See "Shares Eligible for Future Sale--Outstanding Registration Rights." The Company and all its officers and Directors and certain other stockholders of the Company, holding an aggregate of approximately Rule 144(k) Shares, Rule 144 Shares and Rule 701 Shares (excluding unvested shares), subject to certain exceptions (including, with respect to the Company, the right to issue up to an aggregate of % of the shares of Common Stock outstanding on the date of this Prospectus in connection with acquisitions by the Company), have agreed not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequences of ownership of the Common Stock, whether any such transactions described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise for a period of 180 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated. See "Shares Eligible for Future Sale" and "Underwriters." No predictions can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price for the Class A Common Stock prevailing from time to time. Sales of substantial numbers of shares of Class A Common Stock in the public market could adversely affect the market price of the Class A Common Stock. DISPARATE VOTING RIGHTS AND VOTING CONTROL The Class A Common Stock entitles its holders to one vote per share on all matters submitted generally to a vote of the Company's stockholders, while the Class B Common Stock entitles its holders to 10 votes per share. The holders of Series A Preferred Stock vote as if they had converted each of their shares into 25 shares of Class B Common Stock (i.e., 250 votes per share of Series A Preferred Stock). If the holders of the Series A Preferred Stock transfer their shares to persons other than certain permitted transferees, the new holders will vote as if each of their shares of Series A Preferred Stock had been converted into 25 shares of Class A Common Stock (i.e., 25 votes per share of Series A Preferred Stock). Accordingly, as of the consummation of the Offering, the holders of the Class B Common Stock and the holders of the Series A Preferred Stock will have sufficient voting power to determine the outcome of most matters submitted to the stockholders for approval. Upon completion of the Offering, Continental's Directors and officers as a group will own or control approximately % of the voting power of the outstanding voting securities of the Company. Accordingly, such management group will, in effect, be able to control the vote on all matters submitted to a vote of the holders of the Company's voting securities, except to the extent the Company's Restated Certificate of Incorporation (the "Restated Certificate") or applicable law requires a 66 2/3% vote and on those matters requiring a separate class vote. See "Beneficial Ownership of Common and Preferred Stock" and "Description of Capital Stock." DILUTION Persons purchasing shares of Class A Common Stock in the Offering will sustain immediate dilution in tangible net worth per share of Common Stock of approximately $ (assuming an initial public offering price of $ per share of Class A Common Stock). Dilution for this purpose represents the difference between the per share initial public offering price of the Class A Common Stock and the pro forma deficit in tangible net worth per share of Class A Common Stock after the Offering. See "Dilution." ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS Certain provisions of the Company's Restated Certificate and Amended and Restated By-Laws (the "By-Laws") could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding capital stock of the Company and could make it more difficult to consummate certain types of transactions involving an actual or potential change in control of the Company, such as a merger, tender offer or proxy contest. See "Description of Capital Stock--DGCL and Certain Provisions of the Restated Certificate and the By-Laws." The most significant of these is the disparate voting rights of the Class B Common Stock described above. See "Disparate Voting Rights and Voting Control." The Restated Certificate also provides for three classes of Directors to be elected on a staggered basis--one class each year--which enables existing management to exercise significant control over the Company's affairs. Certain institutional investors and The Providence Journal Company currently have the right to designate nominees to stand for election to the Company's Board of Directors. See "Management--Directors, Executive Officers and Other Officers." Pursuant to the Restated Certificate, shares of the Company's Preferred Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. See "Management--Directors, Executive Officers and Other Officers" and "Description of Capital Stock." RELIANCE ON KEY PERSONNEL The success of the Company's business will partially depend upon the continued availability of the services of certain key individuals, including Amos B. Hostetter, Jr., Chairman of the Board of Directors and Chief Executive Officer of the Company. The Company does not have employment contracts with, nor does it maintain key man insurance on, any of its executive officers. See "Management."

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+RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Notes offered hereby. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon and in the Offering Memorandum dated April 26, 1995, because the Old Notes were issued pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold unless registered under the Securities Act and applicable state securities laws, or pursuant to an exemption therefrom, or in a transaction not subject to the Securities Act and applicable state securities laws. The Company does not intend to register the Old Notes under the Securities Act and, after consummation of the Exchange Offer, will not be obligated to do so except under limited circumstances. See "The Exchange Offer--Purpose and Effect." Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business, such holders have no arrangement with any person to participate in the distribution of such New Notes and neither such holders nor any such other person is engaging in or intends to engage in a distribution of such New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "The Exchange Offer." HIGH LEVERAGE As a result of the Acquisition, the refinancing of certain debt and the repurchase of the Series B Preferred Stock (including accrued and unpaid dividends thereon) which the Company effected with the proceeds of the Old Notes, the Company has significant debt and debt service obligations. Assuming the repurchase of the Series B Preferred Stock had occurred on June 30, 1995, and after giving effect to the debt, redeemable preferred stock and redeemable warrants of United "pushed down" to the accounts of the Company, (i) the Company would have had $521.4 million of long-term indebtedness (including current maturities), $17.2 million of redeemable preferred stock, $12.0 million of redeemable warrants, and $48.8 million of common stock and other stockholders' equity; (ii) the Company would have had a long-term indebtedness to redeemable preferred stock, redeemable warrants and total stockholders' equity ratio of 6.7 to 1; and (iii) the Company would have had a long-term indebtedness, redeemable preferred stock and redeemable warrants to total stockholders' equity ratio of 11.3 to 1. See "Pro Forma Combined Financial Information." By contrast, after giving effect to "push-down" accounting, the Company's historical long-term indebtedness to redeemable preferred stock plus redeemable warrants plus stockholders' equity ratio as of June 30, 1995 was 6.0 to 1 and its historical long-term indebtedness, redeemable preferred stock and redeemable warrants to stockholders' equity ratio as of June 30, 1995 was 11.3 to 1. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, potential acquisition opportunities, general corporate purposes or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness; (iii) the Company may be more vulnerable to economic downturns, may be limited in its ability to withstand competitive pressures and may have reduced flexibility in responding to changing business and economic conditions; and (iv) fluctuations in market interest rates will affect the cost of the Company's borrowings to the extent not covered by interest rate hedge agreements because interest under the New Credit Facilities will be payable at variable rates. The Company's ability to service its indebtedness will be dependent on its future performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. The Company believes that, based upon current levels of operations, it should be able to meet its debt service obligations, including principal and interest payments on the Notes, when due. However, if the Company cannot generate sufficient cash flow from operations to meet its debt service obligations, defaults may occur thereunder and the Company might be required to refinance its indebtedness. There is no assurance that refinancings could be effected on satisfactory terms or would be permitted by the terms of the New Credit Agreement. SUBORDINATION The indebtedness evidenced by the Notes and the Guarantees (including principal, premium, if any, and interest) will be subordinated in right of payment to present and future Senior Indebtedness of the Company and Senior Guarantor Indebtedness of each Guarantor. In the event of the dissolution or liquidation of United or the Company, or in the case of certain events of default with respect to the Notes or such Senior Indebtedness or Senior Guarantor Indebtedness, certain creditors of the Company holding Senior Indebtedness or of any Guarantor holding Senior Guarantor Indebtedness will be entitled to be paid in full before any payment is made to holders of the Notes or the Guarantees. Senior Indebtedness and Senior Guarantor Indebtedness would currently include, among other things, the debt incurred under the New Credit Facilities and, in the case of Senior Indebtedness, the Company's current and future obligations under capitalized leases. After giving pro forma effect to the repurchase of Series B Preferred Stock, together with accrued and unpaid dividends thereon, effected with the proceeds of the Old Notes as if such transaction had occurred on June 30, 1995, there would have been approximately $391.6 million of Senior Indebtedness and Senior Guarantor Indebtedness of United outstanding on such date, substantially all of which represents Indebtedness or guarantees of Indebtedness under the New Credit Facilities which would have been secured by substantially all of the assets of the Company; in addition, after taking into account approximately $59.8 million of outstanding letters of credit, there would have been approximately $97.2 million available to be drawn by the Company as secured Senior Indebtedness under the revolving credit portion of the New Credit Facilities, which amounts would have been secured Senior Guarantor Indebtedness of United; and, on a pro forma basis on such date, Indebtedness pari passu to the Notes would have been $231.7 million, and there would not have been any Indebtedness subordinated to the Notes. See "Pro Forma Combined Financial Information." The Indenture does not prohibit or limit the designation of Indebtedness otherwise permitted to be incurred as Senior Indebtedness or Senior Guarantor Indebtedness. See "Description of the New Notes -- Subordination." LIMITED PRACTICAL VALUE OF GUARANTEES BY UNITED United fully and unconditionally guarantees, on a senior subordinated basis, all payments of principal, premium, if any, and interest on the Notes. However, since at present United's only significant asset is the capital stock of the Company (and such asset is pledged to the lenders under the New Credit Facilities), if the Company should be unable to meet its payment obligations with respect to the Notes, it is unlikely that United would be able to do so. RESTRICTIVE COVENANTS The Indenture and the credit agreement (as amended, the "New Credit Agreement") for the New Credit Facilities contain numerous restrictive covenants that will limit the discretion of management with respect to certain business matters. These covenants place significant restrictions on, among other things, the ability of the Company to incur additional indebtedness, to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. The New Credit Agreement also contains a number of financial covenants that require the Company to meet certain financial ratios and tests. See "Financing the Acquisition." A failure to comply with the obligations in the New Credit Agreement or the Indenture could result in an event of default under the New Credit Agreement, or an Event of Default (as hereinafter defined) under the Indenture, which, if not cured or waived, could permit acceleration of the indebtedness thereunder and acceleration of indebtedness under other instruments that may contain cross- acceleration or cross-default provisions. Other indebtedness of the Company and its subsidiaries that may be incurred in the future may contain financial or other covenants more restrictive than those applicable under the New Credit Agreement. The New Credit Agreement restricts the prepayment, purchase, redemption, defeasance or other payment of any of the principal of the Notes so long as any loans remain outstanding under the New Credit Agreement. RISKS INHERENT IN IMPLEMENTATION OF CONSOLIDATION PLAN The Company's future operations and earnings will be largely dependent upon the Company's ability to integrate the businesses separately conducted by ASI and the Company prior to the Merger. The Company must, among other things, eliminate approximately 10,000 overlapping items from its catalogs to be distributed in the fourth calendar quarter of 1995, close redundant distribution centers effectively, while at the same time maximizing retention of the related business, and eliminate certain corporate and sales positions and otherwise reduce combined administrative costs and expenses. There can be no assurance that the Company will successfully integrate the former separate businesses of ASI and the Company, and a failure to do so would have a material adverse effect on the Company's results of operations and financial condition. Additionally, although the Company does not currently have any acquisition plans, the need to focus management's attention on integration of the former businesses and implementation of the Company's consolidation plan may limit the Company's ability to successfully pursue acquisitions or other opportunities related to its business for the foreseeable future. As discussed under "Business -- Consolidation Plan and Benefits of the Acquisition" and as presented under "Pro Forma Combined Financial Information," management estimates that the Company expects to realize significant cost savings as a result of a successful implementation of its consolidation plan. The achievement of these savings is significantly dependent on the successful implementation of such plan. There can be no assurances, however, that such savings will be achieved or sustained. In addition, the Company believes that the Acquisition is likely to result in a reduction in the rate of revenue growth for some period following the Acquisition as a result of the loss of customers to competition. COMPETITION The Company operates in a highly competitive environment. The Company competes to obtain reseller purchases both with office products manufacturers and with other national, regional and specialty wholesalers of office products, office furniture, computers and related items. A trend toward consolidation has occurred in recent years throughout the office products industry. Although as the result of such consolidations at the national full-line wholesale level only one competitor (S.P. Richards) remains, consolidation of commercial dealers and contract stationers has also resulted in an increased ability of those resellers to buy goods directly from manufacturers. In addition, over the last decade, office products superstores (which largely buy directly from manufacturers) have entered virtually every major metropolitan market and commercial dealers, contract stationers and retail dealers have formed buying groups to purchase directly from manufacturers on a collective basis. Increased competition in the office products industry has also led to heightened price awareness among consumers, making purchasers of commodity type office products extremely price sensitive and requiring the Company to increase its efforts to convince resellers of the continuing advantages of its competitive strengths (as compared to those of manufacturers and other wholesalers), such as marketing and catalog programs, speed of delivery, and the ability to offer resellers a broad line of business products from multiple manufacturers with lower minimum order quantities on a "one-stop shop" basis. See "Business --Competition." CHANGING END USER DEMANDS The Company's sales and profitability are largely dependent on its ability to continually enhance its product offerings to meet changing end user demands. End users' traditional demands for office products have changed over the last several years as a result of (i) increased recycling efforts, (ii) efforts by various businesses to establish "paperless" work environments, (iii) the widespread use of computers and other technological advances, resulting in the elimination or reduction in use of traditional office supplies and (iv) a trend toward non-traditional offices, such as home-offices. The Company's ability to continually monitor and react to such trends and changes in end user demands will be necessary to avoid adverse effects on its sales and profitability. SERVICE INTERRUPTIONS Substantially all of the Company's shipping, warehouse and maintenance employees at certain of the Company's facilities in Chicago, Detroit, Philadelphia, Baltimore, Los Angeles, Minneapolis and New York City are covered by various collective bargaining agreements, which expire at various times during the next three years. Although the Company considers its relationships with its employees to be satisfactory, a prolonged labor dispute could have a material adverse effect on the Company's business as well as the Company's results of operations and financial condition. In addition, the Company's ability to readily deliver its products could be impaired by work stoppages by its employees. Although the Company has maintained service levels during past work stoppages by distributing to its customers from unaffected distribution centers, profitability has been reduced during such periods as a result of higher distribution costs. The Company's ability to receive and distribute products is largely dependent on the availability of trucks utilized by both manufacturers and the Company, and therefore the occurrence of a national trucking strike could also impair the Company's operations. The Company's service levels would also be affected in the event of an interruption in operation of its computers or telecommunications network on a company-wide scale for an extended period of time, although the Company has developed contingency plans to limit its exposure. The Company has not experienced any work stoppages for the financial periods presented herein that had a material effect on the Company's operations and financial condition. DEPENDENCE ON KEY PERSONNEL The Company's continued success largely will depend on the efforts and abilities of its executive officers and certain other key employees, particularly Mr. Thomas W. Sturgess, the Company's Chairman of the Board, President and Chief Executive Officer, Mr. Michael D. Rowsey and Mr. Steven R. Schwarz, each an Executive Vice President of the Company, and Mr. Daniel H. Bushell, an Executive Vice President and the Chief Financial Officer of the Company, the loss of any of whom could have a material adverse effect on the Company. Although all but Mr. Sturgess have entered into employment agreements with the Company as described under "Management," the Company is currently integrating two formerly separate management teams and any officer could choose to resign at any time. On May 31, 1995, Jeffrey K. Hewson resigned as President and Chief Executive Officer of United and the Company, and Thomas W. Sturgess, Chairman of the Board of United and the Company, assumed such responsibilities. The Company currently does not have any "key man" life insurance for its key personnel. CONTROL BY WINGATE PARTNERS As of the date of this Prospectus, approximately 75% of the outstanding Shares were controlled by the Voting Trust (as hereinafter defined), the five trustees of which hold all voting power to vote such Shares and may act by majority vote of the trustees. Three of the five trustees serve as indirect general partners of Wingate Partners, L.P. ("Wingate Partners") or Wingate Partners II, L.P. ("Wingate II"), each of which is a Delaware limited partnership and a private investment firm located in Dallas, Texas. In addition, the trustees are obligated to nominate and vote for a board of directors of United of which directors designated by Wingate Partners comprise a majority. Four of the current nine directors of United are indirect general partners of Wingate Partners or Wingate II. The Company is a wholly owned subsidiary of United. Consequently, Wingate Partners and Wingate II and their indirect general partners will control United and, through control of United, the Company and, thus, will have the power to elect a majority of the directors thereof and to approve any action requiring stockholder approval. See "Management --Directors and Executive Officers," "Certain Transactions" and "Ownership of Voting Securities." FRAUDULENT CONVEYANCE CONSIDERATIONS Substantially all of the net proceeds of the offering of the Old Notes were used to refinance the Bridge Loan under the Subordinated Bridge Facility, repay approximately $6.5 million outstanding under the Term Loan Facilities and pay a dividend of $7.0 million to United to repurchase the outstanding shares of Series B Preferred Stock, together with accrued and unpaid dividends thereon. In addition, pursuant to the Merger, United assumed all of the obligations of Associated; pursuant to the Subsidiary Merger, the Company assumed all obligations of ASI; and, pursuant to the Indenture, each future domestic Restricted Subsidiary of the Company will guarantee the Notes. Accordingly, the obligations of the Company under the Notes and the obligations of United and any future Restricted Subsidiary under the Guarantees may be subject to review under relevant federal and state fraudulent conveyance statutes ("fraudulent conveyance statutes") in a bankruptcy, reorganization or rehabilitation case or similar proceeding or a lawsuit by or on behalf of unpaid creditors of the Company, United or any future Restricted Subsidiary. If a court were to find under relevant fraudulent conveyance statutes that, at the time of issuance, incurrence or assumption by any debtor of obligations under the Notes, Guarantees, the Bridge Loan or the term or revolving loans ("Senior Loans") under the New Credit Facilities, (a) such debtor incurred such obligation with the intent of hindering, delaying or defrauding current or future creditors or (b)(i) such debtor received less than reasonably equivalent value or fair consideration for incurring such obligation and (ii)(A) was insolvent or was rendered insolvent by reason of such incurrence, (B) was engaged, or about to engage, in a business or transaction for which its assets constituted unreasonably small capital, or (C) intended to incur, or believed that it would incur, obligations beyond its ability to pay as such obligations matured (as all of the foregoing terms are defined in or interpreted under such fraudulent conveyance statutes), such court could subordinate such obligations to presently existing and future indebtedness of such debtor, as the case may be, and take other action detrimental to the holders of the Notes, including, under certain circumstances, invalidating the Notes or the Guarantees. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the jurisdiction which is being applied. Generally, however, a company would be considered insolvent for purposes of the foregoing if, at the time it incurs any given obligation, the sum of the company's debts (including unliquidated or contingent debt) is greater than all the company's property at a fair valuation, or if the present fair saleable value of the company's assets is less than the amount that will be required to pay its probable liability on its existing debts (including unliquidated or contingent debt) as they become absolute and matured. On the basis of the historical financial information of United and Associated and other factors, management believes that (i) each obligation of each debtor was and is being incurred for proper purposes and in good faith and (ii) (A) after giving effect to the Acquisition, the Mergers, the Bridge Loan, the Senior Loans and related transactions, each such prior or current debtor received or is receiving reasonably equivalent value and fair consideration for incurring such obligation and (B) each such prior or current debtor was, is and will be solvent under the foregoing standards, had, has and will have sufficient capital for carrying on their businesses, was, is and will be able to pay their debts as they mature, and had, has and will have sufficient assets to satisfy any probable money judgment against it in any pending action. There can be no assurance, however, as to whether a court would concur in such view. LIQUIDITY OF THE NOTES The New Notes are being offered to the holders of the Old Notes. Although the Initial Purchaser currently makes a market in the Old Notes and has informed the Company that it currently intends to make a market in the New Notes, it is not obligated to do so, and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. The Company does not intend to apply for listing of the Notes on any securities exchange or for quotation through the Nasdaq National Market System.

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+RISK FACTORS Prospective investors in the New Notes should evaluate the following factors, which may affect a decision to acquire the New Notes. RISKS ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS The Company is highly leveraged. After giving effect to the Transactions, on a pro forma basis as of June 30, 1995, the Company would have had total outstanding indebtedness of approximately $91.8 million, of which $90.0 million would have been outstanding under the Notes, and the Company would have had total stockholders' equity of $45.0 million. In addition, the Company has the ability to borrow an additional $20.0 million under the Senior Credit Facility. This high level of indebtedness will result in significant interest expense and eventual principal repayment obligations. Under the Senior Credit Facility, all borrowings are required to be repaid in full for at least 45 consecutive days during the period from July 1 to November 1 of each year. Under the Senior Credit Facility, substantially all of the Company's assets (other than real estate), including the capital stock of its subsidiaries, are pledged to secure borrowings thereunder. By virtue of these security interests, in the event of a default under the Senior Credit Facility or bankruptcy proceedings involving the Company, the lenders thereunder will have a claim upon the assets so pledged prior in right to the Noteholders. See "Capital Structure--Senior Credit Facility." The Company believes that its cash flow, together with the proceeds from the Transactions and the borrowings under the Senior Credit Facility, will be adequate to fund its currently anticipated requirements for working capital, capital expenditures and scheduled principal and interest payments. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required to refinance all or a portion of its existing debt, sell certain of its assets or obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The financial covenants and other restrictions contained in the Senior Credit Facility require the Company to satisfy certain financial tests, and the financial covenants and other restrictions contained in the Senior Credit Facility and in the Indenture limit the Company's ability to borrow additional funds and to dispose of certain assets. See "Capital Structure--Senior Credit Facility" and "Description of the New Notes." The Company's high degree of leverage could significantly limit its ability to withstand competitive pressures and adverse economic conditions or to take advantage of significant business opportunities that may arise or to meet its obligations. RISKS OF ACCIDENTS AND DISTURBANCES AT PARKS Because all the Company's parks feature "thrill rides," attendance at the parks and, consequently, revenues may be adversely affected by any serious accident or similar occurrence with respect to a ride. The Company liability insurance policies provide coverage of up to $15 million per loss occurrence and require the Company to pay the first $25,000 of loss per occurrence. In addition, in view of the proximity of certain of the Company's parks to major urban areas and the appeal of the parks to teenagers and young adults, the Company's parks could experience disturbances that could adversely affect the image of and attendance levels at its parks. Working together with local police authorities, the Company has taken certain security-related precautions designed to prevent disturbances in its parks. EFFECTS OF INCLEMENT WEATHER Because the great majority of a theme park's attractions are outdoor activities, attendance at parks and, accordingly, the Company's revenues are significantly affected by the weather. Unfavorable weekend weather and unusual weather of any kind can adversely affect park attendance. NEW NOTES EFFECTIVELY SUBORDINATED TO SECURED INDEBTEDNESS The New Notes are not secured and therefore will be effectively subordinated to borrowings under the Senior Credit Facility and other secured indebtedness permitted under the terms of the Indenture, to the extent of the value of the assets securing such indebtedness. The indebtedness under the Senior Credit Facility is secured by liens on substantially all of the Company's assets (other than real estate). On the date of this Prospectus, the Company had $20.0 million of revolving credit available under the Senior Credit Facility. Subject to certain conditions specified therein, the Indenture permits the Company and its subsidiaries to incur additional indebtedness, including capital lease obligations and secured purchase money indebtedness, which obligations and secured indebtedness will effectively rank senior to the New Notes. See "Capital Structure-- Senior Credit Facility" and "Description of the New Notes--Certain Covenants." ABILITY TO PAY NEW NOTES DEPENDENT ON FUNDS FROM SUBSIDIARIES The Company is a holding company that derives all of its operating income from its subsidiaries. The Company must rely upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations, including the payment of principal of, premium, if any, and interest on the New Notes. The ability of the Company's subsidiaries to make such payments may be restricted by, among other things, applicable corporate laws and other laws and regulations. POTENTIAL SUBORDINATION OR VOIDING OF NEW NOTES BASED ON FRAUDULENT CONVEYANCE The incurrence of indebtedness (such as the Notes) in connection with the Merger is subject to review under relevant federal and state fraudulent conveyance and similar statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of the Company. Under these statutes, if a court were to find that obligations (such as the Notes) were incurred with the intent of hindering, delaying or defrauding present or future creditors, that the Company received less than a reasonably equivalent value or fair consideration for those obligations, or that the Company contemplated insolvency with a design to prefer one or more creditors to the exclusion, in whole or in part, of other creditors and, at the time of the incurrence of the obligations, the obligor either (i) was insolvent or rendered insolvent by reason thereof, (ii) was engaged or was about to engage in a business or transaction for which its remaining unencumbered assets constituted unreasonably small capital, or (iii) intended to incur or believed that it was incurring debts beyond its ability to pay such debts as they matured or became due, such court could void the Company's obligations under the Notes, subordinate the Notes to other indebtedness of the Company or take other action detrimental to the holders of the Notes. The measure of insolvency for purposes of a fraudulent conveyance or other similar claim will vary depending upon the law of the jurisdiction being applied. Generally, however, a company will be considered insolvent at a particular time if the sum of its debts at that time is greater than the then fair value of its assets or if the fair salable value of its assets at that time is less than the amount that would be required to pay its probable liability on its existing debts as they become absolute and mature. The Company believes that, after giving effect to the Transactions, the Company was (i) neither insolvent nor rendered insolvent by the incurrence of indebtedness in connection with the Merger, (ii) in possession of sufficient capital to run its business effectively, and (iii) incurring debts within its ability to pay as the same mature or become due. In addition, the Note Guarantees may be subject to review under relevant federal and state fraudulent conveyance and similar statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of any of the Note Guarantors. In such a case, the analysis set forth above would generally apply, except that the Note Guarantees could also be subject to the claim that, since the Note Guarantees were incurred for the benefit of the Company (and only indirectly for the benefit of the Note Guarantors), the obligations of the Note Guarantors thereunder were incurred for less than reasonably equivalent value or fair consideration. A court could void a Note Guarantor's obligation under the Note Guarantees, subordinate the Note Guarantees to other indebtedness of a Note Guarantor or take other action detrimental to the holders of the New Notes. HIGHLY COMPETITIVE BUSINESS The Company's theme parks compete directly with other theme parks and amusement parks and indirectly with all other types of recreational facilities and forms of entertainment within their market areas, including movies, sports attractions and vacation travel. Accordingly, the Company's business is and will continue to be subject to factors affecting the recreation and leisure time industries generally, such as general economic conditions and changes in discretionary consumer spending habits. Within each park's regional market area, the principal factors affecting competition include location, price, the uniqueness and perceived quality of the rides and attractions in a particular park, the atmosphere and cleanliness of a park and the quality of its food and entertainment. Certain of the Company's direct competitors have substantially greater financial resources than the Company. CONTROL BY PRINCIPAL STOCKHOLDERS; CHANGE OF CONTROL After consummation of the Transactions, approximately 87% of the aggregate voting power of the Company's Common Stock and Convertible Preferred Stock was held by a small number of stockholders. Accordingly, such stockholders collectively have the ability to elect the entire Board of Directors and generally to direct the business and affairs of the Company. See "Stock Ownership of Management and Certain Beneficial Holders." A Change of Control could require the Company to refinance substantial amounts of indebtedness, including indebtedness under the Senior Credit Facility. In addition, upon the occurrence of a Change of Control, the holders of the New Notes would be entitled to require the Company to repurchase the New Notes at a purchase price equal to 101% of the principal amount of such New Notes, plus accrued and unpaid interest, if any, to the date of repurchase. The Company's failure to repurchase the New Notes would result in a default under the Indenture and the Senior Credit Facility. In the event of a Change of Control, there can be no assurance that the Company would have sufficient assets to satisfy its obligations under the New Notes. In addition, a Change of Control permits acceleration of the indebtedness outstanding under the Senior Credit Facility. See "Capital Structure--Senior Credit Facility" and "Description of the Notes--Change of Control."

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+RISK FACTORS Investment in the Shares is speculative and involves a high degree of risk. Prospective investors should consider carefully the following risk factors, as well as the other information set forth in this Prospectus. Risks Related to the Company History of Losses. The Company had a prior history of net losses and experienced cash-flow deficiencies and had been unable to pay many of its obligations as they became due. The Company's prior auditors had a going concern explanatory paragraph in their report at March 31, 1994. As a result of the Company's improved working capital position from recent financings and a corresponding reduction in current liabilities, the Company's current auditors' report does not contain a going concern explanatory paragraph at March 31, 1995. Although the Company incurred a profit for the fiscal year ended March 31, 1995 as a result of an extraordinary gain, such continued profitability cannot be guaranteed. There are many events and factors in connection with development, production and sales over which the Company has little or no control, including, without limitation, production delays, marketing difficulties, lack of market acceptance, and superior competitive products based on future technological innovation. There can be no assurance that future operations will continue to be profitable or will satisfy future cash-flow requirements. See "BUSINESS OF THE COMPANY" and "FINANCIAL STATEMENTS". Adverse Consequences of Constraints Imposed by Debt Obligations. The Company owes a $1.5 million promissory note to Sirrom Capital Corporation ("Sirrom") pursuant to a loan transaction consummated as of March 31, 1995. The $1.5 million promissory note (the "Sirrom Note") is secured by a first mortgage against the Company's premises and by a first lien against all of the Company's personal property and proceeds thereof, including general intangibles such as the Company's patents and royalties, but excluding the Company's inventory and accounts receivable. The Sirrom mortgage against the Company's premises replaces the mortgage previously held by Dow Corning Enterprises, Inc. ("DCE"), which DCE mortgage was satisfied from Sirrom loan proceeds and debt forgiveness by DCE. The Sirrom Note matures March 31, 2,000 and is payable monthly, interest only, commencing May 1, 1995, with a balloon payment of principal and accrued and unpaid interest due on the maturity date. The Company had been in default of the DCE note due to historical cash deficiencies. If the Company becomes in default of the Sirrom note, the Company's operations and assets could be materially and adversely impacted. For a complete discussion of the Sirrom loan transaction, see "BUSINESS OF THE COMPANY - Recent Events." The Sirrom loan documents impose certain constraints on the Company's business. Sirrom's consent is required to sell or encumber Sirrom's collateral having an aggregate fair market value exceeding $25,000. The Company may license its intellectual property in the ordinary course of business so long as the Company's interest in the license agreements are freely assignable to Sirrom. The Company may not incur certain additional indebtedness in excess of $200,000 annually without Sirrom's consent (which may not be unreasonably withheld or delayed). Further, under a warrant for Common Stock also given to Sirrom in connection with the loan, the Company must give Sirrom advance notice of certain events, such as dividend payments, certain new stock issues, reorganization, merger, sale of substantially all assets, and advance notice of the record date to be set for determining shareholders entitled to vote on such matters. See, "BUSINESS OF THE COMPANY - Recent Events." Such consent and notice requirements could impede the Company's ability to act expeditiously in its operations or corporate matters, which may have an adverse impact on the Company's business and corporate affairs. Absence of Dividends. The Company has never paid cash dividends on its Common Stock and has no plans to do so in the foreseeable future. See "DIVIDENDS". Dilution from Possible Future Issuance of Additional Shares. The Board of Directors has the power to issue Common Stock without shareholder approval, up to the number of authorized shares set forth in the Company's Certificate of Incorporation, as amended. In addition, as of March 31, 1995, the Company granted options to employees, officers and directors of the Company as well as to certain non-affiliates representing 274,226 shares in the aggregate, of which 173,038 were exercisable as of March 31, 1995. In connection with a recent loan from Sirrom Capital Corporation ("Sirrom") and resulting satisfaction of the Company's obligation to Dow Corning Enterprises, Inc. ("DCE"), the Company issued warrants to Sirrom for a minimum of 100,000 shares (subject to increases of 50,000 shares annually commencing March 31, 1997 so long as the Sirrom loan is still outstanding) and to DCE for 200,000 shares of Common Stock, both of which are exercisable as of March 31, 1995. Further, the Company is currently involved in defending a lawsuit initiated by a financial consulting firm. There, the plaintiff alleges, among other things, that it is entitled to receive warrants to purchase Company common stock which, if exercised, would represent 15% of the outstanding shares of the Company. See "BUSINESS OF THE COMPANY - Legal Proceedings". The issuance of any additional shares by the Company in the future may result in a reduction of the book value or market price, if any, of the then-outstanding Common Stock. Issuance of additional shares of Common Stock may reduce the proportionate ownership and voting power of then-existing shareholders. See "MANAGEMENT - Stock Options" ; "DESCRIPTION OF SECURITIES"; and "BUSINESS OF THE COMPANY - Recent Events, and - Legal Proceedings." Furthermore, funds exceeding those funds generated by the Debenture private placement and the Sirrom loan may be required to meet the working capital needs of the Company. If additional funding is required, the Company might seek to issue additional shares of Common Stock to the public or securities convertible into Common Stock. There is no assurance that the Company would be able to arrange alternative financing on advantageous terms, if at all. If the Company were to sell additional securities in the future, the interest of investors who acquired the shares pursuant to this Prospectus could be further diluted. Limitations on Use of Net Operating Loss Carryforwards. As of March 31, 1995, the Company had net operating loss carryforwards of approximately $17.9 million. These tax net operating losses may be carried forward and utilized against future taxable income through the year 2009. The availability of these carryforwards to reduce future taxable income of the Company is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"). In particular, the utilization of such carryforwards would be severely restricted upon the occurrence of certain changes during a three-year period resulting in a more than 50% aggregate change in the ownership of the Company. The conversion of the Debentures into Common Stock may result in a change in ownership that could cause these limitations to become applicable to the Company. If the Company becomes subject to these limitations, the annual amount of tax carryforwards that may be utilized against future income will be limited. Because of this annual limitation and the expiration rules described above, assuming conversion of the Debentures into Common Stock, the tax carryforwards may expire prior to the time the Company would be able to fully utilize them against future taxable income, if any. Dependence on Key Employees. The Company's future success depends in part upon key managerial, technical and marketing personnel and upon its ability to continue to attract and retain such highly talented individuals. Competition for qualified personnel is intense in the medical device industry. The Company anticipates it will have the financial ability to expand its sales force, and to that goal recently hired a new Vice President of Sales and Marketing. However, there can be no assurance that the Company will retain its key employees or that it will attract and assimilate such employees in the future. To mitigate this risk, the Company entered into employment agreements with certain executive officers. Any of the employment agreements could be terminated prematurely in the event of the resignation, disability or death of such employees. The Company has not obtained policies of key-man life insurance on the lives of any of its key management personnel. Prohibition on Sales to European Community Without ISO (CE Mark) Certification. The European Community ("EC") nations have adopted universal standards in order to provide simplified trade among the member nations and to assure free access to trade while maintaining quality standards for products sold. These standards have been developed by the International Organization for Standards ("ISO"). All companies doing business in these nations must be certified to these standards set forth by the EC which is evidenced by being granted the CE Mark. Standards for implantable medical products were implemented January 1, 1993, with a transition period which ended December 31, 1994. In order for the Company to continue to sell its pacemakers in the EC, it must obtain certification, the CE Mark. The Company does not yet have the CE Mark registration and is therefore prohibited from selling its pacemakers to the EC member nations until it is granted the CE Mark. Thus, as of January 1, 1995, the Company ceased selling its pacemakers to its customers in EC nations. Although the Company is preparing for certification, the Company cannot assure when or if the CE Mark will be received. The continued loss of this European market could have a material adverse effect on the Company's business and results of operations. Dependence on Certain Patents and Licenses. The medical device industry is highly competitive and manufacturers rely on their trade secrets and intellectual property rights to develop and maintain a competitive edge in the marketplace. The Company manufactures and markets its products pursuant to certain patents it owns and pursuant to certain licenses of patents held by others. The licenses are non-exclusive and thus the technologies that are subject to such licenses are available to the Company's competitors. Further, upon the expiration of a patent, the technology that was subject to the patent also becomes available to the Company's competitors. In the area of intellectual property law, patent infringement claims are common and such a claim could adversely impact the Company's ability to use, in whole or in part, its patented or licensed technologies or processes. Risks Related to the Medical Device Business Technological and Product Obsolescence. The medical device industry is characterized by extensive research and development and rapid technological change. Development by others of new or improved products, processes or technologies may make the Company's current product or any future products obsolete or less competitive. The Company will be required to devote continued resources to enhance its current product and develop new products for the medical marketplace. There are many events and factors in connection with the development, production and sale of such products over which the Company has no control. It is not possible to provide any assurance that the Company's business will be successful. Increase in Sales Force Required. Historically, the Company's cash flow deficiencies impeded its ability to hire executive marketing personnel and to increase the size of its independent sales force. The Company's marketing success will depend on its ability to recruit and retain additional sales representatives, which is critical to market acceptance and sales growth. Adverse Effect of Government Regulation. The Company's products are classified as medical devices and as such are subject to extensive regulation by the FDA. A medical device must be cleared by the FDA through an extensive application process before it can be commercially marketed by the Company. Any delay of clearance or rejection of an application could have a material adverse effect on the Company's business and results of operations. All of the pacemaker systems marketed by the Company (including related electrode leads and ancillary equipment) are in commercial distribution under the FDA's 510(k) Premarket Notification regulations or Premarket Approval regulations. The Company recently applied for FDA clearance to market its ultra-slim MAESTRO II dual-chamber pulse generator. The Company believes, but cannot assure, that it will receive clearance for commercial distribution of this product by the FDA. Further, the Company cannot predict the timeline to which the clearance would be received. Although the Company's predecessor to the MAESTRO II dual-chamber pulse generator, the MAESTRO dual-chamber device, has been approved by the FDA for commercial distribution in the United States, the Company is no longer selling those devices since it has exhausted its supply of integrated circuits required to manufacture them. Thus, until the Company obtains FDA clearance of its MAESTRO II dual-chamber device, it cannot sell to the dual-chamber market. Further, as of January 1, 1995, the Company ceased selling its pacemakers to member nations of the European Community. The Company must first obtain certification from the International Organization for Standards (which is analogous to the FDA in the United States) before it can recommence selling its pacemakers to those European nations. See, " - Absence of ISO Certification and Impact on European Distribution." Adverse Effect of Competition. There are a number of established companies engaged in the design, manufacture, marketing and sale of cardiac pacemaker systems which have greater financial resources, research and development facilities, manufacturing capabilities and marketing organizations than the Company. Certain established companies are developing a single-lead atrial-controlled ventricular cardiac pacing system, one of which is Intermedics Inc. Intermedics recently received FDA clearance for such a pacing system and commenced marketing its new system in March 1995. A successful introduction of any such new system could dramatically impact the Company's competitive position and its ability to become a viable entity in the cardiac pacemaker industry. The Company believes that although the new Intermedics system creates some competition, the Company will benefit through its sales to Intermedics Inc. of the Company's electrode leads which Intermedics uses with its new system. The lead sales to Intermedics Inc. are made pursuant to a supply agreement between the Company and Intermedics, which agreement expires on April 1, 1996, unless renewed for an additional two years by mutual agreement. However, Intermedics Inc. also manufactures leads pursuant to a license agreement with the Company, and there can be no guarantee that its demand for the Company's leads will not decrease. Exposure to Claims and Litigation. The nature of the medical device industry subjects participants therein to the risk of litigation in several areas, including claims for personal injuries resulting from the use of products similar to those manufactured by the Company as well as for patent, licensing or trademark infringement. The Company maintains product liability coverage, which it believes is customary in the industry. There can be no assurance, however, that the Company's insurance coverage is adequate to mitigate all costs, expenses and losses which may be incurred in litigation proceedings. In accordance with industry practice, the Company has attempted to limit its product warranty obligations (associated with defective pacemakers) to replacement of any defective pacemakers and some patient out-of-pocket expenses up to $500.00. There can be no assurance that the Company's warranty policy will be adequate to mitigate against all costs, expenses and losses. Single Sources of Supplies and Production Risks. Single sources are relied upon by the Company for certain critical materials used in the Company's products, including medical adhesives, integrated circuits, hybrid microelectronic circuitry, lithium batteries and a material used to produce Surethane(TM). A delay in delivery of such critical materials or the loss of one of the suppliers of such materials could have a significant adverse effect on the Company's business. The Company has exhausted its supply of certain components for its FDA-approved dual-chamber devices, resulting in a decline of those sales. Thus, the Company will not be able to manufacture dual-chamber devices until its new dual-chamber device is cleared by the FDA. Further, two of the Company's principal suppliers of materials used primarily in electrode lead production have indicated that they will no longer supply their materials to the medical device industry. The Company believes it has an adequate supply of one such material to meet demand for the next several years and has identified alternate sources for the other materials, which the Company may utilize pending FDA review and approval of those alternate materials. Reliance on Third-Party Reimbursement. Hospitals, physicians and other health care providers that purchase medical devices for use in furnishing care to their patients typically rely on third-party payors, principally Medicare, Medicaid, and private health insurance plans, to reimburse all or part of the costs or fees associated with the medical procedures performed with those devices, and of the costs of acquiring those devices. Cost control measures adopted by third- party payors in recent years have had and may continue to have a significant effect on the purchasing practices of many providers, generally causing them to be more selective in the purchase of medical devices. Limitations may be imposed upon the conditions for which procedures may be performed or on the cost of procedures for which third-party reimbursement is available, which could adversely affect the market for the Company's products or any future products. Proposed Health Care Reform. The public and the federal government have recently focused significant attention on reforming the health care system in the United States. Recently, numerous legislative proposals have been introduced in Congress that would effect major reforms of the U.S. health care system. The Company cannot predict the health care reforms that may be enacted (i.e, price limitations, reimbursements from third-party payors) nor the effect any such reforms may have on its business. Product Recalls. In the event problems arise with the Company's products after commercial introduction, the Company might be required to recall the defective products. In that event, the costs and potential liability to the Company could be significant and would have a material adverse effect on the Company's business and operations. The Company recalled products in September 1990, in August 1991 and in March 1994. Risks of the Offering Limited Market for the Company's Securities. There is currently a limited public market for the Company's Common Stock. The Company's Common Stock had historically been listed in the NASDAQ Market System. Nevertheless, the Company is currently listed on the NASD's OTC Bulletin Board Service. This Service allows market makers to enter quotes and trade securities that do not meet the NASDAQ's qualification requirements. The Company will be using its best efforts to relist its Common Stock on the NASDAQ Small-Cap(SM) Market. However, there is no assurance that the Company will obtain such listing and, in the event its stock is relisted, there is no assurance that the Company will maintain sufficient qualifications to maintain the listing. Listing and Maintenance Criteria for NASDAQ System; Disclosure Relating to Low-Priced Stocks. The National Association of Securities Dealers, Inc. (the "NASD"), which administers NASDAQ, requires that, in order for a company's securities to be listed on the NASDAQ Small-Cap(SM) Market, the Company must have $4,000,000 in total assets, a $1,000,000 market value of the public float and $2,000,000 in total capital and surplus. Further, initial listing requires two market makers and a minimum bid price of $3.00 per share. Continued inclusion on the NASDAQ Small-Cap(SM) Market currently requires two market makers and a minimum bid price of $1.00 per share; provided, however, if the Company falls below the minimum bid price, it will remain eligible for continued inclusion if the market value of the public float is at least $1,000,000 and the Company has $2,000,000 in capital and surplus. On August 30, 1991, the Company's Common Stock was deleted from NASDAQ for failing to meet the listing maintenance criteria in effect at that time ($375,000 in capital and surplus). Subsequently, trading in the Company's Common Stock has been in the non-NASDAQ over-the-counter market known as the NASD OTC Bulletin Board, or more commonly referred to as "pink sheets." As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's Common Stock. In addition, sales of the Company's Common Stock through the "pink sheets" are subject to rules promulgated by the Commission that impose various sales practice requirements on broker-dealers who sell securities governed by the rule (i.e., "penny stocks") to persons other than established customers and certain accredited investors if the Company fails to meet certain criteria set forth in the rule. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The rules further require the delivery by the broker dealer of a disclosure schedule prescribed by the Commission relating to the penny stock market. Disclosure must also be made about all commissions and about current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The Commission's regulations generally define a "penny stock" as any equity security that has a market price (as defined) of less than $5.00 per share. Although the regulations provide several exceptions to or exemptions from the penny stock rules based on, for example, specified minimum revenues or assets value, the company does not fall within any of the stated exceptions. Thus, a transaction in the Company's securities will subject the broker dealer to sales practice and disclosure requirements required under the penny-stock rules. Such rules cause the trading of the stock to be more cumbersome and could have a material and adverse effect on the marketability of the stock. Possible Volatility of Securities Prices. The market price of the Company's securities may be highly volatile, as has been the case with the securities of other companies engaged in high technology research and development. Factors such as announcements by the Company or its competitors concerning technological innovations, new commercial products or procedures, proposed government regulations and developments or disputes relating to patents or proprietary rights may have a significant impact on the market price of the Company's securities. Adverse Effect on Stock Price from Shares Eligible for Future Sale. No prediction can be made as to the effect, if any, that future sales of Common Stock or the availability of additional Common Stock for sale in the public market under this Prospectus will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of options or warrants or the conversion of debentures) in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. As of the date of this Prospectus, the Company had outstanding 1,342,819 shares of Common Stock, of which 958,443 shares are freely transferable without restriction or further registration under the Act, and 384,376 shares may be sold subject to volume and other limitations of Rule 144 under the Act (unless such shares are subsequently registered under the Act, in which case they would be free from the Rule 144 limitations). The sale of a substantial number of shares could adversely affect the market price of the Common Stock.

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+RISK FACTORS In evaluating the Company's business, prospective investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus. Reliance on Media 100(R). For the nine months ended August 31, 1995, approximately 39.6% of the Company's net sales were attributable to the Company's digital media system, Media 100. The Company expects that sales of Media 100 will account for a significant and growing proportion of the Company's overall sales for the foreseeable future. The Company has sold Media 100 primarily to corporate and institutional users, many of whom will require only one or a limited number of systems. Accordingly, the Company's ability to increase sales of Media 100 will depend in large part on its ability to expand its customer base and no assurance can be given that increased sales will result in profitability. Any competitive, technological or other factor adversely affecting sales of Media 100 would have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pending Litigation. On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. ("Avid"), a Massachusetts-based company, in the United States District Court for the District of Massachusetts. The complaint alleges patent infringement by the Company arising from the manufacture, sale and use of the Company's Media 100 line of products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. On July 28, 1995, the Company filed an Answer and Counterclaim denying any infringement and asserting that the patent in question is invalid. The Company intends to vigorously defend the lawsuit, which is currently early in the pre-trial stage. In addition, Avid has filed papers in the United States Patent and Trademark Office requesting reissuance of the patent and stating that it seeks patent claims broader than those set forth in the existing patent. The reissuance proceedings remain pending. If such broader claims were to issue, the Company expects that Avid would seek to incorporate such claims into the litigation, although Avid has made no reference to the reissue proceedings in the litigation to date. If the Company does not prevail in the action, it could be required to pay substantial damages for infringement and cease offering products that allegedly infringe such patent, either of which results would have a material adverse effect on the Company. Alternatively, the Company could be required to seek to obtain a license under the patent. If so, there can be no assurance that such a license would be available to the Company or, if available, that the terms of any such license would be satisfactory. Moreover, the pendency and expense of the litigation could adversely affect the Company's business, market share, financial condition and operating results, regardless of the outcome of the litigation. There can be no assurance that the Company will prevail in the litigation, or that any of the above-described effects of the litigation, whether or not successful, will not be material. See "-- Reliance on Media 100." Dependence on Digital Media Market. Media 100 is targeted primarily at the corporate and institutional market. Many of these corporate and institutional users currently rely on traditional analog editing processes. Digital editing alternatives are relatively new and currently account for a small portion of this market. The Company's future growth will depend, in part, on the rate at which these users convert to digital editing processes and the rate at which digital media gains new users drawn to video. There can be no assurance that the use of digital media products will expand among corporations and institutions or professional or mass market users. See "Business -- Digital Media -- Market." Competition. The markets in which the Company participates are highly competitive and product ease of use, performance and price are of prime importance. In the emerging corporate and institutional market for digital media, the Company has encountered competition primarily from Avid, which has greater financial resources than the Company, as well as Truevision Inc. (a subsidiary of RasterOps Corp.) ("Truevision") and Radius Inc. Because this market is new and still evolving, it is difficult to predict future sources of competition; however, competitors may foreseeably include larger vendors, such as Matsushita Electric Industrial Company Limited, through its subsidiary Panasonic Co. ("Matsushita"), which currently compete in the market of professional users. To the extent that the Company has sold into the market of professional users, the Company has encountered competition primarily from Avid and ImMix (a division of Scitex America) ("ImMix"). In addition, competition in this segment comes from comparably sized or smaller competitors, such as Matrox Electronic Systems Ltd. ("Matrox") and FAST Electronic GmbH ("FAST") as well as much larger vendors, such as Matsushita, which has introduced digital, nonlinear editing systems. The Company expects that other vendors of analog videotape editing equipment, such as Sony Corporation ("Sony"), many of which have substantially greater financial, technical and marketing resources than the Company, will develop and introduce competing digital, nonlinear systems. Some of the Company's competitors have greater financial, technical or marketing resources than the Company. See "Business -- Digital Media -- Competition." The markets for the Company's data acquisition and imaging and externally-sourced networking products are highly competitive. Data Translation competes in the data acquisition market principally with National Instruments Corporation and Keithley Instruments, Inc. and in the imaging market with Matrox and Imaging Technology Inc., some of which have substantially greater financial, technical or marketing resources than the Company. The Company also competes with a number of smaller competitors in each of these markets. These data acquisition and imaging markets and the Company's share of such markets have been adversely affected in recent years by reduced government funding of research, increased competition and lower levels of corporate capital expenditures. There can be no assurance that such markets will grow in the future or that the Company can maintain its position in such markets. See "Business -- Data Acquisition and Imaging -- Competition." In the market for networking products in the United Kingdom, the Company competes with Azlan Group PLC and Persona Group PLC and numerous other larger competitors that have substantially greater financial, technical and marketing resources than the Company as well as numerous smaller competitors. See "Business -- Networking Distribution Business -- Competition." There can be no assurance that any of the Company's competitors will not be able to develop products comparable or superior to those offered by the Company or to adapt more quickly than the Company to new technologies or evolving customer requirements. Dependence on Proprietary Technology. The Company's success is heavily dependent upon its proprietary technology. The Company relies principally upon trademark, copyright and trade secret protection to protect its proprietary technology. There can be no assurance such measures are adequate to protect the Company's proprietary technology or that third parties will not assert infringement claims in the future or that such claims will not be successful. See "Business -- Proprietary Rights." Need to Respond to Technological Change. The markets for the Company's products are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The Company's future success will depend in part upon its ability to enhance its existing products and to introduce new products and features to meet changing customer requirements and emerging industry standards. There can be no assurance that the Company will successfully complete the development of these products or that the Company's current or future products will achieve market acceptance. In order to appeal to lower end mass market users, the Company plans to announce the introduction of a lower cost model of Media 100, with fewer features, in early 1996. In addition, the Company may announce other new products from time to time. Any delay or failure of these products to achieve market acceptance would adversely affect the Company's business. Furthermore, there can be no assurance that, despite significant testing, errors will not be found in new products and upgrades after commencement of commercial shipments, which could result in delay in or loss of market acceptance. In addition, there can be no assurance that products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. The introduction of new or enhanced products also requires the Company to manage the transition from existing products in order to meet changes in customer ordering patterns, manage levels of product inventory and ensure that adequate supplies of new products can be delivered to meet customer demand. New product introductions could contribute to quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline. New products could also have the effect of decreasing customer demand for the Company's current products. See "Business -- Research and Development." Risks Associated with Development and Maintenance of Distribution Channel. The Company utilizes a network of specialized value added resellers ("VARs") to sell and support Media 100. The Company relies to a significant extent on these VARs, rather than on a direct sales force, to sell Media 100. Some of these VARs also offer competing products or systems, and there can be no assurance that these VARs will devote the resources necessary to market and sell Media 100 effectively. In addition, many of these VARs are small organizations with limited capital. Furthermore, the Company will be required to expand its network of VARs into other markets and for such new products as the lower cost model of Media 100 in order to increase its sales of Media 100. There can be no assurance that the Company's network of VARs will be able to sell the Company's products effectively or that the Company will be able to expand such networks successfully. See "Business -- Digital Media -- Customers and Sales." Dependence on Macintosh Computer. The Company's current digital media product operates on Apple Computer, Inc.'s Macintosh. In addition, the Company plans to develop a significant portion of its future digital media products to operate on a Macintosh computer. The Company's operating results could be adversely affected if its customers and resellers are not able to obtain sufficient quantities of the required Macintosh or if Apple Computer, Inc. decreases or discontinues sales of the Macintosh. Also, changes to the operating system or architecture of the Macintosh, could require the Company to adapt its products to those changes and any inability to do so, or delays in doing so, could adversely affect the Company's business. In addition, there can be no assurance that technical improvements in PC-based products targeted to the corporate and institutional, professional or mass markets will not enable such products to compete directly with the Company's digital media system. Dependence on Key Suppliers. Many of the numerous raw materials, parts and components purchased for use in the Company's hardware and software applications are off-the-shelf items readily available from alternative vendors. Several, however, are custom-made for the Company to meet its specifications and applications or are manufactured by a single supplier. Certain components used by the Company do not have ready substitutes or have been subject to industry-wide shortages. There can be no assurance that the Company's inventories would be adequate to meet the Company's production needs during any interruption of supply. The Company's inability to develop alternative supply sources, if required, or a reduction or stoppage in supply, could adversely affect its operations until new sources of supply become available. See "Business -- Manufacturing." In addition, the Company distributes networking products in the United Kingdom that are manufactured by several suppliers, such as 3Com Corporation, Hewlett-Packard Company, Sonix Communications Ltd, Shiva Corporation and U.S. Robotics Inc. The continued sales of the Company's externally sourced networking products depends on the continued availability of products from these suppliers. There can be no assurance that these suppliers will continue to supply networking products to the Company or that the Company will be able to obtain adequate alternative sources of networking products if these suppliers ceased providing products to the Company. There also can be no assurance that these suppliers will not significantly alter their pricing. See "Business -- Networking Distribution Business." Dependence on Key Personnel. The Company's future success depends to a significant extent on its senior management and other key employees, including key development and engineering personnel. The loss of the Company's founder, current Chairman and Chief Executive Officer, Alfred A. Molinari, Jr. or the current Vice President/General Manager of the Multimedia Group and Director, John A. Molinari, could have a material adverse effect upon the Company's results of operations. The Company also believes that its future success will depend in large part on its ability to attract and retain additional key employees. Competition for such personnel in computer-related industries is intense and there can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Business -- Employees."

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+RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMPANY, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING CONSIDERATIONS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. DEPENDENCE ON SINGLE PRODUCT; DECLINING SALES; UNCERTAINTY OF PRODUCT DEVELOPMENT. Virtually all of the Company's revenues are derived from the sale of its Finally Free hair removal product. For the years ended May 31, 1994 and 1995, sales of Finally Free represented 99.1% and 99.7% of the Company's net sales, respectively. Revenues derived from the sale of Finally Free products have been declining from $3,823,000 in the 1993 fiscal year, to $2,897,000 in the 1994 fiscal year to $2,733,000 in the 1995 fiscal year. Although the Company is attempting to develop other products, there can be no assurance that other products will be successfully developed and contribute to the Company's revenues and profits or that sales of the Finally Free product will not continue to decline. DEPENDENCE ON FOREIGN SALES. The United States Food and Drug Administration ("FDA") has determined that Finally Free requires pre-market approval before it is sold, manufactured or distributed in the United States. The Company has not obtained such approval and has no current plans to do so. All sales of the Finally Free product are derived from foreign markets, principally Japan and Europe. There can be no assurance that the Company will continue to sell the Finally Free product in such markets or initiate or expand sales substantially in other foreign markets. DEPENDENCE ON PRINCIPAL CUSTOMERS. For the years ending May 31, 1995, 1994 and 1993, sales to the Company's principal customer, Ikeda Corporation ("Ikeda") represented 76%, 68% and 36% of the Company's total sales, respectively and sales to Impromedia S.L., ("Impromedia") the Company's next biggest customer represented 10%, 25% and 0% of the Company's total sales, respectively. The loss or reduction of sales to Ikeda, and to a lesser extent, Impromedia, would have a material adverse effect on the financial condition of the Company. UNCERTAIN IMPACT OF PROPOSED MERGER AND CHANGE IN CONTROL. The Company has executed a letter of intent whereby the Company will be combined with Classy Lady by Mehl of Puerto Rico, Inc. ("Classy Lady"). See "Recent Developments." This transaction is subject to execution of a definitive agreement and there can be no assurance that it will be consummated. Further, there can be no assurance that if the proposed transaction is completed that the hair removal products for which Classy Lady has certain patent rights can be commercially developed and marketed and sold profitably or that the business combination will otherwise have a positive effect on the financial condition and business prospects of the Company. In addition, the proposed transaction with Classy Lady, if consummated, would result in a majority of the Company's Common Stock being owned by the present shareholders of Classy Lady, resulting in a change of control of the Company. Management of the Company is unable to predict the impact of such a change in control on the business prospects and financial condition of the Company. FUTURE NEED FOR CAPITAL. Management of the Company anticipates that if the Classy Lady transaction is consummated, commercial exploitation of Classy Lady's patent rights will require substantial additional capital. There can be no assurance that additional capital requirements will be available on acceptable terms or at all. Future financings could have dilutive effect on the Company's shareholders. DEPENDENCE ON KEY PERSONNEL. The Company's success is dependent on certain key management personnel. Competition for qualified employees is intense, and the loss of such key personnel, or the inability to attract and retain the additional highly skilled employees required for the Company's activities, could adversely affect its business. RISK OF COMPETITION WITH COMPETITORS HAVING SUBSTANTIALLY GREATER RESOURCES. There are several companies that offer the hair removal products sold by the Company in other formats and which compete with the Company. Many of such other companies have established markets, product history, and substantially larger sales and service organizations and financial strength than the Company. RISK OF PRODUCT LIABILITY. The Company may be subject to claims for personal injuries or other damages resulting from its products or services. There can be no assurance that the Company's product liability insurance will be sufficient to protect the Company against liability that could have a material adverse effect on the Company. NO ASSURANCE OF SUSTAINED PUBLIC MARKET. The Company's Common Stock is quoted on the NASDAQ Small Cap Market. There has been only a limited public market for the Company's Common Stock and no market recently for the Company's Warrants. In the absence of a sustained public trading market, an investor may be unable to sell the Common Stock receivable upon exercise of the Company's Warrants. RECENT DEVELOPMENTS On October 11, 1995, the Company and Classy Lady of Mehl of Puerto Rico, Inc., a privately-held company, signed a non-binding letter of intent to reorganize and combine both companies. Pursuant to the letter of intent, the Company will issue 15 million additional shares of its Common Stock to acquire the assets or shares of Classy Lady. The letter of intent also provides for a payment of a post-combination earn-out based on a formula to be negotiated by the parties. The Company will be re-named Mehl/Biophile International Corporation and Thomas L. Mehl, Sr., a principal shareholder of Classy Lady, will be Chairman of the Board and Chief Executive Officer. The proposed combination would result in the present shareholders of Classy Lady owning a majority of the Company's Common Stock, representing a change of control of the Company. The letter of intent provides that upon completion of the business combination, a majority of the Company's Board of Directors would be designated by the Classy Lady shareholders. The Company and Thomas L. Mehl, Sr. have had a long-term relationship since 1985 on the Finally Free-trademark hair removal system patented by Mr. Mehl. Thomas L. Mehl, Sr. has been granted additional patents and has patents pending involving hair removal products for the consumer hair removal market. These patents and patents pending cover new multiple hair removal techniques for the consumer and are licensed exclusively to Classy Lady. Dr. Nardo Zaias, a dermatologist and principal shareholder of Classy Lady, has been granted a United States patent covering laser hair removal techniques for the professional hair removal market. Dr. Zaias has exclusively licensed his laser hair removal patent to Classy Lady. The proposed acquisition is subject, among other conditions, to negotiation of a definitive agreement and completion of each party's due diligence investigations. Although an agreement in principal has been reached, there can be no assurance that a final agreement will be consummated.

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+RISK FACTORS In addition to the information included elsewhere in this Prospectus, the following considerations in connection with an investment in the Common Stock should be carefully reviewed prior to determining whether to purchase shares of Common Stock. Accordingly, an investment in the Common Stock involves certain important risks and should be undertaken only by persons whose financial resources are sufficient to enable them to assume such risks. In analyzing this Offering, potential investors should give careful consideration to each of the following, as well as all the other information set forth in this Prospectus. FINANCIAL CONDITION; LEVERAGE. The Company has incurred significant net losses in each of its last five years and, as shown in the Consolidated Financial Statements, the Company incurred a net loss of $879,000 for the fiscal year ended April 30, 1995. The Company did, however, generate net income of $279,000 in the quarter ended July 31, 1995, although there can be no assurance that the Company will continue to generate net income in the future. The Company's principal source of cash are funds generated from operations. The Company has no short-term borrowing capacity nor can it obtain significant further trade credit beyond existing terms from its key vendors and suppliers. The Company is highly leveraged. The Company's high degree of leverage will have important consequences to investors in this Offering, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, should it need to do so, may be impaired; (ii) a substantial portion of the Company's cash flow from operations will be dedicated to the repayment of obligations to Bank of America National Trust and Savings Association (the "Bank") which, as of July 31, 1995, consists of the balance on a senior secured note of $3,043,000, including $427,000 of future interest costs and the balance on a junior secured note of $557,000, including $128,000 of future interest costs, thereby reducing the funds available to the Company for its operations, and any future business opportunities; and (iii) the Company's degree of leverage may make it more vulnerable to a downturn in its business or the economy generally. RENEWAL OF CONCESSION AGREEMENT. The concession agreement between Sea View and the County of Los Angeles for the operation of Gladstone's and the adjacent parking lot expires on October 31, 1997. See "Business--Properties." The property on which Gladstone's is located is owned by the State of California. Although the County of Los Angeles currently acts as landlord under an agreement with the State, any future lease extension or renewal will require the State's approval and likely the County's as well. If such agreements are not extended or renewed beyond their present expiration time, or if the terms of such extension or renewal are substantially less favorable to the Company than the existing terms, then the Company's revenues (approximately 80% of which are derived from Gladstone's) would be materially adversely impacted. CITY OF LOS ANGELES - SUNSET PUMP PLANT. The City of Los Angeles has scheduled a public works project to replace an aging sewer system along a stretch of Pacific Coast Highway that includes a portion of Gladstone's parking lot. As part of this project, an underground storage tank will be built adjacent to a section of the parking lot. The construction of the underground tank and related work along Pacific Coast Highway is currently scheduled to be completed between October 1995 and May 1996, although delays may occur. Although this work is expected to be done during Gladstone's slower months, the ultimate impact on revenues due to construction or traffic problems is unknown at this time. The Company is working with both the City and County of Los Angeles to minimize any possible disruptions and determine appropriate remedies if business is negatively impacted. LICENSE AGREEMENT - MCA. Sea View and MCA Development Venture Two ("MCA") (a subsidiary of MCA INC.) are parties to a license agreement relating to the use of Gladstone's trade name and trademarks at MCA's CityWalk project in Universal City, California. The license agreement requires that MCA pay a license fee of 0.8% of gross receipts for use of the licensed property. Pursuant to the terms of the license agreement, there is no fixed duration of the agreement; yet, under certain circumstances, MCA may terminate the agreement on six months notice provided that it ceases to use all licensed property immediately after giving such notice. The Company believes that the Gladstone's at CityWalk is very successful and has no reason to believe that the license agreement will be terminated at this time. However, there can be no assurance that the license agreement will remain in effect. See "Business--License Agreement." INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 21, 1995 3,004,282 Shares CALIFORNIA BEACH RESTAURANTS, INC. Common Stock ($.01 par value) __________________________________ The 3,004,282 shares of common stock, $.01 par value (the "Common Stock") of California Beach Restaurants, Inc. (the "Company"), covered by this Prospectus are being offered by certain shareholders of the Company described herein ("Selling Shareholders"). The Selling Shareholders do not necessarily intend to sell their shares of Common Stock but may decide to do so in the future. The Company will not receive any proceeds from the sale of the shares offered hereunder. The Company has been advised by the Selling Shareholders that the shares of Common Stock offered hereby may be sold from time to time in the over-the-counter market, on terms and at prices then prevailing or prices related to the then market price for such shares, or in negotiated transactions. The Selling Shareholders and any brokers or dealers who execute sales of the shares offered hereby may be deemed to be "underwriters," as such term is defined under the Securities Act of 1933, as amended. See "Plan of Distribution." SINCE AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK POTENTIAL PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER "RISK FACTORS" ON PAGES 4-6 OF THIS PROSPECTUS. The Selling Shareholders have agreed to indemnify the Company, and the Company has agreed to indemnify the Selling Shareholders, against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Plan of Distribution" for a description of arrangements between the Company and the Selling Shareholders. Expenses of this Offering, estimated at $42,000, will be paid by the Company. The Common Stock is traded on the OTC Bulletin Board under the symbol "CBHR." As of November 20, 1995, the most recent reported bid price of the Common Stock was on October 19, 1995 at $.01. __________________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. __________________________________ THE DATE OF THIS PROSPECTUS IS __________, 1995. CERTAIN AGREEMENTS. Sand and Sea Partners and Sea Fair Partners, entities currently owning approximately 19.6% of the Common Stock of the Company and affiliated with J. Christopher Lewis, a director of the Company, have entered into an agreement with the Bank to vote their shares in favor of the Bank's two nominees to the Board of Directors. In addition, Jefferson W. Asher, Jr., a director of the Company, is a limited partner of Sand and Sea Partners. See "Management--Certain Relationships and Related Transactions--December 1994 Private Placement and Debt Restructurings." RELIANCE ON MANAGEMENT. The Company will be dependent on the services of its Chairman of the Board, President and Chief Executive Officer, Alan Redhead, and its Chief Financial Officer, Mark E. Segal. The Company has employment agreements with Messrs. Redhead and Segal, which set forth certain terms of employment for each of these individuals. The Company has no non-disclosure or non-competition agreements with these individuals nor does the Company have key person life insurance coverage on these individuals. If the services of Mr. Redhead or Mr. Segal become unavailable, the business of the Company's restaurants might be impacted negatively. See "Management--Directors and Executive Officers--Other Compensation Agreements." RISKS OF RESTAURANT OWNERSHIP. Restaurants historically have represented a high risk investment in a very competitive industry. The rate of failure for restaurants is considered to be at least as high or higher than the rate of failure for small businesses generally. The Company's restaurants compete with a wide variety of restaurants, ranging from national and regional restaurant chains to other locally owned restaurants, many of which have substantially greater financial and marketing resources than the Company. See "Business--Competition." Various factors, some of which are intangible, bear upon the prospective success or failure of a restaurant. These subjective factors include the concept, decor and ambiance of the restaurant, the quality of food and service, the location and accessibility of the restaurant, and the experience and skill of the restaurant management. Each of these factors bears directly upon customer acceptance of the restaurant, and each, with the possible exception of management, represents an inherently uncertain risk which cannot be reliably predicted. Additionally, such unforeseen events as food poisoning or suspension of a liquor license would very likely have an adverse impact on a restaurant's operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." ECONOMY/NATURAL DISASTERS. Both of the Company's restaurants continue to be adversely affected by a weak local economy that has existed in the Los Angeles area for the past several years. The Los Angeles economy, as measured by a number of economic indicators, including unemployment, continues to lag behind the rest of the country. Additionally, the Los Angeles area was hit by two natural disasters during the Company's fiscal year ended April 30, 1994. On November 2, 1993 a major brush fire caused extensive damage to Malibu and surrounding areas. Because of its proximity to the fire area, Gladstone's was forced to close to the general public for two and one half days. Sales continued to be adversely impacted for several weeks after the fires due to various road closures which hindered access to the restaurant as well as a general apprehension on the part of the public to venture into or through the impacted area. On January 17, 1994, the Los Angeles metropolitan area was hit by a major earthquake. Although neither of the Company's restaurants suffered structural damage, both operations suffered damage from broken dishes and glassware, broken wine and liquor bottles and loss of certain perishable inventory. The damage caused by the earthquake significantly impacted sales at both restaurants. Although the Company carries earthquake insurance, damages did not exceed the policy deductible. Moreover, Pacific Coast Highway was closed in certain areas for several days in early February 1994 and in January and March 1995 due to mudslides. The closure of Pacific Coast Highway at any time has a significant negative impact on sales at Gladstone's. Gladstone's is located on the beach and is dependent, to a certain extent, on favorable weather, tourism and freeway and highway access. Tourism continues to be down in southern California as a result of several factors, including the 1992 Los Angeles riots as well as the 1994 earthquake. LIMITED PUBLIC MARKET; DISCLOSURE RELATING TO LOW PRICE STOCKS. There is presently a limited public trading market for the Common Stock. There can be no assurance that a more active market will develop for the Common Stock. Purchasers in this Offering may, therefore, have difficulty selling their shares of Common Stock, should they decide to do so. In addition, if an active market for the Common Stock develops, there can be no assurance that such markets will continue or that shares of Common Stock purchased in this Offering may be sold without incurring a loss. The Company's securities may become subject to the "penny stock rules" adopted pursuant to Section 15(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The penny stock rules apply to companies not traded on a national stock exchange or on the Nasdaq (but may be listed on pink sheets or the OTC Bulletin Board) whose common stock trades at less than $5.00 per share, which have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years), and which have average revenues of less than $6,000,000 for the last three years. Such rules require, among other things, that brokers who trade "penny stock" to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade "penny stock" because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. MARKET OVERHANG. The 3,004,282 shares being registered hereunder constitute 88.3% of the Common Stock. Such shares are proposed to be sold by the Selling Shareholders in block trades, by brokers/dealers as principals, in brokerage transactions in the over-the-counter market or in private sales. The market overhang of the potential sale of these shares could have an adverse effect on the price of the Common Stock until all of the shares being registered hereunder have been sold.

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+RISK FACTORS BEFORE INVESTING IN THE COMMON STOCK OR SERIES C PREFERRED OFFERED HEREBY, HOLDERS AND OTHER PROSPECTIVE PURCHASERS SHOULD CONSULT CAREFULLY THE FACTORS PRESENTED BELOW. CHANGE IN COMPOSITION OF LOAN PORTFOLIO Through the establishment of a commercial and consumer loan department and the acquisition of a commercial bank, the Bank has changed the composition of its loan portfolio in recent years. This change is consistent with the Bank's goal to convert from a thrift to a commercial bank. The residential mortgage loan portfolio has decreased from approximately 85% of the loan portfolio at March 31, 1992 to 67% of the loan portfolio at June 30, 1995. At the same time, the commercial business and consumer loan portfolio increased from 15% at March 31, 1992 to 33% at June 30, 1995. Commercial business and consumer loans are generally considered to carry different and significantly greater risks than single family residential mortgage loans. Commercial business and consumer loans are generally considered to have a greater risk than single family residential mortgage loans because the risk of borrower default is greater and their collateral (i.e. commercial property, business receivables, equipment and vehicles) is more likely to decline in value and may be more difficult to liquidate than single family residences. Although the Bank's redistribution of its loan composition is consistent with the Bank's operating strategy and will allow the Bank to be comparable to its bank peer group, there are no assurances that the Bank will be able to generate sufficient loan volume in the commercial business and consumer loan area to either maintain those portfolios at their current level or increase the portfolios. See 'Business--Lending Activities of the Bank.' ALLOWANCE FOR LOAN LOSSES Industry experience indicates that a portion of the Bank's loans will become delinquent and a portion of the loans will require partial or entire charge off. Regardless of the underwriting criteria utilized by the Bank, losses may be experienced as a result of various factors beyond the Bank's control, including, among others, changes in market conditions affecting the value of security and problems affecting the credit of the borrower. Due to the concentration of loans in South Florida, adverse economic conditions in that area could result in a decrease in the value of a significant portion of the Bank's collateral. There can be no assurance that the Bank will not experience significant losses in its loan portfolios which may require significant additions to the loan loss reserves. See 'Business--Non-Performing Assets and Allowance for Loan Losses.' INTENSE COMPETITION IN THE BANK'S MARKET AREA Vigorous competition exists in all areas where the Bank presently engages in business. The Bank faces intense competition in its market areas from major banking and financial institutions, including many which have substantially greater resources, name recognition and market presence than the Bank. Particularly intense competition exists for sources of funds, including savings and time deposits, in the residential mortgage market and in the residential construction lending business. Other banks, many of which have higher legal lending limits, actively compete for loans, deposits and other services which the Bank offers. Competitors of the Bank include commercial banks, savings banks, savings and loan associations, insurance companies, finance companies, credit unions and mortgage companies. Trends toward the consolidation of the banking industry may make it more difficult for smaller banks, such as the Bank, to compete with large national and regional banking institutions. EFFECT OF INTEREST RATES The operations of the Bank, and of savings banks in general, are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government and, in particular, the Board of Governors of the Federal Reserve System (the 'FRB'). Deposit flows and the cost of funds are influenced by interest rates of competing investments and general market rates of interest. Lending activities are affected by the demand for residential mortgage financing and for other types of loans, which in turn is affected by the interest rates at which such financing may be offered and by other factors affecting the supply of housing and the availability of funds. The operations of the Bank are substantially dependent on its net interest income, which is the difference between the interest income received from its interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities. At June 30, 1995, those liabilities that would reprice within the next twelve months exceeded those assets that would reprice within the next twelve months by $8.6 million, or 3.1% of total assets. As a result of this negative interest sensitivity gap, an increase in market interest rates is likely to result in a reduction in net interest income for the Bank because the level of interest paid on interest-bearing liabilities is likely to increase more quickly than the level of interest received on interest-earning assets. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management.' Increases in the level of interest rates may reduce loan demand, and thereby the amount of loans that can be originated by the Bank and, similarly, the amount of loan and commitment fees, as well as the value of the Bank's investment securities and other interest-earning assets. Moreover, volatility in interest rates can result in disintermediation, which is the flow of funds away from savings institutions into direct investments, such as corporate securities and other investment vehicles which, because of the absence of federal deposit insurance, generally pay higher rates of return than savings institutions or banks, or the transfer of funds within a bank from a lower yielding savings accounts to higher yielding certificates of deposit. DEPOSIT INSURANCE PREMIUMS; POTENTIAL ASSESSMENT The Bank, as a federal stock savings bank, pays deposit insurance premiums primarily to the Savings Association Insurance Fund (the 'SAIF'). As part of the acquisition of Governors in November 1994, the Bank assumed over $58 million in deposits insured by the Bank Insurance Fund (the 'BIF') and, therefore, the Bank also pays insurance premiums on a portion of its deposits at the BIF assessment rate. As of March 31, 1995, the most recent date of assessment, approximately 70% of the Bank's deposits were treated as SAIF insured deposits for assessment purposes, with the remaining 30% of deposits being assessed at the BIF rate. In the event both the Century acquisition and Banyan acquisition are consummated, this relative ratio of SAIF-and BIF-assessed deposits is expected to change to 62% and 38%, respectively, and is expected to remain at such ratio subsequent to the conversion to a commercial bank. Both SAIF and BIF are required to be recapitalized to 1.25% of insured reserve deposits. While the BIF has reached the required reserve ratio, the SAIF is not expected to be recapitalized until at least the year 2002. The Resolution Trust Corporation Completion Act (the 'RTC Completion Act') authorized $8 billion in funding for the SAIF, however, such funds only become available to the SAIF if the FDIC determines that the funds are needed to cover losses of the SAIF and several other stringent criteria are met. BIF members are currently paying premiums based upon a newly reduced assessment rate schedule of 4 to 31 basis points ($0.04 to $0.31 for every $100 of assessable deposits), which new rate schedule is retroactive to May 1995. Members of SAIF are currently paying average deposit insurance premiums of between 24 and 25 basis points ($0.24 to $0.25 for every $100 of assessable deposits). Under the new assessment rate schedule, approximately 92% of BIF members will pay the lowest assessment rate of 4 basis points; SAIF members would retain the existing assessment rate schedule of 23 to 31 basis points. In announcing this proposed rule, the FDIC noted that the premium differential may have adverse consequences for SAIF members with regard to pricing of loans and deposits and could impair the ability to raise funds in capital markets. Deposit insurance premiums are one of the larger components of a financial institution's non-interest expense. This disparity in insurance premiums between those required for financial institutions with all or primarily SAIF insured deposits and those with all or primarily BIF deposits (such as commercial banks) will allow BIF members to attract and retain deposits at a lower effective cost. The resultant competitive disadvantage could also result in the Bank having to raise its deposit rates to remain competitive or losing deposits to BIF members who may decide to pay higher rates of interest on deposits because of the lower deposit insurance premiums. Although the Bank has other sources of funds, these other sources may have higher costs than those of deposits. Several alternatives to mitigate the effect of the BIF/SAIF premium disparity have been suggested by the Administration, by members of Congress and by industry groups. In July 1995, the Chairman of the FDIC announced in testimony before the Congress a proposal to recapitalize the SAIF by a one-time charge to SAIF members of approximately $6.6 billion, or approximately 85 basis points ($.85 for every $100) of assessable deposits on March 31, 1995 and an eventual merger of the SAIF with the BIF. The Company is unable to predict the likelihood of legislation effecting these changes, although a consensus among regulators, legislators and bankers appears to be developing in this regard. If the proposed assessment of $.85 to $.90 per $100 of assessable deposits was effected based on deposits as of March 31, 1995, as proposed, the Bank's pro rata share would amount to approximately $960,000 to $990,000 after taxes, respectively. Such an assessment, as currently proposed, would not be affected by the conversion of the Bank to a commercial bank and would have a material adverse effect on the Company's earnings and results of operations. Accordingly, there can be no assurance that the reduction in BIF insurance premium rates by the FDIC will not have an adverse impact on the Bank's operations, earnings, and/or its competitive position in those markets where it operates, nor can there be any assurance that action would be taken to address the resulting disparity. If the Bank's premiums were to be reduced to 4 basis points as a result of paying this assessment, the Bank's net income, based on deposits as of March 31, 1995, would increase by approximately $200,000 after tax per year. ABILITY TO MAKE DIVIDEND PAYMENTS The Company is a legal entity separate and distinct from the Bank. Because the Company's principal business activity is limited to owning the Bank, the Company's payments of dividends on the Common Stock, Series A Preferred and Series C Preferred will generally be funded from dividends received by the Company from the Bank. Federal regulations limit the aggregate amount of cash dividends that the Bank may pay to the Company, its sole shareholder. The Bank's ability to make dividend payments to the Company is subject to the Bank's continuing profitable operations and there can be no assurance that future earnings of the Bank will support sufficient dividend payments to the Company. DEPENDENCE ON KEY PERSONNEL The Bank's success depends to a significant extent upon the performance of its Chairman of the Board and President and its Executive Vice President and Chief Financial Officer, the loss of either of whom could have a materially adverse effect on the Bank. The Bank believes that its future success will depend in large part upon its ability to retain such personnel. There can be no assurance that the Bank will be successful in retaining such personnel. CONTROL BY MANAGEMENT The executive officers and directors of the Company own approximately 23% of the Company's outstanding shares of Common Stock, excluding currently exercisable options and warrants. Such persons would own 38% of the Company's outstanding shares of Common Stock if all outstanding options, whether or not currently exercisable, were exercised. After the completion of the Offerings (assuming no exercise of the over-allotment option), the executive officers and directors are expected to own approximately 16% of the Company's outstanding shares of Common Stock, excluding all options. Therefore, management is likely, by virtue of this concentration of stock ownership, to significantly influence the election of the Company's directors and to significantly influence the outcome of actions requiring shareholder approval. FINANCIAL INSTITUTIONS LEGISLATION AND OTHER REGULATORY ISSUES During 1989 and 1991, Congress passed two major pieces of banking legislation: the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (the 'FIRREA') and the Federal Deposit Insurance Corporation Improvement Act of 1991 (the 'FDICIA'). The FIRREA and the FDICIA have significantly changed the thrift and commercial banking industries in order to protect the deposit insurance funds and depositors through, among other things, revising and limiting the types and amounts of investment authority, significantly increasing minimum regulatory capital requirements and broadening the scope and power of federal bank and thrift regulators over financial institutions and affiliated persons. These laws, and the resulting implementing regulations, have subjected the industry to extensive regulation, supervision and examination by the OTS and the FDIC. This has resulted in increased deposit insurance premiums and increased administrative, professional and compensation expenses in complying with an unprecedented number of new regulations and policies. The regulatory structure created gives the regulatory authorities extensive authority in connection with their supervisory and enforcement activities and examination policies. Further, Congress could enact future legislation that could significantly affect the powers, authority and operations of the Bank and have a material adverse effect on the Company's business. See 'Regulatory Matters.' NO PRIOR MARKET FOR THE SERIES C PREFERRED Unlike the Common Stock, the Series C Preferred is a new issue of securities, therefore, prior to the Offerings, there has been no market for the Series C Preferred. Although the Company has applied to list the Series C Preferred on NASDAQ, there can be no assurance that such application will be granted. Ryan, Beck has indicated its intention to be a market maker in the Series C Preferred as long as the volume of trading and other market making considerations justify such an undertaking. However, a public market having depth, liquidity and orderliness depends on the presence in the marketplace of a sufficient number of buyers and sellers at any given time, over which neither the Company nor its market makers have control. There can be no assurance that a liquid market for the Series C Preferred will develop. If an active trading market does develop, there can be no assurance that such trading market will continue. Additionally, since the prices of securities generally fluctuate, there can be no assurance that purchasers in the Offerings will be able to sell securities at or above the purchase price. THE COMPANY AND THE BANK Republic Security Financial Corporation (the 'Company'), headquartered in West Palm Beach, Florida, is a savings bank holding company. Its principal business is the operation of Republic Security Bank, Federal Savings Bank, a federal stock savings bank (the 'Bank'). As of June 30, 1995, the Company had consolidated assets of $276 million, deposits of $225 million and shareholders' equity of $22.7 million. The Bank commenced operations on November 19, 1984 as a stock savings bank. It is a member of the Federal Home Loan Bank (the 'FHLB') System, and its deposits are insured by the Federal Deposit Insurance Corporation (the 'FDIC') up to applicable limits. The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision (the 'OTS') and the FDIC. The Bank has seven full-service branches, six of which are located in Palm Beach County and one in Dade County, Florida. The Bank's main business activities are attracting deposits, originating loans, making investments and servicing loans for the Bank and for others. Earnings depend primarily upon the difference between interest received on loans and investments and interest paid on the Bank's deposit base and borrowings. Historically, the Bank's operating strategy was to originate long-term residential mortgage loans and short-term construction loans on residential properties. Recently, management began to shift the Bank's business from traditional thrift activities to those more closely related to commercial banking, with emphasis placed on originating consumer and commercial loans. The Bank's current business strategy includes (i) concentration on consumer and commercial lending, (ii) emphasis on transaction accounts, particularly business and personal checking accounts, (iii) focus on non-interest income from loan and deposit service fees and new products and services, (iv) achievement of a higher profile through additional strategically located banking offices, (v) continued emphasis on residential construction lending, (vi) maintenance of a presence in the residential mortgage market and (vii) growth through a combination of bank and branch acquisitions, as well as de novo expansion of the branch network. On April 17, 1995, the Bank filed an application to convert its charter from a federal savings bank to a State of Florida commercial bank, and at the same time the Company applied with the Federal Reserve Board to become a bank holding company. The Bank and the Company have received all necessary federal and state regulatory approvals and anticipate the conversions to be completed on or before November 15, 1995. The charter conversion reflects the Bank's desire to overcome the limitations on commercial and consumer loan generations imposed under its thrift charter and is consistent with the Bank's shift in focus from traditional thrift business activities to commercial banking activities. As a consequence of the Bank's application for a commercial bank charter, on July 26, 1995 the Company changed its fiscal year-end from March 31 to December 31. RECENT DEVELOPMENTS QUARTER ENDED SEPTEMBER 30, 1995 The following tables set forth selected consolidated financial condition data for the Company at September 30, 1995, June 30, 1995, and March 31, 1995, and selected operating results for the Company for the three months and six months ended September 30, 1995 and 1994. The selected consolidated financial and operating data and financial ratios at and for the three and six months ended September 30, 1995 and 1994 are derived from the unaudited financial statements of the Company, which in the opinion of management, reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The selected results of operations presented below are not necessarily indicative of the results that may be expected for any other period. This information should be read in conjunction with the Consolidated Financial Statements of the Company presented elsewhere in this Prospectus. <TABLE> <CAPTION> AT AT AT SEPTEMBER 30, JUNE 30, MARCH 31, 1995 1995 1995 ------------- -------- --------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Total assets....................................................... $ 273,901 $275,980 $ 280,039 Investments........................................................ 11,437 11,358 14,153 Loans receivable - net............................................. 207,928 229,819 227,940 Loans held for sale................................................ 7,478 Goodwill........................................................... 3,118 3,173 3,229 Total deposits..................................................... 210,803 225,081 229,735 Borrowed money..................................................... 29,091 17,469 19,733 Shareholders' equity............................................... 23,610 22,672 20,446 Non-performing assets.............................................. 5,010 6,345 3,436 </TABLE> <TABLE> <CAPTION> AT OR FOR THE AT OR FOR THE THREE MONTHS SIX MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- -------------------- 1995 1994 1995 1994 ------ ------ ------- ------ (IN THOUSANDS) <S> <C> <C> <C> <C> SUMMARY OF OPERATING RESULTS: Interest income............................................. $5,454 $3,624 $10,774 $6,985 Interest expense............................................ 2,704 1,539 5,416 3,048 ------ ------ ------- ------ Net interest income......................................... 2,750 2,085 5,358 3,937 Provision for loan losses................................... 50 75 75 150 ------ ------ ------- ------ Net interest income after provision for loan losses......... 2,700 2,010 5,283 3,787 Non-interest income......................................... 1,367 602 2,281 1,456 Operating expenses.......................................... 2,896 2,138 5,575 4,349 ------ ------ ------- ------ Income before income tax.................................... 1,171 474 1,989 894 Income taxes................................................ 421 170 712 325 ------ ------ ------- ------ Net income.................................................. $ 750 $ 304 $ 1,277 $ 569 ------ ------ ------- ------ ------ ------ ------- ------ PER SHARE DATA Primary earnings per share.................................. $ .15 $ .06 $ .25 $ .11 Fully diluted earnings per share............................ $ .13 $ .06 $ .23 $ .11 Stated book value........................................... $ 4.35 $ 4.13 $ 4.35 $ 4.13 Tangible book value......................................... $ 3.83 $ 4.13 $ 3.83 $ 4.13 Average common shares and common stock equivalents outstanding (in thousands)................................ 4,629 4,489 4,544 4,478 </TABLE> <TABLE> <CAPTION> AT OR FOR THE AT OR FOR THE THREE MONTHS SIX MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, --------------------- --------------------- 1995(1) 1994(1) 1995(1) 1994(1) ------- ------- ------- ------- <S> <C> <C> <C> <C> OTHER DATA: Return on average assets......................................... 1.09% .59% .93% .55% Return on average shareholders' equity........................... 12.96% 6.09% 11.28% 5.72% Average shareholders' equity to average total assets............. 8.43% 9.70% 8.25% 9.69% Allowance for loan losses to total loans......................... 1.13% .69% 1.13% .69% Net charge-offs to average loans................................. * * * .04% Non-performing assets to total assets at period end.............. 1.83% 1.18% 1.83% 1.18% Non-performing loans as a percentage of total loans.............. 1.59% .63% 1.59% .63% Allowances for loan losses to non-performing loans............... 71% 107% 71% 107% Tangible capital ratio(2)........................................ 7.25% 6.05% 7.25% 6.05% Core capital ratio(2)............................................ 7.25% 6.05% 7.25% 6.05% Risk-based capital ratio(2)...................................... 11.90% 12.41% 11.90% 12.41% Net interest margin.............................................. 4.31% 4.40% 4.21% 4.16% Net interest spread.............................................. 3.75% 4.17% 3.71% 3.96% Efficiency ratio................................................. 70% 80% 73% 81% Number of full service offices................................... 7 5 7 5 Loan servicing portfolio (in millions)........................... $325 $250 $325 $250 <FN> - ------------------------ * Less than .01% (1) Data is presented on an annualized basis, where appropriate. (2) Ratios presented are for the Bank only. Upon conversion of the Bank to a commercial bank and the Company becoming a bank holding company, the Company will be subject to capital requirements applied on a consolidated basis in a form substantially similar to those currently required of the Bank. Capital ratios as if the Bank was converted to a commercial bank at September 30, 1995 would be: Leverage capital ratio 7.20% Tier I risk-based capital ratio 11.50% Total risk-based capital ratio 11.90% </FN> </TABLE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS Total assets decreased $2.1 million to $273.9 million at September 30, 1995 from $276 million at June 30, 1995. The decrease in total assets is attributable to $14.3 million decrease in deposits offset by an increase of $11.6 million in Federal Home Loan Bank advances which will be partially repaid with the proceeds of loans held for sale of $7.5 million at September 30, 1995. The Bank sells mortgage loans in the normal course of business. At September 30, 1995, loans under commitment which did not close before quarter-end are classified as loans held for sale. The decrease in deposits was attributable to lowering interest rates paid on certificates of deposits since March 1995 to become aligned with the commercial bank market. Management believes most of the deposit run-off as a result of lowering interest rates paid on deposits has already occurred and anticipates deposit run-off to significantly decrease. Shareholders' equity increased approximately $1.0 mllion at September 30, 1995 from June 30, 1995. The increase in stockholders' equity is attributable to continued net income and an increase of $367,000 due to the exercise of warrants offset by $187,000 in common and preferred dividends paid during the quarter. Net income for the quarter ended September 30, 1995 increased $446,000 to $750,000 from $304,000 for the quarter ended September 30, 1994. The increase is due to an increase in net interest income of $665,000 and an increase in other income of $765,000 partially offset by an increase of $758,000 in operating expenses. Net interest income increased due to an increase in average loans outstanding of approximately $45.0 million and an increase in the average investment balance of approximately $11.0 million. The increases in the loan and investment balances is largely attributable to the acquisition of Governors in November 1994. The increase in non-interest income for the quarter ended September 30, 1995 compared to the quarter ended September 30, 1994 is attributable to a $360,000 increase in fee income, a $215,000 increase in gain on sales of loans, a $105,000 increase in net loan servicing income and a $85,000 increase in loan trading gains. The amount of fee income related to deposit and loan accounts has more than doubled since the quarter ended September 30, 1994 primarily due to an increase in the volume of deposit and loan accounts and, to a lesser extent, an increase in fee charges. Net loan servicing income has increased due to an increase in the amount of loans serviced for others and a decrease in the amortization of loan servicing rights. Loan trading department brokers loan packages for a fee and also acts as a principal in buying and reselling the same loan package for a gain. Operating expenses for the quarter ended September 30, 1995 increased $758,000 to approximately $2.9 million from $2.1 million for the quarter ended September 30, 1994 as a result of increases in employee compensation, occupancy expense, data processing expense and insurance expense. These increases are due to increases in the number of employees, the number of branch locations and departments and an increase in loan and deposit volumes, primarily as a result of the acquisition of Governors. Net income for the six months ended September 30, 1995 was $1.3 million compared to $569,000 for the six months ended September 30, 1994. The increase is attributable to an increase in net interest income of $1.4 million, an increase in other income of $825,000, partially offset by an increase in operating expenses of $1.2 million. Other income increased due to a $211,000 increase in gain on sale of loans, a $115,000 increase in loan servicing fees attributable to an increase in the amount of loans serviced for others and an increase of $606,000 in service fee income due to an increase in the volume of deposit and loan accounts. In addition, the six months ended September 30, 1994 included a $307,000 gain on the sale of loan servicing rights and a $200,000 loss on the sale of trading investments. The provision for loan losses decreased $75,000 for the six months ended September 30, 1995 compared to the six months ended September 30, 1994 primarily due to a decrease in net loan charge-offs. However, the allowance for loan losses as a percent of total loans increased from .69% at September 30, 1994 to 1.13% at September 30, 1995. This increase is a result of the allowance acquired from Governors and a decrease in net loan charge-offs during fiscal 1995 and the six months ended September 30, 1995. In management's opinion, the credit quality of the Bank's loan portfolio exclusive of loans acquired from Governors has not declined from Septembre 30, 1994. In addition, management believes the allowance for loan losses acquired were adequate for the loan portfolio acquired. The amount of provision for loan losses is a function of management's ongoing evaluation of the allowance for loan losses which considers the characteristics of the loan portfolio, past loan loss experience, economic conditions and other relevant factors. In accordance with the Bank's asset classification policy, non-performing loans are recorded at the lesser of the loan balance or estimated fair value of the collateral underlying the loan for collateral dependent loans, or the net present value of estimated future cash flows discounted at the loan's original effective interest rate. As a result, any expected losses from loans identified at September 30, 1995 as non-performing have been recognized by the Bank and should not have a future impact on the allowance for loan losses unless the condition of the loan further detoriates. Operating expenses increased primarily due to increases in employee compensation, occupancy expense and data processing expenses related to the Bank's growth as a result of the Governor's acquisition. PROPOSED ACQUISITION OF WEST PALM BEACH BRANCH OF CENTURY BANK On October 3, 1995, the Bank entered into an agreement with Century, an unaffiliated thrift, to purchase one branch office located in West Palm Beach, Florida. The operations of this branch have consisted of accepting deposits and withdrawals from savings, checking, money-market and certificate of deposit accounts. The branch has not originated loans or engaged in any other revenue- producing activities. The acquisition is expected to be consummated in December 1995. This will not increase the Bank's branch office network because the Bank expects to integrate this branch within the Bank's existing branch network by combining this new office with an existing office in the vicinity. The amount to be paid by the Bank to the seller for the transfer of such assets and liabilities of the branch shall be equal to $1,125,000, to be amortized over seven years on a straight line basis. The acquisition cost in excess of the fair market value of tangible assets acquired will be recorded as an intangible asset. In connection with the acquisition, the Bank will assume approximately $32.6 million of deposit liabilities, which are SAIF insured, $31.5 million of assets, including $12.5 million of adjustable rate single-family residential loans with an 8.25% yield, and $19 million in cash.

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+RISK FACTORS In addition to the other information set forth in this Prospectus, prospective investors should carefully consider the following information in evaluating the Company and its business before making an investment in the Units. DEFICIENCY OF EARNINGS TO FIXED CHARGES; LEVERAGE The Company currently has, and after the Offering will continue to have, a substantial amount of long-term debt in relation to common shareholders' equity. As of April 1, 1995, the Company had total Debt of $173.8 million. After giving effect to the Offering and the application of certain cash balances of the Company to the payment of debt, as of April 1, 1995, the Company would have had $171.1 million of total Debt, including the $125.0 million aggregate principal amount of the Senior Secured Notes. See "Use of Proceeds," "Summary of the Refinancing Transaction," and "Capitalization." The Company's gross interest expense for the twelve months ended April 1, 1995, the twelve months ended March 26, 1994, and fiscal 1994, 1993, 1992 and 1991 was $20.2 million, $20.5 million, $20.0 million, $21.1 million, $21.8 million and $16.1 million, respectively. The Company's gross interest expense is not expected to change materially after giving effect to the Offering and the application of the proceeds therefrom. For the twelve months ended April 1, 1995 and on a pro forma basis the twelve months ended March 26, 1994, and fiscal 1994 (in each case to exclude the gain on the sale of and the results for KES) and for fiscal years 1993, 1992 and 1991, the Company's earnings were insufficient to cover fixed charges by $4.3 million, $17.5 million, $16.6 million, $9.3 million, $19.4 million and $38.1 million, respectively. These amounts were calculated including KES for the periods prior to its sale in October 1993. The Company's ability to make interest payments on and to repay the principal of the Senior Secured Notes will depend upon the Company's ability to generate cash sufficient to meet such required payments or to refinance its debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's level of indebtedness, together with the restrictive covenants included in the Indenture and the Credit Facility, may have the effect of limiting the Company's ability to incur additional indebtedness, sell assets or acquire other entities, and may otherwise limit the operational and financial flexibility of the Company. The effect of these restrictions may be to place the Company at a competitive disadvantage in relation to less leveraged competitors. If applicable covenants are satisfied, the debt agreements of the Company or its Subsidiaries do not limit the total Debt that may be incurred. See "Description of Senior Secured Notes" and "Description of Certain Indebtedness." CERTAIN RESTRICTIONS UNDER CREDIT FACILITY The Credit Facility will contain extensive affirmative and negative covenants, including, among others, covenants: (i) prescribing minimum levels of net worth and working capital; (ii) requiring the maintenance of a certain interest coverage ratio, current ratio and ratio of total liabilities to net worth; and (iii) placing limits on the ability of the Company and each of its subsidiaries to incur indebtedness, create liens, guarantee indebtedness, make investments, make loans or extensions of credit, make capital expenditures, declare, pay or make dividends, substantially change the nature of its business, engage in transactions with affiliates, enter into leases, and form subsidiaries. The Credit Facility will require the Company to maintain as of the end of each fiscal quarter an interest coverage ratio of 1.1 to 1.0 during fiscal 1995, 1.5 to 1.0 during fiscal 1996 and 1.75 to 1.0 during fiscal 1997, measured on a rolling four-quarter basis. On a pro forma basis for fiscal 1994 (to exclude the gain on the sale of and the results for KES), the interest coverage ratio was 1.2 to 1.0. In addition, the net worth covenant under the Credit Facility will require the Company to maintain a net worth of at least $70 million, less the after-tax effect of prepayment penalties associated with the prepayment of debt with the proceeds of the Offering. At April 1, 1995, the Company had a net worth of approximately $76.4 million. The Company currently would be, and will be upon the completion of the Offering, in compliance with all covenants under the Credit Facility. The Credit Facility will also contain covenants which limit the ability of the Company and each of its subsidiaries to sell assets other than sales in the ordinary course of business, sales of obsolete or idle assets (other than the collateral under the Credit Facility) and sales of certain non-steel related assets (in which event the maximum revolving advance amount would be reduced), and to enter into certain transactions among affiliates, among others. The Credit Facility does not permit the Company or any of its Subsidiaries to (i) merge, consolidate or reorganize (except that the Company and its Subsidiaries may merge with each other under certain conditions) or (ii) acquire all or substantially all of the stock or assets of any entity unless the Company has working capital after such transaction of no less than the sum of $20.0 million plus scheduled principal payments due within 36 months (excluding obligations arising under the Credit Facility). At April 1, 1995, assuming completion of the Offering and the application of certain cash balances of the Company to the payment of debt, the Company would have had $67.6 million in working capital and minimal term debt amortization requirements over the next five years. In addition, the Credit Facility will restrict prepayment of indebtedness, including the Senior Secured Notes through optional redemptions, Change of Control Offers and certain Asset Sale Offers. The Credit Facility will be a borrowing base facility, although the agent for the lenders may reduce the borrowing base by the amount of reserves such agent reasonably deems necessary (including reserves for environmental matters). The Credit Facility will contain certain events of default including, among others: (i) failure to pay the obligations under the Credit Facility when due; (ii) breach of any representation or warranty in any of the loan documents; (iii) failure to comply with terms, provisions, conditions or covenants in any of the loan documents (which in some cases do not include notice or cure periods); (iv) issuance of liens or attachment which are not stayed or lifted within 30 days or entry of judgment (over a threshold level) which is not satisfied, stayed or discharged of record within 40 days; (v) certain events of insolvency or bankruptcy or the written admission of inability to pay debts when due; (vi) liens created under the Credit Facility ceasing to be first priority, perfected security interests or any portion of the collateral being seized; (vii) material defaults under other agreements to which the Company or any of its subsidiaries is a party which has a material adverse effect on the Company; (viii) change of ownership; (ix) revocation, suspension, adverse modification or termination (or the institution of proceedings to do so) of any material license, permit, patent, trademark or tradename; (x) certain ERISA violations; and (xi) interruption of business operations. In addition, any change in the condition or affairs (financial or otherwise) of Newport, Koppel or Imperial which in the lenders' reasonable opinion materially impairs the collateral for the Credit Facility or the ability of Newport, Koppel and Imperial, taken as a whole, to perform their obligations under the Credit Facility will constitute an event of default. See "Description of Certain Indebtedness." RECENT LOSSES The Company has incurred losses before extraordinary items of $5.9 million, $13.4 million and $20.6 million for the fiscal years ended 1993, 1992 and 1991, respectively. These losses include the results of KES prior to its sale in October 1993. For fiscal 1994, excluding the gain on the sale of and the results for KES, the Company's pro forma net loss before the cumulative effect of a change in accounting principle was $10.2 million. Primary factors contributing to the Company's losses include the decline in the demand for and the selling prices of the Company's products, particularly its tubular products; the start-up of Koppel in the face of declining markets; start-up costs associated with Newport's continuous slab caster; and increases in the cost of steel scrap, the Company's principal raw material. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON OIL COUNTRY TUBULAR GOODS MARKET OCTG products represent the Company's principal product lines and largest source of net sales, representing 39% of the Company's net sales for the twelve months ended April 1, 1995. The market for OCTG is primarily dependent upon domestic oil and natural gas drilling activity, which is largely dependent on current and forecasted oil and gas prices. The domestic drilling industry has been in a period of contraction since 1986, with average rig count declining from a high of approximately 3,970 in 1981 to a low of approximately 718 in 1992, according to Baker Hughes, Inc. For the six months ended April 1, 1995, average rig count was 768. Any increase in rig count in the future may benefit only welded or only seamless product sales depending on the type of wells being drilled. The Company's OCTG sales and margins are also influenced by OCTG imports, inventory levels of welded and seamless products, competitive conditions, steel scrap prices and other factors beyond the Company's control. The Company's OCTG sales and margins may be subject to significant variation from year to year. No assurance can be given as to the likelihood, timing and extent of any increase in domestic oil and natural gas drilling or as to the level of future demand for the Company's products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Industry-wide inventory levels of OCTG can vary significantly from period to period and have a direct effect on the demand for new production of such products. As a result, the Company's OCTG sales and results of operations may vary significantly from period to period. During most of the period from 1986 to 1993, demand within the energy industry for OCTG was satisfied to a significant extent through draw downs of existing inventories held by distributors and end users. Draw downs of existing inventories of OCTG abated in late 1992 and inventory levels began to increase during 1993. There can be no assurance that OCTG inventories will not again become excessive or that substantial draw downs of such inventories will not again occur, which could have a material adverse effect on price levels and the quantity of OCTG products sold by the Company. CYCLICAL INDUSTRY AND SENSITIVITY TO ECONOMIC CONDITIONS The demand for the Company's OCTG products is cyclical in nature, being dependent on oil and natural gas drilling activity, industry-wide inventory levels and general economic conditions. See "-- Dependence on Oil Country Tubular Goods Market." The demand for the Company's SBQ and hot rolled coil products is also cyclical in nature and is sensitive to general economic conditions. The demand for and the pricing of the Company's SBQ and hot rolled coil products is also affected by economic trends in areas such as commercial and residential construction, automobile production and industrial investment in new plants and facilities. Future economic downturns may adversely affect the Company. CAPITAL INTENSIVE INDUSTRY The Company operates in an industry which requires substantial capital investment, and additional capital expenditures are required by the Company to continue to upgrade its facilities. The Company believes that foreign and domestic producers will continue to invest heavily to achieve increased production efficiencies and improve product quality. During the past few years, the Company has deferred certain discretionary capital expenditures due to financial constraints. There can be no assurance that there will be sufficient internally generated cash or available acceptable external financing to make the necessary capital expenditures for a protracted period of time. ASSUMPTIONS REGARDING CAPITAL EXPENDITURE PROGRAM The Company has begun to implement a three-year, $21.7 million capital expenditure program intended to reduce its operating costs, improve quality and enhance its marketing position; the program consists of nine projects, one of which has been completed. The capital expenditure program is under continuous review and the Company may, based upon the results of engineering studies, revisions in budgeted project costs, increases or decreases in estimated operating benefits, changes in the demand for the Company's products, or the unavailability of internally generated cash or acceptable external financing, decide in the future to eliminate, postpone, modify or accelerate projects, or to substitute new projects for those currently included in the program. Upon completion of the capital expenditure program, the Company believes that its steelmaking operations, like those of other steel producers, will continue to require capital expenditures and additional projects that are essential to the Company's long-term competitiveness. See "-- Competition" for information concerning low cost thin slab casting operations. Because the estimated operating benefits from the Company's expected efficiencies and planned capital improvements are based upon a number of assumptions, estimated operating benefits may not necessarily be indicative of the Company's future financial performance, and increases in the cost of raw materials or other operating costs may offset any operating benefits causing actual results to vary significantly. In addition, the Company has based its operating benefits estimates on fiscal 1994 production and shipment levels and product mix. Any increase or decrease in actual tons shipped or a change in product mix would affect the operating benefits realized through the capital expenditure program. There can be no assurance that the estimated operating benefits of the Company's capital expenditure program will actually be achieved, that demand for tubular products, hot rolled coils and SBQ products will continue to support fiscal 1994 production and shipment levels, that other difficulties will not be encountered in completing the capital expenditure program, or that the projects can be installed or constructed at the estimated costs. COMPETITION The Company competes with foreign and domestic producers, including both integrated and mini-mill producers, many of which have substantially greater assets and larger sales organizations than the Company. The domestic mini-mill steel industry, particularly with respect to OCTG products, is characterized by vigorous competition with respect to price, quality and service, as well as competition to achieve technological advancements that would allow a mini-mill to lower its production costs. In addition, excess production capacity among OCTG producers has resulted in competitive product pricing and continued pressures on industry profit margins. The economics of operating a steel mini-mill encourage mini-mill operators to maintain high levels of output, even in times of low demand, which exacerbates the pressures on industry profit margins. In the welded OCTG and line pipe market, the Company competes against certain manufacturers who purchase hot rolled coils for further processing into welded OCTG and line pipe products. Since these tubular manufacturers acquire their principal raw material from other producers, they avoid the substantial investment required to build and operate a melt shop and hot strip mill. The cost of finished tubular products for these manufacturers is largely dependent on the market price of hot rolled coils. Depending on market demand for hot rolled coil, these tubular manufacturers may purchase hot rolled coils at a lower or higher cost than the Company's cost to manufacture hot rolled coils. The barriers to entry to the welded tubular market with respect to capital investment are low by steel industry standards. Manufacturers with facilities utilizing thin slab casting are expected to be increasingly strong competitors in the hot rolled coil market. The principal advantages of thin slab casting over the Company's melting and hot strip mill operations at the Newport facilities may include reduced capital costs per unit, lower energy and labor costs per unit and increased economies of scale. Certain steel facilities are currently utilizing thin slab casting technology and additional thin slab casting facilities have either been announced or are currently under construction. The anticipated increase in the use of thin slab casting technology may result in lower prices to the Company's competitors for hot rolled coils and closures of excess hot rolled capacity. As a result, particularly in times of soft demand for hot rolled coil, the Company may be forced by competitive pressures to lower prices for finished products. Alternatively, the Company may be required to invest in new technologies not included in its present capital expenditure program to offset the Newport facilities' potential cost disadvantages when compared to a low cost thin slab casting operation. The domestic steel industry has historically faced significant competition from foreign steel producers. Many foreign steel producers are owned, controlled or subsidized by their governments and their decisions with respect to production and sales may be influenced more by political and economic policy considerations than by prevailing market conditions. Foreign steel producers' share of OCTG domestic consumption has increased from approximately 7% in 1992 to approximately 23% for the twelve months ended March 31, 1995. See "Business -- Competition." In the SBQ market, the announced reopening of a previously closed facility with significant capacity and the announced expansion of existing facilities could result in an increase in competition for the Company's line of SBQ products. UNIONIZED LABOR FORCE The United Steel Workers of America ("USWA") represents substantially all of the Company's hourly 1,270-person workforce. In 1994, the Company negotiated collective bargaining agreements with respect to its hourly workforces at Newport and Koppel, both of which expire in 1999. Execution of the Newport agreement followed rejection of an earlier proposal and a two-day strike. The Company's collective bargaining agreement with the USWA for Imperial expires in November 1995. There can be no assurance that work stoppages will not occur in the future. OWNERSHIP CONTROL OF MANAGEMENT Two of the Company's executive officers are currently directors of the Company. Executive officers and directors of the Company, as a group, currently beneficially own 36.8% of the Company's common stock. As a result, the executive officers have sufficient voting power to influence the election of the Company's Board of Directors and the policies of the Company. See "Principal Stockholders." VOLATILITY IN RAW MATERIAL COSTS The market for steel scrap, the principal raw material used in the Company's operations, is highly competitive and subject to price volatility influenced by periodic shortages (due to increased demand by foreign and domestic users), freight costs, speculation by scrap brokers and other market conditions largely beyond the Company's control. Although the domestic mini-mill industry attempts to maintain its profit margin by attempting to increase the price of its finished products in response to increases in scrap costs, increases in the prices of finished products often do not fully compensate for such scrap price increases and generally lag several months behind increases in steel scrap prices, thereby restricting the ability of mini-mill producers to recover higher raw material costs. During periods of declining steel prices, declines in scrap prices may not be as significant as declines in product prices and, likewise, a decline in scrap prices may cause a decline in selling prices for the Company's products. A number of companies have announced plans to open new facilities, some of which will be located in the same geographic region as the Company's facilities. Operation of these new mini-mills will increase the demand for steel scrap and may result in an increase in steel scrap costs to the Company. In addition, certain existing thin slab casting mini-mills are expanding capacity which may also significantly increase the cost of steel scrap to the Company. The Company's steel scrap costs per ton increased by approximately 6% for the twelve months ended April 1, 1995 from the comparable prior year period. COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS The Company's specialty steel and adhesives operations are subject to various federal, state and local laws and regulations, including, among others, the Clean Air Act, the 1990 amendments to the Clean Air Act (the "1990 Amendments"), the Resource Conservation and Recovery Act ("RCRA") and the Clean Water Act and all regulations promulgated in connection therewith, including, among others, those concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous waste such as electric arc furnace dust. Since its inception the Company has spent substantial amounts to comply with these requirements, and the 1990 Amendments may require additional expenditures for air pollution control. In addition, there can be no assurance that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. The Company's mini-mills are classified, in the same manner as similar steel mills in the industry, as generating hazardous waste due to the production in the melting operation of dust that contains lead, cadmium and chromium. In the event of a release of a hazardous substance generated by the Company, the Company could be responsible for the remediation of contamination associated with such a release. During the third quarter of fiscal 1992 and the fourth quarter of fiscal 1993, Newport shut down its melt shop operations for 23 days and 19 days, respectively, when it was discovered that radioactive substances were accidentally melted, resulting in the contamination of the melt shop's electric arc furnace emission control facility, or "baghouse facility." To date, the accidental melting of radioactive materials has not resulted in any notice of violations from federal or state environmental regulatory agencies. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated baghouse dust. However, a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approvals, the actual cost of disposal could substantially exceed current reserves of $4.4 million. As of April 1, 1995, claims recorded in connection with disposal costs exhaust available insurance coverage. As of April 1, 1995, the possible range of estimated losses related to the environmental contingency matters discussed above in excess of those accrued by the Company is $0 to $3.0 million; however, with respect to the Consent Order (as discussed below), the Company cannot estimate the possible range of losses should the Company ultimately not be indemnified. In March 1995, Koppel entered into a Consent Order with the Environmental Protection Agency ("EPA") relating to an April 1990 RCRA facility assessment (the "Assessment") completed by the EPA and the Pennsylvania Department of Environmental Resources. The Assessment was performed in connection with a RCRA Part B permit pertaining to a landfill that is adjacent to the Koppel facilities and owned by Babcock & Wilcox Company ("B&W"), the former owner of the Koppel facilities. The Assessment identified potential releases of hazardous constituents into the environment from numerous Solid Waste Management Units ("SWMU's") and Areas of Concern ("AOC's"). The SWMU's and AOC's identified during the Assessment and the EPA's follow-up investigation are located at and adjacent to the Company's Koppel facilities. The Consent Order establishes a schedule for investigating, monitoring, testing and analyzing the potential releases. Contamination documented as a result of the investigation may require cleanup measures. Pursuant to various agreements entered into among the Company, B&W and PMAC, Ltd. ("PMAC") at the time of the Company's acquisition of the Koppel facilities in fiscal 1991, B&W and PMAC agreed to indemnify the Company against various known and unknown environmental matters. While reserving its rights against B&W, PMAC has accepted full financial responsibility for the matters covered by the Consent Order other than with respect to a 1987 release of hazardous constituents (the "1987 Release") that the Company believes could represent the most significant component of any potential cleanup, and other than with respect to hazardous constituents generated by Koppel after its acquisition by the Company, if any. B&W, PMAC and Koppel are in dispute as to whether the indemnification provisions relating to the 1987 Release expire in October 1995. B&W has not acknowledged responsibility for any cleanup measures that may be required as a result of any investigation (other than with respect to the 1987 Release, in the event certain actions are taken by the EPA prior to October 1995). Koppel and PMAC have jointly retained an environmental consultant to conduct the required investigation. The Company believes that it is entitled to full indemnity for all of the matters covered by the Consent Order from B&W and/or PMAC. However, in the event the indemnifying parties default on their respective obligations under the applicable agreements for any reason (including the inability to pay such obligations), or to the extent any disputes regarding the application of the indemnification provisions to the 1987 Release are determined adversely to the Company, Koppel will be obligated to complete any cleanup required by the EPA. Prior to the completion of the site analysis to be performed in connection with the Consent Order, the Company cannot predict the expected cleanup cost for the SWMU's and AOC's covered by the Consent Order. PRODUCT LIABILITY Certain losses may result or be alleged to result from defects in the Company's products, thereby subjecting the Company to claims for consequential damages. Drilling for oil and natural gas, in particular, involves a variety of risks. The Company warrants certain of its OCTG, line pipe and SBQ products to be free of certain defects. There can be no assurance that product liability in excess of insurance coverage will not be incurred or that the Company will be able to maintain insurance with adequate coverage levels. The Company recently settled a case with respect to a product liability claim. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters -- Legal Matters." FRAUDULENT CONVEYANCE ISSUES; HOLDING COMPANY STRUCTURE The Senior Secured Notes will be obligations of the Company and will be unconditionally guaranteed, jointly and severally, by the Subsidiaries. Under applicable provisions of Federal bankruptcy law and comparable provisions of state fraudulent transfer laws, if it were found that any Subsidiary had incurred the indebtedness represented by its obligations under the Subsidiary Guarantee with an intent to hinder, delay or defraud creditors or had received less than a reasonably equivalent value for such indebtedness and: (i) was insolvent on the date of the execution of the Subsidiary Guarantee; (ii) was rendered insolvent by reason of the Subsidiary Guarantee; (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business; or (iv) intended to incur or believed that it would incur debts beyond its ability to pay as such debts matured, the obligations of such Subsidiary under the Subsidiary Guarantee could be avoided or claims in respect of such Subsidiary could be subordinated to all other debts of such Subsidiary. The Subsidiary Guarantee will contain a savings clause that limits the amount of the Subsidiary Guarantee to the maximum amount which can be guaranteed by such Subsidiary under applicable Federal and state laws relating to the insolvency of debtors. A legal defense of the Subsidiary Guarantee on fraudulent conveyance grounds could, among other things, focus on the benefits, if any, realized by a Subsidiary as a result of the issuance by the Company of the Senior Secured Notes. To the extent that the Subsidiary Guarantee were held to be unenforceable as a fraudulent conveyance or for any other reason, the holder of a Senior Secured Note would cease to have any direct claim in respect of such Subsidiary, unless such Subsidiary issued an Intercompany Note, and would be solely a creditor of the Company and any Subsidiary whose obligations under the Subsidiary Guarantee were not avoided or held unenforceable. Similarly, the security interest granted by such Subsidiary to secure its obligations under the Subsidiary Guarantee could be avoided or held unenforceable. In the event the Subsidiary Guarantee were avoided or subordinated, the claims of the holders of the Senior Secured Notes with respect to such Subsidiary Guarantee would be subordinated to claims of other creditors of such Subsidiary. In addition, since the operations of the Company are conducted through subsidiaries, the Company's cash flow and, consequently, its ability to service debt, including the Senior Secured Notes and pay dividends with respect to its Common Stock, is dependent upon the cash flow of its subsidiaries and the payment of funds by those subsidiaries to the Company. CERTAIN LIMITATIONS ON THE SECURITY FOR THE SENIOR SECURED NOTES, THE INTERCOMPANY NOTES AND THE GUARANTEES The Senior Secured Notes will be obligations of the Company secured by a pledge of the Intercompany Notes and will be guaranteed, jointly and severally, by the Subsidiaries. If an Event of Default occurs and is continuing, the Trustee may declare the principal amount and accrued interest on the Senior Secured Notes to be immediately due and payable. If the Trustee does not take such action, a vote of the Holders of at least 25% of the principal amount of the outstanding Senior Secured Notes is required to accelerate the Senior Secured Notes. The right of the Trustee under the Security Documents to foreclose upon and sell the collateral upon the occurrence of a default is likely to be significantly impaired by applicable bankruptcy laws if a bankruptcy proceeding were to be commenced by or against the Company or its Subsidiaries prior to or possibly even after the Trustee has foreclosed upon and sold the Collateral. See "Description of the Notes--Certain Bankruptcy Limitations." For each of Newport, Koppel and Erlanger, its obligations under the Subsidiary Guarantee will be secured by a first priority mortgage and security interest and its Intercompany Note will be secured by a second priority mortgage and security interest in its steel-making operations, excluding inventory, accounts receivable and certain intangible property. No appraisals of any of the Collateral have been prepared in connection with the Offering by or on behalf of the Company or the Subsidiaries. At April 1, 1995, the net book value of the Collateral was approximately $147.4 million. There can be no assurance that the proceeds of any sale of the Collateral pursuant to the Indenture and the Security Documents following an acceleration after an Event of Default under the Indenture would be sufficient with respect to amounts owed with respect to the Senior Secured Notes. The proceeds from the sale of the Collateral would be applied to repay the Subsidiary's obligations under the Subsidiary Guarantee, which may be an amount less than the obligations outstanding with respect to the Senior Secured Notes and its Intercompany Note (where applicable). See "-- Fraudulent Conveyance Issues; Holding Company Structure." By its nature, some or all of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the Collateral will be saleable or that it will be able to be sold in a short period of time. In addition, the ability of the Collateral Agent to realize upon the Collateral may be subject to certain bankruptcy law and fraudulent conveyance limitations in the event of a bankruptcy. See "Description of Senior Secured Notes -- Security" and "-- Certain Bankruptcy Limitations." In addition, the Trustee for the Senior Secured Notes will enter into an intercreditor agreement with The Bank of New York Commercial Corporation, the agent for the lenders under the Credit Facility, that may delay the sale of the property subject to the lien of the Indenture and the Security Documents in order to permit the orderly sale of the property securing the Credit Facility. Under the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), a secured party may be held liable, in certain limited circumstances, for the costs of remediating or preventing releases or threatened releases of hazardous substances at a mortgaged property. There may be similar risks under various other federal laws, state laws and common law theories. Liability for cleanup costs may be imposed in situations, among others, where a secured party takes title to property by foreclosure, thereby becoming the owner of the property and losing the security interest exemption contained in CERCLA. The Subsidiary Guarantee and the Intercompany Note of Koppel will be secured in part with respect to the real property of the Koppel facilities. The Koppel facilities are the subject of a Consent Order with the EPA relating to potential releases of hazardous contaminants into the environment. See "-- Cost of Compliance with Environmental Matters." LIMITATIONS ON ABILITY TO PURCHASE THE SENIOR SECURED NOTES FOLLOWING A CHANGE OF CONTROL A Change of Control would constitute a default under the Credit Facility. If a Change of Control were to occur, the Company might be unable to repay all of its obligations under the Credit Facility, to purchase all of the Senior Secured Notes tendered and to repay other indebtedness that may become payable upon the occurrence of a Change of Control. See "Description of the Senior Secured Notes -- Change of Control."

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+RISK FACTORS AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. IN DECIDING WHETHER TO PURCHASE SHARES OF COMMON STOCK OFFERED HEREBY, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE FOLLOWING FACTORS THAT MAY AFFECT THE COMPANY'S CURRENT OPERATIONS AND FUTURE PROSPECTS. FLUCTUATIONS IN COST AND AVAILABILITY OF INGREDIENTS Several of the principal ingredients used in the Company's products, including chocolate and nuts, are subject to significant price fluctuations. Although cocoa beans, the primary raw material used in the production of chocolate, are grown commercially in Africa, Brazil and several other countries around the world, cocoa beans are traded in the commodities market, and their supply and price are therefore subject to volatility. The Company believes its principal chocolate supplier purchases most of its beans at negotiated prices from African growers, often at a premium to commodity prices. Although the price of chocolate has been relatively stable in recent years, the supply and price of cocoa beans, and in turn of chocolate, are affected by many factors, including monetary fluctuations and economic, political and weather conditions in countries in which cocoa beans are grown. The Company purchases most of its nut meats from domestic suppliers who procure their products from growers around the world. The price and supply of nuts are also affected by many factors, including weather conditions in the various regions in which the nuts used by the Company are grown. Although the Company often enters into purchase contracts for these products, significant or prolonged increases in the prices of chocolate or of one or more types of nuts, or the unavailability of adequate supplies of chocolate or nuts of the quality sought by the Company, could have a material adverse effect on the Company and its results of operations. LOCATION DEPENDENCY The Company's expansion plans are critically dependent on the Company's ability to obtain suitable sites at reasonable occupancy costs for its franchised and Company-owned stores in the factory outlet, tourist and regional mall environments that constitute its primary location targets. There is no assurance that the Company will be able to obtain suitable locations in these environments at a cost that will allow stores to be economically viable. RELIANCE ON FRANCHISEES The continued growth and success of the Company is dependent in part upon its ability to attract, retain and contract with qualified franchisees and the ability of those franchisees to operate their stores successfully and to promote and develop the Rocky Mountain Chocolate Factory store concept and its reputation for an enjoyable in-store experience and product quality. Although the Company has established criteria to evaluate prospective franchisees and has been successful in attracting franchisees, there can be no assurance that franchisees will be able to operate successfully Rocky Mountain Chocolate Factory stores in their franchise areas in a manner consistent with the Company's concepts and standards. See "Business -- Franchising Program." RAPID EXPANSION; MANAGEMENT OF GROWTH The number of franchised and Company-owned stores has more than doubled since the end of fiscal 1992. The Company intends to open at least 17 Company-owned stores and between 25 and 30 franchised stores in fiscal 1996. The Company is subject to a variety of business risks generally associated with rapidly growing companies, such as the inability to control costs and achieve continued profitability during a period of aggressive growth. The Company's future store expansion will also depend upon a number of factors including, among others, the cost and availability of suitable sites, the implementation of enhanced operational and financial systems, the employment and training of additional management, store staff and other personnel, the negotiation of acceptable lease and financing terms, its ability to attract franchisees and the cost-effective and timely opening of stores. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth. Also, there can be no assurance that the Company will be able to open its planned stores in a timely or cost-effective manner, if at all. GOVERNMENT REGULATION The Company is subject to regulation by the Federal Trade Commission and must comply with certain state laws governing the offer, sale and termination of franchises and the refusal to renew franchises. Many state laws also regulate substantive aspects of the franchisor-franchisee relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees and regulating discrimination among franchisees in charges, royalties or fees. Franchise laws continue to develop and change, and changes in such laws could impose additional costs and burdens on franchisors. The Company's failure to obtain approvals to sell franchises and the adoption of new franchise laws, or changes in existing laws, could have a material adverse effect on the Company and its results of operations. Each of the Company-owned and franchised stores is subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining required licenses or approvals from such agencies could delay or prevent the opening of a new store. The Company and its franchisees are also subject to laws governing their relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Because a significant number of the Company's employees are paid at rates related to the federal minimum wage, increases in the minimum wage would increase the Company's labor costs. The failure to obtain required licenses or approvals, or an increase in the minimum wage rate, employee benefits costs (including costs associated with mandated health insurance coverage) or other costs associated with employees, could have a material adverse effect on the Company and its results of operations. Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. A finding of a failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of all or a portion of the Company's facilities for an indeterminate period of time, and could have a material adverse effect on the Company and its results of operations. COMPETITION The retailing of confectionery products is highly competitive. The Company and its franchisees compete with numerous businesses that offer confectionery products. Many of these competitors have greater name recognition and financial, marketing and other resources than the Company. In addition, there is intense competition among retailers for real estate sites, store personnel and qualified franchisees. Competitive market conditions could have a material adverse effect on the Company and its results of operations and its ability to expand successfully. CONSUMER TASTES AND PREFERENCES The sale of the Company's products is affected by changes in consumer tastes and eating habits, including views regarding consumption of chocolate. Numerous other factors that the Company cannot control, such as economic conditions, demographic trends, traffic patterns and weather conditions, influence the sale of the Company's products. Changes in any of these factors could have a material adverse effect on the Company and its results of operations. DEPENDENCE ON SENIOR MANAGEMENT The Company's success is highly dependent on the skills, experience and efforts of its senior management. The loss of the services of one or more members of its senior management could have a material adverse effect on the Company and its plans for growth. The Company is the beneficiary of key man life insurance in the amount of $1,000,000 on the life of Franklin E. Crail, the Company's Chairman of the Board and President; however, there can be no assurance that such insurance would be adequate to compensate the Company for the loss of Mr. Crail's services. The Company has not entered into employment agreements with any member of its senior management. See "Management." CONTROL BY EXISTING STOCKHOLDERS Coronet Insurance Company ("Coronet") and Mr. Crail will continue to own 31.1% and 10.0%, respectively, of the outstanding Common Stock of the Company after completion of this Offering (27.8% and 9.8%, respectively, if the Underwriter's over-allotment option is exercised in full). The Selling Stockholders are likely to continue to have the ability to control the election of the Company's Board of Directors and, therefore, to control the Company and its business and affairs, and in some circumstances could prevent the approval of proposals submitted by other stockholders. See "Principal and Selling Stockholders." CHANGE IN PRODUCT MIX The Company believes that approximately 50% of franchised stores' revenues are generated by sales of products manufactured by and purchased from the Company, 30% by sales of products made in the stores with ingredients purchased from the Company or approved suppliers and 20% by sales of products purchased from approved suppliers for resale in the stores. Franchisees' sales of products manufactured by the Company generate higher revenues to the Company than sales of store-made or other products. A significant decrease in the amount of products franchisees purchase from the Company, therefore, could adversely affect the Company's total revenues and results of operations. Such a decrease could result from franchisees' decisions to sell more store-made products or products purchased from third party suppliers. IMPACT OF INFLATION Inflationary factors such as increases in the costs of ingredients and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company's future lease costs for new facilities may reflect potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on its increased costs to its customers. FLUCTUATIONS OF QUARTERLY RESULTS The Company's sales and earnings are seasonal, with significantly higher sales and earnings occurring during the Christmas and summer vacation seasons than at other times of the year, which causes fluctuations in the Company's quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and the sale of franchises. Because of the seasonality of the Company's business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of the results that may be achieved in other quarters or for a full fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results."

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+RISK FACTORS The purchase of Company Common Stock in the Offerings involves certain investment risks. In determining whether or not to make an investment in the Company Common Stock, prospective investors should carefully consider the matters set forth below, as well as the other information contained herein. Potential Effects of Changes in Interest Rates and the Current Interest Rate Environment The operations of the Company and Roxborough-Manayunk are substantially dependent on their respective net interest income, which consists of the difference between the interest income earned on their interest-earning assets and the interest expense paid on their interest- bearing liabilities. Like most financial institutions, the Company's and Roxborough-Manayunk's earnings are affected by changes in market interest rates, which increased from early 1994 to early 1995, and other economic factors beyond their control. As a result of borrowers refinancing higher rate mortgage loans in 1993 and the rise in short-term interest rates from early 1994 to early 1995, the Company's interest rate spread decreased from 3.47% for 1992 to 3.26% for 1993 and 3.04% for 1994. Roxborough-Manayunk's interest rate spread increased from 3.32% for 1992 to 3.37% for 1993 and decreased to 3.27% for 1994. For the three months ended March 31, 1995, the Company's and Roxborough-Manayunk's interest rate spreads amounted to 3.21% and 3.44%, respectively. Further increases in short-term interest rates could adversely affect the Company's and Roxborough-Manayunk's interest rate spreads and net interest income in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Roxborough-Manayunk." In addition to affecting interest income and expense, changes in interest rates also can affect the market value of the Company's and Roxborough-Manayunk's interest-earning assets, which are comprised of fixed and adjustable-rate instruments. Generally, the market value of fixed-rate instruments fluctuates inversely with changes in interest rates. At March 31, 1995, the Company and Roxborough-Manayunk had $13.0 million and $49.5 million of investment securities and $90.6 million and $0 of mortgage-backed securities, respectively, which were classified as held to maturity in accordance with the terms of Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"). Such designation effectively restricts the Company's and Roxborough-Manayunk's ability to sell such assets in order to meet their liquidity needs or in response to increases in interest rates. Generally, the reclassification and sale of any of such assets could result in the remainder of the Company's and Roxborough-Manayunk's portfolio of investment and mortgage-backed securities classified as held to maturity being reclassified as available for sale. However, SFAS No. 115 permits an institution to reclassify securities deemed held to maturity as available for sale under certain circumstances in connection with a major business combination. Consequently, in connection with the Conversion and the Merger, the Company may consider reclassifying a portion of its investment and mortgage-backed securities portfolio from held to maturity to available for sale in order to maintain the Company's existing interest rate risk position or credit risk policy. The decision to reclassify a portion of its investment and mortgage-backed securities portfolio from held to maturity to available for sale will depend upon what effect the Conversion and the Merger has on the consolidated interest rate risk and credit risk positions. Pursuant to SFAS No. 115, securities classified as available for sale must be reported at fair value, with unrealized gains or losses being reported as a separate component of stockholders' equity. Consequently, the transfer of a portion of the Company's investment and mortgage-backed securities portfolio from held to maturity to available for sale will result in any unrealized gains or losses with respect to such securities being reported as a separate component of stockholders' equity. The Company's investment and mortgage-backed securities (including securities classified as available for sale) had an aggregate carrying value and market value of $116.6 million and $112.1 million, respectively, at March 31, 1995, while Roxborough-Manayunk's investment and mortgage-backed securities (including securities classified as available for sale) had an aggregate carrying value and market value of $126.7 million and $126.0 million, respectively, as of such date. At March 31, 1995, the Company and Roxborough-Manayunk had $727,000 and $1.3 million, respectively, of loans classified as held for sale. The OTS has implemented an interest rate risk component into its risk- based capital rules, which is designed to calculate on a quarterly basis the extent to which the value of an institution's assets and liabilities would change if interest rates increase or decrease. If the net portfolio value of an institution would decline by more than 2% of the estimated market value of the institution's assets in the event of a 200 basis point increase or decrease in interest rates, then the institution is deemed to be subject to a greater than "normal" interest rate risk and must deduct from its capital 50% of the amount by which the decline in net portfolio value exceeds 2% of the estimated market value of the institution's assets, as of an effective date to be determined by the OTS. As of March 31, 1995, if interest rates increased by 200 basis points, Progress' net portfolio value would decrease by 2.93% of the estimated market value of Progress' assets, as calculated by the OTS, which would result in a $1.6 million capital deduction if such deduction was currently required. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Asset and Liability Management." Changes in interest rates also can affect the average life of loans and mortgage-related securities. Decreases in interest rates in recent periods have resulted in increased prepayments of loans and mortgage-backed securities, as borrowers refinanced to reduce borrowing costs. Under these circumstances, the Company and Roxborough-Manayunk are subject to reinvestment risk to the extent that they are not able to reinvest such prepayments at rates which are comparable to the rates on the maturing loans or securities. A significant increase in the level of interest rates may also have an adverse effect on the ability of certain of the Company's and Roxborough- Manayunk's borrowers with adjustable-rate loans to repay their loans. Historical Financial Condition and Results of Operations The Company has recognized operating losses in recent years due, to a large extent, to the prior economic recession and the resulting decline in real estate values in the Company's market area. These conditions had a material adverse effect on the quality of the Company's loan portfolio and contributed in 1990 and 1991 to substantial increases in the Company's non-performing assets, which consist of non-accrual loans and accruing loans 90 days or more overdue (collectively "non-performing loans"), as well as real estate acquired by the Company through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure (collectively "REO"). The Company's non-performing assets increased from $17.5 million or 5.2% of total assets at December 31, 1989 to $50.4 million or 16.1% of total assets at December 31, 1991. In 1991, the Company changed its senior management and began the process of improving the credit quality of the Company's assets through the early identification of potential problem assets and the administration, rehabilitation or liquidation of the Company's non-performing assets. As a result of management's efforts, the Company's non-performing assets have since declined and totalled $8.8 million or 2.5% of total assets at March 31, 1995. Roxborough-Manayunk has historically maintained a relatively low level of non-performing assets. At March 31, 1995 and December 31, 1994 and 1993, Roxborough-Manayunk's non-performing assets totalled $1.2 million, $1.3 million and $2.4 million or 0.5%, 0.5% and 0.9% of total assets at such dates, respectively. At March 31, 1995, the Company's allowance for loan losses amounted to $1.6 million or 0.8% and 37.4% of total loans and total non-performing loans, respectively, and the net carrying value of the Company's REO amounted to $4.5 million at such date. The $4.5 million of REO at March 31, 1995 included a $3.4 million property which the Company has entered into an agreement to sell for $3.2 million. Although there can be no assurances, such sale is expected to be consummated in November 1995. For additional information, see "Business of the Company - Asset Quality - Non- Performing Assets." At March 31, 1995, Roxborough-Manayunk's allowance for loan losses amounted to $416,000 or 0.4% and 37.1% of total loans and total non-performing loans, respectively, and the net carrying value of Roxborough-Manayunk's REO amounted to $103,000 as of such date. Following consummation of the Conversion and the Merger, future additions to the Company's allowance for loan losses or reductions in carrying values of REO could become necessary in the event of a deterioration in the real estate market and economy in the Company's primary market area, future increases in non-performing assets or for other reasons, which would adversely affect the Company's results of operations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and the carrying value of its REO. Such agencies may require the Company to make additions to the allowance for loan losses and adjustments to the carrying values of REO based on their judgments about information available to them at the time of their examination. Increased Emphasis on Commercial Business, Residential Construction, Commercial Real Estate and Consumer Lending At March 31, 1995, the Company's commercial business loans, residential construction loans, commercial real estate loans (including multi-family residential loans) and consumer loans amounted to $12.2 million or 5.7%, $4.9 million or 2.3%, $75.4 million or 35.5% and $19.5 million or 9.2% of the Company's total loan portfolio (including loans classified as held for sale), respectively. Similarly, at March 31, 1995, Roxborough-Manayunk's commercial business loans, residential construction loans, commercial real estate loans (including multi-family residential loans) and consumer loans amounted to $2.8 million or 2.8%, $995,000 or 1.0%, $14.9 million or 15.1% and $5.1 million or 5.1% of Roxborough-Manayunk's total loan portfolio (including loans classified as held for sale), respectively. The Company intends to increase its emphasis on commercial business, residential construction, commercial real estate (primarily multi-family residential) and consumer lending following consummation of the Conversion and the Merger, utilizing the lending staff and procedures currently employed by the Company. Commercial business and commercial real estate lending entails different and significant risks when compared to single- family residential lending because such loans often involve large loan balances to single borrowers and because the payment experience on such loans is typically dependent on the successful operation of the project or the borrower's business. Commercial real estate lending can also be significantly affected by supply and demand conditions in the local market for apartments, offices, warehouses or other commercial space. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project, when completed, having a value which is insufficient to assure full repayment. Finally, consumer lending is also generally considered to involve additional credit risk than traditional mortgage lending because of the type and nature of the collateral and, in certain cases, the absence of collateral. For additional information, see "Business of the Company" and "Business of Roxborough-Manayunk." Regulation The Company, as a savings and loan holding company, and Progress and Roxborough-Manayunk, as federally chartered savings banks, are subject to extensive governmental supervision and regulation, which is intended primarily for the protection of depositors. In addition, the Company, Progress and Roxborough-Manayunk are subject to changes in federal and state law, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be accurately predicted at this time but could adversely affect the business and operations of the Company and Progress Bank. A bill has been introduced in the House Banking Committee that would consolidate the OTS with the Office of the Comptroller of the Currency ("OCC"). The resulting agency would regulate all federally chartered commercial banks and savings institutions. In the event that the OTS is consolidated with the OCC, it is possible that the thrift charter could be eliminated and that savings institutions could be forced to convert to commercial banks. Under present law, this would trigger a recapture of a savings institution's bad debt reserve. Recapitalization of SAIF and Effect of Reduction in BIF Premiums Deposits of Progress and Roxborough-Manayunk are presently insured by the SAIF. The Resolution Trust Corporation ("RTC") Completion Act (the "RTC Completion Act") authorized $8.0 billion in funding for the SAIF. However, such funds only become available to the SAIF if the Chairman of the FDIC certifies that the funds are needed to pay for losses of the SAIF; SAIF members are unable to pay additional premiums to cover such losses without an adverse effect on such institutions; and the premium increase could reasonably be expected to result in greater losses to the government. The funds are authorized through fiscal year 1998, or until the SAIF's reserve ratio equals 1.25%, whichever occurs first, and the funds may only be used to pay for losses at failed thrifts. Under the RTC Completion Act, SAIF members, such as Progress and Roxborough-Manayunk, could be required to pay higher deposit insurance premiums in the future. By contrast, financial institutions which are members of the BIF, because it has higher reserves and is expected to be responsible for fewer troubled institutions, are likely to experience lower deposit insurance premiums in the future. The FDIC has proposed that the premium schedule for BIF members be revised to provide a range of .04% to .31% of deposits, so that well-capitalized and healthy BIF members would pay the lowest premiums. The proposal is based on the FDIC's expectation that the BIF will reach the required reserve ratio in mid-1995 as a result of the decrease in bank failures in the past few years. The lower premiums for BIF members are expected to take effect in the third quarter of 1995. The disparity in deposit insurance premiums between SAIF members and BIF members is exacerbated by the statutory requirement that both the SAIF and BIF funds be recapitalized to a 1.25% of insured reserve deposits ratio. While the BIF is expected to reach the required reserve ratio in 1995, the SAIF is not expected to reach such target until 2002. As a result of this disparity, SAIF members could be placed at a material, competitive disadvantage to BIF members with respect to pricing of loans and deposits and the ability to achieve lower operating costs. In addition, a significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operation of Progress Bank. See "Regulation - Savings Bank Regulation - Insurance of Accounts." In July 1995 the Chairman of the FDIC announced in testimony before the U.S. Congress related to the condition of the SAIF and related issues a proposal to recapitalize the SAIF by a one-time charge of SAIF-insured institutions of approximately $6.6 billion, or approximately $.85 to $.90 for every $100 of assessable deposits, and an eventual merger of the SAIF with the BIF. The Company currently is unable to predict the likelihood of legislation effecting these changes, although a consensus among regulators, legislators and bankers appears to be developing in this regard. If the proposed assessment of $.85 to $.90 per $100 of assessable deposits was effected based on deposits as of March 31, 1995, as proposed, Progress Bank's pro rata share would amount to approximately $4.4 million to $4.7 million, respectively. Dividends The Company suspended dividend payments on the Company Common Stock after the second quarter of 1990 in order to conserve its capital resources in light of operating losses and the inability of Progress to meet its risk-based capital requirement at the time, and the Company has not paid any dividends since such date. The Board of Directors of the Company may consider paying cash dividends on the Company Common Stock commencing in 1996, although no decision has been made as to the amount of such dividends, if any. Dividends, when and if paid, will be subject to determination and declaration by the Board of Directors in its discretion, which will take into account the Company's consolidated financial condition and results of operations, tax considerations, industry standards, economic conditions, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the Company Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. The Company's ability to pay dividends on the Company Common Stock depends on the use of the net proceeds of the Offerings and the receipt of dividends from Progress Bank. For a discussion of the requirements and limitations relating to the ability of Progress Bank to pay dividends to the Company in the future, see "Market Price for Company Common Stock and Dividends" and "Regulation - Savings Bank Regulation - Restrictions on Capital Distributions." Limitation of Tax Benefits The Conversion and the Merger are expected to result in an "ownership change" of the Company for federal income tax purposes. As a result, an annual limitation will be imposed on the Company's ability to utilize its pre-combination net operating loss carryforwards to offset future taxable income and on its ability to deduct "Built-in-Losses" of the Company, as defined in Section 382 of the Internal Revenue Code of 1986, as amended. While management believes that the amount of losses which have not yet been recognized by the Company and its subsidiaries is less than the applicable amounts beyond which such limitations would apply to the deduction of such losses in the event of an "ownership change," no assurance can be given that such limitations will not apply. For further information, see "Taxation - Federal Taxation." Effect of the Conversion and the Merger The Company will be required to recognize certain expenses which are directly related to the merger of Progress and Roxborough-Manayunk, which expenses are estimated to be approximately $50,000. These expenses, in addition to expenses attributable to the Offerings, include legal, accounting and other miscellaneous expenses. Furthermore, the combination of Progress and Roxborough-Manayunk, as with any merger, will involve various inherent uncertainties. For example, upon completion of the Conversion and the Merger, Progress Bank will be required to integrate the personnel, facilities and various other aspects of the businesses of Progress and Roxborough-Manayunk. Management of Progress and Roxborough-Manayunk currently estimate that it will take approximately one to two years to substantially complete the operational integration of the two institutions and anticipates that a successful integration will result in certain economies of scale and operating efficiencies. Although there can be no assurance that such integration can be successfully completed within the contemplated time period or that any economies of scale or operating efficiencies will be realized upon its completion, management of Progress and Roxborough-Manayunk believe that Progress Bank can become a better capitalized and more profitable institution than either of its predecessors upon completion of the consolidation process. In addition, there can be no assurance that the various operating activities of Progress and Roxborough-Manayunk will be continued or perform on a consolidated basis as they did separately. Possible Dilutive Effect of Issuance of Additional Shares Various possible issuances of Company Common Stock could dilute the interests of prospective and existing stockholders of the Company following consummation of the Conversion and the Merger, as noted below. The number of shares to be sold in the Conversion and the Merger may be increased as a result of an increase in the Estimated Price Range of up to 15% to reflect changes in market and financial conditions prior to the completion of the Offerings or to fill the order of the ESOP. In the event that the Estimated Price Range is so increased, or in the event that the market price for the Company Common Stock declines from recent levels, the Company may be required to issue up to 5,780,263 shares of Conversion Stock under the Merger Agreement. The Company and Progress will have a right to terminate the Merger Agreement if a greater number of shares of Conversion Stock is required to be issued. See "The Conversion and the Merger - Conditions to the Merger" and "The Offerings - Stock Pricing, Exchange Ratio and Number of Shares to be Issued." An increase in the number of shares will decrease net income per share and stockholders' equity per share on a pro forma basis. See "Capitalization" and "Pro Forma Unaudited Financial Information." The ESOP intends to purchase up to 8% of the Conversion Stock to be issued in the Offerings. In the event that the maximum of the Estimated Price Range is increased above $32.2 million, the ESOP will have a first priority right to purchase the amount in excess of $32.2 million, up to an aggregate of 8% of the total Conversion Stock issued. See "Management of the Company and Progress Bank Following the Conversion and the Merger - Benefits - Employee Stock Ownership Plan" and "The Offerings - Subscription Offering - Priority 2: ESOP." Following consummation of the Conversion and the Merger and the receipt of stockholder approval, the 1995 Recognition Plan intends to acquire an amount of Company Common Stock equal to 3.5% of the shares of Conversion Stock issued in the Offerings. Such shares of Company Common Stock may be acquired in the open market with funds provided by the Company, if permissible, or from authorized but unissued shares of Company Common Stock. In the event that additional shares of Company Common Stock are issued to the 1995 Recognition Plan, stockholders would experience dilution of their ownership interests and stockholders' equity per share and net income per share would decrease as a result of an increase in the number of outstanding shares of Company Common Stock. See "Pro Forma Unaudited Financial Information" and "Management of the Company and Progress Bank Following the Conversion and the Merger - Benefits - 1995 Recognition Plan." Following consummation of the Conversion and the Merger and the receipt of stockholder approval, the Company will adopt the 1995 Stock Option Plan and will reserve for future issuance pursuant to such plan a number of authorized shares of Company Common Stock equal to an aggregate of 8.5% of the Conversion Stock issued in the Offerings (476,000 shares, based on the maximum of the Estimated Price Range and an assumed Actual Purchase Price of $5.75). See "Pro Forma Unaudited Financial Information" and "Management of the Company and Progress Bank Following the Conversion and the Merger - Benefits - 1995 Stock Option Plan." The Company also has adopted and maintains the Key Employee Stock Compensation Program, the 1993 Stock Incentive Plan and the 1993 Directors' Stock Option Plan, and has reserved for issuance pursuant to such plans 95,955 shares, 176,488 shares and 50,000 shares of Company Common Stock, respectively, and in connection therewith options with respect to 95,250 shares, 132,500 shares and 39,000 shares had been granted as of March 31, 1995, respectively. Similarly, Roxborough-Manayunk also has adopted and maintains the 1992 Stock Option Plan and the 1994 Stock Option Plan and has reserved for issuance pursuant to such plans 20,000 shares and 20,000 shares of Roxborough-Manayunk Common Stock, respectively, and in connection therewith options with respect to all of such shares had been granted as of March 31, 1995, respectively. Upon consummation of the Conversion and the Merger, the foregoing plans shall be continued and, in the case of Roxborough-Manayunk's existing plans, Company Common Stock will be issued in lieu of Roxborough-Manayunk Common Stock (in accordance with the Exchange Ratio) pursuant to the terms of such plans and the Merger Agreement. See "Management of the Company" and "Management of Roxborough-Manayunk." The Company has 300,000 warrants outstanding, with each warrant entitling the holder thereof to purchase one share of Company Common Stock at an exercise price of $6.00 per share (the "Warrants"). The Warrants may not be exercised prior to the earlier to occur of May 31, 1996 or the effective date of the registration of the shares of Company Common Stock underlying the Warrants. The Company has agreed to use its best efforts to file such registration statement in December 1995. Once the Warrants become exercisable, they may be exercised in whole or in part until June 30, 1999. See "Description of Capital Stock of the Company - Warrants to Purchase Company Common Stock." Assuming the issuance of 4,869,565 shares of Conversion Stock at $5.75 per share (the midpoint of the Estimated Price Range), there will be 8,853,606 shares of Company Common Stock outstanding upon consummation of the Conversion and the Merger. Accordingly, the exercise of all 300,000 Warrants would dilute the voting interests of the Company's stockholders at the time by approximately 3.3%. Possible Dilution to Roxborough-Manayunk Public Stockholders as a Result of Purchase Limitations The OTS has required that the purchase limitations contained in the Plan of Conversion include Exchange Stock to be issued to Roxborough-Manayunk Public Stockholders for their Roxborough-Manayunk Public Shares. As a result, certain holders of Roxborough-Manayunk Public Shares may be limited in their ability to purchase Conversion Stock in the Offerings, as the amount of Exchange Stock received by such Roxborough-Manayunk Public Stockholders will reduce the amount of Conversion Stock that they would otherwise have been able to purchase in the Offerings. See "The Offerings - Limitations on Conversion Stock Purchases." Purchases of Conversion Stock in the Offerings Persons who subscribe for shares of Conversion Stock in the Offerings will need to submit a stock order form for the aggregate dollar amount of shares they wish to purchase (the "Order Amount"), rather than a specific number of shares or shares at a specific price per share. The Order Amount will be divided by the Actual Purchase Price, which will be the average closing price of the Company Common Stock as reported on the Nasdaq National Market during the 20 trading days ending on the day prior to the close of the Offerings, in order to determine the number of shares of Conversion Stock to be received by each subscriber. As a result, unlike when shares of Company Common Stock are purchased in the open market, a subscriber will not know at the time he submits a stock order form either the number of shares that he will receive or the price per share that he will be paying. In addition, a subscriber will most likely receive an odd lot number of shares of Conversion Stock, which may result in higher commissions when the shares are sold. However, a subscriber purchasing shares of Conversion Stock in the Offerings will not pay any brokerage commissions with respect to such purchase. Relationships Between the Company, Roxborough-Manayunk and Sandler O'Neill The Parties have engaged Sandler O'Neill as a financial advisor in connection with the offering of Conversion Stock, and Sandler O'Neill has agreed to use its best efforts to solicit subscriptions and purchase orders for shares of Conversion Stock in the Offerings. See "The Offerings - Marketing Arrangements" for a discussion of the fees to be paid to Sandler O'Neill in that regard. In addition, the Parties have also retained Sandler O'Neill as a conversion agent to provide recordkeeping services and to solicit proxies in connection with the Conversion and the Merger for a fee of $17,500 plus out-of-pocket expenses. Furthermore, Sandler O'Neill was also engaged by the Company prior to the execution of the Merger Agreement to act as a financial advisor to the Company and its subsidiaries in connection with the Conversion and the Merger for a fee of $25,000, which amount will be credited toward the fees to be paid with respect to the sale of the Conversion Stock. Moreover, Sandler O'Neill served as one of eight market makers with respect to the Company Common Stock in April 1995 and has engaged in other transactions with the Company and Roxborough-Manayunk in the past. Finally, an affiliate of Sandler O'Neill, 1993 SOP Partners, L.P., is currently deemed to beneficially own 200,000 shares or 6.10% of the outstanding Company Common Stock, warrants to purchase an additional 50,000 shares of Company Common Stock and $500,000 of subordinated debt of the Company. See "Management of the Company - Beneficial Ownership of Company Common Stock." The Parties selected Sandler O'Neill to serve as their financial advisor based upon, among other things, Sandler O'Neill's expertise with respect to stock offerings of financial institutions in general and savings institutions in particular, as well as its familiarity with the Parties. In addition, prior to engaging Sandler O'Neill, the Company and Roxborough- Manayunk had considered two other prospective financial advisors and had determined that Sandler O'Neill's compensation arrangements were the most competitive. The Company, Roxborough-Manayunk and Sandler O'Neill believe that Sandler O'Neill's ownership of the Company Common Stock and the Company's warrants and subordinated debt do not present any material conflicts of interest. However, in order to minimize any potential conflicts of interest, Sandler O'Neill has indicated that its affiliate will not exercise its subscription rights to purchase shares of Conversion Stock, and Sandler O'Neill has ceased its market-making activities with respect to the Company Common Stock until the completion or termination of the Conversion and the Merger. Anti-takeover Provisions Certain provisions of the Company's Certificate of Incorporation and Bylaws and the Delaware General Corporation Law ("DGCL"), as well as a shareholder rights plan adopted by the Company, could have the effect of discouraging non-negotiated takeover attempts which certain stockholders might deem to be in their interest and making it more difficult for stockholders of the Company to remove members of its Board of Directors and management. For example, the Company's Certificate of Incorporation upon consummation of the Conversion and the Merger will include a provision prohibiting any person from acquiring beneficial ownership of more than 10% of the outstanding Company Common Stock for a period of three years following consummation of the Conversion and the Merger. In addition, any business combination with any person owning 10% or more of the outstanding Company Common Stock would need to be approved by the holders of at least 80% of the outstanding Company Common Stock and by the holders of a majority of the stock not held by such 10% stockholder, unless such transaction was approved by the Board of Directors or certain other conditions were met. If any person acquires 20% or more, or commences a tender offer to acquire 20% or more, of the outstanding Company Common Stock, the preferred stock purchase rights attached to each share of Company Common Stock will become exercisable under the Company's shareholder rights plan. All currently outstanding shares of Company Common Stock, as well as shares of Conversion Stock and Exchange Stock to be issued in the Conversion and the Merger, have or will have a preferred stock purchase right attached thereto. Generally, the exercisability of such rights would make any hostile takeover attempt prohibitively expensive unless the Board of Directors agreed to redeem such rights. In addition, various federal laws and regulations could affect the ability of a person, firm or entity to acquire the Company or shares of its Common Stock. See "Regulation," "Restrictions on Acquisition of the Company and Progress Bank" and "Description of Capital Stock of the Company." Directors and executive officers of the Company, Progress and Roxborough-Manayunk expect to hold 13.77% of the shares of Company Common Stock outstanding upon consummation of the Conversion and the Merger (including outstanding stock options), based upon the midpoint of the Estimated Price Range. See "The Offerings - Beneficial Ownership and Proposed Purchases by Directors and Executive Officers." Executive officers of the Company and Progress Bank, as well as other eligible employees of the Company and Progress Bank, also will hold shares of Company Common Stock which are allocated to the accounts established for them pursuant to the ESOP, which intends to purchase up to 8% of the Conversion Stock to be issued in the Offerings. Under the terms of the ESOP, shares of Company Common Stock which have not yet been allocated to the accounts of employee participants in the ESOP will be voted by the trustees of the ESOP in the same ratio on any matter as to those allocated shares for which instructions are given to the trustees. In addition, and subject to stockholder approval following the consummation of the Conversion and the Merger, the Company expects to acquire Company Common Stock on behalf of the 1995 Recognition Plan, a non-tax qualified restricted stock plan, in an amount equal to 3.5% of the Conversion Stock issued in the Offerings. Under the terms of the 1995 Recognition Plan, current directors and executive officers of Roxborough-Manayunk will be allocated shares of Company Common Stock over which the trustees of such plan will have voting rights until such shares vest. Subject to stockholder approval, the Company also intends to reserve for future issuance pursuant to the 1995 Stock Option Plan a number of authorized shares of Company Common Stock equal to an aggregate of 8.5% of the Conversion Stock issued in the Offerings. See "Management of the Company and Progress Bank Following the Conversion and the Merger - Benefits." Possible Adverse Income Tax Consequences of the Distribution of Subscription Rights The Parties have received an opinion of RP Financial that subscription rights have no value. However, this opinion is not binding on the Internal Revenue Service ("IRS"). If the subscription rights are deemed to have an ascertainable value, receipt of such rights likely would be taxable only to persons who exercise the subscription rights (either as capital gain or ordinary income) in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. See "The Conversion and the Merger - Effects of the Conversion and the Merger" and "- Tax Aspects."

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+RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors in addition to the other information set forth in this Prospectus in connection with an investment in the Common Stock offered hereby. DEPENDENCE ON WAREHOUSE FINANCING. The Company's ability to sustain the growth of its financing business is dependent upon funding obtained through warehouse facilities until its equipment loans are permanently funded. The funds the Company obtains through warehouse facilities are full recourse short-term borrowings secured primarily by the underlying equipment. These borrowings in turn typically are repaid with the proceeds received by the Company when its equipment loans are securitized or sold. The Company has an $81.5 million revolving credit facility with a syndicate of banks led by NatWest Bank N.A. ("NatWest"), which is renewable annually at the bank syndicate's discretion; a $100.0 million warehouse facility with Prudential Securities Realty Funding Corporation, which provides warehouse financing for certain equipment loans to be securitized through its affiliate, Prudential Securities Incorporated; a $5.5 million warehouse facility with Prudential Securities Realty Funding Corporation, which provides warehouse financing for certain medical receivables loans; and a $75.0 million warehouse facility with ContiTrade Services L.L.C. ("ContiTrade"), which provides warehouse financing for certain equipment loans to be securitized or otherwise permanently funded through ContiTrade. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Warehouse Facilities." Prudential Securities Incorporated is one of the underwriters in the Offering. See "Underwriting." There can be no assurance that this type of warehouse financing will continue to be available to the Company on acceptable terms. If the Company were unable to arrange continued access to acceptable warehouse financing, the Company would have to curtail its loan originations, which in turn would have a material adverse effect on the Company's financial condition and operations. DEPENDENCE ON PERMANENT FUNDING PROGRAMS. The Company's use of securitization as its principal form of permanent funding is an important part of the Company's business strategy. To sustain the growth of its securitization program, the Company will need an increasing amount of equity and/or long-term debt financing. If for any reason the Company were to become unable to access the securitization market to permanently fund its equipment loans, the consequences for the Company would be materially adverse. The Company's ability to complete securitizations and other structured finance transactions depends upon a number of factors, including general conditions in the credit markets, the size and liquidity of the market for the types of receivable-backed securities issued or placed in securitizations sponsored by the Company and the overall financial performance of the Company's loan portfolio. The Company does not have binding commitments from financial institutions or investment banks to provide permanent funding for its equipment or medical receivables loans. IMPACT OF CREDIT ENHANCEMENT REQUIREMENTS. In connection with its securitizations and other structured financings, the Company is required to provide credit enhancement for the debt obligations issued and sold to third parties. Typically, the credit enhancement consists of cash deposits, the funding of subordinated tranches and/or the pledge of additional equipment loans which are funded with the Company's capital. In the securitizations sponsored to date by the Company, the Company effectively has been required to furnish credit enhancement equal to the difference between (i) the aggregate principal amount of the equipment loans originated by the Company and transferred to the Company's special purpose finance subsidiary and the related costs of consummating the securitization and (ii) the net proceeds received by the Company in such securitizations. See "Business -- Capital Resources and Transaction Funding." The requirement to provide this credit enhancement reduces the Company's liquidity and requires it to obtain additional capital. If the Company is unable to obtain and maintain sufficient capital, it may be required to halt or curtail its securitization or other structured financing programs, which in turn would have a material adverse effect on the Company's financial condition and operations. CREDIT RISK. Many of the Company's customers are outpatient healthcare providers that have complex credit characteristics. Providing financing for these customers often involves a high degree of credit risk. Although the Company seeks to mitigate its risk of default and credit losses through its underwriting practices and loan servicing procedures and through the use of various forms of limited and non-recourse financing (in which the financing sources that permanently fund the Company's equipment loans assume some or all of the risk of default by the Company's customers), the Company remains exposed to potential losses resulting from a default by an obligor. Obligors' defaults could cause the Company to make payments to the extent of the recourse position the Company maintains under its permanent equipment funding arrangements; could result in the loss of the cash or other collateral pledged as credit enhancement under its permanent equipment funding arrangements; or could require the Company to forfeit any residual interest it may have retained in the underlying equipment. At March 31, 1995, the Company's contingent liability under all of its limited recourse equipment loans was approximately $36.5 million. During the period after the Company initially funds an equipment loan and prior to the time it funds the loan on a permanent basis with non-recourse or limited recourse financing, the Company is exposed to full recourse liability in the event of default by the obligor. In addition, under the terms of securitizations and other types of structured finance transactions, the Company generally is required to replace or repurchase equipment loans in the event they fail to conform to the representations and warranties made by the Company, even in transactions otherwise designated as non-recourse or limited recourse. Defaults by the Company's customers also could adversely affect the Company's ability to obtain additional financing in the future, including its ability to use securitization or other forms of structured finance. The sources of such permanent funding take into account the credit performance of the equipment loans previously financed by the Company in deciding whether and on what terms to make new loans. In addition, the credit rating agencies and insurers that are often involved in securitizations consider prior credit performance in determining the rating to be given to the securities issued in securitizations sponsored by the Company and whether and on what terms to insure such securities. In addition, to date, all of the Company's medical receivables loans (as opposed to its equipment loans) have been funded on a full recourse basis whereby the Company is fully liable for any losses that are incurred. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Under the Company's wholesale loan origination program (the "Wholesale Program"), the Company purchases equipment loans from regional medical equipment finance companies and equipment manufacturers (collectively, "Originators") that generally do not have direct access to the securitization market as a source of permanent funding for their loans. The Company does not work directly with the borrowers at the origination of these equipment loans and therefore is not directly involved in structuring the credits and generally does not independently verify credit information supplied by the Originator. Accordingly, the Company faces a higher degree of risk when it acquires loans on a wholesale basis. The Company initiated the Wholesale Program in June 1994 and expects to focus on this business as a significant part of the Company's growth strategy. During the nine months ended March 31, 1995, loans originated under the Wholesale Program constituted 23% of total loans originated during the period. The Company has limited experience in the wholesale loan origination business and there can be no assurance that the Company will be able to grow this business successfully or avoid related liabilities or losses. See "Business -- Loan Characteristics and Underwriting." INTEREST RATE RISK. The Company's equipment loans are all structured on a fixed interest rate basis with its customers. Prior to securitization or sale of its loans, the Company funds its loans through short-term warehouse facilities which bear interest at variable rates. At any point in time, the Company may be exposed to interest rate risk on loans funded through its warehouse facilities to the extent interest rates increase between the time the loans are initially funded and the time they are permanently funded. Increases in interest rates during this period could narrow or eliminate the spread, or result in a negative spread, between the interest rate the Company realizes on its equipment loans and the interest rate that the Company pays under its warehouse facilities. To protect itself against this risk, the Company may use a hedging strategy, including taking short positions in U.S. Treasury securities having maturities comparable to the maturities of the equipment loans to be securitized. There can be no assurance, however, that the Company's hedging strategy or techniques will be effective, that the profitability of the Company will not be adversely affected during any period of changes in interest rates or that the costs of hedging will not exceed the benefits. In addition, the Company is subject to margin calls on the outstanding short positions in U.S. Treasury obligations it assumes in connection with its hedging activities. If the Company is required to pay additional margin on its short positions, the Company's capital may be adversely affected. A substantial and sustained increase in interest rates could adversely affect the Company's ability to originate loans. In certain circumstances, the Company for a variety of reasons may retain for an indefinite period certain of the equipment loans it originates. In such cases, the Company's interest rate exposure may continue for a longer period of time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 18 to the Company's Consolidated Financial Statements contained elsewhere in this Prospectus. LEVERAGE. The Company is highly leveraged. As of March 31, 1995, the Company and its consolidated subsidiaries had total debt of $380.6 million, of which $161.7 million was full recourse debt and $218.9 million was limited recourse debt. Of the $380.6 million of total debt, $232.6 million was long-term debt and $148.0 million was short-term debt. Since substantially all of the net proceeds of the Offering are expected to be applied to the temporary reduction of short-term borrowings under the Company's warehouse facilities, the Company's total long-term debt will not change on completion of the Offering. After completion of the Offering, the Company will continue to have substantial debt service requirements. The degree to which the Company is leveraged also may impair its ability to obtain additional financing on acceptable terms. POSSIBLE ADVERSE CONSEQUENCES FROM RECENT GROWTH. In the past two years, the Company originated a significantly greater number of equipment loans than it did in previous years. As a result of this rapid growth, the Company's loan portfolio grew from $206.7 million at March 31, 1994 to $370.6 million at March 31, 1995. In light of this growth, the historical performance of the Company's loan portfolio, including rates of credit loss, may be of limited relevance in predicting future loan portfolio performance. Any credit or other problems associated with the large number of equipment loans originated in the recent past will not become apparent until sometime in the future. Further, while the Company's loan originations have grown substantially in the past two years, the Company's gross margins have declined significantly during the same period, and, as a result, the Company's historical results of operations may be of limited relevance to an investor seeking to predict the Company's future performance. In order to support the growth of its business, the Company has added a significant number of new operating procedures and personnel and has relocated its headquarters from Irvine, California to Doylestown, Pennsylvania. The Company is absorbing the effects of this relocation and the implementation of new computer hardware and software to manage its business operations. The recent move, the related service and support personnel turnover and the Company's significant growth all have placed substantial new and increased pressures on the Company's personnel. Although the Company believes the addition of new operating procedures and personnel, together with its new computer system, will be sufficient to enable it to meet its current operating needs, there can be no assurance that this will be the case. If the Company does not effectively manage its growth, or if the Company fails to sustain its historical levels of performance in credit analysis and transaction structuring with respect to the increased loan origination volume, the consequences will be materially adverse. ABILITY TO SUSTAIN GROWTH. To sustain the rates of growth it has achieved in the last two years, the Company will be required to penetrate further the markets for lower cost diagnostic imaging equipment and for other types of medical equipment or devices such as lasers used in patient treatment. The Company faces significant barriers to entry in the patient treatment device market, which is more diverse than the diagnostic imaging market because of the larger number of manufacturers and types of products and the greater price range of those products. The Company has limited experience in the patient treatment device market. There can be no assurance that the Company will be able to penetrate and compete effectively in the markets described above. RISKS RELATED TO THE MEDICAL RECEIVABLE FINANCING BUSINESS. In July 1993, the Company entered the medical receivable financing business and expects to focus on this business as a part of the Company's growth strategy. The Company's medical receivable financing business generally consists of providing loans to healthcare providers that are secured by their receivables from payors such as insurance companies, large self-insured companies and governmental programs and by other collateral. The Company has limited experience in the medical receivable financing business and there can be no assurance that the Company will be able to grow this business successfully or avoid related liabilities or losses. The Company has funded its medical receivable financing business to date through the use of the Company's capital and a relatively small medical receivables warehouse facility and recently, on a limited basis, through the Company's revolving credit facility which the Company generally uses for its equipment financing business. The growth of the Company's medical receivable financing business is dependent on various factors including the Company's ability to obtain additional funding facilities to finance medical receivables loans. While the medical receivable financing business shares certain characteristics, including an overlapping customer base, with the Company's core equipment financing business, there are many differences, including unique risks. Healthcare providers could overstate the quality and characteristics of their medical receivables, which the Company analyzes in determining the amount of the line of credit to be secured by such receivables. After the Company has established or funded a line of credit, the healthcare providers could change their billing and collection systems, accounting systems or patient records in a way that could adversely affect the Company's ability to monitor the quality and/or performance of the related medical receivables. There are substantial technical legal issues associated with creating and maintaining perfected security interests in medical receivables. Payors may make payments directly to healthcare providers that have the effect (intentionally or otherwise) of circumventing the Company's rights in and access to such payments. Payors may attempt to offset their payments to the Company against debts owed to the payors by the healthcare providers. In addition, as a lender whose position is secured by receivables, the Company is likely to have less leverage in collecting outstanding receivables in the event of a borrower's insolvency than a lender whose position is secured by medical equipment which the borrower needs to run its business. A customer which receives medical receivables loans from the Company and defaults on obligations secured by such receivables may require additional loans, or modifications to the terms of existing loans, in order to continue operations and repay outstanding loans. The Company may have a conflict of interest when the Company acts as servicer for an equipment-based securitization and originates medical receivables loans to borrowers whose previous equipment loans have been securitized. The Company's efforts to develop suitable sources of funding for its medical receivable financing business through securitization or other structured finance transactions may be constrained or hindered due to the fact that the use of structured finance transactions to fund medical receivables is a relatively new process. The Company has not previously issued debt secured by medical receivables in the structured finance markets. While the Company believes it has structured its credit policies and lending practices to take account of these and other factors, there is no assurance the Company will not realize credit losses in connection with its medical receivable financing business or that the medical receivable financing business will meet the Company's growth expectations. MEDICAL EQUIPMENT MARKET. The demand for the Company's equipment financing services is impacted by numerous factors beyond the control of the Company. These factors include general economic conditions, including the effects of recession or inflation, and fluctuations in supply and demand for various types of sophisticated medical equipment resulting from, among other things, technological and economic obsolescence and government regulation. In addition, the demand for sophisticated medical equipment also may be negatively affected by declining reimbursement to healthcare providers for their services from third-party payors such as insurance companies and government programs, and the increased use of managed healthcare plans that often restrict the use of certain types of high technology medical equipment. For the nine months ended March 31, 1995, magnetic resonance imaging ("MRI") machines accounted for approximately 49.6% (by dollar volume) of the loans originated by the Company during such period. Any substantial decrease in the Company's loan originations for the purchase of MRI machines could have a material adverse effect on the Company. HEALTHCARE REFORM. During the past half decade, large U.S. corporations and U.S. consumers of healthcare services have substantially increased their use of managed healthcare plans such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs"). This development has increased the purchasing power of those plans, which in turn have used that power to lower the amounts they pay for healthcare services. Since 1993, numerous proposals have been presented to Congress to restructure the U.S. healthcare system. The principal features of these proposals are to provide universal access to healthcare services and to achieve overall cost containment. To date none of the proposals initiated at the federal government level has been enacted. In the private sector, however, cost containment initiatives have continued. Certain aspects of these actual and proposed cost containment initiatives, particularly plans to eliminate payment for duplicative procedures, may reduce the overall demand for the types of medical equipment financed by the Company. Declining reimbursement for medical services also could pressure hospitals, physician groups and other healthcare providers, which form a significant portion of the Company's customer base, to experience cash flow problems. This in turn could negatively impact their ability to meet their financial obligations to the Company and/or reduce their future equipment acquisitions which could adversely affect the Company. The Company believes that the general movement toward a managed healthcare system in the U.S. will materially reduce the demand for medical equipment and for related financing. See "Business -- Government Regulation." CONSEQUENCES OF GOVERNMENT REGULATION. The acquisition, use, maintenance and ownership of most types of sophisticated medical equipment financed by the Company are regulated by federal, state and/or local authorities. See "Business -- Government Regulation." DEPENDENCE ON REFERRALS AND SUPPORT FROM EQUIPMENT MANUFACTURERS. The Company obtains a significant amount of its equipment financing business through referrals from four manufacturers of diagnostic imaging equipment and other manufacturers of medical equipment it finances. In addition, these manufacturers often provide credit support for or assume first loss positions with respect to equipment financing they refer to the Company. These manufacturers are not contractually obligated to refer their customers to the Company or to provide credit support. There is no assurance that these manufacturers will continue to provide such referrals or credit support. If for any reason the Company were no longer to benefit from these referrals or credit support, its equipment financing business would be materially adversely affected. COMPETITION. The business of financing sophisticated medical equipment is highly competitive. The Company competes with equipment manufacturers that sell and finance sales of their own equipment and finance subsidiaries of national and regional commercial banks and equipment leasing and financing companies. Many of the Company's competitors have significantly greater financial and marketing resources than the Company. In addition, the competition in the new markets recently targeted by the Company, specifically equipment financing in the hospital market and medical receivable financing market, may be greater than the levels of competition historically experienced by the Company. The Company believes that increased equipment loan originations during the past two years resulted, in part, from a decrease in the number of competitors in the higher cost medical equipment financing market and the Company's high level of penetration in this market. There can be no assurance that new competitive providers of financing will not enter the medical equipment financing market in the future. To meet its long-term growth plans, the Company must penetrate further its targeted markets for lower cost medical equipment and medical receivable financing businesses. Such penetration may require the Company to reduce its margins to be competitive in the lower cost medical equipment and medical receivable financing businesses. In addition, there can be no assurance that the Company will sustain the same level of equipment loan originations in future periods as during the past two years or that it will be able to meet its long-term growth objectives. See "Business -- Competition." DISCONTINUED OPERATIONS. In June 1993, the Company adopted a formal plan to discontinue its healthcare services segment that consisted of seven outpatient healthcare facilities which it operated or managed on a direct basis and one facility which was in the developmental stage and not yet in operation. At the end of fiscal 1993, the Company established a reserve for the divestiture of the operations and recorded a loss on discontinued operations and disposal of discontinued operations. As of June 30, 1994, the Company had disposed of or entered into definitive agreements to sell six of these outpatient healthcare facilities, had written off the investment and assets of the remaining two, and recorded an additional $3.1 million after-tax charge in excess of the amounts of estimated losses reported as of June 30, 1993 for the disposition of this segment of the Company's business. The Company may be subject to certain contingent liabilities based on the prior operations of the facilities. The consideration received by the Company from several of the purchasers in these transactions included promissory notes, and in some cases, the purchasers entered into other arrangements with the Company to refinance the medical equipment and/or other assets used in these facilities. In addition, in connection with the disposal of these facilities, the Company retained certain assets associated with the prior operation of the facilities, primarily accounts receivable, which it is collecting and for which it believes it established sufficient reserves. The purchasers who acquired the facilities and/or equipment and other assets related to the facilities generally have limited financial resources and substantial amounts of indebtedness in addition to their obligations to the Company. Should one or more of the purchasers become insolvent and be unable to meet its obligations to the Company and if the Company is unable to successfully remarket the financed equipment and other assets or if a significant percentage of the accounts receivable retained by the Company prove to be uncollectible, the Company could incur additional losses. At March 31, 1995, the Company's aggregate maximum exposure, if all of the purchasers of these facilities were to become insolvent and the financed equipment and other assets were to be unsaleable, was approximately $6.9 million. INVESTEE COMPANIES. The Company has investments in and does business with two companies that operate diagnostic imaging equipment and accordingly is subject to the risks of that business. As of March 31, 1995, the remaining balances of loans made to Diagnostic Imaging Services, Inc. ("DIS") and Healthcare Imaging Services, Inc. ("HIS") that have been permanently funded on a limited recourse basis were approximately $7.2 million and $2.7 million, respectively. As of March 31, 1995, the remaining balances of such loans that have been permanently funded on a recourse basis or through internally generated funds were approximately $15.2 million and $1.5 million, respectively. The Company owns approximately 4.5 million shares of convertible preferred stock of DIS having an aggregate liquidation preference of $4.5 million. In addition, as of March 31, 1995, the Company owned approximately 9% and 17% of the common stock of DIS and HIS, respectively. See "Business -- Other Business Activities," "Certain Transactions" and Note 6 to the Company's Consolidated Financial Statements included elsewhere in this Prospectus. SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the Company will have outstanding approximately 9,211,180 shares of Common Stock (9,586,180 if the Underwriters' over-allotment option is exercised in full). Of these shares of Common Stock, 8,122,880 shares, which include the 2,500,000 shares offered hereby, will be freely tradable without restriction or further registration under the 1933 Act. All of the remaining 1,088,300 shares of Common Stock outstanding upon completion of the Offering are restricted securities as defined in the 1933 Act (the "Restricted Securities"). All of the Restricted Securities and any other shares of Common Stock acquired by an officer, director or more than 10% stockholder of the Company (each, an "affiliate") are eligible for resale pursuant to the provisions of Rule 144 under the 1933 Act ("Rule 144") or at any time pursuant to an effective registration statement covering such shares of Common Stock. Of these Restricted Securities, 835,013 shares of Common Stock are subject to lock-up provisions as described below. See "Shares Eligible for Future Sale" and "Description of Capital Stock." The Company also has reserved or made available for issuance 3,347,685 shares of Common Stock pursuant to various options and warrants to purchase Common Stock and the Company's 1986 Stock Incentive Plan, as amended (the "Plan"), and the conversion of the Convertible Subordinated Notes. Of these reserved shares, 1,009,761 shares, available for issuance pursuant to the Plan, 1,367,924 shares, issuable upon conversion of the Convertible Subordinated Notes, 35,000 shares, issuable pursuant to the exercise of certain warrants to purchase Common Stock, and 675,000 shares, issuable pursuant to the exercise of warrants to purchase Common Stock and a unit option issued in a public offering in February 1991, are covered by currently effective registration statements under the 1933 Act and are therefore freely tradable upon issuance. The remaining 260,000 reserved shares are Restricted Securities that are eligible for resale upon exercise pursuant to Rule 144 or at any time pursuant to an effective registration statement covering such shares of Common Stock. The Company also has reserved, subject to stockholder approval and an increase in the Company's authorized capital stock, (i) 400,000 shares of Common Stock for issuance to the former shareholders of MEF Corp. in connection with the January 1993 acquisition of MEF Corp. and (ii) 200,000 shares of Common Stock for issuance to certain employees of the Company under a stock incentive plan. Of these reserved shares, 971,258 shares of Common Stock issuable under various options and warrants and pursuant to the conversion of the Convertible Subordinated Notes are subject to lock-up provisions as described below. See "Shares Eligible for Future Sale" and "Description of Capital Stock." The Company, its officers and directors and certain stockholders, certain holders of outstanding options and warrants to purchase Common Stock and certain holders of Convertible Subordinated Notes owning or holding options or warrants or conversion rights for an aggregate of 2,635,074 shares of Common Stock, have agreed that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, Common Stock or other capital stock of the Company, or any right to purchase or acquire Common Stock or other capital stock of the Company, for a period of 180 days after the date of this Prospectus, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters. See "Underwriting." No prediction can be made as to the effect, if any, that sales of the Common Stock or the availability of such shares for sale in the public market will have on the market price for the Common Stock prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market under Rule 144 or otherwise could adversely affect prevailing market prices for the Common Stock and impair the ability of the Company to raise capital through the sale of equity securities in the future. See "Shares Eligible for Future Sale." DEPENDENCE UPON KEY PERSONNEL. The ability of the Company to successfully continue its existing financing business, to expand into its targeted markets and to develop its newer businesses depends upon the ability of the Company to retain the services of its key management personnel, including David L. Higgins, the Company's Chief Executive Officer, and Michael A. O'Hanlon, the Company's President and Chief Operating Officer. The loss of any of these individuals or an inability to attract and maintain additional qualified personnel could adversely affect the Company. There can be no assurance that the Company will be able to retain its existing management personnel or to attract additional qualified personnel. See "Management."

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+RISK FACTORS Prospective investors should carefully read the entire Prospectus (including the Commodity Futures Trading Commission Risk Disclosure Statement and the CFTC Risk Disclosure Statement: Foreign Futures and Foreign Options) and carefully consider the following risks before subscribing for Units. Since the commodity markets involve substantial risks, an investment in the Units should be made only after consulting with independent qualified sources of investment and tax advice. Among the risks involved are the following: THE COMMODITY FUTURES MARKETS (1) COMMODITY INTEREST TRADING IS VOLATILE. A principal risk in commodity futures trading is the volatility (price fluctuation) in the market prices of commodities. The prices of commodities fluctuate rapidly and over wide ranges. The profitability of the Fund will depend on identifying trends in fluctuations in market prices. Prices of commodity futures contracts are affected by a wide variety of complex and hard to predict factors, such as supply and demand of a particular commodity, weather and climate conditions, governmental activities and regulations, political and economic events and prevailing psychological characteristics of the marketplace. See "Description of Commodity Trading--Commodity Prices" and "The Trading Advisors." (2) COMMODITY FUTURES TRADING IS HIGHLY LEVERAGED. Commodity futures contracts are traded on margins which typically range from 1% to 20% of the value of the contract. The average margin is less than 10% of the value of the contract. The low margin deposits normally required in commodity futures trading permit an extremely high degree of leverage. A relatively small price movement in a commodity futures contract may result in immediate and substantial loss to the investor. Like other leveraged investments, a commodity futures transaction may result in losses in excess of the amount invested. If the Fund invests a substantial amount of its assets in a losing commodity futures trade, a substantial reduction in the value of a Unit would result. Although the Fund may lose more than its initial margin on a trade, the Fund, and not the Limited Partners personally, will be subject to margin calls. See "Description of Commodity Trading--Margins." (3) COMMODITY FUTURES MARKETS MAY BE ILLIQUID. It is not always possible to execute a buy or sell order at the desired price, or to close out an open position, due to market conditions, limits on open positions and/or daily price fluctuation limits (see "Glossary") imposed by both U.S. and non-U.S. exchanges and approved by the Commodity Futures Trading Commission ("CFTC"). Daily price fluctuation limits establish the maximum amount the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the trading session. Once the market price of a commodity futures contract reaches its daily price fluctuation limit, positions in the commodity can be neither taken nor liquidated unless traders are willing to effect trades at or within the limit. Because these limits only govern price movements for a particular trading day, they do not limit losses. In certain commodities, the daily price fluctuation limits may apply throughout the life of a contract, so that the holder of a contract who cannot liquidate his or her position by the end of trading on the last trading day for that contract may be required to make or take delivery of the commodity. Another instance of difficult or impossible execution occurs in markets which lack sufficient trading liquidity. It is also possible for an exchange or the CFTC to suspend trading in a particular contract, order immediate settlement of a particular contract, or direct that trading in a particular contract be conducted for liquidation only. For example, during periods in October 1987 trading in certain stock index futures was too illiquid for markets to function properly and was at one point suspended. Although the Fund's Trading Advisors intend to purchase and sell actively traded commodities, no assurance can be given that such markets will be or remain liquid, or that Fund orders will be executed at or near the desired prices. See "Trading Policies." (4) PERIODS OF UNPROFITABLE TRADING. Losses were posted to the Fund in 1994 (-6.93%) and 1992 (-3.47%). Total return for the three calendar years 1992, 1993 and 1994 was 28.74% and 56.88% for the past five years. A hypothetical $1,000 Net Asset Value per Unit of the Fund, available at the beginning of each of those three years would have lost $34.70 in 1992, gained $383.20 in 1993, and lost $69.30 in 1994. (5) SPECIFIC RISKS OF TRADING IN OPTIONS ON COMMODITY FUTURES. The Fund engages in trading options on commodity futures. No specific limitation on the percentage or amount of such contracts, if any, engaged in by the Fund has been imposed. The Trading Advisors have significantly less experience in trading options on futures than they have in trading futures contracts. See "The Trading Advisors." Although successful trading in options on futures contracts requires many of the same skills required for successful futures trading, the risks involved are somewhat different. Options trading may be restricted in the event that trading in the underlying futures contract becomes restricted, and options trading may itself by illiquid at times, irrespective of the condition of the market in the IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- underlying futures contract, making it difficult to offset option positions. As of the date of this Prospectus trading in foreign options is subject to approval of foreign options by the CFTC on a case-by-case basis. The Fund will trade only in options, including foreign options, to purchase or sell commodity futures contracts or physical commodities, if such options have been approved for trading on a designated contract market by the CFTC. (6) FORWARD CONTRACTS ON FOREIGN CURRENCIES ARE NOT TRADED ON EXCHANGES AND LACK REGULATORY PROTECTIONS OF EXCHANGES. The Fund engages in the trading of forward contracts on foreign currencies pursuant to the direction of the Trading Advisors for customer accounts. No specific limitation on the percentage or amount of such contracts, if any, engaged in by the Fund has been imposed. See "Description of Commodity Trading--Commodity Markets." A forward contract is a contractual obligation to purchase or sell a specified quantity of a commodity at a specified date in the future at a specified price and, therefore, is similar to a futures contract. However, forward contracts are not traded on exchanges and, as a consequence, investors in forward contracts are not afforded the regulatory protections of such exchanges or the CFTC; rather banks and dealers act as principals in such markets. Neither the CFTC nor banking authorities regulate trading in forward contracts on currencies, and foreign banks may not be regulated by any United States governmental agency. There are no limitations on daily price moves in forward contracts. In addition, speculative position limits are not applicable to forward contract trading, although the principals with which the Fund may deal in the forward markets may limit the positions available to the Fund as a consequence of credit considerations. The principals who deal in the forward contract markets are not required to continue to make markets in the forward contracts they trade. There have been periods during which certain participants in forward markets have refused to quote prices for forward contracts or have quoted prices with an unusually wide spread between the price at which they are prepared to buy and that at which they are prepared to sell. In addition, the imposition of exchange and credit controls or the fixing of currency exchange rates by governmental authorities might limit forward trading to less than that which a Trading Advisor would otherwise direct for the Fund. Not only are the forward markets substantially unregulated, but it is also possible that the CFTC or certain other governmental agencies may in the future attempt to prevent the Fund from trading in the forward markets. CIS Financial Services, Inc. ("CISFS"), will act as the forward contract broker for the Fund and will arrange for the Fund to contract with one or more banks as a direct counterparty of the Fund in order to make or take future delivery of a specified lot of a particular currency. CISFS will guarantee the obligations of the Fund for which it acts as Broker through lines of credit it has established with the counterparty bank(s). The Fund initially expects to engage in transactions in foreign exchange contracts with only one bank. However, more banks may be added as counterparties in the future. Forward contracts will be transacted only with banks having in excess of $100,000,000 of capitalization. See "Trading Policies," "Risk Factors--Failure of Brokerage Firms," "Charges to the Fund," and "Brokerage Arrangements." Because performance of forward contracts on currencies and other commodities are not guaranteed by any exchange or clearinghouse, the Fund will be subject to the risk of the inability or refusal on the part of the bank to perform with respect to such contracts on the part of the principals or agents with or through which the Fund trades. Any such failure or refusal, whether due to insolvency, bankruptcy or other causes, could subject the Fund to substantial losses. The Fund will not be excused from the performance of any forward contracts into which it has entered due to the default of third parties or CISFS in respect of other forward trades which in a Trading Advisor's trading strategy were to have substantially offset such contracts. However, the Fund will only transact foreign exchange contracts with well-capitalized banks as discussed above. It is not possible to predict at this time whether the Fund's activities in the forward markets may be affected as a result of such actions. See "Trading Policies." Certain cases may be interpreted to suggest that entities such as the Fund may not trade in the currency forward markets. Were the Fund to become unable to trade in the forward markets, the prospect of achieving its investment objectives would be materially adversely affected. (7) CONTRACTS OFFERED ON FOREIGN EXCHANGES SUBJECT TO DIFFERENT REGULATIONS AND TRADING PRACTICES. The Fund engages in the trading of contracts on foreign exchanges. Futures exchanges are being established in many countries, particularly throughout Europe and Asia, and trading on those markets constitutes a steadily increasing share of total worldwide volume in futures trading. In some cases, the types of contracts traded on these exchanges resemble those traded on U.S. futures exchanges, but in many other instances there are no comparable U.S. contracts. Foreign exchanges are not regulated by the CFTC or any other United States governmental agency. Therefore, options and futures trading on any such exchange may be subject to more risks than trading options and futures contracts on exchanges in the United States. For example, some foreign markets, in contrast to United States exchanges, are "principals' markets" similar to the forward markets in which performance is the IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- responsibility only of the individual member with whom the trader has entered into a contract and not of any exchange or clearing corporation. Due to the absence of a clearing house system on certain foreign markets, such markets are significantly more susceptible to disruptions than are United States exchanges. Moreover, the Fund is subject to whatever regulatory provisions are applicable to transactions effected outside the United States, whether on foreign exchanges or otherwise. Trading on foreign exchanges involves the additional risks of expropriation, burdensome or confiscatory taxation, moratoriums, exchange and investment controls or political or diplomatic events which might adversely affect the Fund's trading activities. In trading on these exchanges, the Fund will also be subject to the risk of changes in the exchange rates between the U.S. Dollar and the currencies in which foreign contracts are margined and settled. Although the CFTC is prohibited by statute from promulgating rules which govern in any respect any rule, contract term or action of any foreign commodity exchange, the CFTC has adopted rules to regulate the sale of foreign futures contracts and foreign options within the United States. These regulations may restrict the Fund's access to foreign markets by limiting the activities of certain participants in such markets with whom the Fund could otherwise have traded. See "CFTC Risk Disclosure Statement: Foreign Futures and Foreign Options." CHARGES (8) THE FUND PAYS SUBSTANTIAL FEES, COMMISSIONS AND EXPENSES WHICH COULD DEPLETE ITS ASSETS. See "Conflicts of Interest--Relationship of the General Partners, the Introducing Broker, the Clearing Broker, and the Foreign Currency Broker," on page 30. MANAGEMENT AND INCENTIVE FEES. John W. Henry & Co., Inc. receives a quarterly incentive fee of 15% of the Fund's Trading Profits attributable to trading directed by it. Sabre Fund Management Limited receives a quarterly incentive fee of 18% of the Fund's Trading Profits attributable to trading directed by it. In addition, John W. Henry & Co., Inc. receives a monthly management fee of 1/3 of 1% of the Fund's Net Asset Value subject to its management at month's end. Sabre Fund Management Limited receives a monthly management fee equal to 1/4 of 1% of the Fund's Net Asset Value subject to its management at month's end. BROKERAGE FEES. Beginning the first business day of the month after the initial closing of this offering, the Fund pays brokerage commissions of $35 per round turn trade (plus NFA, exchange and clearing fees), of which $15 is paid to the Fund's Clearing Broker and $20 is paid to the Fund's Introducing Broker. Until that time, the Fund has paid commissions of $50 per round turn trade, plus the fees mentioned above. There is no method to predict accurately the amount of brokerage commissions which the Fund may pay because those commissions will be entirely dependent on the volume of trading by the Fund and the commission rates charged to the Fund from time to time. The Fund has paid brokerage commissions, on an annual basis, of approximately 3.2%-6.2% of the Fund's Net Asset Value. Based on currently anticipated commission rates, the General Partners estimate that brokerage commissions, on an annual basis, will approximate an amount in the lower end of the historical range. Actual charges may differ substantially from the historical range and this estimate, and will be determined by trading opportunities perceived by the Trading Advisors. ADMINISTRATIVE FEE. Each of the General Partners receives from the Fund an annual administrative fee based on the Fund's Net Asset Value on the first business day of each fiscal year of the Fund. The annual administrative fee payable to IDS Futures is 1.125% of Fund's beginning Net Asset Value for each fiscal year, and the annual administrative fee payable to CISI is 0.25% of the Fund's beginning Net Asset Value for each fiscal year. BREAKEVEN POINT. THE FUND IS OBLIGATED TO PAY BROKERAGE COMMISSIONS AND CERTAIN CHARGES INCIDENTAL TO TRADING, AS WELL AS THE GENERAL PARTNERS' ADMINISTRATIVE FEES, THE TRADING ADVISORS' MANAGEMENT FEES, AND LEGAL, ACCOUNTING, AUDITING, PRINTING, RECORDING AND FILING FEES, POSTAGE CHARGES, AND ANY EXTRAORDINARY EXPENSES REGARDLESS OF WHETHER THE FUND REALIZES PROFITS. THESE PAYMENTS MAY CAUSE THE FUND TO TERMINATE. THE FUND WILL BE REQUIRED TO MAKE TRADING PROFITS OF A VERY SUBSTANTIAL MAGNITUDE TO AVOID DEPLETION OR EXHAUSTION OF ITS ASSETS FROM THE AGGREGATE OF THESE CHARGES. SEE "CHARGES TO THE FUND--ESTIMATE OF THE FUND'S BREAKEVEN POINT." For example, if the Fund's Net Asset Value (as defined under "Charges to the Fund--Certain Definitions") declines to less than $500,000 as of the close of business on any trading day, the Fund will terminate. See "Amended and Restated Limited Partnership Agreement--Termination of Fund" and Exhibit A attached hereto. Quarterly incentive fees payable to the Trading Advisors are based upon, among other things, unrealized appreciation on open commodity positions, and any such fees paid to the Trading Advisors will be retained by them even if the Fund subsequently experiences losses. Such appreciation may never be realized by the Fund. In addition, because the incentive fee is determined on a quarterly rather than an annual IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- basis, the Fund may pay substantial incentive fees to the Trading Advisors during portions of the Fund's fiscal year even though subsequent losses result in a yearly net loss for the Fund. Moreover, because incentive fees payable to each Trading Advisor are calculated separately, it is possible that one Trading Advisor may receive incentive fees in respect of Trading Profits achieved on the assets managed by it during a quarter in which the other Trading Advisor experiences losses on the assets that it manages which are greater than the profits earned by the funds under management by the Trading Advisor receiving fees. Thus, it is possible that incentive fees could be payable during a quarter in which the Net Asset Value per Unit actually has declined. The Clearing Broker receives a significant benefit from a portion of the interest generated by the Fund's assets. See "Use of Proceeds." (9) INCENTIVE FEE PAYMENTS PER UNIT WILL NOT MATCH PERFORMANCE PER UNIT EXACTLY. The incentive fees payable to the Trading Advisors accrue monthly and are payable quarterly, based on the increase in Net Asset Value of the funds under management of each Trading Advisor, subject to certain adjustments related to interest realized on those funds, distributions or redemptions, and allocations or reallocations. See "Charges to the Fund--Description of Charges to the Fund" and "Charges to the Fund--Certain Definitions." Whenever an incentive fee is payable to one or more of the Trading Advisors, each outstanding Unit owned by a Limited Partner will pay a proportionate amount of such incentive fee. This method of calculating and paying incentive fees, while requiring each outstanding Unit to contribute equally to payment of such fees, nonetheless creates a distortion in that not every outstanding Unit is likely to have participated equally in the gains which give rise to an incentive fee payment to a Trading Advisor. This is because Units will be sold to Limited Partners at prices per Unit which are likely to vary depending upon the time when particular Limited Partners purchase their Units and are admitted to the Fund and the trading experience of the Fund. See the Notes to the cover page of this Prospectus. The Fund as a whole may be required to pay incentive fees to one or more Trading Advisors even though the value of particular Units has remained the same or even declined since they were purchased. On the other hand, a Limited Partner could purchase Units which experience an increase in value although the Fund as a whole has not experienced any Trading Profits during that period of time and consequently pays no incentive fee. The extent of such distortions will depend on a variety of factors including, but not limited to, the time at which particular Limited Partners are admitted to the Fund, the prices at which Units are sold at such times, the timing of the Fund's trading profits and losses, and the magnitude of such admissions, profits and losses and the profitability of trading directed by each Trading Advisor. Therefore, the amounts paid in incentive fees attributable to certain Units may, from time to time, vary from the specific trading performance (participation in profit or loss) experienced by those Units. If an alternative method of calculating incentive fees were to be employed by the Fund that matched the trading experience of Units to the incentive fee contribution of Units, the amounts payable by Limited Partners in incentive fees with respect to their Units would vary from those payable under the method that the Fund will employ. In addition, if Units are purchased at a Net Asset Value per Unit which reflects an accrued but unpaid incentive fee on unrealized Trading Profits recognized as of such date, and such accrual is subsequently reversed in whole or in part due to trading losses by the end of the current calendar quarter, the reversal of the accrued incentive fee will be credited to all Units equally, including the Units purchased at a Net Asset Value per Unit which already fully reflected such accrual. This will result in the Net Asset Value per Unit of previously outstanding Units being lower than it would have been had no new Units been purchased at a price reflecting an accrued incentive fee, because the "unaccrual" of the incentive fee resulting from the losses subsequent to the date of such purchase would otherwise have accrued to the exclusive benefit of the previously outstanding Units, not such Units plus the Units more recently purchased. TRADING ADVISORS (10) RELIANCE ON TRADING ADVISORS FOR PROFITABLE PERFORMANCE. TRADING METHODS. The Fund has a contract with the Trading Advisors ("Advisory Contract") pursuant to which the Fund's commodity accounts will be managed, subject to rights of earlier extension and termination, until June 30, 1995 by the Trading Advisors in accordance with their respective trading methods, subject to the automatic right of the General Partners to renew for an additional one-year period. Each Trading Advisor will direct trading for the Fund completely independently of the other Trading Advisor, and will have no knowledge of trading decisions being made by the other Trading Advisor. No assurance can be given that the trading techniques and strategies of either Trading Advisor will be profitable in the future, or that the services of any Trading Advisor will continue to be available to the Fund. The specific details of the Trading Advisors' respective trading methods are proprietary; consequently, the Limited Partners will not be able to determine the full details of those methods or whether those methods as described herein (see "The Trading Advisors") and which generated the performance results included under "The Trading Advisors--Past Performance of the Trading Advisors" are being followed. IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- Subject to the Fund's trading policies, each Trading Advisor may alter its trading methods if it determines that such a change is in the best interest of the Fund. Each Trading Advisor has agreed to notify the General Partners of any such changes which it considers to be material. See "The Trading Advisors." If the General Partners are so notified of a material change in an advisor's trading methods, they will so notify the Limited Partners in the monthly report to the Limited Partners. The past performance displayed for the Trading Advisors is not necessarily indicative of future performance. The selection of Trading Advisors, and the decision to continue use of a particular Trading Advisor, was based on their performance records to date. It should not be assumed that trading performed by the Trading Advisors in the future will be profitable or will have results comparable to past performance. CONFLICTS OF INTEREST. From time to time, the Trading Advisors (or their affiliates) will manage additional accounts, and these accounts (see "Conflicts of Interest--Other Commodity Pools and Accounts"), together with that of the Fund, will increase the level of competition for the same trades desired by the Fund, including the priorities of order entry. There is no specific limit imposed by the Advisory Contract between the Fund and the Trading Advisors as to the number of accounts they (or their affiliates) may manage. In addition, the positions of all of the accounts owned or controlled by each of the Trading Advisors or their affiliates are aggregated for the purposes of applying speculative position limits (see "Glossary" and "Risk Factors--Effects of Speculative Position Limits"), and such aggregation might limit the number of contracts which can be traded or held by the Fund pursuant to the direction of a Trading Advisor whose trading approaches such limits. In fulfilling their responsibilities to the Fund, the General Partners have required that the Advisory Contract provide for notice to the General Partners by a Trading Advisor when the Fund's positions are first included in an aggregate amount which equals ninety percent (90%) of the applicable speculative limit and will promptly respond thereafter to requests from the General Partners with respect to the percentage of the applicable speculative limit reflected by the aggregate positions owned or controlled by any Trading Advisor or any of its principals, employees or agents. The Advisory Contract also provides for the right of the General Partners to inspect each of the Trading Advisor's trading records for the purpose of confirming that the Fund is being treated equitably by that Trading Advisor with respect to modifications of trading strategy resulting from such limits, as well as with respect to the assignment of priorities of order entry to that Trading Advisor's accounts. Each Trading Advisor may, in directing trading for other accounts, employ trading programs different from those employed in connection with the Fund's trading. The performance of such other trading programs may be more successful than the performance of programs employed in connection with the Fund's trading. See also "Risk Factors--Multiple Trading Advisors." LIMITATION OF LIABILITY AND INDEMNIFICATION FOR TRADING ADVISORS. The Trading Advisors, their principals and employees will not be liable to the Fund, the Limited Partners, any of their successors or assigns or the General Partners except by reason of acts or omissions in contravention of the express terms of the Advisory Contract or due to misconduct or negligence or for not having acted in good faith in the reasonable belief that its actions were taken in, or not opposed to, the best interests of the Fund. The Fund will indemnify each Trading Advisor, its principals and employees to the full extent permitted by law for any liability incurred in connection with any acts or omissions related to the Trading Advisor's management of Fund assets, provided that there has been no judicial determination that such liability was the result of negligence, misconduct or breach of the Advisory Contract nor any judicial determination that the conduct which was the basis for such liability was not done in a good faith belief that it was in, or not opposed to, the best interests of the Fund. Any such indemnification involving a material amount, unless ordered or expressly permitted by a court, will be made by the Fund only upon the opinion of mutually acceptable independent legal counsel that the Trading Advisor has met the applicable standard of conduct described above. CHANGE IN PRINCIPALS AND ADVISORS. Each Trading Advisor is dependent on the services of its respective principals. If the services of such principals were not available to a Trading Advisor, or were interrupted, the continued ability of that Trading Advisor to render services to clients would be subject to substantial uncertainty, and such services of the Trading Advisor could be terminated completely. If the Advisory Contract is terminated with respect to one or more Trading Advisors, the General Partner would be required to make other arrangements for providing advisory services if the Fund intends to continue trading. No assurance can be given that the Trading Advisors' services will be available to the Fund following the expiration of the current Advisory Contract or that the Trading Advisors' services may not be earlier terminated. See "The Trading Advisors--The Advisory Contract." Upon termination of a Trading Advisor, the General Partners may direct liquidation of all positions established by the terminated Trading Advisor prior to commencement of trading IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- directed by another trading advisor with respect to those assets. If any new trading advisors were to be retained by the Fund, fee arrangements which differ substantially from those established with the Trading Advisors may be implemented. (11) TRADING DECISIONS BASED ON TECHNICAL ANALYSIS DO NOT CONSIDER FUNDAMENTAL TYPES OF DATA AND REQUIRE PRICE TRENDS TO BE PROFITABLE. In general, the Trading Advisors use, and any additional advisors which the Fund may select in the future may use, trend-following systems based on mathematical analysis of certain technical data regarding past market performance. See "The Trading Advisors." These trend-following systems do not generally take into account fundamental external factors, except insofar as such factors may influence the technical data constituting input information for the trading system. Fundamental factors include, among others, factors that affect the supply and demand of the underlying commodity, interest rates, government intervention, exchange controls and political stability. Technical systems may be unable to respond to fundamental causative events until after their impact has ceased to influence the market. Causative factors include, among others, the daily, weekly and monthly price fluctuations, volume variations and changes in open interest. The profitability of any diversified technical trading system depends upon major price moves or trends in some commodities which can be interpreted by the system as price trends sufficient to dictate an entry or exit decision. In the past there have been periods when no commodity has experienced any major price movements or when price movements have been erratic or ill-defined, and such periods are likely to recur in the future. The best technical trading system will not be profitable if there are no trends of the kind it seeks to follow. Any factor which would make it more difficult to execute trades at a system's signal prices, such as a significant lessening of liquidity in a particular market, would also be detrimental to profitability. Trend-following technical systems may produce profitable results for a period of time, after which further application of such systems to the technical input data fails to detect correctly any future price movements. For this reason, commodity trading advisors utilizing such systems may modify and alter their systems on a periodic basis. Such systems (including the Trading Advisors') may also be modified and altered for application to accounts of different sizes. Furthermore, government control of or intervention in the markets traded may lessen the prospect of sustained price moves. A number of markets traded by the Fund may be targets for governmental intervention. The use of technical trading systems by professional advisors has been increasing as a proportion of overall volume of the markets as a whole, and for certain commodities in particular. This could result in several advisors attempting simultaneously (because of the availability of the same current market information) to initiate or liquidate substantial positions in any market at or about the same time as either or both of the Trading Advisors, or otherwise cause an alteration of historical trading patterns or affect the execution of trades to the significant detriment of the Fund. (12) LEVERAGE ADJUSTMENTS TO SABRE FUND MANAGEMENT, LTD.'S TRADING METHODS AFFECTS PERFORMANCE VOLATILITY. In September 1992, in an effort to increase the rates of return historically achieved by Sabre Fund Management, Ltd. ("Sabre"), the General Partners agreed with the recommendation of Sabre that it increase the leverage used in its trading by 50%. By increasing the leverage at which Sabre trades for the Fund, the General Partner intended to provide Sabre the potential to achieve rates of return more comparable to those ordinarily expected from a speculative trading approach, although there can be, of course, no assurance that increasing the leverage at which Sabre trades will have such a result. Increasing the leverage at which Sabre will trade can, however, be expected to increase volatility of the performance of Sabre by increasing both trading profits and losses. There can be no assurance as to the effect which such leverage adjustments may have on the performance of Sabre or of the Fund. This leverage increase is still in effect as of the date of this Prospectus. (13) PERIODS WITHOUT DISCERNIBLE PRICE TRENDS MAKE PROFITABLE TRADING DIFFICULT. There can be no assurance that any trading strategies will produce profitable results. The past performance of an advisor's trading strategies is not necessarily indicative of future profitability, and the best trading strategies, whether based on technical or fundamental analysis, will not be profitable if there are no trends of the kind they seek to follow. The profitability of any technical or fundamental trading strategy depends upon significant price moves or trends in at least some commodities. In the past there have been periods without discernible trends and presumably similar periods will occur in the future. Any factor which reduces the occurrence of major trends may reduce the prospect that any trading strategy will be profitable. For this reason, commodity trading advisors may modify or alter their trading methods on a periodic basis. Subject to the trading limitations described under "Trading Policies," a Trading Advisor may alter its trading methods, upon written notice to the General Partners of any material change in such trading methods, if a Trading Advisor determines that such change is in the best interests of the Fund. Changes in commodity interests traded shall not be deemed material changes in trading methods. The trading methods to be IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- utilized by the Trading Advisors are generally proprietary and confidential, and Limited Partners will not be notified of changes in commodity interests traded or modifications, additions or deletions to the Trading Advisors' trading methods. See "The Trading Advisors." (14) OTHER CLIENTS OF THE TRADING ADVISORS MAY COMPETE FOR SAME TRADES AND POSITIONS. Each Trading Advisor may manage other accounts, including other publicly offered pools and accounts in which the Trading Advisor or its principals may have an interest, which could increase the level of competition for the same trades the Fund might otherwise make, including order execution and availability of speculative position limits. Each Trading Advisor has represented that it will not knowingly or deliberately employ a trading strategy on behalf of the Fund which is inferior to any strategy which it employs for other accounts, or otherwise favor on an overall basis any other account managed by them over the Fund. Each Trading Advisor and its principals, however, may employ trading methods, policies and strategies which differ from those employed on behalf of the Fund in circumstances which differ from those under which the Fund operates. Further, each Trading Advisor may be restricted in the positions it can take on behalf of the Fund due to positions taken for such Trading Advisor's own account or its customer. Therefore, the results of the Fund's trading may differ from those of the other accounts concurrently managed by the Trading Advisors. See "The Trading Advisors." (15) MULTIPLE TRADING ADVISORS MAY NOT INCREASE PROTECTION AGAINST LOSSES OR PRODUCE MORE PROFITABLE TRADING. The Fund has retained two independent Trading Advisors to attempt to achieve substantial protection against major losses without sacrificing the ability to capitalize on profitable trends through diversification. In addition, the Fund may in the future retain the services of one or more additional Trading Advisors. In fact, the diversification of trading approaches among the Trading Advisors may have the opposite result. There is no assurance that the use of multiple trading approaches will not effectively result in losses by one Trading Advisor which offset or exceed any profits achieved by the other Trading Advisor. Accordingly, there is no assurance that the use of two Trading Advisors will be any more successful than the retention of one Trading Advisor. Because the Trading Advisors will trade independently of each other, the Fund could hold opposite positions pursuant to the directions of each Trading Advisor, and could simultaneously buy and sell the same futures contract, thereby incurring commission and transaction fee costs with no net change in its holdings. Conversely, the Trading Advisors may at times enter identical orders and therefore compete for the same positions. This competition could prevent the orders from being executed at the desired price or prevent execution altogether. The past performance of the Trading Advisors does not reflect the impact these factors may have on the Fund's overall performance. In addition, although margin requirements applicable to trading directed by each Trading Advisor will ordinarily be met from the Fund assets allocated to it, a Trading Advisor could incur losses that would make it unable to meet margin calls from those assets. In this event, the General Partners may require contributions and liquidations from the assets allocated to the other Trading Advisor. This could adversely affect the trading strategy of that other Trading Advisor. Moreover, because incentive fees payable to each Trading Advisor are calculated separately, it is possible that one Trading Advisor may receive incentive fees in respect of Trading Profits achieved on the assets managed by it during a quarter in which the other Trading Advisor experiences losses on the assets that it manages which are greater than the profits earned by the funds under management by the Trading Advisor receiving fees. Thus, it is possible that incentive fees could be payable during a quarter in which the Net Asset Value per Unit actually has declined. The effect might be to deplete the Fund assets by the amount of incentive fees paid during periods when the loss incurred by one Trading Advisor outweighs the profits recognized by the other Trading Advisor. (16) SPECULATIVE POSITION LIMITS MAY LIMIT POSITIONS TAKEN BY FUND. The CFTC and domestic exchanges have established speculative position limits ("position limits") on the maximum net long or short futures position which any person, or group of persons acting in concert, may hold or control in particular futures contracts or options on futures traded on U.S. commodity exchanges. The CFTC has adopted a rule which requires commodity exchanges to impose speculative position limits on all commodities traded on the exchange (with the exception of certain commodities subject to speculative position limits established by the CFTC). All commodity accounts owned or controlled by each Trading Advisor and its affiliates are combined for position limit purposes. With respect to futures trading in commodities subject to such limits, a Trading Advisor may thus be required to reduce the size of the futures positions which would otherwise be taken for the Fund in such commodities and not trade futures in certain of such commodities in order to avoid exceeding such limits. Such modification of trades of the Fund, if required, could adversely affect the operations and profitability of the Fund. See "Description of Commodity Trading--Regulation." If such limits are exceeded, a Trading Advisor will be compelled to liquidate positions in each of its clients' trading accounts, including the Fund's, on a pro rata basis in accordance with the amount of equity in each such account. While each Trading Advisor believes that the speculative position limits will not IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- adversely affect the trading directed by it, it is possible that from time to time the trading approach or instructions of an advisor may have to be modified and that positions held by the Fund may have to be liquidated to avoid exceeding such limits. Such modification or liquidation, if required, could adversely affect the operations and profitability of the Fund. In addition, the speculative position limits will apply on an aggregate basis to all positions held by the Fund. (17) NEW ADVISORS MAY BE RETAINED WITHOUT NOTICE TO, OR APPROVAL BY, LIMITED PARTNERS. Upon termination of a Trading Advisor, the General Partners may direct liquidation of all positions established by such Trading Advisor prior to commencement of trading directed by another trading advisor with respect to those assets. Any additional and replacement trading advisors would be selected by the General Partners without prior notice to, or approval from, Limited Partners who would not have the opportunity to review their performance records and the terms of their agreements with the Fund prior to their selection. Pursuant to the Amended and Restated Limited Partnership Agreement, the General Partners are authorized to enter into advisory contracts with new advisors on terms and conditions as they, in their sole discretion, deem to be in the best interests of the Fund. If an advisor were to be designated following a decline in the Fund's assets, that advisor might (depending upon the compensation arrangements negotiated with the General Partners) receive an incentive fee based on any subsequent trading profits despite the fact that those trading profits do not exceed trading losses incurred by previous or existing advisors or by the Fund as a whole. (18) EXCHANGE FOR PHYSICALS MAY NOT ALWAYS BE PERMITTED. The Trading Advisors may engage in exchange for physicals for the Fund's accounts. See "Glossary." If the Trading Advisors were to be prevented from making use of this trading technique for the Fund, due to changes in applicable regulations, the trading performance of the Fund could be adversely affected. (19) INCREASING THE ASSETS TRADED BY THE TRADING ADVISORS MAY HAVE POSSIBLE ADVERSE EFFECTS. Commodity trading advisors are limited in the amount of assets that they can successfully manage, both by the difficulty of executing substantially larger trades made necessary by the larger amount of equity under management and by the restrictive effect of speculative position limits. Increased equity generally results in a larger demand for the same commodity interest contract positions among the accounts managed by a commodity trading advisor. Furthermore, a number of analysts believe that a trading advisor's rate of return tends to decrease as the amount of equity under management increases. The Trading Advisors have not agreed to limit the amount of additional equity that they may manage, and the assets under management of certain Trading Advisors have increased substantially since the beginning of the Fund's trading and may increase further. There can be no assurance that the Trading Advisors' respective trading systems will not be adversely affected by additional equity, including any additional assets of the Fund. LIMITED PARTNERS AND THE FUND (20) FUND OPERATING HISTORY NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. The Fund began trading on June 16, 1987. The Fund's initial capitalization was $7,372,260. The Net Asset Value per Unit at the commencement of trading on June 16, 1987 was $225.43 and the Net Asset Value per Unit as of April 30, 1995 was $260.14 (which would have been equivalent to $780.42 before the February 28, 1995 3-for-1 split). The average annual rate of return from an investment in the Fund through April 30, 1995 is 15.5%, based on the initial Net Asset Value. Due to the uncertainty of the commodity markets the General Partners' past performance generally and the past performance of the Fund specifically cannot be regarded as an indicator of the Fund's future performance. See "The General Partners--Past Performance of the General Partners" and "The Trading Advisors--Past Performance of the Trading Advisors." In addition, the CFTC has proposed changes in its regulations that would alter the manner of presenting past performance, although not the manner in which it is calculated. (21) GENERAL PARTNERS LIMITED EXPERIENCE AS POOL OPERATORS. CISI and IDS Futures have limited prior experience in operating commodity pools. In addition to operating the Fund since June 16, 1987, CISI currently operates another public commodity pool jointly with IDS Futures. See "The General Partners--Past Performance of the General Partner" and "The General Partners." (22) AUTOMATIC TERMINATION FEATURES COULD TERMINATE FUND. The Units are designed for investors who desire longer term investments. The Fund will terminate on December 31, 2006, and will terminate automatically if the Fund's Net Asset Value decreases below $500,000 at the close of business on any trading day. In addition, the Fund will suspend trading and may terminate if the Net Asset Value per Unit (after adding back any previous distributions from the Fund to the Limited Partners) decreases below $125, after the 3-for-1 split. See "Trading IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- Policies" and "Amended and Restated Limited Partnership Agreement--Termination of Fund" and "Amended and Restated Limited Partnership Agreement--Redemption." However, no assurance can be given that the investor will receive $125 per Unit, or any other specified amount since the impossibility of executing trades under certain conditions, together with the expenses of liquidation, may deplete the Fund's assets below this amount. See "Commodity Futures Markets May Be Illiquid" above. (23) INVESTORS HAVE LIMITED MANAGEMENT RIGHTS. Purchasers of the Units will become Limited Partners in the Fund and, as such, they will be unable to exercise any management functions with respect to its operations. The rights and obligations of the Limited Partners are governed by the provisions of the Delaware Revised Uniform Limited Partnership Act and by the Amended and Restated Limited Partnership Agreement, which provides, in part, that amendments thereto may be proposed by the General Partners or by Limited Partners owning at least 10% of the outstanding Units and will be adopted if approved by the holders of a majority of such Units (not including any Units held by the General Partners or their corporate affiliates, but including any Units held by representatives and employees of the Selling Agent and of its corporate affiliates). See "Amended and Restated Limited Partnership Agreement--Management of Fund" and the Amended and Restated Limited Partnership Agreement attached as Exhibit A. (24) RISK OF SUBSTANTIAL LOSSES AFTER ADMISSION OF NEW LIMITED PARTNERS. The Fund could incur substantial losses shortly after the admission of new Limited Partners. The General Partners could subsequently decide to deleverage trading, alter allocations of assets among the Trading Advisors, or terminate a Trading Advisor, any of which may impair the potential for profit for those Limited Partners. The fixed rate charges to the Fund, paid irrespective of the Fund's profitability, could further exacerbate such losses. (25) LIMITED ABILITY TO LIQUIDATE INVESTMENT IN UNITS. Although a Limited Partner may transfer his or her Units, no market exists for the Units and none is likely to develop. In addition, a transferee of a Unit can only become a substituted Limited Partner with the General Partners' consent. See "Amended and Restated Limited Partnership Agreement--Transfers of Units." Restrictive redemption privileges are provided in the Amended and Restated Limited Partnership Agreement. See "Redemptions." No redemptions are permitted by a subscriber during the first six months after he or she has been first admitted to the Fund. Thereafter, under certain conditions, a Limited Partner may require the Fund to redeem any or all of his or her Units (with the redemption amount designated either in terms of Units or dollars) based on the Net Asset Value per Unit as of the last day of any month on ten (10) days written notice to the General Partners. Accordingly, the Net Asset Value per Unit on the date such notice is given may vary considerably from that on the redemption date. The minimum redemption amount, whether requested in terms of dollars or Units, is the lesser of $500 or the Net Asset Value of two Units, unless the Limited Partner is redeeming his or her entire interest in the Fund. The Units are generally noncallable by the General Partners, but the General Partners have authority under the Fund's Amended and Restated Limited Partnership Agreement to require Limited Partners that are employee benefit plans to withdraw from the Fund under certain conditions. See "Purchases by Employee Benefit Plans--ERISA Considerations." (26) SUBSTANTIAL REDEMPTIONS COULD AFFECT FUND'S TRADING. Substantial redemptions of Units by the Limited Partners within a limited period of time could require the Fund to liquidate positions more rapidly than would otherwise be desirable, which could adversely affect the value of both the Units being redeemed and the outstanding Units. In addition, regardless of the period of time in which redemptions occur, the resulting reduction in the Fund's Net Asset Value could make it more difficult for the Fund to generate Trading Profits or recoup losses due to a reduced equity base. (27) CLAIMS AGAINST LIMITED PARTNERS COULD BE MADE BY FUND. Under certain circumstances, (see "Amended and Restated Limited Partnership Agreement--Nature of The Partnership" and Exhibit A--Amended and Restated Limited Partnership Agreement), a Limited Partner might be required to repay to the Fund a distribution for a period of three years after the distribution was received with the knowledge that the distribution violated Delaware partnership law. (28) EXPIRATION OF THE FUND'S CONTRACTS WITH THE CLEARING BROKER AND TRADING ADVISORS COULD LEAD TO CHANGES IN FUND'S OPERATIONS. The Advisory Contract, as amended, between the Fund and the Trading Advisors has been renewed for a one year period ending June 30, 1995 and is subject to extension by the Fund for an additional one year term. Furthermore, the Advisory Contract is terminable by the Fund or such Trading Advisors upon the occurrence of certain other events. Upon termination of the contract with the Trading Advisors, the General Partners will be required to re-negotiate such contracts or make other arrangements for providing such services if the Fund intends to continue trading. No assurance can be given that upon expiration of the Advisory Contract IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- that the General Partners will be able to retain the existing trading advisors or new trading advisors on the same terms or fee structure as the current Advisory Contract. In addition, no assurance can be given that the services of the Introducing Broker and Clearing Broker will be available after the expiration or termination of the Clearing Brokerage Agreement. If the Fund were to employ new brokers, the brokerage commissions charged might be higher or lower than those currently paid by the Fund. See "The Trading Advisors--The Advisory Contract" and "Brokerage Arrangements." (29) LIMITED NET WORTH OF GENERAL PARTNERS. The General Partners will maintain a minimum net worth as described under the caption "The General Partners--Minimum Investment and Net Worth" and Exhibit A--Amended and Restated Limited Partnership Agreement for as long as they continue as general partners of the Fund. However, investors should recognize that affiliates of the General Partners, including Cargill Investor Services, Inc. and American Express Financial Advisors Inc., have no similar obligations to maintain a minimum net worth in connection with the Fund's operation and that the assets of such affiliates will not be available to discharge obligations of the Fund. (30) POTENTIAL INDEMNIFICATION OBLIGATIONS OF FUND COULD REDUCE ITS NET ASSET VALUE. Under certain circumstances, the Fund might be subject to indemnification obligations with respect to the General Partners, the Trading Advisors, the Clearing Broker, the Selling Agent, the Escrow Agent and related parties. The Fund will not carry any insurance to cover any obligations and none of the foregoing parties will be insured for losses for which the Fund has agreed to indemnify them. Any indemnification paid by the Fund would reduce the Fund's Net Asset Value. (31) MONTHLY ACCOUNT STATEMENT PROVIDED AFTER SUBSCRIPTION. CFTC Regulation 4.21(f) requires that a copy of the Fund's latest monthly account statement be attached to this disclosure document when used to solicit prospective investors. However, due to the unnecessary administrative burden that exact compliance with Regulation 4.21(f) would create, the Fund has proposed, and the CFTC has accepted, an alternative solution. Prospective investors will be furnished the Fund's latest monthly account statement immediately following receipt of their subscriptions by the Selling Agent. In addition to receiving the latest monthly account statement, each prospective investor will be provided with an address and phone number to contact within 16 days from the date of the mailing of the account statement and confirmation by the Selling Agent if the investor wishes to rescind his/her subscription. CONFLICTS (32) CONFLICTS OF INTEREST EXIST FROM RELATIONSHIPS AMONG FUND'S SERVICE PROVIDERS. There exist inherent and potential conflicts of interest in the operation of the Fund's business. See "Conflicts of Interest." These include (i) the conflict between the duty of the General Partners to monitor the Trading Advisors' trading volume and the financial advantage to the Introducing Broker, an affiliate of IDS Futures, and to the Clearing Broker, an affiliate of CISI, in the event of substantial trading by the Trading Advisors and (ii) the competition with the Fund by affiliates of the General Partners and the Fund's Introducing Broker and Clearing Broker, by the Trading Advisors, and by customers (including other commodity pools) of the foregoing entities in connection with the execution of similar commodity transactions. (33) LACK OF INDEPENDENT INVESTIGATION OF FUND'S STRUCTURE BY SELLING AGENT. American Express Financial Advisors Inc., the Selling Agent for the Fund, is an affiliate of IDS Futures, one of the Fund's General Partners. Accordingly, no independent investigation of the Fund's structure and operations has been undertaken by the Selling Agent. In addition, the Fund, the Selling Agent, the General Partners, and one of the Fund's Trading Advisors are represented by the same counsel. TAXATION (34) TAX LAWS SUBJECT TO CHANGE. It is possible that the current federal income tax treatment accorded an investment in the Fund will be modified by legislative, administrative or judicial action in the future. The nature of future changes in federal income tax law, if any, cannot be determined prior to enactment of any new tax legislation. However, such legislation could significantly alter the tax consequences and decrease the after-tax rate of return of an investment in the Fund. In addition, regulations are expected to be promulgated which will implement or clarify provisions of recent tax law changes. Any such change may or may not be retroactive. Potential limited partners should seek, and must rely on, the advice of their own tax advisors with respect to the possible impact on their investments of federal and state tax law and any future proposed tax legislation or administrative or judicial action. See "Federal Income Tax Considerations." IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- (35) DEDUCTIBILITY OF PARTNERSHIP EXPENSES MAY BE LIMITED. The Tax Reform Act of 1986 imposes limitations on the deductibility of certain miscellaneous itemized deductions. Such deductions, including, for example, investment advisory fees, are only deductible to the extent they exceed two (2) percent of the taxpayer's adjusted gross income. This limitation would not apply to the Fund or to a partner's share of Fund expenses if the Fund were determined to be engaged in the trade or business of trading commodities and its expenses were directly related to its trade or business activities. If, however, the Fund is not engaged in the trade or business of trading commodities or its expenses are not related to its trade or business activities, then such expenses would instead "flow through" to Fund partners and each partner would only be able to deduct his or her share of these expenses to the extent they, together with other miscellaneous itemized deductions of the partner, exceed the two (2) percent floor. See "Federal Income Tax Considerations." (36) POSSIBILITY OF TAXATION AS A CORPORATION WOULD PREVENT PASS-THROUGH OF PROFIT OR LOSS TO INVESTORS. The General Partners have been advised by their counsel, Chapman and Cutler, that, in its opinion, under current federal income tax law and regulations, the Fund will be classified as a partnership and not as an association taxable as a corporation. This status has not been confirmed by a ruling from, and such opinion is not binding upon, the Internal Revenue Service (the "Service"). No such ruling has been or will be requested. The facts and authorities relied upon by counsel in its opinion may change in the future. If the Fund should be taxed as a corporation for federal income tax purposes in any taxable year, income or loss of the Fund would not be passed through to the partners, and the Fund would be subject to tax on its income at the tax rate applicable to corporations. In addition, all or a portion of distributions made to partners could be taxable to the partners as dividend income, and the amount of such distributions would not be deductible by the Fund in computing its taxable income. See "Federal Income Tax Considerations--Partnership Taxation." (37) LIMITED PARTNERS WILL BE TAXED ON INCOME AND PROFITS WHETHER OR NOT DISTRIBUTED. If the Fund has taxable income for a fiscal year, such income will be taxable to the Limited Partners in accordance with their distributive shares of the Fund's income, whether or not such income is distributed to the limited partners. The Amended and Restated Limited Partnership Agreement provides that the General Partners will determine whether and in what amount the Fund will distribute its profits or capital. It is possible that no distributions will be made in some years in which profits are achieved. Accordingly, if there are profits (including unrealized profits), the limited partners will incur tax liabilities, but the limited partners may not receive distributions of cash adequate to pay taxes with respect to such profits. Prospective investors should note further that the Fund might sustain losses after the end of the fiscal year offsetting such realized or unrealized profits, so a limited partner might never receive the profits on which he or she is taxed. However, Limited Partners may, subject to the conditions described under "Redemptions," redeem Units to provide funds for the payment of taxes. (38) BROKERAGE COMMISSIONS TO AMERICAN EXPRESS FINANCIAL ADVISORS INC. MIGHT BE CHARACTERIZED AS NON-DEDUCTIBLE EXPENSE. A portion of the commodity brokerage commissions payable by the Fund to American Express Financial Advisors Inc. as Introducing Broker might be characterized by the Internal Revenue Service as a syndication expense. If so the Fund (and indirectly the Limited Partners) would be required to treat that portion of the commodity brokerage commissions as a non-deductible syndication expense. Over a period of years this amount could be substantial. (39) TAX CONSEQUENCES OF COMMODITY FUTURES AND OPTIONS TRADING DIFFER FROM THOSE FOR OTHER INVESTMENTS. The federal income tax treatment of trading in commodity interests varies significantly from the federal income tax treatment accorded other types of investments. Additionally, the tax consequences of certain transactions that the Fund may enter into are not addressed in the Code or regulations and are uncertain at this time. There is no assurance that the Service will agree with the Fund's tax treatment of such transactions. See "Federal Income Tax Considerations." (40) PARTNERSHIP ALLOCATIONS COULD BE CHALLENGED BY IRS. There can be no assurance that the partnership allocations contained in the Amended and Restated Limited Partnership Agreement will not be challenged by the Service. While it is intended that such allocation provisions comply with applicable U.S. Treasury regulations, the liability of the limited partners could be substantially increased if the allocations were successfully challenged. See "Federal Income Tax Considerations--Allocations of Fund Profits and Losses." REGULATION (41) ABSENCE OF REGULATION APPLICABLE TO SECURITIES MUTUAL FUNDS AND THEIR ADVISORS. The Fund has not registered as a securities investment company, or "Mutual Fund," subject to the extensive regulation by the Securities and Exchange Commission (the "SEC") imposed upon such entities under the Investment Company Act of 1940. In IDS MANAGED FUTURES, L.P. - -------------------------------------------------------------------------------- addition, the Trading Advisors are not registered under the Investment Advisers Act of 1940 (or any similar state law). Investors are, therefore, not afforded the protections provided by those Acts. However, under the Commodity Exchange Act, as amended, the Trading Advisors are each registered as a commodity trading advisor, the General Partners are each registered as a commodity pool operator, the Clearing Broker is registered as a futures commission merchant, the Introducing Broker is registered as an introducing broker, and the Fund is subject to regulation by the CFTC and the NFA. See "Description of Commodity Trading--Regulation." (42) FUTURE REGULATORY CHANGES COULD OCCUR. The futures market, particularly the stock index futures and options markets, could be subject to significant additional regulations as a result of regulatory and Congressional responses to market turbulence in recent years. It is unknown to what extent statutory modifications and/or administrative regulations will be promulgated. In addition, the various exchanges and regulatory bodies are also considering implementing changes in self-imposed regulations. The regulation of commodities and securities transactions in the United States is a rapidly changing area of law and the various regulatory procedures described herein are subject to modification by government action. The effect of any future regulatory change on the Fund is impossible to predict, but could be substantial and adverse. See "Description of Commodity Trading--Regulation."

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+RISK FACTORS THE SECURITIES OFFERED HEREBY INVOLVE SUBSTANTIAL INVESTMENT RISKS. ACCORDINGLY, COMMON STOCK AND WARRANTS SHOULD BE PURCHASED OR EXERCISED AND COMPANY NOTES CONVERTED INTO COMMON STOCK ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. IN EVALUATING AN INVESTMENT IN THE COMPANY AND ITS BUSINESS PRIOR TO PURCHASE, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS. RECENT LOSSES Although the Company had net income of approximately $284,000 for the year ended September, 30, 1994, and $443,000 for the year ended September 30, 1993, the Company reported a net loss of approximately $4,045,000 for the nine-month period ended June 30, 1995, compared with net income of approximately $550,000 for the nine-month period ended June 30, 1994. Approximately $2,703,000 of the losses in the nine-month period ended June 30, 1995 are attributable to losses incurred by Conquest Air (including a cumulative adjustment of $1,916,000) and $775,000 relate to the amortization of debt discounts. The balance of such losses are attributable to adverse trends in the business operated by Wico Corporation (the principal operating subsidiary of the Company). In addition, Wico Corporation had net losses of approximately $741,000 and $1,742,000 for the fiscal years ended September 30, 1992 and September 30, 1991, respectively. There can be no assurance that the Company will operate profitably in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DECREASE IN STOCKHOLDERS' EQUITY; DEFICIT TANGIBLE NET WORTH As of September 30, 1994 (partially as a result of the Wico Merger), the Company's stockholders' equity was approximately $1,614,000. However, due to losses in the nine months ended June 30, 1995, and notwithstanding the receipt of approximately $1,570,000 from the issuance of Common Stock in the third quarter of 1995, stockholders' equity at June 30, 1995 was reduced to approximately $670,000. Although such stockholders' equity increased subsequent to June 30, 1995 as a result of the receipt in July 1995 of an additional $1,180,000 of net proceeds from the sale of 1995 Private Placement Shares, and will further increase upon the issuance of up to 881,631 Creditors Shares in reduction of up to $981,631 of liabilities, there can be no assurance that the Company will not continue to incur significant net losses which would result in future reductions of stockholders' equity. In addition, at June 30, 1995, the Company's tangible net worth (tangible assets less liabilities) was a deficit of approximately $5,500,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Pro Forma Balance Sheet" and "Business - Sale of Conquest Air; 1995 Private Placement; and Settlements with Certain Creditors." SUBSTANTIAL INDEBTEDNESS AND DEFAULTS UNDER PRIOR CREDIT AGREEMENT The Company is subject to substantial indebtedness for money borrowed, including an aggregate of approximately $19.7 million outstanding at October 31, 1995 under a revolving credit facility due September 30, 1998 and a separate senior secured term loan maturing in 2000, and $2.737 million of Private Placement Notes due October 1996. To the extent that the Company is able to exchange such Private Placement Notes for $2.737 million of 12% Exchange Notes, any remaining Private Placement Notes and all newly issued Exchange Notes will be due and payable in full on October 1, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources (Private Placements)" and "Business - -1994 Private Placement." The Company's revolving credit and term loan facilities with institutional lenders are secured by substantially all of the assets of the Company, limited personal guarantees from Stephen R. Feldman, Chairman of the Board of the Company, and Bentley J. Blum, a principal stockholder and director, in the amounts of $1.0 million and $3.0 million, respectively, and by pledges in favor of one of such institutional The Company's publicly traded Common Stock and the Public Warrants are traded on NASDAQ under the symbols "CAIR" and "CAIRW," respectively, and are also listed on the Boston Stock Exchange under the symbols "CAC" and "CACWS," respectively. On November 8, 1995, the last reported sale price for the Common Stock on NASDAQ was $1.1875 per share. The closing sale price for the Public Warrants was $0.25. ADDITIONAL INFORMATION The holders of any: (i) Selling Stockholders' Shares, (ii) 1994 Private Placement Conversion Shares or Preferred Stock Conversion Shares issuable upon conversion of the Private Placement Notes, Series B Preferred Stock or Series E Preferred Stock, or (iii) Warrant Shares issuable upon exercise of the Warrants (collectively, the "Selling Securityholders") are obligated to deliver a current Prospectus on each occasion that sales of their securities are made, whether such sales are made directly by Selling Securityholders or through broker-dealers. Such Prospectus must indicate the name of the beneficial owner(s) of the securities and the aggregate amount of securities being offered. See "Selling Securityholders and Plan of Distribution." The Company has agreed (i) to file, during any period in which offers or sales of securities are being made, a post-effective amendment to the registration statement on Form S-1 under the Securities Act (the "Registration Statement") of which this Prospectus is a part, (ii) to make available a Prospectus to each Selling Securityholder upon request, (iii) to amend such Prospectus from time to time after the date hereof through post-effective amendments to such Registration Statement to reflect any facts or events which individually or in the aggregate, represent a fundamental change in the information set forth in the most recent Prospectus and (iv) to remove from registration by means of a post-effective amendment of the Registration Statement any of the securities which remain unsold at the termination of the offering which is anticipated to occur on or about November 13, 1997 (two years from the Effective Date of this Prospectus). The Selling Securityholders and any broker-dealer that acts in connection with the sale of the securities owned by Selling Securityholders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, and any commission or profit received by a broker-dealer from the purchase or resale of such securities as principals might be deemed to be underwriting discounts and commissions under the Securities Act. The Company and the Selling Securityholders have agreed to mutually indemnify each other under certain conditions. See "Selling Securityholders and Plan of Distribution." The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement with respect to the securities being offered by this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. The Registration Statement and the exhibits and schedules thereto may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company has informed the Selling Securityholders that the anti-manipulative rules under the Securities Exchange Act of 1934, Rules 10b-2, 10b-6 and 10b-7, may apply to their sales in the market and has furnished the Selling Securityholders with a copy of these rules. The Company will pay all expenses in connection with this offering, which expenses are estimated to be approximately $200,000. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, files reports, proxy statements and other information with the Commission. Reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at Regional Offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60604, and 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. lenders of all of the Company's Common Stock owned by certain principal stockholders, representing approximately 60% of the Company's outstanding Common Stock. (see "Possible Change in Control" below). At June 30, 1995 and at September 30, 1995, the Company had drawn the maximum $13.0 million available under its prior line of credit facility and, as of both such dates, was not in compliance with certain financial covenants under the credit agreement with its then institutional lender. Such lender waived non-compliance with such covenants on June 30, 1995, and recently waived non-compliance with such covenants at September 30, 1995 in connection with a refinancing of the Company's senior secured indebtedness effected October 20, 1995. On October 20, 1995, the Company's operating subsidiaries completed a refinancing of its senior secured indebtedness with its existing institutional lender and another commercial lender. Pursuant to the terms of the refinancing, the Company's operating subsidiaries received a maximum $14.0 million senior secured revolving credit facility with the new commercial institutional lender due in September 1998, out of which $6.0 million was applied in reduction of its indebtedness to its current institutional term lender, and the remaining outstanding balance due such lender was restated as a $12.6 million term loan facility payable in installments with a final payment of approximately $10 million due in 2000. The terms of the refinancing requires the Company and its subsidiaries to comply with a number of ongoing covenants, including revised financial covenants. There is no assurance that the Company or its subsidiaries will be able to comply with such financial covenants or that additional waivers would be forthcoming in the event of such non-compliance in the future. In the event such waivers are required and are not obtained, the lenders could declare all indebtedness to be immediately due and payable and would be entitled to exercise their remedies under the credit agreements. See "Risk Factors - Security Interests and Restrictive Loan Covenants" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." CASH FLOW AND LIQUIDITY PROBLEMS The Company is also suffering from liquidity and cash flow problems, primarily as a result of negative cash flow in the Company's recently sold airline business, and losses in the Company's gaming business. However, as a result of costs associated with the consolidation of its recently acquired gaming subsidiary and weakness in demand for certain of the products distributed by Wico, the Company's manufacturing and distribution businesses also suffered losses due to a lack of working capital and attendant inventory shortages. The operations from the Company's continuing businesses generated positive cash flow in fiscal 1994, 1993 and 1992 in the amounts of approximately $1,761,000, $1,832,000 and $1,300,000, respectively. However, for the nine months ended June 30, 1995, operating cash flow from such businesses was negative by $363,000 and total cash flow, exclusive of approximately $1,570,000 received from the issuance of Common Stock in June 1995, was negative by approximately $669,000. Although the Company's believes that the recent refinancing of its senior debt will relieve its current cash flow shortages, there is no assurance that the Company will not incur additional cash flow shortages in the future or default in payment of its indebtedness, including the $2,737,500 aggregate amount of Private Placement Notes and/or Exchange Notes due in October 1996. See "Management's Discussion and Analyses of Financial Conditions and Results of Operations - Liquidity and Capital Resources." [This page intentionally left blank] SECURITY INTERESTS AND RESTRICTIVE LOAN COVENANTS Wico, a wholly-owned subsidiary of the Company, and the operating subsidiaries of Wico are parties to lending agreements with its two institutional lenders which provide for a term loan and a revolving credit facility and which contain various financial and other covenants. Such covenants, among other things, require that Wico and its consolidated subsidiaries maintain certain minimum levels of adjusted net worth and consolidated cash flow and minimum ratios of debt service coverage and interest expense to indebtedness, and prohibit the Company and its subsidiaries, without the lenders consent, from declaring any dividends, making any acquisitions, incurring additional indebtedness and engaging in certain other transactions. Substantially all of the Company's consolidated assets are pledged as collateral to secure its indebtedness to the institutional lenders. The obligations of the Company and its subsidiaries under the credit agreements are cross-defaulted, so that upon the occurrence of an event of default under either of the credit agreements, both lenders could declare all indebtedness to be immediately due and payable and would be entitled to exercise the rights of secured creditors and foreclose upon substantially all of the assets of the Company, Wico and its subsidiaries. In such event, it is unlikely that the stockholders of the Company would realize any value on their investment in the equity of the Company. Moreover, to the extent that the Company's consolidated assets serve as collateral to secure outstanding indebtedness, or are restricted from being used as security for outstanding indebtedness, such assets will not be available to secure future indebtedness, which may adversely affect the Company's future borrowing ability. At June 30, 1995 and September 30, 1995 Wico was in default of its operating income covenant and ratio of interest expense to operating income covenant under the prior credit agreement with one of its institutional lenders. Although the institutional lender waived this requirement through September 30, 1995 in connection with the senior debt refinancing consummated on October 20, 1995, there can be no assurance that the Company will be in compliance with these and other requirements of the new credit agreements following September 30, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." SALE OF CONQUEST AIR; CONTINUING SUBSTANTIAL LIABILITIES AND RISK OF NON-PAYMENT The operations of the Company's Conquest Air commuter airline business incurred significant losses which adversely affected the Company's working capital and liquidity position through June 30, 1995. As a result, the lessors of the aircraft operated by Conquest Air issued default notices and the Company was unable to pay certain other obligations of Conquest Air. The Company has agreed to pay by January 1996 approximately $550,000 to one of such lessors and a former Conquest Air supplier. See "Use of Proceeds." On June 30, 1995, the Company sold the stock of Conquest Air to Air L.A., Inc. ("Air LA"), a publicly-owned operator of a regional commuter airline. In consideration for such sale, the Company received an aggregate of $6 million of Air LA equity securities and notes. As part of the sale, in consideration for 250,000 Air LA stock options exercisable at $.50 per share through June 2000, the Company provided Air LA with a secured $250,000 bridge loan pending a contemplated debt refinancing by Air LA. At June 30, 1995, the Company was also in default in payments to lessors of the six remaining aircraft formerly operated by the Conquest Air in the amount of approximately $400,000. Although Air LA assumed such obligations, as at October 31, 1995 $192,000 of such $400,000 amount still remain outstanding. In addition, the Company has recently been advised that Air LA was in arrears in payment of approximately $248,000 of monthly aircraft lease installments due from July 1, 1995 through October 31, 1995. Air LA reported net losses of $5,376,802 for the nine month period ended March 31, 1995. Accordingly, even if it completes its debt refinancing and repays the Company's bridge loan, should Air LA not be able to pay its purchase price obligations to the Company, or be unable to cure prior defaults and pay ongoing obligations to its aircraft lessors on a timely basis, the Company could ultimately incur both a substantial financial loss from the sale of Conquest Air and be required to pay damages aggregating in excess of $2.2 million to the aircraft lessors. See "Management's Discussion and Analyses of Financial Conditions and Results of Operations - Results and Plan of Operations of Air LA" and "Business - Sale of Conquest Air." POTENTIAL OBLIGATION TO REDEEM CERTAIN SECURITIES Pursuant to the terms of the Company's 800,000 outstanding shares of Series E Preferred Stock, the holders of such Series E Preferred Stock can require the Company to redeem such securities at $1.00 per share in the event that the Company consummates any public offering of its securities resulting in its receipt of gross proceeds of $3,000,000 or more. Although the Company's offering of the 2,975,000 Company Shares at $1.00 per share will not result in its receipt of gross proceeds of $3,000,000, to the extent that the Company receives cash proceeds from the exercise of all or any portion of the 1,961,925 Class B Warrants, the 53,241 Underwriter's Warrants or the 53,241 Class Z Warrants offered hereby, the aggregate gross proceeds received by the Company from the exercise of any of such 2,068,407 Warrants offered hereby could arguably be deemed to be coupled with gross proceeds received from the sale of the 2,975,000 Company Shares, resulting in the Company being obligated to redeem all or a portion of such Series E Preferred Stock. The Company (i) does not believe that the intent of the agreement with the holders of the Series E Preferred Stock was that cash proceeds which may be received at some indefinite time in the future from exercise of the offering of such 2,068,407 Warrants would constitute an event potentially triggering redemption of the Series E Preferred Stock, and (ii) does not anticipate, based upon the current market price of the Company's Common Stock ($1.1875 per share at November 8, 1995) and an average exercise price of approximately $5.02 per Warrant Share, that such Class B Warrants, Underwriter's Warrants or Class Z Warrants will be exercised in the foreseeable future. However, if the holders of the Series E Preferred Stock are subsequently able, upon exercise of any of such 2,068,407 Warrants, to compel the Company to repurchase the Series E Preferred Stock for up to $800,000, the required redemption of the Series E Preferred Stock would reduce amounts otherwise available for working capital and expansion of the Company's business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," and "Description of Securities - Preferred Stock (Series E Preferred Stock)." LICENSING AND REGULATION The Langworthy acquisition provided a significant product line expansion for the portion of Wico's prior business operations in the gaming industry, consisting principally of the supply of replacement parts for slot machines. However, such acquisition required the Company to secure additional licenses in order to expand the acquired business operations. The Company plans to engage in the gaming supply business in Connecticut, Indiana, Iowa, Louisiana, Missouri, Nevada, New Jersey, Mississippi and other jurisdictions where gambling is authorized. The Company has received approval for its license in Wisconsin and Mississippi, and has received a conditional license in New Jersey. However, there can be no assurance that the Company will not encounter delays in obtaining necessary licenses in other jurisdictions, and that such delays will not adversely affect the Company's planned casino supply business. While additional licenses or authorizations are not required for the continuation of the Company's sale and distribution of replacement parts for slot machines or its continuation of substantially all of the Langworthy operations in Nevada, and the Company has obtained approvals or conditional licenses in Mississippi and New Jersey, the Company will still be required to obtain licenses in other jurisdictions where gambling is authorized and the Company plans to engage in the gaming supply business. It should be noted, however, that Nevada accounted for approximately 50% of Langworthy's casino supply business in 1993. Any beneficial holder of securities of the Company may be subject to investigation by the gaming authorities in any or all of the jurisdictions in which the Company (or any of its subsidiaries) operates if such authorities have reason to believe that such ownership may be inconsistent with such state's gaming policies. Persons who acquire beneficial ownership of more than certain designated percentages of securities will be subject to certain reporting and qualification procedures established by such gaming authorities, as well as local licensing authorities. The failure of the Company or its key personnel to obtain or retain required licenses, permits or approvals in one or more jurisdictions could have an adverse effect on this aspect of the Company's gaming supply business and could adversely affect the ability of the Company and its key personnel to obtain or retain licenses in other jurisdictions. No assurance can be given that such licenses, permits or approvals will be obtained, retained or renewed in the future in the jurisdictions where the Company may seek to operate or that competitors will not succeed in obtaining licenses where the licensing of the Company is delayed or not approved. CONTROL BY PRINCIPAL STOCKHOLDERS The Company's officers and directors and their affiliates and family members beneficially own approximately 55.9% of the issued and outstanding Common Stock of the Company and hold options and warrants which, if fully exercised, would entitle such persons to own an aggregate of approximately 37% of the outstanding Common Stock on a fully-diluted basis, assuming exercise or conversion of all warrants, options and other securities exercisable for or convertible into Company Common Stock as at the Effective Date. Under Delaware law, the vote of only the holders of a majority of the outstanding voting capital stock is required to elect the entire Board of Directors and to effect fundamental corporate changes. There are no cumulative voting rights under the Company's Certificate of Incorporation, and thus such stockholders may possess the ability to elect all of the members of the Board of Directors of the Company, to increase its authorized capital, to dissolve or merge the Company or to sell its assets, if they so choose, and to generally exert substantial and effective control over the business and operations of the Company. POSSIBLE CHANGE OF CONTROL Pursuant to its current credit agreement with its institutional lender, Bentley J. Blum, Stephen R. Feldman, Iris Feldman, Miriam Katowitz and Paul E. Hannesson (collectively, the "Pledgors") have pledged to the lender all of the outstanding capital stock of the Company now owned or hereafter acquired by each of them. Such shares represent approximately 60% of the total number of Company shares of Common Stock currently outstanding. Accordingly, upon the occurrence of an event of default (as defined), any and all shares of pledged stock held by the lender may, at the option of such lender or its nominee, be registered in the name of the lender or its nominee, and the lender or its nominee will succeed to all rights pertaining to such shares. In the event that the contemplated refinancing is consummated, it is anticipated that the Pledgors will continue to be required to pledge all of their shares of Company Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." CERTAIN POTENTIAL BENEFITS TO INSIDER In connection with the recent refinancing of the Company's senior indebtedness, Bentley J. Blum, a principal stockholder and director of the Company, increased his limited personal guaranty of such indebtedness from $1.0 million to $3.0 million, and has also collateralized the $2.0 million increase in his personal guaranty with certain assets independent of his interests in the Company. In consideration for his commitment to furnish such increased guaranty and collateral, in September 1995 the Company's Board of Directors agreed to issue to Mr. Blum, simultaneous with the closing of such refinancing and issuance of his increased collateralized guaranty, an aggregate 500,000 shares of Company Common Stock, at $.001 per share. Such shares were issued to Mr. Blum contemporaneous with the October 20, 1995 closing of the refinancing and the issuance of his collateralized increased guaranty. In addition to such 500,000 shares, the Company further agreed that on each anniversary of the date of closing of the refinancing, to the extent that Mr. Blum's $3.0 million collateralized guaranty shall then remain in effect, he shall receive five year warrants to purchase an additional 250,000 Company shares. Inasmuch as the terms of the refinancing contemplate a five year maximum term of the credit facility, Mr. Blum would potentially be entitled to receive warrants to purchase an aggregate of 1,250,000 additional Company shares. All such warrants, if and to the extent issued, shall have a term expiring five years from the date of issuance and will be exercisable at the closing sale price of the Company's publicly traded Common Stock on the date of issuance. On November 8, 1995, the closing sale price of the Company's Common Stock, as reported on NASDAQ, was $1.1875 per share. The 500,000 shares issued in October 1995 to Mr. Blum for $.001 per share represent a substantial potential for profit upon resale. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and "Management - Compensation Committee Interlocks and Insider Participation." POTENTIAL CHARGE TO FUTURE EARNINGS. The excess, if any, between the closing sale price of the Company's Common Stock and the average value of approximately $1.11 per share for the Creditors Shares, could represent a charge to earnings to the Company in an amount equal to the difference between the closing sale price of the Company's Common Stock and value of the Creditors Shares on the date of issuance thereof. Although such charges to earnings will not impact consolidated stockholders' equity, it may have a material adverse effect on the market price of the Company's Common Stock. See "Management - Compensation Committee Interlocks and Insider Participation" and "Business - Settlement with Certain Creditors." SEASONALITY Wico's consumer products segment experiences its peak sales relating to the Christmas holiday selling season. Due to the importance of the Christmas selling season, net sales relating thereto constitute a disproportionate amount of net sales for the entire year and all of Wico's income from operations of this segment. Unfavorable economic conditions affecting retailers generally during the Christmas selling season in any year could materially adversely affect Wico's results of operations for this segment. Wico must also make decisions regarding how much inventory to buy in advance of the season in which it will be sold. Significant deviations from projected demand for products can have an adverse effect on Wico's sales and profitability for this segment. DEPENDENCE UPON KEY EXECUTIVE The success of the Company is largely dependent on the personal efforts of Steffen I. Magnell, its Chief Executive Officer and President, who devotes substantially all of his business time to the affairs of the Company and Wico. Mr. Magnell has entered into an employment agreement with the Company and Wico expiring March 31, 1998. Under the terms such agreement, Mr. Magnell is restricted from entering into competition with the Company. However, the Company does not currently maintain key employee life insurance on the life of Mr. Magnell. In the event that it became necessary to replace such person, the Company believes that another suitable executive would be available, although there can be no assurance that the terms and conditions of employment of such employee will not be less favorable to the Company. See "Management." DEPENDENCE ON A LIMITED NUMBER OF SUPPLIERS. The Company's consumer products business has been largely dependent upon a principal supplier located in the Far East. Sales of such consumer products decreased by $1,390,000 (approximately 24%) in the nine months ended June 30, 1995 as compared to the comparable nine month period in fiscal 1994, primarily as a result of production difficulties encountered by such supplier. Although the Company continues to purchase products from such vendor and is seeking alternative sources of supply, there is no assurance that such sources will be available, or that its present supplier will not incur further production difficulties, either of which events may continue to adversely affect future sales of the Company's consumer products. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." NO MINIMUM NUMBER OF COMPANY SHARES OR UNDERWRITER FOR SALE OF COMPANY SHARES. There is no minimum number of Company Shares or net proceeds therefrom that must be sold or received by the Company in order to consummate the offering of the 2,975,000 Company Shares being offered pursuant to this Prospectus; which offering of Company Shares will terminate on January 31, 1996. Accordingly, the net proceeds, if any, received from the sale of Company Shares may be insufficient to cover offering expenses or otherwise enable the Company to discharge certain obligations intended to be paid with such proceeds. In addition, no funds provided by investors purchasing Company Shares will be returned, irrespective of the number of Company Shares sold. See "Use of Proceeds" and "Plan of Distribution - The Company Shares." The 2,975,000 Company Shares are also being offered directly by the Company, without the services of any underwriter or placement agent either purchasing such Company Shares on a "firm commitment" basis or selling such shares as agent on a "best efforts" basis. In view of the absence of an underwriter or placement agent, the offering price for the 2,975,000 Company Shares has been determined solely by the Company, without the involvement or participation of any independent party and no underwriter or other broker-dealer participated in the preparation of the offering documents. Although the Company may engage the services of registered broker-dealers to assist in the sale of the Company Shares, without the services of a recognized underwriter for such securities, there is a lesser likelihood of a successful completion of such offering for the account of the Company. See "Plan of Distribution - The Company Shares" NO DIVIDENDS The payment of dividends, if any, on the Company's Common Stock rests within the discretion of its Board of Directors and, among other things, will depend upon the Company's earnings, capital requirements and financial condition, as well as other relevant factors. The Company has not declared any dividends since inception, and has no present intention of paying any dividends on its Common Stock in the foreseeable future, and it intends to use earnings, if any, to generate increased growth. Wico, the Company's principal operating subsidiary, is also prohibited by the terms of its banking agreements from paying any dividends to the Company, other than certain limited amounts. The Company does not expect to declare or pay any dividends in the foreseeable future. The Company intends to retain future earnings for investment in its business. RISK OF DELISTING FROM NASDAQ The Company's Common Stock is currently traded on the SmallCap Market of NASDAQ. NASDAQ imposes certain minimum criteria for continued listing of securities. These requirements include minimums for total assets, total capital and surplus, and share bid price of $2,000,000, $1,000,000 and $1.00, respectively. Any issue which falls below the $1.00 bid price, but has a market value of public float of $1,000,000 and equity of $2,000,000, is exempt from the minimum bid price requirement. In June 1995, NASDAQ notified the Company that, based on its consolidated balance sheet at March 31, 1995, the Company's capital and surplus had fallen below the minimum $1,000,000 amount necessary to maintain continued eligibility for listing on NASDAQ. Such notice advised that the Company would be subject to delisting unless it either demonstrated, through a periodic report filed with the Securities and Exchange Commission, compliance with the $1,000,000 minimum capital and surplus test, or requested a temporary exception to be considered by the NASDAQ Listing Qualifications Committee. Such exception request is applicable when a corporation has developed a plan of action that will result in full compliance, but requires additional time to implement. In response to the NASDAQ notification, in July 1995, the Company filed its required reports with the Securities and Exchange Commission and attended a hearing with NASDAQ. Based primarily upon receipt of proceeds aggregating approximately $2.9 million from its 1995 Private Placement, the Company was able to demonstrate its renewed compliance with the listing requirements; and as a result, NASDAQ withdrew its notice to the Company. If the Company's Common Stock were delisted from NASDAQ, it would trade on either the NASD Bulletin Board or in the over the counter market in what is commonly referred to as the "pink sheets", and be subject to the "penny stock" rules of the Securities and Exchange Commission. As a consequence of such delisting, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's Common Stock or other securities. If this were to occur, the market for the Company's Common Stock would be materially and adversely affected. SIGNIFICANT DILUTION TO PERCENTAGE EQUITY INTERESTS OF PRESENT STOCKHOLDERS AND DEPRESSIVE EFFECT ON MARKET PRICE OF COMMON STOCK As at October 31, 1995, the Company's outstanding capital stock consists of (i) 7,550 shares of convertible Series A Preferred Stock, (ii) 2,000,000 shares of convertible Series B Preferred Stock, (iii) 800,000 shares of convertible Series E Preferred Stock, and (iv) 12,622,454 shares of Common Stock. An aggregate of 881,631 Creditors Shares were recently issued to certain creditors of the Company in exchange for accrued obligations aggregating up to $981,631, and an additional 2,975,000 Company Shares are being offered hereby by the Company at $1.00 per share until not later than January 31, 1996. See "Plan of Distribution - The Company Shares." In addition to the aggregate of 12,622,454 shares of Common Stock presently outstanding and the maximum of 2,975,000 additional shares to be outstanding upon the sale of all 2,975,000 Company Shares offered hereby, 6,420,057 additional shares of Common Stock are being registered pursuant to the Registration Statement of which this Prospectus is a part and are issuable in connection with (i) the 2,718,407 Warrant Shares underlying the Class B Warrants, the Bank Warrant, the Affiliate Warrant and the Underwriter's Warrants, (ii) an estimated 2,281,250 Private Placement Conversion Shares, (iii) the 1,030,400 Preferred Stock Conversion Shares, and (iv) 195,000 Warrant Shares issuable upon exercise of the outstanding Public Warrants. The foregoing does not include a maximum of 4,075,500 additional shares issuable and potentially issuable in connection with other outstanding options and warrants, including an aggregate of 1,895,500 shares underlying outstanding warrants and options held by officers and directors of the Company and their affiliates, and up to an additional 1,250,000 shares underlying warrants which may be issued in connection with the Company's senior debt refinancing to Bentley J. Blum, a principal stockholder and director, in consideration for his increased personal guaranty of institutional indebtedness and his providing personal collateral to secure such increased guaranty. See "Management - Compensation Committee Interlocks and Insider Participation." The potential issuance of an additional 13,470,557 shares of Common Stock (including the maximum 1,250,000 shares potentially issuable to Mr. Blum in connection with the contemplated refinancing) represents 51.6% of the 26,093,011 shares of Common Stock which would be outstanding on a fully-diluted basis, assuming exercise or conversion of all such options, warrants and convertible securities. In addition, the Private Placement Conversion Shares are issuable at 80% of the applicable closing bid price of the Company's publicly traded Common Stock on each date that Private Placement Notes may be converted into Common Stock. The 2,281,250 Private Placement Conversion Shares referred to above are assumed based upon a $1.20 conversion price. However, based on the $1.1875 closing bid price of the Company's Common Stock at November 8, 1995, the conversion price on such date would have been $0.95 and an aggregate of 2,881,579 Private Placement Conversion Shares would have been issued if all $2,737,500 of Private Placement Notes had been converted on such date. Accordingly, the 26,093,011 shares of Common Stock potentially issued on a fully-diluted basis may be significantly increased depending upon the applicable conversion prices of Private Placement Notes in effect on the date of conversion, and otherwise adjusted depending upon whether and to the extent that holders of the convertible Private Placement Notes accept non-convertible 12% Exchange Notes and cash in exchange for such Private Placement Notes. See "Business - 1994 Private Placement." The issuance of such additional shares of Common Stock would represent substantial dilution to the interests of present stockholders in the percentage equity ownership of the Company, and such issuances (or even the potential thereof) is likely to have a significant depressive effect on the current market price of the Company's publicly traded Common Stock. SHARES ELIGIBLE FOR FUTURE SALE At October 31, 1995, there were an aggregate of 12,622,454 shares of Common Stock outstanding, including 3,481,821 shares which are being registered for immediate resale pursuant to this Prospectus; and an additional maximum 2,975,000 Company Shares which may be sold by the Company shortly after the Effective Date of this Prospectus. In the four fiscal 1995 quarters ended September 30, 1995, the market price of the Company's publicly traded Common Stock has fluctuated between a low of approximately $.25 per share to a high of $3.125 per share. The existence on the Effective Date of this Prospectus of an aggregate of 6,481,821 shares of Common Stock available for immediate resale into the market is likely to have a significant depressive effect on the market price of the Company's publicly traded Common Stock, and could render difficult the sales of Common Stock by investors. In addition, the potential issuance of up to 6,420,057 additional registered shares of Common Stock upon the exercise of Warrants and the conversion of Company Private Placement Notes and Series B and Series E Preferred Stock represents a further potential "overhang" on the future market price of the Company's Common Stock. Upon the Effective Date of this Prospectus, approximately 7,500,000 shares of Common Stock will be "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act, in that such shares were issued and sold by the Company in transactions not involving a public offering. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, after at least two years have elapsed since the purchase of such shares from the Company or its affiliate, the holder of the shares can (along with any person with whom such individual is required to aggregate sales) sell, within any three-month period, a number of shares of restricted securities that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or, if the Common Stock is quoted on NASDAQ or a stock exchange, the average weekly trading volume during the four calendar weeks preceding the sale. A person who has not been an affiliate of the Company for at least three months may, after at least three years have elapsed from the purchase of the restricted securities from the Company or an affiliate, sell such restricted shares under Rule 144 without regard to any of the limitations described above. Because substantially all of the Company's outstanding restricted shares of Common Stock will become eligible for sale pursuant to Rule 144 on or before July 1997 (three years from the closing of the Wico Merger), the possible or actual sales of Common Stock by stockholders of the Company pursuant to Rule 144 could have a further depressive effect upon the price of the Common Stock in any market that may develop therefor, and could also render difficult the sales of Common Stock by investors. NECESSITY OF CONTINUING POST-EFFECTIVE AMENDMENTS TO THE COMPANY'S REGISTRATION STATEMENT AND STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS; OBLIGATION TO SELLING SECURITYHOLDERS In order to exercise the Class B Warrants, the Public Warrants, the Underwriter's Warrants and Class Z Warrants and purchase the underlying Common Stock, it is necessary that such warrants and underlying Common Stock be registered or otherwise exempt from applicable registration requirements. In addition, the conversion of the Private Placement Notes into 1994 Private Placement Conversion Shares will likewise require the registration of such shares. The Company would be unable to issue Common Stock to those persons desiring to exercise their Class B Warrants and convert their Private Placement Notes unless and until the underlying Common Stock are qualified for sale in jurisdictions in which such purchasers reside, or an exemption from such qualification exists in such jurisdictions. There can be no assurance that the Company will be able to effect any required qualification. The Class B Warrants, the Public Warrants, the Underwriter's Warrants and the Class Z Warrants will not be exercisable and the Private Placement Notes may not be converted unless the Company maintains a current Registration Statement on file with the Commission through post-effective amendments to the Registration Statement containing this Prospectus. The Class B Warrants may not be redeemed by the Company at any time when a current registration is not maintained. However, the failure to maintain an effective registration statement will not extend the term of the Class B Warrants, the Public Warrants, the Underwriter's Warrants and the Class Z Warrants. Although the Company plans to file appropriate post-effective amendments to the Registration Statement containing this Prospectus, and to maintain a current Registration Statement on file with the Commission relating to the Class B Warrants, the Public Warrants, the Underwriter's Warrants, the Class Z Warrants, the shares of Common Stock underlying such Class B Warrants and the 1994 Private Placement Conversion Shares, there can be no assurance that such will be accomplished or that the Class B Warrants, the Public Warrants, the Underwriter's Warrants or the Class Z Warrants will continue to be so registered. See "Description of Securities - Warrants."

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+RISK FACTORS Investment in the Common Stock offered hereby is highly speculative and involves a high degree of risk. It is impossible to foresee and describe all the risks and business, economic and financial factors which may affect the Company. Prospective investors should carefully consider the following factors, as well as all other matters set forth elsewhere in this Prospectus, before making an investment in the Common Stock offered hereby. 1. CREDIT FACILITY RESTRICTIONS; FUTURE AVAILABILITY. The Company currently has available a revolving line of credit (the "Line") with an institutional lender (the "Senior Lender"). On March 28, 1995, the Line was increased from $25 million to $30 million; provided, however, that the Company may borrow in excess of $27 million only after (i) the Senior Lender has reviewed and been satisfied, in its sole discretion, with the Company's audited consolidated financial statements for the year ended December 31, 1994, and (ii) the Company has received additional capitalization of not less than $4 million (after all expenses of issuance and sale) from the issuance of its equity securities. In May 1995, the Senior Lender completed its review and became satisfied with the Company's audited consolidated financial statements for the year ended December 31, 1994. The Company's revolving credit agreement dated December 29, 1992, as amended (the "Credit Agreement"), governing the Line contains covenants that impose limitations on the Company and requires the Company to be in compliance with certain financial ratios. If the Company fails to make required payments, or if the Company fails to comply with the various covenants contained in the Credit Agreement, the Senior Lender may be able to accelerate the maturity of such indebtedness. As of December 31, 1994, the Company was in compliance with the required financial ratios and other covenants and the Company believes that it is presently in compliance with the financial ratios and all other covenants under the Credit Agreement. The receivables, inventory and equipment of the Company (including its subsidiaries), as well as the capital stock of its subsidiaries, are pledged to the Senior Lender to secure the Line. The Credit Agreement expires on May 31, 1997. Borrowings under the Line bear interest at either one-quarter of one percent ( 1/4%) below the prime rate or, at the Company's option, two percent (2%) above certain LIBOR rates. As of May 1, 1995, $22,549,000 was outstanding under the Line. To the extent that there is an increase in interest rates, or present borrowing arrangements are no longer available, the Company could be adversely impacted. See "USE OF PROCEEDS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." 2. DEPENDENCE ON FINANCING FOR FUTURE EXPANSION. In order to continue to grow its business and achieve its expansion strategy, the Company may require additional debt or equity financing in amounts exceeding those contemplated to be provided by this Offering or available, or that may be available, under the Line. There can be no assurance that the Company will be able to obtain such additional financing to continue its growth if, as and when required. In that regard, after this Offering (assuming the issuance of the 4,550,000 shares of Common Stock offered hereby and the 682,500 shares covered by the Over-Allotment Option) the Company will only have a nominal amount of authorized and unreserved shares of Common Stock available for issuance. As a result, the Company expects to seek the approval of its shareholders to increase the number of shares of Common Stock and preferred stock authorized to be issued, although no assurance can be given that such approval will be obtained. See "Lack of Additional Authorized and Unissued Shares" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." 3. DECLINING GROSS PROFIT MARGINS. During the past four years the Company has been experiencing declining gross profit margins as a result of the competitive environment in the electronics distribution industry, a greater number of large volume transactions at reduced margins and a change in the Company's overall sales mix. The Company expects that these trends will continue, and possibly even accelerate, in the future. Furthermore, as the Company endeavors to expand its business with existing customers, it expects to do so at decreasing gross profit margins. In order to obtain profitability while gross profit margins are declining, the Company will need to expand its sales while improving operating efficiencies. While the Company believes that its investments in plant capacity and computer and communications equipment and its expansion of its sales offices, corporate staff and other infrastructure have positioned the Company to achieve improvements in operating efficiencies, there can be no assurance that this goal can be achieved. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of Operations" and "BUSINESS -- Products." 4. DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon the services of its executive officers, including Paul Goldberg, its Chairman and Chief Executive Officer, and Bruce M. Goldberg, its President and Chief Operating Officer. The loss of the services of one or more of the Company's key executives for any reason could have a material adverse effect upon the business of the Company. While the Company believes that it would be able to locate suitable replacements for its executives if their services were lost to the Company, there can be no assurance it would be able to do so. The Company's future success will also depend in part upon its continuing ability to attract and retain highly qualified personnel. The Company owns a $1,000,000 term life insurance policy on Paul Goldberg's life and a $1,000,000 term life insurance policy on Bruce M. Goldberg's life, with benefits on both policies payable to the Company. The Company also has employment agreements with its four executive officers. See "MANAGEMENT" and "EXECUTIVE COMPENSATION -- Employment Agreements." 5. RELATIONSHIPS WITH SUPPLIERS. Substantially all of the Company's inventory has and will be purchased from manufacturers with whom the Company has entered into non-exclusive distribution agreements, which are typically cancellable upon 30 to 90 days written notice. While these agreements generally provide for price protection, stock rotation privileges, obsolescence credit and return privileges if an agreement is cancelled, there can be no assurance that the manufacturers will comply with their contractual obligations or that these agreements will not be cancelled. In 1994 the Company's three largest suppliers accounted for approximately 14%, 7% and 6% of purchases, respectively. While the Company does not believe that the loss of any one supplier would have a material adverse impact upon the Company since most products sold by the Company are available from multiple sources, the Company's future success will depend in large part on maintaining relationships with existing suppliers and developing new relationships. The loss of, or significant disruptions in relationships with, suppliers could have a material adverse effect on the Company's business since there can be no assurance that the Company will be able to replace lost suppliers. See "BUSINESS -- Suppliers." 6. INCREASING EARNINGS BREAK EVEN. In late 1992 the Company embarked upon an aggressive expansion plan. Since the end of 1992, the Company has opened ten new sales offices, relocated all existing sales offices into larger facilities, acquired three distributors and increased its plant capacity, computer and communications equipment, staff in most corporate departments and service capabilities. See "BUSINESS -- Corporate Strategy -- Expansion," "-- Corporate Strategy -- Services" and "-- Facilities and Systems." In order to finance its growth, the Company has also increased its debt significantly in recent years. As a result of its expansion and increased debt service, the level of the Company's revenues required to achieve a break even in earnings has increased significantly. While the Company believes that its expansion plans will enable it to achieve substantial growth in revenues, there can be no assurance that such growth will be obtained or maintained. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS." 7. FOREIGN MANUFACTURING AND TRADE REGULATION. A significant number of the components sold by the Company are manufactured outside the United States and purchased by the Company from United States subsidiaries or affiliates of those foreign manufacturers. As a result, the Company and its ability to sell at competitive prices could be adversely affected by increases in tariffs or duties, changes in trade treaties, currency fluctuations, strikes or delays in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. The Company's ability to be competitive in or with the sales of imported components could also be affected by other governmental actions and changes in policies related to, among other things, anti-dumping legislation and currency fluctuations. Since the Company purchases from United States subsidiaries or affiliates of foreign manufacturers, the Company's purchases are paid for in U.S. dollars which does reduce the potential adverse effect of currency fluctuations. While the Company does not believe that these factors adversely impact its business at present, there can be no assurance that such factors will not materially adversely affect the Company in the future. See "BUSINESS -- Foreign Manufacturing and Trade Regulation." 8. COMPETITION. The Company competes with many companies that sell and distribute semiconductors and passive products. Many of these companies have greater assets and possess greater financial and personnel resources than those of the Company. Many of these competitors also carry product lines which the Company does not carry. There can be no assurance that the Company will be able to continue to compete successfully with existing or new competitors and failure to do so could have a material adverse effect on the Company. See "BUSINESS -- Competition." 9. INDUSTRY CYCLICALITY. The electronics distribution industry has been affected historically by general economic downturns, which have had an adverse economic effect upon manufacturers and end-users of electronic components and electronic component distributors such as the Company. In addition, the life-cycle of existing electronic products and the timing of new product development and introduction can affect demand for electronic components. See "BUSINESS -- Products." 10. DEPENDENCE ON THE COMPUTER INDUSTRY. Many of the products the Company sells are used in the manufacture or configuration of computers. These products are characterized by rapid technological change, short product life cycles and intense competition. The computer industry has experienced significant unit volume growth over the past two years, which has in turn increased demand for many of the Company's products. A slowdown in the growth of the computer industry could adversely affect the Company's ability to continue its recent growth. See "BUSINESS -- Products." 11. CONTINUED GROWTH. The Company's growth may depend, in part, upon its ability to acquire other distributors in the future. No assurances can be given that any such acquisitions will be achieved. Future acquisitions will depend, in part, on the Company's ability to find suitable candidates for acquisition and the availability of sufficient internal funds and/or debt or equity financing to consummate any such acquisition. See "BUSINESS -- Corporate Strategy." There can be no assurance that the Company will be able to sustain its recent rate of growth in sales. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 12. POTENTIAL PRODUCT LIABILITY. As a result of its value-added services and as a participant in the distribution chain between the manufacturer and the end-user, the Company would likely be named as a defendant in any products liability action brought by an end-user. To date, no material claims have been asserted against the Company for products liability; there can be no assurance, however, that such material claims will not arise in the future. In the event that any products liability claim is not fully funded by insurance or if the Company is unable to be indemnified by or recover damages from the supplier of the product that caused such injury, the Company may be required to pay some or all of such claim from its own funds. Any such payment could have a material adverse impact on the Company. See "LEGAL PROCEEDINGS." 13. CONTINUED CONTROL BY PRESENT SHAREHOLDERS AND MANAGEMENT. Paul Goldberg, Bruce M. Goldberg and members of their family and trusts therefor (collectively, the "Goldberg Group") own 2,051,440 shares of the outstanding Common Stock, approximating 16.5% of the outstanding shares (and assuming the sale of the 4,550,000 shares pursuant hereto, 12.1% of the outstanding shares after the Offering is completed) and, in the event of the exercise of all outstanding stock options and warrants (but not the New Options), the Goldberg Group would own approximately 16.7% (and 12.7% after the Offering is completed). As a result, the Goldberg Group may be in a position to effectively control the Company. In addition, the executive officers of the Company comprise four of the six directors of the Company. Accordingly, they are in a position to control the day to day affairs of the Company without the oversight and controls of a Board of Directors comprised of a greater percentage of independent (non-employee) directors. See "PRINCIPAL SHAREHOLDERS" "MANAGEMENT" and "EXECUTIVE COMPENSATION -- Employment Agreements -- The Goldberg Agreements." 14. LACK OF ADDITIONAL AUTHORIZED AND UNISSUED SHARES. The Company's Certificate of Incorporation (the "Certificate") authorizes the issuance of 20,000,000 shares of Common Stock and 1,000,000 shares of preferred stock. Assuming the issuance as of the date hereof of the 4,550,000 shares of Common Stock offered hereby and the 682,500 shares covered by the Over-Allotment Option and the exercise of all Existing Rights, only 128,560 (0.6%) of the Company's authorized shares of Common Stock would remain unissued. As a result of the limited number of authorized and unissued shares of Common Stock, the Company expects at its 1995 annual meeting of shareholders currently scheduled to be held in July 1995 (the "1995 Annual Meeting") to seek approval of its shareholders to increase the number of shares of Common Stock and preferred stock authorized to be issued. Since the current record date for shareholders entitled to vote at the 1995 Annual Meeting is May 15, 1995, purchasers of shares of Common Stock issued pursuant to this Offering will not be entitled to vote at such meeting on this matter or any other matter coming before such meeting. At the Company's 1994 annual meeting of shareholders held on July 29, 1994, the shareholders of the Company did not approve the proposal of the Company's Board of Directors (the "Board") to increase the number of shares of Common Stock and preferred stock authorized to be issued to 40,000,000 and 5,000,000, respectively. In the event that the shareholders of the Company do not approve an increase in the authorized shares of capital stock of the Company in the future, the continued growth of the Company could be materially and adversely impaired as a result of its inability to raise additional equity capital when needed or to be able to issue shares of its capital stock in connection with future acquisitions or other corporate purposes including issuance of options to employees including the New Options. See "DESCRIPTION OF SECURITIES." 15. POSSIBLE ISSUANCE OF ADDITIONAL SHARES. To the extent available for issuance, the Company's Board has the power to issue any or all authorized and unissued shares without shareholder approval, including the shares of authorized preferred stock, which shares can be issued with such rights, preferences and limitations as are determined by the Board. Any securities issuances may result in a reduction in the book value or market price of the outstanding shares. If the Company issues any additional securities, such issuance may reduce the proportionate ownership and voting power of each existing shareholder. Further, any new issuances of securities could be used for anti-takeover purposes or might result in a change of control of the Company. See "DESCRIPTION OF SECURITIES." 16. NO DIVIDENDS ANTICIPATED. The Company has not paid any cash dividends on its Common Stock and does not anticipate paying dividends on its shares in the foreseeable future inasmuch as it expects to employ all available cash in the continued growth of its business. Further, the Credit Agreement prohibits the payment of dividends. See "DIVIDEND POLICY." 17. CERTAIN PROVISIONS IN THE CERTIFICATE; ANTI-TAKEOVER PROVISIONS. The Company's Certificate includes provisions designed to discourage attempts by others to acquire control of the Company without negotiation with the Board, and to attempt to ensure that such transactions are on terms favorable to all of the Company's shareholders. These provisions provide, among other things, that meetings of shareholders' may only be called by the Board; that an affirmative vote of two-thirds of the outstanding shares of Common Stock is required to approve certain business combinations unless 65% of the Board approves such transaction; for three classes of directors with each class elected for a three year staggered term; that the Board in evaluating a tender offer or certain business combinations is authorized to give due consideration to all relevant factors; and that actions of shareholders may not be taken by written consent of shareholders in lieu of a meeting. For various reasons, however, these provisions may not always be in the best interest of the Company or its shareholders. These reasons include the fact that the provisions of the Certificate (i) make it difficult to remove directors even if removal would be in the best interest of the Company and its shareholders; (ii) make it more difficult for shareholders to approve certain transactions that are not approved by at least 65% of the Board, even if the transactions would be beneficial to the Company; and (iii) eliminate the ability of the shareholders to act without a meeting. Further, the Certificate and the Company's Bylaws include provisions that are intended to provide for limitation of liabilities of officers and directors in certain circumstances and for indemnification of officers and directors against certain liabilities. See "DESCRIPTION OF SECURITIES -- Certain Provisions of Certificate of Incorporation and Bylaws" and "-- Certain Provisions Relating to Limitation of Liability and Indemnification of Directors." 18. POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be subject to significant fluctuations in response to such factors as, among others, variations in the anticipated or actual results of operations of the Company or of other distributors in the electronics industry and changes in general conditions in the economy, the financial markets or the electronics distribution industry. See "MARKET INFORMATION." 19. SHARES AVAILABLE FOR FUTURE RESALE. Of the 12,446,791 shares of Common Stock presently outstanding, approximately 2,081,440 are "restricted securities" within the meaning of the Act and the rules and regulations promulgated thereunder and, generally, may be sold only in compliance with Rule 144 under the Act, pursuant to registration under the Act or pursuant to another exemption therefrom. Generally, under Rule 144, a person who has held "restricted securities" for a period of at least two years (including the holding period of any prior owner except an affiliate) may sell a limited number of such shares in the public market. Generally, a person is entitled to sell, within any three month period, in ordinary brokerage transactions a number of those shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 169,968 shares immediately after the Offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which the Rule 144 notice of the sale is filed with the Commission. Persons who are not affiliates of the Company, who have not been affiliated with the Company at any time during the 90-day period prior to the sale and who have satisfied a three year holding period (including the holding period of any prior owner except an affiliate) may sell without regard to such limitations. Substantially all restricted shares of the outstanding Common Stock are presently eligible for sale under Rule 144. Sales made pursuant to Rule 144 by the Company's existing shareholders may have a depressive effect on the price of the shares in the public market. Such sales also could adversely affect the Company's ability to raise capital at that time through the sale of its equity securities. The Underwriter has, however, obtained an agreement of the Company and the directors and executive officers of the Company not to sell any of their Common Stock for a period of 180 days from the date of this Prospectus without the Underwriter's prior written consent. 30,000 shares of the "restricted securities," which were recently acquired by the holder thereof pursuant to the exercise of a warrant of the Company, are being registered concurrently herewith as a result of registration rights provided in such warrant. None of the other "restricted securities" have registration rights. See "SHARES ELIGIBLE FOR FUTURE SALE," "CONCURRENT REGISTRATION OF SHARES FOR FUTURE SALE BY WARRANT HOLDERS" and "UNDERWRITING." 20. MARKET OVERHANG OF EXISTING RIGHTS. The Company had outstanding as of the date of this Prospectus the Existing Rights representing options, warrants and other potential rights to acquire up to 2,192,149 shares of the Company's Common Stock. It is anticipated that the holders of the Existing Rights, from time to time, will exercise their Existing Rights to acquire shares of the Company's Common Stock and will offer their shares in the public market place, which could interfere with the Company's ability to obtain future financing and could adversely affect the market price of the Common Stock. In addition, under certain circumstances and events, including obtaining the required shareholder approvals, the New Options could become exercisable. See "SHARES ELIGIBLE FOR FUTURE SALE," "CONCURRENT REGISTRATION OF SHARES FOR FUTURE SALE BY WARRANT HOLDERS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Acquisitions," "EXECUTIVE COMPENSATION -- Employees', Officers', Directors' Stock Option Plan" and "-- Employment Agreements" and "DESCRIPTION OF SECURITIES -- Existing Warrants." 21. BROAD DISCRETION IN APPLICATION OF PROCEEDS. The net proceeds of this Offering, after being used initially to reduce the Company's Line, may be applied to working capital and other corporate purposes. Accordingly, management of the Company will have broad discretion over the use of proceeds. See "USE OF PROCEEDS." 22. DILUTION. The net tangible book value of the Company at March 31, 1995, was approximately $17.0 million or $1.36 per share of Common Stock. Net tangible book value per share of Common Stock is determined by dividing the Company's tangible net worth (total tangible assets less total liabilities) by the number of shares of Common Stock outstanding. After giving effect, as of that date, to the sale of 4,550,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $2.00 per share and after deduction of underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses payable by the Company and the receipt by the Company of approximately $7,750,000 of net proceeds, the pro forma net tangible book value would have been approximately $24.7 million or $1.45 per share of Common Stock. This amount represents an immediate increase in net tangible book value of $.09 per share to existing shareholders and an immediate dilution in net tangible book value of $.55 per share to new investors purchasing shares in the Offering. See "DILUTION." 23. UNDERWRITER'S PURCHASE WARRANTS. In connection with the Offering, the Company will sell to the Underwriter, for nominal consideration, the Underwriter's Purchase Warrants. Subject to the approval by the Company's shareholders of the authorization of at least 35,000,000 shares of Common Stock in the future, the Underwriter's Purchase Warrants will be exercisable commencing 12 months after the date of this Prospectus until five years from the date of this Prospectus, at an exercise price of $ (140% of the public offering price of the Common Stock) per share. The Underwriter's Purchase Warrants will have certain anti-dilution provisions. For the life of the Underwriter's Purchase Warrants, the holders thereof will be given the opportunity to profit from a rise in the market price for the underlying shares with a resulting dilution in the interest of the Company's other shareholders. The terms on which the Company could obtain additional capital during the life of the Underwriter's Purchase Warrants may be adversely affected because the holders of the Underwriter's Purchase Warrants might be expected to exercise them at a time when the Company would otherwise be able to obtain any needed additional capital in a new offering of securities at a price per share greater than the exercise price per share of the Underwriter's Purchase Warrants. The Company has also agreed to register or qualify, or both, the Underwriter's Purchase Warrants and/or the shares underlying the Underwriter's Purchase Warrants on two occasions, the first of which would be at the Company's expense and the second of which would be at the expense of the holders of the Underwriter's Purchase Warrants. In addition, the holders of the Underwriter's Purchase Warrants have the right to "piggyback" on any registration statements that the Company files during the exercise period. Such obligation could interfere with the Company's ability to obtain future financing. See "UNDERWRITING."

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+RISK FACTORS Prospective investors should consider carefully, in addition to the other information contained or incorporated by reference in this Prospectus, the following factors before purchasing the Mortgage Notes offered hereby. HIGHLY LEVERAGED NATURE OF THE COMPANY The Company is highly leveraged and will continue to be highly leveraged after the consummation of the Offering. At June 30, 1995, ARI had Indebtedness (including the current portion thereof) of approximately $84.3 million, including approximately $26.6 million of borrowings under the Company's Revolving Credit Loan. A portion of the net proceeds of the Offering will be used to repay $78.0 million of ARI's existing Indebtedness, including all amounts outstanding under the Revolving Credit Loan. See "Use of Proceeds." At June 30, 1995, on a pro forma basis after giving effect to the Offering and the repayment of such outstanding Indebtedness, ARI would have had no outstanding senior Indebtedness other than $100.0 million represented by the Mortgage Notes and ARI's stockholders' equity would have been approximately $44.3 million. In addition, management expects that on the Closing Date at least approximately $24.0 million will be available to the Company for borrowing under the Revolving Credit Loan. See "Capitalization." ARI may incur additional Indebtedness in the future, including Indebtedness under the Revolving Credit Loan and by remarketing the Freeport IRBs. See "Description of Certain Indebtedness." The degree to which the Company is leveraged could have important consequences to holders of the Mortgage Notes. For example, ARI's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired. Furthermore, certain of ARI's existing and anticipated future borrowings are and will continue to be at variable rates of interest, which causes ARI to be vulnerable to increases in interest rates. See "Description of Mortgage Notes" and "Description of Certain Indebtedness." Based upon its current level of operations, the Company believes that its cash flow from operations together with other available sources of liquidity will be adequate to meet ARI's anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments. Following the Offering, the Indenture will restrict ARI from incurring additional Indebtedness (other than under the Revolving Credit Loan and remarketing the Freeport IRBs) which requires principal payments prior to maturity of the Mortgage Notes. The ability of the Company to make scheduled payments or to refinance its obligations with respect to its Indebtedness depends on its financial and operating performance, which, in turn is subject to prevailing economic conditions and to financial, business and other factors, many of which are beyond ARI's control. There can be no assurance, however, that ARI will continue to generate cash flow sufficient to meet its obligations. In any event, a refinancing of all or a portion of its Indebtedness may not be available on terms acceptable to ARI, if at all, particularly in light of ARI's high levels of Indebtedness, the pledge of its significant production and intellectual property assets as security for the Mortgage Notes, the pledge of substantially all of ARI's assets to secure certain other Indebtedness to which ARI is or may become a party and the restrictive covenants in the Revolving Credit Loan and the Indenture. INTERNATIONAL OPERATIONS The Company's foreign operations are exposed to certain political, economic and other risks inherent in doing business abroad, including exposure to potentially unfavorable changes in tax or other laws, partial or total expropriation, and the risks of war, terrorism and other civil disturbances for which the Company carries no insurance coverage. ARI's exports of rice products to many countries are limited by government quotas, levies or other restrictions or prohibitions on the importation of rice from the United States. In addition, the Company's rice business has been adversely affected in the past by armed conflicts, embargoes declared by the U.S. government, international political disagreements, civil unrest and political instability. Certain markets for ARI's rice products and certain of its operating facilities are located in developing nations and there can be no assurance that the occurrence of such events will not disrupt the Company's business in the future. The loss of any significant export rice market because of these events or conditions could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION While the Company maintains a significant market share in most of its markets, the overall market for branded rice remains competitive both domestically and abroad. In general, competition in both domestic and international markets is based upon the quality of rice, brand recognition, price, quality of service, seller relationships with the purchasers and the ability to arrange financing. The Company's U.S. competitors in the domestic and export milled rice markets include Riviana Foods Inc., Riceland Foods, Inc., Producers Rice Mills, Inc., Continental Grain Company, Cargill Inc. and Farmers Rice Cooperative. There are other competitors in certain specialized marketing areas, such as Mars, Inc. (Uncle Ben's), Philip Morris Companies, Inc. (Minute) and the Quaker Oats Company (Rice-a-Roni), who typically have greater financial and other resources than the Company and may devote substantially greater resources to increase the amount of direct competition with the Company. Currently, no domestic company has more than 25% of the United States rice exporting business. In addition, the Company's competitors in the international rice trading markets include marketers from other exporting countries such as Thailand and Pakistan that compete on the basis of quality and price and marketers from other countries such as Vietnam and Burma that compete primarily based upon price. There can be no assurance that the Company will maintain its market position or improve its financial performance. See "Business -- Competition." GOVERNMENT SUPPORT PROGRAMS Price supports and other government programs have significant influence over ARI's net sales. The adoption of the Food Security Act of 1985 opened world markets to U.S. rice millers, processors and marketers and generally resulted in increased throughput from higher domestic and export sales beginning in April 1986. This legislation provides subsidies to rice producers so that rice can be milled at prices expected to be competitive in the world market. The Food Security Act of 1985 originally was only applicable to crops produced through 1990; however, through the Food, Agriculture, Conservation and Trade Act of 1990, these price supports have been extended to crops produced through the crop year 1995. There can be no assurance that the currently favorable provisions of such legislation will be extended into future periods or will not be amended due to budgetary or other governmental constraints. Proposals to significantly limit or eliminate altogether federal farm price support programs have been introduced in the United States Congress and if such legislation is enacted, there could be a significant impact on the supply and price of U.S. grown rice. Management believes that, should such a change occur, any adverse effect would be of limited duration because (i) domestic prices would adjust to a point of economic equilibrium with imports which would justify adequate production by U.S. growers using alternate or fallow acreage and employing economies of scale and (ii) any shortage of U.S. grown rice due to termination of price supports could be offset by imports from other countries using ARI's cost efficient bulk handling facilities at the Freeport, Texas deep water port and ARI's other strategically located packaging facilities. FLUCTUATIONS IN WORLD RICE PRICES The Company buys its rough and milled rice on the open market from various independent growers and suppliers at prices that are subject to worldwide market fluctuations in rice prices. Historically, world market prices for rice have fluctuated in response to a number of factors, including changes in domestic governmental farm support programs, changes in international agriculture and trading policies and weather conditions during the growing and harvesting seasons in the world's major rice growing regions. Increases in rice prices can have a significant adverse short-term effect on the Company's results of operations. ARI's opportunities to reduce the risk of short-term fluctuations in rice prices by utilizing the commodity futures market are limited by the relatively small size of the existing rice futures market. Historically, the volume of rice covered by futures contracts has been immaterial and management does not anticipate that this will change. No assurance can be given that future fluctuations in world rice prices will not have an adverse short-term effect on ARI's results of operations. ABILITY TO REALIZE ON COLLATERAL The Mortgage Notes will be secured by the Collateral pursuant to the Collateral Documents (as defined), which include (i) the Freeport Deed of Trust creating a second priority security interest in the Company's leasehold interests in the Freeport Facility that is junior only to $13.3 million in aggregate principal amount of the Company's Freeport IRBs, which currently are held by the Company and will be pledged to the holders of the Mortgage Notes until such time as the Company remarkets the Freeport IRBs in accordance with the terms of the Indenture; (ii) the Maxwell Deed of Trust creating a first priority security interest in the Company's fee and leasehold interests in the Maxwell Facility; (iii) the Stuttgart Mortgage creating a first priority security interest in the Company's fee interest in the Stuttgart Facility; (iv) the Houston Deed of Trust creating a first priority security interest in the Company's fee interest in the Houston Property; (v) pledge agreements creating first priority security interests in the capital stock of the Company held by ERLY (other than 200,000 shares of the Company's Series B Preferred Stock pledged to the holders of the Company's Series C Preferred Stock), the capital stock of the Company's subsidiaries held by the Company, the ERLY Intercompany Notes and the Subsidiary Intercompany Notes; (vi) a security agreement creating a first priority security interest in all registered U.S. trademarks, and a security interest in all other registered trademarks, owned or licensed by the Company; and (vii) a pledge of all proceeds of the foregoing. The Freeport Facility is subject to a first deed of trust securing the Freeport IRBs, which if foreclosed upon would extinguish the Lien (as defined) on the Freeport Facility in favor of the Trustee and would result in the proceeds of a foreclosure sale being applied first to the Freeport IRBs. The Collateral (other than the capital stock of the Company and the Company's subsidiaries) is subject to liens in favor of the lender under the Revolving Credit Loan that will be subordinate to the liens in such Collateral granted to the Trustee under the Collateral Documents. The rights of the Trustee and the lender under the Revolving Credit Loan will be subject to the terms of an Intercreditor Agreement (as defined), that will include the right of such lender, under the Revolving Credit Loan, for a period of 90 days, to access and utilize the Company's rice processing facilities to create additional inventory and affix the Company's trademarks to such inventory, which right may adversely impact the ability of the Trustee to sell such facilities and trademarks, and the value realized therefrom, in the event of foreclosure under the Indenture and the Collateral Documents. See "Description of Mortgage Notes -- Security." The Trustee's ability to realize upon real property collateral is limited and restricted by the laws of the applicable states in which the real property is located. For example, California has adopted a "one-form-of-action rule," under which the trustor under a deed of trust on California real property may require a creditor to exhaust its real property collateral before seeking a judgment on the debt (whether in or out of California). Exercising a right of setoff or otherwise proceeding against the trustor's assets in which the creditor does not have a perfected Lien or failing to proceed against real property collateral before seeking to enforce the trustor's obligations may result in the loss of the liens on the real property and any right to pursue other remedies, including a legal action to collect the debt. Moreover, such consequences may also result from any such actions taken by a single holder of Mortgage Notes. In addition, certain states, including California and Texas, have adopted "anti-deficiency laws," which may restrict the ability of the Trustee or the holders of the Mortgage Notes to obtain a deficiency judgment against the Company after a foreclosure or limit the amount that may be recovered in an action to recover deficiencies. In general, any foreclosure must be conducted in accordance with the laws of the applicable states. Accordingly, there can be no assurance that the holders of the Mortgage Notes will be able to realize upon the Collateral in an amount sufficient to satisfy the Mortgage Notes or that they will be able to obtain recourse against other assets of the Company, even as unsecured creditors, if the value of the Collateral which is foreclosed upon is insufficient to satisfy the Mortgage Notes. The land, improvements and certain equipment at the Freeport Facility and a portion of the land, improvements and equipment at the Maxwell Facility are leasehold properties. Accordingly, the Liens upon such Collateral are subject to the terms of the applicable leases and the rights of the landlords thereunder in the event of a breach of the lease, including the right to terminate the leases. If any such lease were terminated, the Company would lose possession of the leasehold properties and its ability to conduct operations on the premises, and the Liens in favor of the Trustee would be extinguished. The terms of the leases provide that notices of default must be delivered to a mortgagee of which the landlord has notice (and the Indenture will require the Company to give notices in accordance with the leases) and such mortgagee has certain rights to cure certain defaults within specified time periods. However, the Trustee has no obligation under the Indenture to cure such defaults unless so instructed by the holders of a majority of the outstanding Mortgage Notes. There can, therefore, be no assurance that any defaults under the leases will be timely cured, or that the leases will not be terminated and, consequently, the Liens on the Collateral lost. Further, the leases contain restrictions on assignment which may affect the ability of the Trustee to dispose of the Collateral following a foreclosure. Finally, if the Company or the landlord were to become the debtor in a bankruptcy proceeding, the leases could be rejected, which may result in the loss of the leasehold interests as Collateral, or may be assumed and assigned. NO ASSURANCE AS TO VALUE OF ASSETS If an Event of Default (as defined) occurs with respect to the Mortgage Notes, there can be no assurance that the liquidation of the Collateral securing the Mortgage Notes would produce proceeds in an amount sufficient to pay the principal of or accrued and unpaid interest on the Mortgage Notes. The Company has obtained appraisals dated as of May 31, 1995 and June 1, 1995, of the Freeport Facility and the Maxwell Facility, respectively, together with the Company's registered U.S. trademarks associated with each such facility, both on a going concern basis, reflecting valuations of approximately $91.0 million and $45.0 million, respectively. The Company did not obtain appraisals for the other assets of the Company that constitute Collateral. Caution generally should be exercised in evaluating appraisal results. An appraisal is only an estimate of value and should not be relied upon as a proven measure of realizable value. Moreover, a valuation of the Freeport Facility and the Maxwell Facility on a liquidation basis likely would result in a significantly lower valuation than reflected by the preliminary appraisals. It is likely that a forced sale of the Collateral would provide proceeds far below the values set forth in the preliminary appraisals. CERTAIN BANKRUPTCY CONSIDERATIONS The right of the Trustee to repossess and dispose of the Collateral upon the occurrence of an Event of Default on the Mortgage Notes is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or against the Company, whether by a holder of the Mortgage Notes or another creditor (including a junior creditor), prior to such repossession and disposition. Under applicable bankruptcy law, secured creditors such as the holders of the Mortgage Notes are prohibited from repossessing their security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval. Moreover, applicable bankruptcy laws permit debtors to continue to retain and to use the collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given "adequate protection." The meaning of the term "adequate protection" may vary according to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the collateral and may include cash payments or the granting of additional security, at such time and in such amount as the court in its discretion may determine, for any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term "adequate protection" and the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Mortgage Notes could be delayed following commencement of a bankruptcy case, whether or when the Trustee could repossess or dispose of the Collateral and whether or to what extent the holders of the Mortgage Notes would be compensated for any delay in payment or loss of value of the Collateral through the requirement of "adequate protection." If the bankruptcy court determines that the value of the Collateral is not sufficient to repay the Mortgage Notes, holders of the Mortgage Notes would not be permitted to receive payments or accrue interest, costs or attorneys' fees during the term of the case. CONTROL BY CERTAIN STOCKHOLDERS The principal stockholders of ERLY, Gerald D. Murphy and his son, Douglas A. Murphy, each of whom is a director and an officer of ERLY, are the direct and indirect record and beneficial owners of 1,517,191 shares, representing approximately 37.4% of the outstanding shares of common stock of ERLY, and 506,502 shares, representing 12.5% of the outstanding shares of common stock of ERLY, respectively. Accordingly, by virtue of ERLY's direct control of the Company (of which ERLY owns 81% of the voting power), in connection with matters submitted to a vote of ERLY's shareholders, such as the election of ERLY's Board of Directors, the Murphy's collectively will be able to significantly influence the direction and future operations of the Company. See "Management" and "Security Ownership of Certain Beneficial Owners and Management." CHANGE OF CONTROL The Indenture governing the Mortgage Notes provides that, upon the occurrence of a Change of Control (as defined in the Indenture), the holders of the Mortgage Notes will have the right to require the Company to repurchase their Mortgage Notes at a price equal to the lesser of 101% or the optional redemption price then applicable of the Accreted Value of the Mortgage Notes, plus accrued and unpaid interest to the date of repurchase. In addition, a Change of Control may constitute a default under the Revolving Credit Loan. If a Change of Control were to occur, the Company may not have the financial resources to repay all of its obligations under the Revolving Credit Loan, the Indenture and any other indebtedness that may become payable upon the occurrence of such Change of Control. ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials (collectively, "Environmental Laws"). The Company believes that it currently conducts its operations, and in the past has operated its business, in substantial compliance with applicable Environmental Laws. From time to time, operations of the Company may result in noncompliance with or liability for cleanup pursuant to Environmental Laws. However, the Company believes that any such noncompliance or liability under current Environmental Laws would not have a material adverse effect on its results of operations and financial condition. See "Business -- Environmental Matters." Any environmental problems at the Company's properties could adversely affect the value of the Collateral or the ability of the Trustee to foreclose on the Collateral. RECOGNITION OF INCOME AND RISK OF ADVERSE TAX CHARACTERIZATION The Mortgage Notes will be issued with original issue discount, which will require holders of the Mortgage Notes to recognize income for federal income tax purposes prior to actual receipt of the cash to which that income is attributable. See "Material Federal Income Tax Consequences." The Mortgage Notes provide for payment of both Fixed Interest and Contingent Interest, which is based on the Company's operating results and is calculated as a fixed percentage of the Company's Consolidated Cash Flow for such periods. The Mortgage Notes and the Indenture have legal and other economic terms typically contained in instruments evidencing indebtedness and are intended to create a debtor-creditor relationship between the Company and the holders of the Mortgage Notes. Based on advice of tax counsel, the Company intends to treat the Mortgage Notes as indebtedness for federal income tax purposes. If the Company's treatment of the Mortgage Notes is not upheld, some or all of the payments on the Mortgage Notes may be recharacterized and the holders may face other adverse tax consequences, including recognition of income for federal income tax purposes prior to actual receipt of the cash to which that income is attributable. See "Material Federal Income Tax Consequences." ABSENCE OF PUBLIC MARKET FOR THE MORTGAGE NOTES Prior to the Offering, there has been no public market for the Mortgage Notes. The Company has been advised by the Underwriter that it presently intends to make a market in the Mortgage Notes after the Offering, as permitted by applicable laws and regulations; however, the Underwriter is not obligated to do so, and any such market making, if commenced, may be discontinued at any time without notice. The Company does not intend to apply for the listing of the Mortgage Notes on any national securities exchange and no assurance can be given that an active public market for the Mortgage Notes will develop. If a market for the Mortgage Notes does not develop or is not maintained, holders of Mortgage Notes may not be able to resell the Mortgage Notes for an extended period of time, if at all. If a market for the Mortgage Notes were to develop, future trading prices of the Mortgage Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations, the market for similar securities (which market is subject to various pressures, including, but not limited to, fluctuating interest rates), general economic conditions and other factors. No assurance can be given that a holder of Mortgage Notes will be able to sell such Mortgage Notes in the future or that such sale will be at a price equal to or greater than the initial offering price of the Mortgage Notes. See "Underwriting."

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+RISK FACTORS Prospective investors should carefully consider the following factors, in addition to the other matters described in this Prospectus, before purchasing New Notes. LEVERAGE AND DEBT SERVICE Following the consummation of the Merger and the Financing, the Company will be highly leveraged. At January 29, 1995, pro forma for the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), the Company's total indebtedness (including current maturities) and stockholder's equity would have been $1,984.7 million and $279.8 million, respectively, and the Company would have had an additional $188.4 million available to be borrowed under the New Revolving Facility. In addition, as of January 29, 1995, after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), scheduled payments under operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been $125.6 million. On the same pro forma basis, for the 52 weeks ended June 25, 1994 and the 31 weeks ended January 29, 1995, the Company's earnings before fixed charges would have been inadequate to cover fixed charges by $82.9 million and $51.9 million, respectively. However, such earnings include non-cash charges of $189.2 million and $114.0 million, respectively, primarily consisting of depreciation and amortization. New Holdings will be required to make semi-annual cash payments of interest on the New Discount Debentures and the Seller Debentures commencing five years from their date of issuance in the amount of approximately $61 million per annum. In addition, New Holdings will be required to commence semi-annual cash payments of interest on any Discount Notes that remain outstanding following the Merger commencing June 15, 1998. The New Indentures permit the Company (in the absence of a default or event of default thereunder) to pay cash dividends to New Holdings in an amount sufficient to allow New Holdings to pay interest on such Indebtedness when due. The Company's ability to make scheduled payments of the principal of, or interest on, or to refinance its Indebtedness (including the New Notes) and to make scheduled payments under its operating leases depends on its future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond its control. Based upon the current level of operations and anticipated cost savings, the Company believes that its cash flow from operations, together with borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments over the next several years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated cost savings can be fully achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital expenditures, or if its future earnings growth is insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt following the Merger and the fact that substantially all of its assets will be pledged to secure the borrowings under the New Credit Facility and other secured obligations. The Company's high level of debt will have several important effects on its future operations, including the following: (a) the Company will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions; (b) the financial covenants and other restrictions contained in the New Credit Facility and other agreements relating to the Company's indebtedness and in the New Indentures will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends; and (c) because of the Company's debt service requirements, funds available for working capital, capital expenditures, acquisitions and general corporate purposes, may be limited. The Company's leveraged position may increase its vulnerability to competitive pressures. The Company's continued growth depends, in part, on its ability to continue its expansion and store conversion efforts, and, therefore, its inability to finance capital expenditures through borrowed funds could have a material adverse effect on the Company's future operations. Moreover, any default under the documents governing the indebtedness of the Company could have a significant adverse effect on the market value of the New Notes. ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS Management of the Company has estimated that approximately $90 million of annualized net cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) can be achieved over a four year period as a result of integrating the operations of Ralphs and Food 4 Less. See "Business -- The Merger." The cost savings estimates have been prepared solely by members of the management of each company. The estimates necessarily make numerous assumptions as to future sales levels and other operating results, the availability of funds for capital expenditures as well as general industry and business conditions and other matters, many of which are beyond the control of the Company. Several of the cost savings estimates are premised on the assumption that certain levels of efficiency presently maintained by either Food 4 Less or Ralphs can be achieved by the combined Company following the Merger. Other estimates are based on a management consensus as to what levels of purchasing and similar efficiencies should be achievable by an entity the size of the Company. Certain of the estimates relating to the consolidation of warehousing and distribution facilities assume the completion of certain capital expenditures to expand the capacity of the continuing facilities. It is anticipated that $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the four year period following the Merger, without which the estimated cost savings may not be fully achievable. Management expects that the non-recurring integration costs will effectively offset any cost savings in the first year following the Merger. Because the assumptions underlying the cost savings estimates are numerous and detailed, management believes that it would be impractical to specify all such assumptions in this Prospectus. However, management also believes that all such assumptions are reasonable in light of existing business conditions and prospects. Investors are cautioned that the actual cost savings realized by the Company may vary considerably from the estimates contained herein and that undue reliance should not be placed upon such estimates. There also can be no assurance that unforeseen costs and expenses or other factors will not offset the projected cost savings in whole or in part. REGIONAL ECONOMIC CONDITIONS Following the consummation of the Merger, a substantial percentage of the Company's business (representing approximately 90% of pro forma sales) will be conducted in Southern California. Southern California began to experience a significant economic downturn in 1991 and has only recently begun a mild recovery. The economy in Southern California has been affected by substantial job losses in the defense and aerospace industries and other adverse economic trends. These adverse regional economic conditions have resulted in declining sales levels at Ralphs and Food 4 Less in recent periods. For the 52 weeks ended June 25, 1994, and the 52 weeks ended January 29, 1995, Food 4 Less and Ralphs experienced 6.9% and 3.7% declines, respectively, in comparable store sales as compared with the comparable period in the prior year, primarily reflecting the weak economy in Southern California, lower levels of price inflation in certain food product categories, and increased competitive store openings in Southern California. For the 31 weeks ended January 29, 1995 and the 32 weeks ended January 29, 1995, Food 4 Less and Ralphs experienced 4.6% and 3.2% declines, respectively, in comparable store sales. However, both Food 4 Less' and Ralphs' comparable store sales declines have begun to moderate in recent months. Although data indicate a mild recovery in the Southern California economy and management believes that overall sales trends in Southern California should improve along with the economy, there can be no assurance that improvement will occur or that substantial future declines in same store sales will not occur. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors in each of its operating divisions include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse club stores, deep discount drug stores and "super centers." Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use these resources to take steps which could adversely affect the Company's competitive position. See "Business -- Competition." CORPORATE STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES Following the consummation of the Merger, a significant portion of the Company's operating income will be generated by its subsidiaries. As a result, the Company will rely on distributions or advances from its subsidiaries to provide a portion of the funds necessary to meet its debt service obligations, including the payment of principal and interest on the New Notes. Should the Company fail to satisfy any payment obligation under the New Notes, the holders would have a direct claim therefor against the Subsidiary Guarantors pursuant to their Guarantees. However, the capital stock of, and substantially all of the assets of, the Subsidiary Guarantors will be pledged to secure the obligations of the Company and such subsidiaries under the New Credit Facility and other secured obligations. The New Indentures will limit, but not prohibit, the ability of the Company and its subsidiaries to incur additional secured indebtedness. In the event of a default under the New Credit Facility (or any other secured indebtedness), the lenders thereunder would be entitled to a claim on the assets securing such indebtedness which is prior to any claim of the holders of the New Notes. Accordingly, there may be insufficient assets remaining after payment of prior secured claims (including claims of lenders under the New Credit Facility) to pay amounts due on the New Notes. In addition, if a court were to avoid the Guarantees under fraudulent conveyance laws or other legal principles or, by the terms of such Guarantees, the obligations thereunder were reduced as necessary to prevent such avoidance, or the Guarantees were released, the claims of other creditors of the Subsidiary Guarantors, including trade creditors, would to such extent have priority as to the assets of such Subsidiary Guarantors over the claims of the holders of the New Notes. The Guarantees of the New Notes by any Subsidiary Guarantor will be released upon the sale of such Subsidiary Guarantor or upon the release by the lenders under the New Credit Facility of such Subsidiary Guarantor's Guarantee of the Company's obligation under the New Credit Facility. The New Indentures limit the ability of the Company and its subsidiaries to incur additional indebtedness and to enter into agreements that would restrict the ability of any subsidiary to make distributions, loans or other payments to the Company. However, these limitations are subject to certain exceptions. See "-- Fraudulent Conveyance Risks" and "Description of the New Notes." CONTROL OF THE COMPANY Following completion of the Merger, the FFL Merger and the Reincorporation Merger, all of the Company's outstanding common stock will be held by New Holdings. Pro forma for such mergers and certain related events, affiliates of Yucaipa and Apollo will have beneficial ownership of approximately 41.8% and 33.9%, respectively, of the outstanding capital stock of New Holdings. Pursuant to a new stockholders' agreement (the "1995 Stockholders Agreement") which will be entered into by the New Equity Investors and certain current FFL stockholders and Holdings warrantholders, upon completion of the Merger, New Holdings and the Company will have boards consisting of nine and ten members, respectively, and (i) Yucaipa will have the right to elect six directors to the board of New Holdings and seven directors to the board of the Company, (ii) Apollo will have the right to elect two directors to the board of each of New Holdings and the Company and (iii) the other New Equity Investors will have the right to elect one director to the board of each of New Holdings and the Company. Under the 1995 Stockholders Agreement, unless and until New Holdings has effected an initial public offering of its equity securities meeting certain criteria, New Holdings and its subsidiaries, including the Company, may not take certain actions without the approval of the New Holdings directors which the New Equity Investors are entitled to elect, including but not limited to certain mergers, sale transactions, transactions with affiliates, issuances of capital stock and payments of dividends on or repurchases of capital stock. As a result of the ownership structure of the Company and the contractual rights described above, the voting and management control of the Company is highly concentrated. Yucaipa, acting with the consent of the directors elected by the New Equity Investors, has the ability to direct the actions of the Company with respect to matters such as the payment of dividends, material acquisitions and dispositions and other extraordinary corporate transactions. Yucaipa will be a party to a consulting agreement with the Company, pursuant to which Yucaipa will render certain management and advisory services to the Company, and will receive fees for such services. Yucaipa will also receive certain fees in connection with the consummation of the Merger, including an advisory fee of $21.5 million, of which $17.5 million will be paid through the issuance of New Discount Debentures. In addition, as a result of the Merger, certain officers and former officers of Ralphs will redeem the EARs for $17.8 million in cash and a deferred payment of up to $5 million and will cancel certain options to purchase common stock of RSI for $880,000. An additional $10 million of the EARs, however, will be reinvested in New Holdings by such officers and former officers. Yucaipa also will be reimbursed for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. In addition, on the Closing Date the Company and EJDC will enter into a Consulting Agreement, pursuant to which EJDC will act as a consultant to the Company with respect to certain real estate and general commercial matters for a period of five years from the Closing Date in exchange for the payment of a one-time consulting fee of $9 million, of which $4 million will be used to purchase interests in the partnership that will purchase New Discount Debentures. See "Certain Relationships and Related Transactions," "Principal Stockholders" and "Description of Capital Stock." SUBORDINATION OF THE NEW SENIOR SUBORDINATED NOTES The payment of principal, premium, if any, and interest on, and any other amounts owing in respect of, the New Senior Subordinated Notes will be subordinated to the prior payment in full of all existing and future Senior Indebtedness, including indebtedness under the New Credit Facility, the New Senior Notes and the Old F4L Senior Notes, if any. Each Subsidiary Guarantor's Senior Subordinated Note Guarantee will also be subordinated in right of payment to Senior Indebtedness of the Subsidiary Guarantors ("Guarantor Senior Indebtedness"). Guarantor Senior Indebtedness will include all existing and future indebtedness not expressly subordinated to other indebtedness, including indebtedness represented by the guarantee of each Subsidiary Guarantor under the New Credit Facility, the New Senior Notes and the Old F4L Senior Notes, if any. As of January 29, 1995, on a pro forma basis, after giving effect to the Merger and the Financing (and certain related assumptions), the aggregate outstanding amount of Senior Indebtedness of the Company (excluding Company guarantees of certain Guarantor Senior Indebtedness) would have been approximately $1,402.6 million and the aggregate outstanding amount of Guarantor Senior Indebtedness of the Subsidiary Guarantors (excluding guarantees by Subsidiary Guarantors of certain Senior Indebtedness of the Company) would have been approximately $16.9 million and the Company would have had $188.4 million available to be borrowed under the New Revolving Facility. The New Senior Subordinated Note Indenture will limit, but not prohibit, the issuance by the Subsidiary Guarantors of additional indebtedness which is Guarantor Senior Indebtedness. See "Description of the New Notes -- Guarantees." In the event of the bankruptcy, liquidation, dissolution, reorganization or other winding up of the Company, the assets of the Company will be available to pay obligations on the New Senior Subordinated Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the New Senior Subordinated Notes. In addition, under certain circumstances, the Company may not pay principal of, premium, if any, or interest on, or any other amounts owing in respect of, the New Senior Subordinated Notes, or purchase, redeem or otherwise retire the New Senior Subordinated Notes, if a payment default or a non-payment default exists with respect to certain Senior Indebtedness and, in the case of a non-payment default, a payment blockage notice has been received by the New Senior Subordinated Note Trustee (as defined). See "Description of the New Notes -- Subordination of the New Senior Subordinated Notes." FRAUDULENT CONVEYANCE RISKS Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court to subordinate or avoid the New Notes or any Guarantee in favor of other existing or future creditors of the Company or a Subsidiary Guarantor. If a court in a lawsuit on behalf of any unpaid creditor of the Company or a representative of the Company's creditors were to find that, at the time the Company issued the New Notes, the Company (x) intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) did not receive fair consideration or reasonably equivalent value for issuing such New Notes and the Company (i) was insolvent, (ii) was rendered insolvent by reason of such distribution, (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void such New Notes and void such transactions. Alternatively, in such event, claims of the holders of such New Notes could be subordinated to claims of the other creditors of the Company. The Company's obligations under the New Notes will be guaranteed by the Subsidiary Guarantors. To the extent that a court were to find that (x) a Guarantee was incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any present or future creditor or the Subsidiary Guarantor contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) such Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for issuing its Guarantee and such Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the issuance of such Guarantee, (iii) was engaged or about to engage in a business or transaction for which the remaining assets of such Subsidiary Guarantor constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the court could void or subordinate such Guarantee in favor of the Subsidiary Guarantor's creditors. Among other things, a legal challenge of a Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Subsidiary Guarantor as a result of the issuance by the Company of the applicable New Notes. To the extent any Guarantees were avoided as a fraudulent conveyance or held unenforceable for any other reason, holders of the New Notes would cease to have any claim in respect of such Subsidiary Guarantor and would be creditors solely of the Company and any Subsidiary Guarantor whose Guarantee was not avoided or held unenforceable. In such event, the claims of the holders of the applicable New Notes against the issuer of an invalid Guarantee would be subject to the prior payment of all liabilities and preferred stock claims of such Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims and preferred stock interests, if any, there would be sufficient assets to satisfy the claims of the holders of the applicable New Notes relating to any voided portions of any of the Guarantees. Based upon financial and other information currently available to it, management of the Company believes that the New Notes and the Guarantees are being incurred for proper purposes and in good faith and that the Company and each Subsidiary Guarantor (i) is solvent and will continue to be solvent after issuing the New Notes or its Guarantees, as the case may be, (ii) will have sufficient capital for carrying on its business after such issuance, and (iii) will be able to pay its debts as they mature. See "Management's Discussions and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ABSENCE OF ESTABLISHED MARKET FOR THE NEW NOTES There is no established market for the New Notes and there can be no assurance as to the liquidity of any markets that may develop for the New Notes, the ability of holders of the New Notes to sell their New Notes, or the price at which holders would be able to sell their New Notes. Future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Underwriters have advised the Company that they currently intend to make a market in the New Notes. However, the Underwriters are not obligated to do so and any market-making may be discontinued at any time without notice. NET LOSSES Food 4 Less has reported a net loss of $11.5 million for the 31 weeks ended January 29, 1995, $2.7 million for the 52 weeks ended June 25, 1994, $27.4 million for the 52 weeks ended June 26, 1993, $33.8 million for the 52 weeks ended June 27, 1992, $9.6 million for the 52 weeks ended June 29, 1991 and $10.1 million for the 53 weeks ended June 30, 1990. Ralphs has reported net earnings of $32.1 million for the 52 weeks ended January 29, 1995, $138.4 million for the 52 weeks ended January 30, 1994, a net loss of $76.1 million for the 52 weeks ended January 31, 1993, a net loss of $41.2 million for the 52 weeks ended February 2, 1992 and a net loss of $51.4 million for the 53 weeks ended February 3, 1991. On a pro forma basis for the 52 weeks ended June 25, 1994 and the 31 weeks ended January 29, 1995, after giving effect to the Merger and the Financing (and certain related assumptions), the Company would have reported a net loss of approximately $82.9 million and $51.9 million, respectively. There can be no assurance that the Company will not continue to report net losses in the future.

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+RISK FACTORS Prospective investors should carefully consider the following factors, in addition to the other matters described in this Prospectus, before purchasing New Notes. LEVERAGE AND DEBT SERVICE Following the consummation of the Merger and the Financing, the Company will be highly leveraged. At January 29, 1995, pro forma for the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), the Company's total indebtedness (including current maturities) and stockholder's equity would have been $1,984.7 million and $279.8 million, respectively, and the Company would have had an additional $188.4 million available to be borrowed under the New Revolving Facility. In addition, as of January 29, 1995, after giving effect to the Merger, the FFL Merger, the Reincorporation Merger and the Financing (and certain related assumptions), scheduled payments under operating leases of the Company and its subsidiaries for the twelve months following the Merger would have been $125.6 million. On the same pro forma basis, for the 52 weeks ended June 25, 1994 and the 31 weeks ended January 29, 1995, the Company's earnings before fixed charges would have been inadequate to cover fixed charges by $82.9 million and $51.9 million, respectively. However, such earnings include non-cash charges of $189.2 million and $114.0 million, respectively, primarily consisting of depreciation and amortization. New Holdings will be required to make semi-annual cash payments of interest on the New Discount Debentures and the Seller Debentures commencing five years from their date of issuance in the amount of approximately $61 million per annum. In addition, New Holdings will be required to commence semi-annual cash payments of interest on any Discount Notes that remain outstanding following the Merger commencing June 15, 1998. The New Indentures permit the Company (in the absence of a default or event of default thereunder) to pay cash dividends to New Holdings in an amount sufficient to allow New Holdings to pay interest on such Indebtedness when due. The Company's ability to make scheduled payments of the principal of, or interest on, or to refinance its Indebtedness (including the New Notes) and to make scheduled payments under its operating leases depends on its future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond its control. Based upon the current level of operations and anticipated cost savings, the Company believes that its cash flow from operations, together with borrowings under the New Revolving Facility and its other sources of liquidity (including leases), will be adequate to meet its anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments over the next several years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated cost savings can be fully achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and make necessary capital expenditures, or if its future earnings growth is insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained, particularly in view of the Company's high level of debt following the Merger and the fact that substantially all of its assets will be pledged to secure the borrowings under the New Credit Facility and other secured obligations. The Company's high level of debt will have several important effects on its future operations, including the following: (a) the Company will have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing the Company's vulnerability to adverse general economic and industry conditions; (b) the financial covenants and other restrictions contained in the New Credit Facility and other agreements relating to the Company's indebtedness and in the New Indentures will require the Company to meet certain financial tests and will restrict its ability to borrow additional funds, to dispose of assets or to pay cash dividends; and (c) because of the Company's debt service requirements, funds available for working capital, capital expenditures, acquisitions and general corporate purposes, may be limited. The Company's leveraged position may increase its vulnerability to competitive pressures. The Company's continued growth depends, in part, on its ability to continue its expansion and store conversion efforts, and, therefore, its inability to finance capital expenditures through borrowed funds could have a material adverse effect on the Company's future operations. Moreover, any default under the documents governing the indebtedness of the Company could have a significant adverse effect on the market value of the New Notes. ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS Management of the Company has estimated that approximately $90 million of annualized net cost savings (as compared to such costs for the pro forma combined fiscal year ended June 25, 1994) can be achieved over a four year period as a result of integrating the operations of Ralphs and Food 4 Less. See "Business -- The Merger." The cost savings estimates have been prepared solely by members of the management of each company. The estimates necessarily make numerous assumptions as to future sales levels and other operating results, the availability of funds for capital expenditures as well as general industry and business conditions and other matters, many of which are beyond the control of the Company. Several of the cost savings estimates are premised on the assumption that certain levels of efficiency presently maintained by either Food 4 Less or Ralphs can be achieved by the combined Company following the Merger. Other estimates are based on a management consensus as to what levels of purchasing and similar efficiencies should be achievable by an entity the size of the Company. Certain of the estimates relating to the consolidation of warehousing and distribution facilities assume the completion of certain capital expenditures to expand the capacity of the continuing facilities. It is anticipated that $117 million in Merger-related capital expenditures and $50 million of other non-recurring costs will be required to complete store conversions, integrate operations and expand warehouse facilities over the four year period following the Merger, without which the estimated cost savings may not be fully achievable. Management expects that the non-recurring integration costs will effectively offset any cost savings in the first year following the Merger. Because the assumptions underlying the cost savings estimates are numerous and detailed, management believes that it would be impractical to specify all such assumptions in this Prospectus. However, management also believes that all such assumptions are reasonable in light of existing business conditions and prospects. Investors are cautioned that the actual cost savings realized by the Company may vary considerably from the estimates contained herein and that undue reliance should not be placed upon such estimates. There also can be no assurance that unforeseen costs and expenses or other factors will not offset the projected cost savings in whole or in part. REGIONAL ECONOMIC CONDITIONS Following the consummation of the Merger, a substantial percentage of the Company's business (representing approximately 90% of pro forma sales) will be conducted in Southern California. Southern California began to experience a significant economic downturn in 1991 and has only recently begun a mild recovery. The economy in Southern California has been affected by substantial job losses in the defense and aerospace industries and other adverse economic trends. These adverse regional economic conditions have resulted in declining sales levels at Ralphs and Food 4 Less in recent periods. For the 52 weeks ended June 25, 1994, and the 52 weeks ended January 29, 1995, Food 4 Less and Ralphs experienced 6.9% and 3.7% declines, respectively, in comparable store sales as compared with the comparable period in the prior year, primarily reflecting the weak economy in Southern California, lower levels of price inflation in certain food product categories, and increased competitive store openings in Southern California. For the 31 weeks ended January 29, 1995 and the 32 weeks ended January 29, 1995, Food 4 Less and Ralphs experienced 4.6% and 3.2% declines, respectively, in comparable store sales. However, both Food 4 Less' and Ralphs' comparable store sales declines have begun to moderate in recent months. Although data indicate a mild recovery in the Southern California economy and management believes that overall sales trends in Southern California should improve along with the economy, there can be no assurance that improvement will occur or that substantial future declines in same store sales will not occur. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. The Company's competitors in each of its operating divisions include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse club stores, deep discount drug stores and "super centers." Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. Some of the Company's competitors have greater financial resources than the Company and could use these resources to take steps which could adversely affect the Company's competitive position. See "Business -- Competition." CORPORATE STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES Following the consummation of the Merger, a significant portion of the Company's operating income will be generated by its subsidiaries. As a result, the Company will rely on distributions or advances from its subsidiaries to provide a portion of the funds necessary to meet its debt service obligations, including the payment of principal and interest on the New Notes. Should the Company fail to satisfy any payment obligation under the New Notes, the holders would have a direct claim therefor against the Subsidiary Guarantors pursuant to their Guarantees. However, the capital stock of, and substantially all of the assets of, the Subsidiary Guarantors will be pledged to secure the obligations of the Company and such subsidiaries under the New Credit Facility and other secured obligations. The New Indentures will limit, but not prohibit, the ability of the Company and its subsidiaries to incur additional secured indebtedness. In the event of a default under the New Credit Facility (or any other secured indebtedness), the lenders thereunder would be entitled to a claim on the assets securing such indebtedness which is prior to any claim of the holders of the New Notes. Accordingly, there may be insufficient assets remaining after payment of prior secured claims (including claims of lenders under the New Credit Facility) to pay amounts due on the New Notes. In addition, if a court were to avoid the Guarantees under fraudulent conveyance laws or other legal principles or, by the terms of such Guarantees, the obligations thereunder were reduced as necessary to prevent such avoidance, or the Guarantees were released, the claims of other creditors of the Subsidiary Guarantors, including trade creditors, would to such extent have priority as to the assets of such Subsidiary Guarantors over the claims of the holders of the New Notes. The Guarantees of the New Notes by any Subsidiary Guarantor will be released upon the sale of such Subsidiary Guarantor or upon the release by the lenders under the New Credit Facility of such Subsidiary Guarantor's Guarantee of the Company's obligation under the New Credit Facility. The New Indentures limit the ability of the Company and its subsidiaries to incur additional indebtedness and to enter into agreements that would restrict the ability of any subsidiary to make distributions, loans or other payments to the Company. However, these limitations are subject to certain exceptions. See "-- Fraudulent Conveyance Risks" and "Description of the New Notes." CONTROL OF THE COMPANY Following completion of the Merger, the FFL Merger and the Reincorporation Merger, all of the Company's outstanding common stock will be held by New Holdings. Pro forma for such mergers and certain related events, affiliates of Yucaipa and Apollo will have beneficial ownership of approximately 41.8% and 33.9%, respectively, of the outstanding capital stock of New Holdings. Pursuant to a new stockholders' agreement (the "1995 Stockholders Agreement") which will be entered into by the New Equity Investors and certain current FFL stockholders and Holdings warrantholders, upon completion of the Merger, New Holdings and the Company will have boards consisting of nine and ten members, respectively, and (i) Yucaipa will have the right to elect six directors to the board of New Holdings and seven directors to the board of the Company, (ii) Apollo will have the right to elect two directors to the board of each of New Holdings and the Company and (iii) the other New Equity Investors will have the right to elect one director to the board of each of New Holdings and the Company. Under the 1995 Stockholders Agreement, unless and until New Holdings has effected an initial public offering of its equity securities meeting certain criteria, New Holdings and its subsidiaries, including the Company, may not take certain actions without the approval of the New Holdings directors which the New Equity Investors are entitled to elect, including but not limited to certain mergers, sale transactions, transactions with affiliates, issuances of capital stock and payments of dividends on or repurchases of capital stock. As a result of the ownership structure of the Company and the contractual rights described above, the voting and management control of the Company is highly concentrated. Yucaipa, acting with the consent of the directors elected by the New Equity Investors, has the ability to direct the actions of the Company with respect to matters such as the payment of dividends, material acquisitions and dispositions and other extraordinary corporate transactions. Yucaipa will be a party to a consulting agreement with the Company, pursuant to which Yucaipa will render certain management and advisory services to the Company, and will receive fees for such services. Yucaipa will also receive certain fees in connection with the consummation of the Merger, including an advisory fee of $21.5 million, of which $17.5 million will be paid through the issuance of New Discount Debentures. In addition, as a result of the Merger, certain officers and former officers of Ralphs will redeem the EARs for $17.8 million in cash and a deferred payment of up to $5 million and will cancel certain options to purchase common stock of RSI for $880,000. An additional $10 million of the EARs, however, will be reinvested in New Holdings by such officers and former officers. Yucaipa also will be reimbursed for (i) any losses incurred upon the resale of the $10 million principal amount of Seller Debentures which may be put to it pursuant to the Put Agreement and (ii) its expenses in connection with the Merger and the related transactions. In addition, on the Closing Date the Company and EJDC will enter into a Consulting Agreement, pursuant to which EJDC will act as a consultant to the Company with respect to certain real estate and general commercial matters for a period of five years from the Closing Date in exchange for the payment of a one-time consulting fee of $9 million, of which $4 million will be used to purchase interests in the partnership that will purchase New Discount Debentures. See "Certain Relationships and Related Transactions," "Principal Stockholders" and "Description of Capital Stock." SUBORDINATION OF THE NEW SENIOR SUBORDINATED NOTES The payment of principal, premium, if any, and interest on, and any other amounts owing in respect of, the New Senior Subordinated Notes will be subordinated to the prior payment in full of all existing and future Senior Indebtedness, including indebtedness under the New Credit Facility, the New Senior Notes and the Old F4L Senior Notes, if any. Each Subsidiary Guarantor's Senior Subordinated Note Guarantee will also be subordinated in right of payment to Senior Indebtedness of the Subsidiary Guarantors ("Guarantor Senior Indebtedness"). Guarantor Senior Indebtedness will include all existing and future indebtedness not expressly subordinated to other indebtedness, including indebtedness represented by the guarantee of each Subsidiary Guarantor under the New Credit Facility, the New Senior Notes and the Old F4L Senior Notes, if any. As of January 29, 1995, on a pro forma basis, after giving effect to the Merger and the Financing (and certain related assumptions), the aggregate outstanding amount of Senior Indebtedness of the Company (excluding Company guarantees of certain Guarantor Senior Indebtedness) would have been approximately $1,402.6 million and the aggregate outstanding amount of Guarantor Senior Indebtedness of the Subsidiary Guarantors (excluding guarantees by Subsidiary Guarantors of certain Senior Indebtedness of the Company) would have been approximately $16.9 million and the Company would have had $188.4 million available to be borrowed under the New Revolving Facility. The New Senior Subordinated Note Indenture will limit, but not prohibit, the issuance by the Subsidiary Guarantors of additional indebtedness which is Guarantor Senior Indebtedness. See "Description of the New Notes -- Guarantees." In the event of the bankruptcy, liquidation, dissolution, reorganization or other winding up of the Company, the assets of the Company will be available to pay obligations on the New Senior Subordinated Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the New Senior Subordinated Notes. In addition, under certain circumstances, the Company may not pay principal of, premium, if any, or interest on, or any other amounts owing in respect of, the New Senior Subordinated Notes, or purchase, redeem or otherwise retire the New Senior Subordinated Notes, if a payment default or a non-payment default exists with respect to certain Senior Indebtedness and, in the case of a non-payment default, a payment blockage notice has been received by the New Senior Subordinated Note Trustee (as defined). See "Description of the New Notes -- Subordination of the New Senior Subordinated Notes." FRAUDULENT CONVEYANCE RISKS Various fraudulent conveyance laws have been enacted for the protection of creditors and may be utilized by a court to subordinate or avoid the New Notes or any Guarantee in favor of other existing or future creditors of the Company or a Subsidiary Guarantor. If a court in a lawsuit on behalf of any unpaid creditor of the Company or a representative of the Company's creditors were to find that, at the time the Company issued the New Notes, the Company (x) intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) did not receive fair consideration or reasonably equivalent value for issuing such New Notes and the Company (i) was insolvent, (ii) was rendered insolvent by reason of such distribution, (iii) was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void such New Notes and void such transactions. Alternatively, in such event, claims of the holders of such New Notes could be subordinated to claims of the other creditors of the Company. The Company's obligations under the New Notes will be guaranteed by the Subsidiary Guarantors. To the extent that a court were to find that (x) a Guarantee was incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any present or future creditor or the Subsidiary Guarantor contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) such Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for issuing its Guarantee and such Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the issuance of such Guarantee, (iii) was engaged or about to engage in a business or transaction for which the remaining assets of such Subsidiary Guarantor constituted unreasonably small capital to carry on its business, or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the court could void or subordinate such Guarantee in favor of the Subsidiary Guarantor's creditors. Among other things, a legal challenge of a Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Subsidiary Guarantor as a result of the issuance by the Company of the applicable New Notes. To the extent any Guarantees were avoided as a fraudulent conveyance or held unenforceable for any other reason, holders of the New Notes would cease to have any claim in respect of such Subsidiary Guarantor and would be creditors solely of the Company and any Subsidiary Guarantor whose Guarantee was not avoided or held unenforceable. In such event, the claims of the holders of the applicable New Notes against the issuer of an invalid Guarantee would be subject to the prior payment of all liabilities and preferred stock claims of such Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims and preferred stock interests, if any, there would be sufficient assets to satisfy the claims of the holders of the applicable New Notes relating to any voided portions of any of the Guarantees. Based upon financial and other information currently available to it, management of the Company believes that the New Notes and the Guarantees are being incurred for proper purposes and in good faith and that the Company and each Subsidiary Guarantor (i) is solvent and will continue to be solvent after issuing the New Notes or its Guarantees, as the case may be, (ii) will have sufficient capital for carrying on its business after such issuance, and (iii) will be able to pay its debts as they mature. See "Management's Discussions and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ABSENCE OF ESTABLISHED MARKET FOR THE NEW NOTES There is no established market for the New Notes and there can be no assurance as to the liquidity of any markets that may develop for the New Notes, the ability of holders of the New Notes to sell their New Notes, or the price at which holders would be able to sell their New Notes. Future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Underwriters have advised the Company that they currently intend to make a market in the New Notes. However, the Underwriters are not obligated to do so and any market-making may be discontinued at any time without notice. NET LOSSES Food 4 Less has reported a net loss of $11.5 million for the 31 weeks ended January 29, 1995, $2.7 million for the 52 weeks ended June 25, 1994, $27.4 million for the 52 weeks ended June 26, 1993, $33.8 million for the 52 weeks ended June 27, 1992, $9.6 million for the 52 weeks ended June 29, 1991 and $10.1 million for the 53 weeks ended June 30, 1990. Ralphs has reported net earnings of $32.1 million for the 52 weeks ended January 29, 1995, $138.4 million for the 52 weeks ended January 30, 1994, a net loss of $76.1 million for the 52 weeks ended January 31, 1993, a net loss of $41.2 million for the 52 weeks ended February 2, 1992 and a net loss of $51.4 million for the 53 weeks ended February 3, 1991. On a pro forma basis for the 52 weeks ended June 25, 1994 and the 31 weeks ended January 29, 1995, after giving effect to the Merger and the Financing (and certain related assumptions), the Company would have reported a net loss of approximately $82.9 million and $51.9 million, respectively. There can be no assurance that the Company will not continue to report net losses in the future.

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+CERTAIN RISK FACTORS Set forth below are certain significant risks involved in investing in the Shares offered by this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business and Properties" for a description of other factors affecting the Company's businesses generally. LEVERAGE Upon completion of the Plan of Reorganization, the Company continued to have significant indebtedness. At May 31, 1995, the Company had total consolidated debt of approximately $2,220,370,000 and a ratio of total consolidated debt to stockholders' equity of approximately 6.2 to 1.0. As a result of the Plan of Reorganization, the Company will have substantially higher interest expense. On a pro forma basis after giving effect to the Plan of Reorganization and related transactions, the Company would have reported a loss of $38.3 million for the year ended May 31, 1995. See "Pro Forma Consolidated Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The ability of the Company to meet its debt service obligations will be dependent upon the future performance of the Company, which, in turn, will be subject to general economic conditions and to financial, competitive, business and other factors, including factors beyond the Company's control. The level of the Company's indebtedness could restrict its flexibility in responding to changing business and economic conditions. The Company believes that the Mid-State Trust V Variable Funding Loan Agreement, a three-year $500 million credit facility described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition," will provide Mid-State Homes, Inc. ("Mid-State Homes") with the funds needed to purchase the instalment notes and mortgages generated by Jim Walter Homes, Inc. ("Jim Walter Homes"). See "Business and Properties--Mid-State Homes." The Company also believes that under present operating conditions sufficient operating cash flow will be generated through fiscal year 1999 to make all required interest and principal payments and planned capital expenditures and meet substantially all operating needs and that amounts available under the Bank Revolving Credit Facility described herein will be sufficient to meet peak operating needs. However, it is currently anticipated that sufficient operating cash flow will not be generated to repay at maturity the principal amount of the Series B Notes without refinancing a portion of such debt or selling assets. No assurance can be given that any refinancing will take place or that such sales of assets can be consummated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The degree to which the Company is leveraged and the terms governing the Company's debt instruments, including restrictive covenants and events of default, could have important consequences to holders of the Shares, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to service its indebtedness; (iii) terms of the Company's debt instruments will restrict the Company's ability to pay dividends and will impose other operating and financial restrictions; (iv) the Company may be more leveraged than other providers of similar products and services, which may place the Company at a competitive disadvantage; and (v) the Company's significant degree of leverage could make it more vulnerable to changes in general economic conditions. Following the Plan of Reorganization, the Company believes that it will be able through fiscal year 1999 to make its principal and interest payments as and when required with funds derived from its operations. However, unexpected declines in the Company's future business, increases in interest rates or the inability to borrow additional funds for its operations if and when required could impair the Company's ability to meet its debt service obligations and, therefore, have a material adverse effect on the Company's business and future prospects. No assurance can be given that additional debt or equity funds will be available when needed or, if available, on terms which are favorable to the Company. Moreover, the terms of the Company's indebtedness contain change in control provisions which may have the effect of discouraging a potential takeover of the Company. See "Capitalization," "Pro Forma Consolidated Statement of Operations," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition" and "-- Liquidity and Capital Resources" and "Description of Certain Indebtedness." Borrowings under the Company's $150 million Bank Revolving Credit Facility bear interest at rates that fluctuate. As of May 31, 1995, there were no borrowings under this facility; however there were $22,727,000 face amount of letters of credit outstanding thereunder. See "Description of Certain Indebtedness--Bank Revolving Credit Facility." ACCOUNTING PRESENTATION The Company emerged from bankruptcy on March 17, 1995. Accordingly, the Company's Consolidated Balance Sheets at and after May 31, 1995 and its Consolidated Statements of Operations and Retained Earnings (Deficit) for May 31, 1995 and periods thereafter will not be comparable to the Consolidated Financial Statements for prior periods included elsewhere herein. Furthermore, the Company's Consolidated Statement of Operations and Retained Earnings (Deficit) for May 31, 1995 will not be comparable to the Company's consolidated statements of operations and retained earnings (deficit) for periods thereafter. Among other things, the Consolidated Statement of Operations and Retained Earnings (Deficit) for the year ended May 31, 1995 includes numerous adjustments required by the Plan of Reorganization, including adjustments to interest expense, payment of substantial professional expenses related to the bankruptcy and payment of $390 million pursuant to the Veil Piercing Settlement described herein. See "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements." Similarly, the Company's Consolidated Balance Sheet as of May 31, 1995 reflects consummation of the Plan of Reorganization, and therefore is not comparable to the Company's Consolidated Balance Sheets at May 31, 1994 or dates prior thereto. DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company has never paid dividends on its common stock and has no present intention of paying any dividends on the Common Stock. In addition, the covenants in certain debt instruments to which the Company is a party restrict the ability of the Company to pay dividends. Under the Bank Revolving Credit Facility, the Company may pay cash dividends only after August 31, 1995 in an amount during any twelve-month period not to exceed the lesser of $5,500,000 and the Company's Available Cash Flow (as defined in the Bank Revolving Credit Facility) during the four most recently completed fiscal quarters, and only provided that the Company has met or exceeded certain financial ratio tests and that no default under the Bank Revolving Credit Facility has occurred or would result from the payment of such dividends. In addition, the Indenture prohibits the Company from making Restricted Payments (defined to include cash dividends); provided, however, the Company is permitted to declare and pay a regular quarterly cash dividend not to exceed $.025 per share on its Common Stock and to pay additional cash dividends in limited amounts (as determined under the Indenture), in each case, so long as no default under the Indenture has occurred or would result from the payment of such cash dividend and certain other conditions are satisfied. See "Dividend Policy" and "Description of Certain Indebtedness--Series B Senior Notes--Covenants" and "--Bank Revolving Credit Facility." HOLDING COMPANY STRUCTURE The Company has no business operations other than (i) holding the capital stock of its operating subsidiaries and intermediate holding companies, (ii) holding cash, cash equivalents and marketable securities and (iii) advancing funds to, and receiving funds from, its subsidiaries. In repaying its indebtedness the Company relies primarily on cash flows from its subsidiaries, including debt service and dividends. The ability of the Company's subsidiaries to make payments with respect to advances from the Company will be affected by the obligations of such subsidiaries to their creditors. Claims of holders of indebtedness of the Company against the cash flows and assets of the Company's subsidiaries will be effectively subordinated to claims of such creditors. The ability of such subsidiaries to pay dividends will also be subject to applicable law and, under certain circumstances, to restrictions contained in agreements entered into, or debt instruments issued, by the Company and its subsidiaries. Under the terms of the Bank Revolving Credit Facility, the subsidiaries of the Company may declare and pay dividends in cash to the Company to enable it to pay, among other things, amounts owing under the Series B Notes when such amounts become due and payable under the terms of the Indenture. See "Description of Certain Indebtedness--Bank Revolving Credit Facility." The Series B Notes are secured by pledges of the capital stock of each of the direct and indirect subsidiaries of the Company other than Mid-State Homes and its subsidiaries and Cardem Insurance. RESTRICTIVE COVENANTS The Indenture and the Bank Revolving Credit Facility contain a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, make capital expenditures, pay dividends, create liens on assets, enter into leases, investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including change of control and asset sale transactions). In addition, under the Bank Revolving Credit Facility, the Company is required to maintain specified financial ratios and comply with certain financial tests, including interest coverage and fixed charge coverage ratios, maximum leverage ratios and minimum earnings before interest, taxes, depreciation and amortization expense, some of which become more restrictive over time. A substantial portion of the Company's indebtedness is secured by the capital stock or assets of certain subsidiaries of the Company. The Company currently is in compliance with the covenants and restrictions contained in its existing debt instruments. However, its ability to continue to so comply may be affected by events beyond its control. The breach of any of these covenants or restrictions could result in a default under those debt instruments, which would permit the lenders or other creditors thereunder to declare all amounts borrowed thereunder to be due and payable together with accrued and unpaid interest, would result in the termination of the commitments of the lenders under the Bank Revolving Credit Facility to make further loans and issue letters of credit and could permit such lenders and other creditors to proceed against the collateral securing the obligations owing to them. Any such default could have a significant adverse effect on the market value and the marketability of the Shares. See "Description of Certain Indebtedness." RISKS OF BUSINESS DOWNTURN Certain of the Company's businesses are affected by general economic or other factors outside their control. The sales of United States Pipe and Foundry Company ("U.S. Pipe") are dependent to some extent upon the rate of residential and non-residential building construction and other forms of construction activity, and are thus subject to certain economic factors such as general economic conditions, the underlying need for construction projects, interest rates and governmental incentives provided to building projects. The cyclical nature of U.S. Pipe's business is offset to some extent by U.S. Pipe's sales to the replacement market. The replacement market generally fluctuates less than the rate of new construction and therefore tends to have a stabilizing influence during a period of depressed construction activity. Jim Walter Homes is also sensitive to certain general economic and other factors. Its business has tended to be countercyclical to national home construction activity. In times of high interest rates or lack of availability of mortgage funds, and thus limited new home construction, Jim Walter Homes' volume of home sales tends to increase due to the terms of the financing it offers. However, in times of low interest rates and increased availability of mortgage funds, Jim Walter Homes' volume of home sales tends to decrease. Also, in times of low interest rates and high availability of mortgage funds, additional competition is able to enter the market. A significant portion of the sales of Jim Walter Resources, Inc. ("Jim Walter Resources") are made pursuant to long-term contracts, which tend to stabilize the results of its operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business and Properties." ASBESTOS-RELATED LITIGATION SETTLEMENTS As discussed more fully under "Recent History" and "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements," the Company and the Indemnitees were defendants in the Veil Piercing Litigation and are beneficiaries of the Veil Piercing Settlement. In order for a holder of a Veil Piercing Claim or any claim related to the LBO which is held by any person who has asserted or may in the future assert Veil Piercing Claims (such claims and Veil Piercing Claims, whether asserted in the past or in the future, collectively, the "Settlement Claims") to assert that Settlement Claim against the Company or any of the Indemnitees, such holder would have to attack the Plan of Reorganization, the approval of the Class (as defined under "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements"), the approval of the Veil Piercing Settlement and all of the actions taken under the Veil Piercing Settlement. Because there were no objections to the Plan of Reorganization or the Veil Piercing Settlement (apart from an objection of the United States Environmental Protection Agency (the "EPA") concerning the scope of certain releases affecting government environmental claims; see "Business and Properties--Legal Proceedings--Plan of Reorganization"), such an attack would have to be based upon an alleged failure to provide due process under the United States Constitution. The Company believes, and the Bankruptcy Court has found, that due process requirements have been met. Should such an attack be sustained, however, the Company, the Indemnitees and the other Released Parties (as defined under "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements") could be exposed to additional liabilities in the future of an indeterminate, but possibly substantial, amount. Future holders of Settlement Claims may also attack the injunctions discussed under "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements" on the grounds that the Bankruptcy Court did not have jurisdiction over their future claims. The Company believes that the Bankruptcy Court and the Celotex bankruptcy court have jurisdiction to issue "channelling" injunctions barring such future claims, if any. In addition, the provisions of Section 524(g) of the Bankruptcy Code explicitly authorize an injunction barring claims by future claimants asserting asbestos-related diseases. Accordingly, if the Celotex bankruptcy court confirms a plan of reorganization containing such an injunction, as contemplated by the Veil Piercing Settlement, and such plan of reorganization is consummated, Section 524(g) of the Bankruptcy Code would be an additional basis for preventing future Settlement Claims from being asserted against the Company, the Indemnitees and the other Released Parties. However, there can be no assurance that such a plan of reorganization will be confirmed and consummated. There will be an evidentiary hearing on October 17, 1995, in the Celotex bankruptcy proceeding to consider all objections to the proposed disclosure statement for the plan of reorganization proposed by Celotex. The hearing will cover claims by certain constituencies in the Celotex bankruptcy proceeding that the proposed Celotex plan of reorganization does not comply with the Veil Piercing Settlement, and may result in changes to the proposed Celotex plan of reorganization, which could affect the availability of a Section 524(g) injunction in the Celotex bankruptcy proceeding. In addition, a future holder of a Settlement Claim may try to attack Section 524(g) as unconstitutional or try to preclude its application to the Company's case. Should that happen, the Company, the Indemnitees and the other Released Parties could be exposed to additional liabilities in the future of an indeterminate, but possibly substantial, amount. It is also possible that some constituencies might seek to have the terms of the Veil Piercing Settlement altered. In the National Gypsum reorganization, the trust established to settle asbestos claims has sought an order requiring the reorganized debtor in that case to make additional payments to the trust. The Company believes that should not happen in its case because the settlement amount is being paid into a separate trust with allocation of such funds to be decided in the Celotex bankruptcy proceeding pursuant to final court orders in both cases. Any such request would have to be made to the Bankruptcy Court, which has previously approved the settlement payment as fair, and/or the Celotex bankruptcy court, which also has previously approved the settlement payment as fair. However, should such a request be made and granted, the Company, the Indemnitees and the other Released Parties could be exposed to additional liabilities in the future of an indeterminate, but possible substantial, amount. LIQUIDITY; ABSENCE OF PUBLIC MARKET Through the date hereof, there has been no established public trading market for the Common Stock. Pursuant to the Plan of Reorganization the Common Stock was issued to a limited number of investors. The Common Stock has been approved for quotation and trading on NASDAQ/NMS under the symbol "WLTR". There can be no assurance that any active trading market will develop or will be sustained for the Common Stock or as to the price at which the Common Stock may trade or that the market for the Common Stock will not be subject to disruptions that will make it difficult or impossible for the holders of Common Stock to sell shares in a timely manner, if at all, or to recoup their investment in the Common Stock. The prices at which the Shares may be sold will be determined by the Selling Security Holders or by agreement between Selling Security Holders and underwriters or dealers, if any. See "Plan of Distribution." EFFECT OF FUTURE SALES OF COMMON STOCK No prediction can be made as to the effect, if any, that future sales of Shares, or the availability of Common Stock for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Pursuant to the Plan of Reorganization, an aggregate of 50,494,313 shares of Common Stock were issued on the Effective Date of the Plan of Reorganization. Pursuant to Section 1145 of the Bankruptcy Code, all of the issued and outstanding shares of Common Stock are freely tradeable without registration under the Securities Act, except for shares issued to an "underwriter" (as defined in Section 1145(b) of the Bankruptcy Code) or subsequently acquired by an "affiliate" of the Company. Except in limited circumstances, none of the holders of such shares has agreed to restrict or otherwise limit in any way such holder's ability to dispose of such shares of Common Stock. See "Description of Capital Stock--Common Stock Registration Rights Agreement." No assurance can be given that sales of substantial amounts of Common Stock will not occur in the foreseeable future or as to the effect that any such sales, or the perception that such sales may occur, will have on the market or the market price of the Common Stock. See "Market for the Common Stock." TAX CONSIDERATIONS A substantial controversy exists with regard to federal income taxes allegedly owed by the Company. Proofs of claim have been filed by the Internal Revenue Service (the "IRS") in the aggregate amount of $110,560,883 with respect to fiscal years ended August 31, 1980 and August 31, 1983 through August 31, 1987, $31,468,189 with respect to fiscal years ended May 31, 1988 (nine months) and May 31, 1989 and $44,837,693 with respect to fiscal years ended May 31, 1990 and May 31, 1991. Objections to the proofs of claim have been filed by the Company and the various issues are being litigated in the Bankruptcy Court. The Company believes that such proofs of claim are substantially without merit and intends to defend such claims against the Company vigorously, but there can be no assurance as to the ultimate outcome. Set forth under "Certain Federal Income Tax Consequences" is a description of certain United States federal income tax consequences to prospective purchasers expected to result from the purchase, ownership and sale or other disposition of the Shares under currently applicable law. DISPUTED CLAIMS RESERVES The total face amount of prepetition claims against the Company and certain of its subsidiaries which are still being disputed by the Company, including the Federal Income Tax Claims (see "Description of Capital Stock--Additional Stock Issuances"), is substantial. If the Company or any of its subsidiaries is unable to pay any claims which ultimately are allowed against it by the Bankruptcy Court, under the Plan of Reorganization the holders of such allowed claims would have recourse to the Company or any such subsidiary as applicable. Management does not expect that any allowed claims will have a material adverse effect on the Company's financial position. CERTAIN CORPORATE GOVERNANCE MATTERS; ANTITAKEOVER LEGISLATION The Restated Certificate of Incorporation of the Company (the "Charter") and the Plan of Reorganization provide that until March 17, 1998 the Board of Directors of the Company shall have nine members, two of whom must be Independent Directors (as defined under "Management--Board of Directors"), three of whom must be G. Robert Durham, James W. Walter and a senior officer of the Company (currently Kenneth E. Hyatt) or their successors who shall be senior officers of the Company, one of whom must be designated by KKR, an affiliate of certain principal stockholders of the Company, and three of whom must be designated by Lehman Brothers Inc. ("Lehman"), whose affiliate Lehman Brothers Holdings, Inc. ("Lehman Holdings") is another principal stockholder of the Company (except that (i) in certain circumstances KKR will have the right to compel the resignation of one or two of Lehman's designees and designate the successor(s), (ii) if more than one director is a designee of KKR, in certain circumstances Lehman will have the right to compel the resignation of one of KKR's designees and designate the successor and (iii) Lehman's or KKR's designees must resign if Lehman or KKR, as the case may be, cease to beneficially own a specified equity interest in the Company). Lehman has informed the Company and KKR that it has determined to transfer, after October 17, 1995, to KKR the right to appoint one of the three Lehman designees. See "Management--Board of Directors" and "Security Ownership of Management and Principal Stockholders." As a result of the foregoing provision, stockholders of the Company other than Lehman and KKR will not have the ability to elect any of the Company's directors prior to March 17, 1998. In addition, the Charter and the Company's By-laws provide that until March 17, 1998 each committee of the Board of Directors (other than the Tax Oversight Committee) must include a number of directors designated by KKR and Lehman, respectively, so that each of KKR and Lehman has representation on the committee proportionate to its representation on the Board. The Charter provides that the foregoing provision and certain other provisions of the By-laws cannot be amended by the Board of Directors prior to March 17, 1998 unless 67% of the whole Board of Directors votes in favor of the amendment. See "Management--Committees of the Board of Directors." The foregoing provisions would, among other things, impede the ability of a third party to acquire control of the Company by seeking election of its nominees to the Board of Directors. In addition, Section 203 ("Section 203") of the Delaware General Corporation Law (the "DGCL") provides that, subject to certain exceptions specified therein, an "interested stockholder" of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date on which such stockholder becomes an "interested stockholder" unless (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an "interested stockholder," (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (iii) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the "interested stockholder." Except as otherwise specified in Section 203, an "interested stockholder" is defined to include (x) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date and (y) the affiliates and associates of any such person. For purposes of Section 203, the Board has approved the transaction (the consummation of the Plan of Reorganization) which resulted in Lehman and the Celotex Settlement Fund Recipient becoming "interested stockholders" and, accordingly, the Company believes that neither of them will be subject to the restrictions of Section 203 unless it ceases to be the owner of 15% or more of the outstanding voting stock of the Company and seeks to reattain such level of ownership. The Board also approved the purchase of Common Stock by Channel One Associates, L.P., a limited partnership the general partner of which is KKR Associates, L.P. ("Channel One"), and its affiliates and associates of 15% or more of the outstanding voting stock of the Company through open market purchases or otherwise. Accordingly, the Company believes that none of Channel One and its affiliates and associates (including the KKR Investors referred to in "Security Ownership of Management and Principal Stockholders") will be subject to the restrictions of Section 203. In connection with the above-described Board approval, Channel One and the KKR Investors agreed with the Company that they will not, and will not permit any of their affiliates to, vote any shares of Common Stock of the Company or otherwise take any other action to modify the composition of the Board of Directors of the Company prior to April 6, 1998 other than as expressly provided for in the Company's Charter and the Plan of Reorganization and that during such period they will not participate in the solicitation of proxies to vote, or seek to advise or influence any person with respect to, voting securities of the Company to modify the composition of the Board of Directors, or propose, assist in or encourage any person in connection with any of the foregoing. See "Description of Capital Stock--Antitakeover Legislation." Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Charter does not exclude the Company from the restrictions imposed under Section 203. The provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the stockholder becoming an interested stockholder. Such provisions also may have the effect of preventing changes in the management of the Company. It is possible that such provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests.