WALTER INDUSTRIES INC /NEW/, POS AM, 1996-09-18

WALTER INDUSTRIES INC /NEW/
POS AM, 1996-09-18
GENERAL BLDG CONTRACTORS - RESIDENTIAL BLDGS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1996

REGISTRATION NO. 33-59013
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------

POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WALTER INDUSTRIES, INC.
(Exact name of registrant as specified in charter)

<TABLE>
<S> <C> <C>
DELAWARE 6711 13-3429953
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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1500 NORTH DALE MABRY HIGHWAY
TAMPA, FL 33607
(813) 871-4811
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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WILLIAM H. WELDON
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
WALTER INDUSTRIES, INC.
1500 NORTH DALE MABRY HIGHWAY
TAMPA, FL 33607
(813) 871-4523
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPY OF ALL COMMUNICATIONS, INCLUDING SERVICE OF PROCESS, TO:
PETER J. GORDON, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017-3909
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. X

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ___________________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ___________________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS

31,885,363 SHARES
WALTER INDUSTRIES, INC.
COMMON STOCK

This Prospectus relates to the offering from time to time of up to
31,885,363 shares (the "Shares") of common stock, par value $.01 per share (the
"Common Stock"), that were issued by Walter Industries, Inc. (the "Company" or
"Walter Industries"), a Delaware corporation formerly named Hillsborough
Holdings Corporation, to certain former creditors and stockholders of the
Company and its subsidiaries pursuant to the Company's Amended Joint Plan of
Reorganization dated as of December 9, 1994, as modified on March 1, 1995 (as so
modified, the "Plan of Reorganization"), under Section 1123(a) of the United
States Bankruptcy Code (the "Bankruptcy Code"). The Plan of Reorganization
became effective on March 17, 1995 (the "Effective Date of the Plan of
Reorganization"). Pursuant to the Plan of Reorganization, 50,494,313 shares of
Common Stock, including the Shares, were issued at that time.

The Shares may be sold to the public from time to time by certain holders
thereof (the "Selling Security Holders") in the amount and in the manner
described herein or as may be set forth in a Prospectus Supplement accompanying
this Prospectus. The Company will receive no proceeds from the sale of any of
the Shares by any of the Selling Security Holders. See "Plan of Distribution."

-------------------

SEE "CERTAIN RISK FACTORS" FOR INFORMATION CONCERNING CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN ANY OF THE SHARES.

The Company's Common Stock is listed on the Nasdaq National Market under the
symbol "WLTR". On September 16, 1996, the last reported sale price of the Common
Stock on the Nasdaq National Market was $ 13 3/8 per share. See "Price Range of
Common Stock and Dividend Policy."

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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 September 17, 1996

<PAGE>
The Selling Security Holders directly, through agents designated from time
to time, or through dealers or underwriters also to be designated, may sell the
Shares from time to time on terms to be determined at the time of sale. To the
extent required, the specific Shares to be sold, the names of the Selling
Security Holders, the respective purchase prices and public offering prices,
historical trading information for the Common Stock, the names of any such
agent, dealer or underwriter, and any applicable commissions or discounts with
respect to a particular offer will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution." If the Company is advised that an
underwriter has been engaged with respect to the sale of any Shares offered
hereby, or in the event of any other material change in the plan of
distribution, the Company will cause an appropriate amendment to the
Registration Statement of which this Prospectus forms a part to be filed with
the Securities and Exchange Commission (the "Commission") reflecting such
engagement or other change. See "Additional Information." Each of the Selling
Security Holders reserves the sole right to accept and, together with its agents
from time to time, to reject in whole or in part any proposed purchase of Shares
to be made directly or through agents.

The Company will not receive any proceeds from this offering, but agreed to
pay substantially all of the expenses of this offering other than applicable
transfer taxes and commissions and discounts payable to dealers, agents or
underwriters. The Selling Security Holders and any broker-dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"), and any
commissions received by them and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Description of Capital Stock--Common Stock
Registration Rights Agreements" and "Plan of Distribution" for a description of
certain indemnification arrangements.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Reports and
other information concerning the Company may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511 and at Suite 1300, 7 World Trade Center, New York, New York 10048.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment
of the fees prescribed by the Commission. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants such as the Company that file
electronically with the Commission. Such reports and other information also can
be inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendments and exhibits thereto) under the Securities
Act with respect to the Shares offered hereby. This Prospectus, which forms a
part of such Registration Statement, does not contain all the information set
forth in such Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. 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 such Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Any interested parties may inspect such Registration Statement,
without charge, at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and may obtain copies of all
or any part of it from the Commission upon payment of the fees prescribed by the
Commission. Such Registration Statement also can be inspected at the offices of
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. Neither the delivery of this Prospectus or any
Prospectus Supplement nor any sales made hereunder or thereunder shall under any
circumstances create any implication that the information contained herein or
therein is correct as of any time subsequent to the date hereof or thereof or
that there has been no change in the affairs of the Company since the date
hereof or thereof.

2
<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information and consolidated financial statements (the "Consolidated Financial
Statements") and notes thereto appearing elsewhere in this Prospectus. The
Company operates, and during all periods for which financial information appears
herein operated, on a fiscal year ending May 31.

THE COMPANY

The Homebuilding and Related Financing Group sells, constructs on the
customer's site, and finances standardized partially finished homes. Sales are
made in approximately 24 states, primarily in the southern part of the United
States. Substantially all of the sales are made on credit provided by the Group.
A credit purchaser must provide his own land and give a first mortgage or deed
of trust to secure payment of the purchase price of the home.

The Water and Waste Water Transmission Products Group is one of the largest
domestic manufacturers of ductile iron pressure pipe and fittings. The Group
also manufactures valves and hydrants, fittings and castings.

The Natural Resources Group engages in coal mining and a related
degasification program. The Group owns four coal mines in Alabama and has the
capacity to produce a total of 9.7 million tons of coal annually. The Group
produced 7.9 million tons of coal in fiscal 1996. A substantial portion of this
output is under long-term contracts and the balance will be used internally to
produce furnace and foundry coke or sold to other customers on a short-term
contract or spot market basis. The Company does not consider itself to be a
significant factor in the domestic or international coal markets.

The Industrial and Other Products Group produces furnace and foundry grades
of coke, specialty chemicals, slag wool products, aluminum sheet, aluminum foil,
window and door screens, window balances, fireplace inserts, fireplaces and
accessories, municipal and original equipment manufacturer castings, patterns
and tooling and resin-coated sand. See "The Company" and "Business and
Properties."

RECENT HISTORY

The Company was organized in August 1987 by a group of investors led by
Kohlberg Kravis Roberts & Co., L.P. ("KKR") for the purpose of acquiring Jim
Walter Corporation, a Florida corporation ("Original Jim Walter"), pursuant to a
leveraged buyout (the "LBO"). Following its organization, the Company organized
and acquired all of the outstanding shares of capital stock of a group of direct
and indirect wholly owned subsidiaries, including Hillsborough Acquisition
Corporation ("HAC"). On September 18, 1987, HAC acquired approximately 95% of
the outstanding shares of common stock of Original Jim Walter pursuant to a cash
tender offer (the "Tender Offer"). On January 7, 1988, (i) Original Jim Walter
merged (the "Merger") into HAC (which changed its name to Jim Walter
Corporation), (ii) HAC distributed substantially all of its assets (principally
excluding the stock of The Celotex Corporation ("Celotex") and several other
subsidiaries of Original Jim Walter) to a parent corporation of HAC (which was
merged into the Company on April 1, 1991) in redemption of all of the shares of
capital stock of HAC owned by such parent corporation, (iii) HAC merged into its
other stockholder, another indirect wholly owned subsidiary of the Company, and
(iv) the surviving

3
<PAGE>
corporation of such merger changed its name to Jim Walter Corporation (and is
hereinafter referred to as "J-II" or "Jim Walter Corporation").

Following the Merger and prior to the commencement of the Chapter 11 Cases
(as defined below), the Company undertook a program of corporate reorganizations
and asset dispositions, which were contemplated by all of the debt agreements
entered into in connection with the Tender Offer and the Merger. Pursuant to
this program the Company restructured and/or disposed of certain of the
businesses of Original Jim Walter, including the disposition in April, 1988 of
all of the stock of the parent corporation of J-II.

Also during this time, the Company and certain of its subsidiaries and
certain of their former and current directors and officers, stockholders and
other persons and entities which were parties to or beneficiaries of
indemnification agreements and other indemnification obligations of the Company
and its subsidiaries (the "Indemnitees") were named as co-defendants in lawsuits
(the "Veil Piercing Litigation") brought by or on behalf of thousands of persons
("Asbestos Claimants") claiming asbestos-related damages against Celotex
alleging, among other things, that (i) Original Jim Walter, its successors and
other entities, including the Company and certain of its subsidiaries, were
liable for all damages, including asbestos-related damages, caused by products
manufactured, sold and distributed by a predecessor of Celotex, by reason of
claims sounding in piercing the corporate veil, alter ego and related theories
("Veil Piercing Claims"), and (ii) the aforementioned distribution by HAC of
substantially all of its assets pursuant to the LBO constituted a fraudulent
conveyance. See "Business and Properties--Legal Proceedings--Asbestos-Related
Litigation Settlements."

On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 ("Chapter 11") of the
Bankruptcy Code with the Bankruptcy Court for the Middle District of Florida,
Tampa Division (the "Bankruptcy Court"); one additional subsidiary also filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy Court
on December 3, 1990 (all such voluntary petitions for reorganization,
collectively, the "Chapter 11 Cases"). Two other subsidiaries, Cardem Insurance
Co., Ltd. (Bermuda) ("Cardem Insurance") and Jefferson Warrior Railroad Company,
Inc. ("J.W. Railroad"), did not file petitions for reorganization under Chapter
11. The filing of the voluntary petitions resulted from a sequence of events
stemming primarily from an inability of the Company's interest reset advisors to
reset interest rates on approximately $624 million of outstanding indebtedness,
which indebtedness by its terms required that the interest rates thereon be
reset to the rate per annum such indebtedness should bear in order to have a bid
value of 101% of the principal amount thereof as of December 2, 1989. The reset
advisors' inability to reset the interest rates was primarily attributable to
two factors: (i) uncertainties arising from the then-pending Veil Piercing
Litigation, including the possibility either that such litigation would lead to
the prohibition of further asset sales and debt repayment or that substantial
new asbestos-related claims might become assertible against the Company, which
uncertainties materially hindered the ability of the Company and its
subsidiaries to pursue a refinancing or sell assets to reduce debt, and (ii)
general turmoil in the high yield bond markets at such time, both of which
depressed the bid value of such indebtedness.

In January 1990, the Company and each of its subsidiaries which were party
to the Chapter 11 Cases filed a declaratory judgment action (the "Adversary
Proceeding") in the Bankruptcy Court against all known Asbestos Claimants who
had filed Veil Piercing Claims, Celotex and Jim Walter Corporation seeking a
declaration, among other things, that (i) the corporate veil between Celotex and
Original Jim Walter could not be pierced, (ii) the Company could not be held
liable for the asbestos-related liabilities of either Celotex or Jim Walter
Corporation on any grounds and (iii) the LBO could not be deemed a fraudulent
conveyance. In October 1990, Celotex and one of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 with the Bankruptcy Court for the
Middle District of Florida, Tampa Division (the "Celotex Bankruptcy Court").

4
<PAGE>
In January 1994, the indenture trustees for certain pre-LBO debentures of
Original Jim Walter assumed by the Company brought an action (the "Fraudulent
Conveyance Lawsuit") for the benefit of the Company's estate and its creditors,
which alleged that the issuance of debt in connection with the LBO constituted a
fraudulent conveyance under New York and Florida law. The plaintiffs sought to
avoid the obligations incurred by the Company and its subsidiaries in the LBO.

On the Effective Date of the Plan of Reorganization the Company and its
subsidiaries emerged from bankruptcy pursuant to the Plan of Reorganization. At
that time, pursuant to the Plan of Reorganization 50,494,313 shares of Common
Stock were issued to certain former creditors and stockholders of the Company
and its subsidiaries and $490,000,000 aggregate principal amount of the
Company's 12.19% Series B Senior Notes Due 2000 (the "Senior Notes") were issued
to certain former creditors of the Company and its subsidiaries. (The Senior
Notes were redeemed in full in January 1996; see "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Results of
Operations--Years Ended May 31, 1996 and Pro Forma 1995.")

Also pursuant to the Plan of Reorganization (i) the Veil Piercing Claims,
the Veil Piercing Litigation and the Adversary Proceeding, among other things,
were settled after a ruling by the Bankruptcy Court (which was affirmed on
appeal by the United States District Court for the Middle District of Florida)
finding in favor of the Company on every claim asserted in the Adversary
Proceeding and (ii) the Fraudulent Conveyance Lawsuit was settled. This
settlement of the Veil Piercing Litigation (the "Veil Piercing Settlement") was
entered into among the Company, certain of its creditors, Celotex, Jim Walter
Corporation and representatives of the Asbestos Claimants and provided for the
dismissal of all the Veil Piercing Claims and the release of the Company, KKR,
any and all of their present and former parents, subsidiaries, stockholders,
partners, officers, directors and employees and certain other parties
(collectively the "Released Parties") from all liabilities relating to the LBO
or associated with asbestos-related liabilities of Celotex or Jim Walter
Corporation. The Veil Piercing Settlement is embodied in the Plan of
Reorganization. The Veil Piercing Settlement, among other things, requires
Celotex, and certain other parties to the Celotex bankruptcy proceedings, to
propose and use their respective best efforts to obtain confirmation of a plan
of reorganization for Celotex that includes an injunction pursuant to Section
524(g) of the Bankruptcy Code ("Section 524(g)") or other similar injunctive
relief providing the same protection as a Section 524(g) injunction acceptable
to each of the Released Parties. Such injunctive relief would provide the
Company with additional assurance that Veil Piercing Claims cannot be asserted
in the future against the Company.

5
<PAGE>
Summary Judgment in part a final order and (2) denied without prejudice
Plaintiffs' Emergency Motion for Injunctive Relief, which sought an injunction
mandating that Celotex and Jim Walter Corporation comply with the Veil Piercing
Settlement. Celotex and Jim Walter Corporation each filed notices of appeal
from, inter alia, the Bankruptcy Court's Order granting in part Plaintiffs'
Motion for Summary Judgment. By order dated June 19, 1996, the Celotex
Bankruptcy Court denied confirmation of the Former Celotex Plan and ordered that
any new plans must be submitted by July 12, 1996. On July 12, 1996, competing
plans were filed by Celotex, Jim Walter Corporation, the Asbestos Bodily Injury
Claimants Committee and others (the "Bodily Injury Plan") and by the Asbestos
Property Damage Claimants Committee (the "Property Damage Plan"). The Company
filed objections to both plans, on the grounds that they did not comply fully
with the Veil Piercing Settlement. On August 23, 1996, both the Bodily Injury
Plan proponents and the Property Damage Plan proponents filed amended plans. The
Property Damage Plan, as amended, provides for a Section 524(g) injunction as to
all claimants. The Bodily Injury Plan, as amended, provides for a Section 524(g)
injunction as to all claimants, but reserves the right to seek confirmation of
the Bodily Injury Plan even if the asbestos property damage claimants class
votes against that plan. If the Bodily Injury Plan were to be confirmed over an
adverse vote of the property damage claimants class, that would appear to
preclude a Section 524(g) injunction as to asbestos property damage claims.
However, in such event the Bodily Injury Plan would still provide for an
injunction against asbestos property damage claims to the extent such an
injunction is allowed by Section 105 of the Bankruptcy Code. Both plans require
the approval of creditors and confirmation by the Celotex Bankruptcy Court. A
confirmation hearing concerning the Current Celotex Plan, as amended, and the
Property Damage Plan, as amended, is currently scheduled to commence on October
7, 1996. See "Business and Properties-- Legal Proceedings--Asbestos Related
Litigation Settlements."

See "Certain Risk Factors" for information concerning certain risks
associated with an investment in the Shares.

6
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA

The following data, insofar as it relates to each of the fiscal years 1992
through 1996, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1996 and 1995 and the related
consolidated statements of operations and retained earnings (deficit) and of
cash flows for the three years ended May 31, 1996 and the notes thereto
appearing elsewhere herein. All of the information presented below should be
read in conjunction with the Company's Consolidated Financial Statements and the
notes thereto, the pro forma consolidated statement of operations of the Company
(the "Pro Forma Consolidated Statement of Operations") and the notes thereto and
the other information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
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1992 1993(2) 1994 1995 1996(3)(4)
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(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Sales and revenues..................... $1,366,581 $1,318,986 $1,328,524 $1,442,322 $1,485,635
Cost of sales (exclusive of
depreciation)......................... 891,882 804,411 845,061 951,381 987,354
Depreciation, depletion and
amortization.......................... 82,801 70,483 71,035 72,037 74,341
Interest and amortization of debt
discount and expense (1)............. 177,060 171,581 155,470 304,548 208,690
Income tax expense(benefit)............ 12,463 24,328 28,917 (170,450) (55,155)
Income(loss) before extraordinary item
and cumulative effect of accounting
change (2)(3)(4)..................... 22,342 46,594 7,175 (358,645) (79,292)
Net income (loss)...................... 22,342 (58,014) 7,175 (358,645) (84,696)
Net loss per share (4)(5)..............
Loss before extraordinary item......... (7.10) (1.56)
Extraordinary item..................... -- (.10)
---------- ----------
Net loss............................... (7.10) (1.66)
---------- ----------
---------- ----------
Number of shares used in calculation of
loss per share........................ 50,494,313 50,988,195
ADDITIONAL FINANCIAL DATA:
Gross capital expenditures............. $ 68,349 $ 71,708 $ 69,831 $ 91,317 $ 83,523
Net property, plant and equipment...... 664,622 663,040 657,863 662,792 541,536
Total assets........................... 3,171,266 3,223,234 3,140,892 3,245,153 3,091,377
Long-term senior debt.................. 948,782 1,046,971 871,970 2,220,370 2,211,296
Liabilities subject to Chapter 11
proceedings........................... 1,845,328 1,725,631 1,727,684 -- --
Stockholders' equity (deficit)......... (230,119) (287,737) (282,353) 360,774 276,694

Employees at end of year............... 7,645 7,545 7,676 7,888 7,755
</TABLE>

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(1) Interest on unsecured obligations not accrued since December 27, 1989
amounted to $163.7 million in each of the years ended May 31, 1992 through
1994. The Company recorded additional interest and amortization of debt
discount and expense of $141.4 million related to the consummation of the
Plan of Reorganization in fiscal 1995.

(2) The Company adopted Statement of Financial Accounting Standards No. 106
"Employers' Accounting for Postretirement Benefits Other than Pensions
("FASB 106") and Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("FASB 109") during fiscal year 1993.

(3) The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("FASB 121") during fiscal year 1996.

(4) Extraordinary item consists of redemption premium and write off of
unamortized debt expense of $8.3 million ($5.4 million after tax) related to
early repayment of the Senior Notes and a $150 million bank credit facility
during fiscal year 1996. See Note 8 of Notes to Financial Statements.

(5) Per share information for fiscal years 1992 through 1994 is not relevant
given the significant change in the Company's capital structure following
consummation of the Plan of Reorganization. See Note 10 of Notes to
Financial Statements.

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<PAGE>
PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS

The following unaudited pro forma consolidated summary of operations was
prepared to illustrate the estimated effects of the Plan of Reorganization and
related financings and the application of the proceeds thereof as if they had
occurred for summary of operations purposes as of June 1, 1994.

THE PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS DOES NOT PURPORT TO BE
INDICATIVE OF THE RESULTS OF OPERATIONS THAT WOULD ACTUALLY HAVE BEEN REPORTED
HAD SUCH TRANSACTIONS IN FACT BEEN CONSUMMATED ON SUCH DATE OR OF THE RESULTS OF
OPERATIONS THAT MAY BE REPORTED BY THE COMPANY IN THE FUTURE. The unaudited pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable. All of the information presented below
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto, the Pro Forma Consolidated Statement of Operations and the notes
thereto and the other information contained elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 1995
------------------------
<S> <C>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNT)
Summary of Operations:
Sales and revenues.......................................................... $1,434,694
Cost of sales (exclusive of depreciation)................................... 951,381
Depreciation, depletion and amortization.................................... 72,037
Interest and amortization of debt expense................................... 223,184
Income tax expense.......................................................... 25,280
Net loss.................................................................... (38,277)
Net loss per share(1)....................................................... (.75)
</TABLE>

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(1) Net loss per share has been computed based on the weighted average number of
shares of Common Stock issuable (50,988,626, which includes 494,313
additional shares of Common Stock issued on September 13, 1995 (180 days
after the Effective Date of the Plan of Reorganization) pursuant to the Plan
of Reorganization, but does not include 3,880,140 additional shares issued
to an escrow account on such date pursuant to the Plan of Reorganization
because such issuance is contingent on future events and would be
anti-dilutive; see "Description of Capital Stock--Additional Stock
Issuances").

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<PAGE>
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
Results of Operations and Financial Condition" and "Business and Properties" for
a description of other factors affecting the Company's businesses generally.

LEVERAGE

At May 31, 1996, the Company had total consolidated debt of approximately
$2,211,296,000 and a ratio of total consolidated debt to stockholders' equity of
approximately 8.0 to 1.0. 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, the $500 million
credit facility described under "Business and Properties--Mid-State Homes", 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 to make all required interest and
principal payments and planned capital expenditures and meet substantially all
operating needs and that amounts available under the Credit Facilities (as
defined in "Description of Certain Indebtedness--Credit Facilities") will be
sufficient to meet peak operating needs.

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. 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 Results of Operations and Financial Condition--Financial Condition"
and "--Liquidity and Capital Resources" and "Description of Certain
Indebtedness--Credit Facilities."

Borrowings under the Company's Credit Facilities bear interest at rates that
fluctuate. As of May 31, 1996, borrowings under this facility totaled
$416,000,000. In addition, there were $23,042,000 face amount of letters of
credit outstanding thereunder. See "Description of Certain Indebtedness-- Credit
Facilities."

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<PAGE>
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 are not comparable to the Company's consolidated
statements of operations and retained earnings (deficit) for the year ended May
31, 1996 and 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 for dates prior thereto.

DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS

The Company has never paid cash dividends on its common stock and has no
present intention of paying any cash 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 cash dividends. Under the Credit
Facilities, commencing on June 1, 1996, in any period of twelve consecutive
months (on a non-cumulative basis, with the effect that amounts not paid in any
twelve month period may not be carried over for payment in a subsequent period)
the Company may pay cash dividends in an amount not to exceed: $5,500,000
provided the Consolidated Leverage Ratio (as defined in the Credit Facilities)
during the four most recently completed fiscal quarters is greater than 2.50 to
1; $11,000,000 provided such Consolidated Leverage Ratio is less than or equal
to 2.50 to 1; and $11,000,000 plus, to the extent positive, Cumulative Excess
Cash Flow (as defined in the Credit Facilities) provided such Consolidated
Leverage Ratio is less than or equal to 2.0 to 1, in each case also provided
that no default under the Credit Facilities has occurred or would result from
the payment of such dividends. See "Dividend Policy" and "Description of Certain
Indebtedness--Credit Facilities."

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. The ability of such
subsidiaries to pay dividends will be subject to applicable law. The Credit
Facilities are secured by pledges of the capital stock and intercompany notes of
each of the direct and indirect subsidiaries of the Company other than Mid-State
Holdings Corporation and its subsidiaries (collectively, "Mid-State Holdings")
and Cardem Insurance.

RESTRICTIVE COVENANTS

The Credit Facilities and the Mid-State Trust V Variable Funding Loan
Agreement 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

10
<PAGE>
corporate activities (including change of control and asset sale transactions).
In addition, under the Credit Facilities, the Company is required to maintain
specified financial ratios and comply with certain financial tests, including
interest coverage, fixed charge coverage and maximum leverage ratios, some of
which become more restrictive over time. A substantial portion of the Company's
indebtedness is secured by the capital stock and intercompany notes 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 Credit Facilities 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--Credit
Facilities."

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, Inc. ("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 Results of Operations and Financial Condition" 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

11
<PAGE>
releases affecting government environmental claims, which appeal has been
dismissed; 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 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 "channeling"
injunctions barring such future claims, if any. In addition, the provisions of
Section 524(g) 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) 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. Indeed,
through July 1996 Celotex and other parties to the Celotex bankruptcy
proceedings filed various plans of reorganization and/or amendments and
supplements thereto, and on August 5, 1996, the Company and others filed
objections to both the Bodily Injury Plan and the Property Damage Plan, on the
grounds that they did not comply fully with the Veil Piercing Settlement. On
August 23, 1996, both the Bodily Injury Plan proponents and the Property Damage
Plan proponents filed amended plans. The Property Damage Plan, as amended,
provides for a Section 524(g) injunction as to all claimants. The Bodily Injury
Plan, as amended, provides for a Section 524(g) injunction as to all claimants,
but reserves the right to seek confirmation of the Bodily Injury Plan even if
the asbestos property damage claimants class votes against that plan. If the
Bodily Injury Plan were to be confirmed over an adverse vote of the property
damage claimants class, that would appear to preclude a Section 524(g)
injunction as to asbestos property damage claims. However, in such event the
Bodily Injury Plan would still provide for an injunction against asbestos
property damage claims to the extent such an injunction is allowed by Section
105 of the Bankruptcy Code. See "Business and Properties--Legal
Proceedings--Asbestos-Related Litigation Settlements". 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.

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

12
<PAGE>
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. On September 13, 1995 (180 days after the Effective Date of the
Plan of Reorganization), 494,313 additional shares of Common Stock were issued
to certain current and former stockholders of the Company and 3,880,140
additional shares were issued to an escrow account and may be distributed to
such stockholders to the extent that certain contingencies regarding Federal
Income Tax Claims (as defined in "Description of Capital Stock--Additional Stock
Issuance") of the Company are resolved satisfactorily. See "Security Ownership
of Management and Principal Stockholders" and "Description of Capital
Stock--Additional Stock Issuances." 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 Agreements." 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 vigorously defend such claims against the Company, 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, 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 Kenneth J. Matlock, or
their successors selected by the remaining directors from the senior officers of
the Company (William H. Weldon and Kenneth E. Hyatt are now serving as
successors to G. Robert Durham and

13
<PAGE>

Kenneth J. Matlock, respectively; Mr. Welden has announced his intention to
retire on September 30, 1996 and will be succeeded as a director by Richard E.
Almy), two of whom must be designated by KKR, an affiliate of certain principal
stockholders of the Company, and two 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 of Lehman's designees and designate the successor, (ii) 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). 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 of Directors. 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 of Directors 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 of
Directors 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

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<PAGE>
the above-described approval of the Board of Directors, 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.

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<PAGE>
THE COMPANY

The Company, through its direct and indirect subsidiaries currently offers a
diversified line of products and services for homebuilding, water and waste
water transmission, residential and non-residential construction, and industrial
markets. A brief description of the Company's four major operating groups
follows.

The Company's executive offices are located at 1500 North Dale Mabry
Highway, Tampa, Florida 33607. The Company's telephone number is (813) 871-4811.

RECENT HISTORY

The Company was organized in August 1987 by a group of investors led by KKR
for the purpose of acquiring Original Jim Walter pursuant to the LBO. Following
its organization, the Company organized and acquired all of the outstanding
shares of capital stock of a group of direct and indirect wholly owned
subsidiaries, including HAC. On September 18, 1987, HAC acquired approximately
95% of the outstanding shares of common stock of Original Jim Walter pursuant to
the Tender Offer. On January 7, 1988, (i) Original Jim Walter merged into HAC
(which changed its name to Jim Walter Corporation), (ii) HAC distributed
substantially all of its assets (principally excluding the stock of Celotex and
several other subsidiaries of Original Jim Walter) to a parent corporation of
HAC (which was merged into the Company on April 1, 1991) in redemption of all of
the shares of capital stock of HAC owned by such parent corporation, (iii) HAC
merged into its other stockholder, another indirect wholly owned subsidiary of
the Company, and (iv) the surviving corporation of such merger changed its name
to Jim Walter Corporation.

Following the Merger and prior to the commencement of the Chapter 11 Cases,
the Company undertook a program of corporate reorganizations and asset
dispositions, which were contemplated by all of the debt agreements entered into
in connection with the Tender Offer and the Merger. Pursuant to this program the
Company restructured and/or disposed of certain of the businesses of Original
Jim Walter, including the disposition in April, 1988 of all of the stock of the
parent corporation of J-II.

Also during this time, the Company and certain of its subsidiaries and the
Indemnitees were named as co-defendants in the Veil Piercing Litigation brought
by or on behalf of the Asbestos Claimants claiming asbestos-related damages
against Celotex alleging, among other things, that (i) Original Jim

16
<PAGE>
Walter, its successors and other entities, including the Company and certain of
its subsidiaries, were liable for all damages, including asbestos-related
damages, caused by products manufactured, sold and distributed by a predecessor
of Celotex, by reason of the Veil Piercing Claims, and (ii) the aforementioned
distribution by HAC of substantially all of its assets pursuant to the LBO
constituted a fraudulent conveyance. See "Business and Properties--Legal
Proceedings--Asbestos-Related Litigation Settlements."

On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court; one additional subsidiary also filed a voluntary petition for
reorganization under Chapter 11 with the Bankruptcy Court on December 3, 1990.
Two other subsidiaries, Cardem Insurance and J.W. Railroad, did not file
petitions for reorganization under Chapter 11. The filing of the voluntary
petitions resulted from a sequence of events stemming primarily from an
inability of the Company's interest reset advisors to reset interest rates on
approximately $624 million of outstanding indebtedness, which indebtedness by
its terms required that the interest rates thereon be reset to the rate per
annum such indebtedness should bear in order to have a bid value of 101% of the
principal amount thereof as of December 2, 1989. The reset advisors' inability
to reset the interest rates was primarily attributable to two factors: (i)
uncertainties arising from the then-pending Veil Piercing Litigation, including
the possibility either that such litigation would lead to the prohibition of
further asset sales and debt repayment or that substantial new asbestos-related
claims might become assertible against the Company, which uncertainties
materially hindered the ability of the Company and its subsidiaries to pursue a
refinancing or sell assets to reduce debt, and (ii) general turmoil in the high
yield bond markets at such time, both of which depressed the bid value of such
indebtedness.

In January 1990, the Company and each of its subsidiaries which were party
to the Chapter 11 Cases filed the Adversary Proceeding in the Bankruptcy Court
against all known Asbestos Claimants who had filed Veil Piercing Claims, Celotex
and Jim Walter Corporation seeking a declaration, among other things, that (i)
the corporate veil between Celotex and Original Jim Walter could not be pierced,
(ii) the Company could not be held liable for the asbestos-related liabilities
of either Celotex or Jim Walter Corporation on any grounds and (iii) the LBO
could not be deemed a fraudulent conveyance. In October 1990, Celotex and one of
its subsidiaries filed voluntary petitions for reorganization under Chapter 11
with the Celotex Bankruptcy Court.

In January 1994, the indenture trustees for certain pre-LBO debentures of
Original Jim Walter assumed by the Company brought the Fraudulent Conveyance
Lawsuit for the benefit of the Company's estate and its creditors, which alleged
that the issuance of debt in connection with the LBO constituted a fraudulent
conveyance under New York and Florida law. The plaintiffs sought to avoid the
obligations incurred by the Company and its subsidiaries in the LBO.

On the Effective Date of the Plan of Reorganization, the Company and its
subsidiaries emerged from bankruptcy pursuant to the Plan of Reorganization. At
that time, pursuant to the Plan of Reorganization, 50,494,313 shares of Common
Stock were issued to certain former creditors and stockholders of the Company
and its subsidiaries and $490,000,000 aggregate principal amount of Senior Notes
were issued to certain former creditors of the Company and its subsidiaries.
(The Senior Notes were redeemed in full in January 1996; see "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations--Years Ended May 31, 1996 and Pro Forma 1995.")

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<PAGE>
and the release of the Released Parties from all liabilities relating to the LBO
or associated with asbestos-related liabilities of Celotex or Jim Walter
Corporation. The Veil Piercing Settlement is embodied in the Plan of
Reorganization. The Veil Piercing Settlement, among other things, requires
Celotex, and certain other parties to the Celotex bankruptcy proceeding, to
propose and use their respective best efforts to obtain confirmation of a plan
of reorganization for Celotex that includes an injunction pursuant to Section
524(g) or other similar injunctive relief providing the same protection as a
Section 524(g) injunction acceptable to each of the Released Parties under to
the Veil Piercing Settlement. Such injunctive relief would provide the Company
with additional assurance that Veil Piercing Claims cannot be asserted in the
future against the Company.

In conjunction with its Chapter 11 bankruptcy proceedings, through July 1996
Celotex filed various plans of reorganization and/or amendments and supplements
thereto which failed to conform to the Veil Piercing Settlement with respect to
providing for a Section 524(g) injunction and which thus violated the Veil
Piercing Settlement. On March 8, 1996, the Company, along with certain other
Released Parties, commenced the Second Adversary Proceeding in the Bankruptcy
Court against Celotex and Jim Walter Corporation seeking (1) a declaration that
the Former Celotex Plan did not contain the Section 524(g) injunction agreed
upon by Celotex and Jim Walter Corporation and thus violated the Veil Piercing
Settlement and (2) a mandatory injunction compelling Celotex to amend the Former
Celotex Plan to incorporate a provision for a Section 524(g) injunction or an
injunction acceptable to the Released Parties that provided the Released Parties
the same protection which would be afforded to them by Section 524(g). On May
28, 1996, the Bankruptcy Court entered an Order granting Plaintiff's Motion for
Summary Judgment in part and denying the Motions for Summary Judgment filed by
Celotex and Jim Walter Corporation. The Bankruptcy Court's Order declared that:
(i) the Veil Piercing Settlement was a valid agreement binding all signatories,
including Celotex and Jim Walter Corporation; (ii) the Former Celotex Plan did
not contain a Section 524(g) injunction; and (iii) Celotex had not proposed an
injunction acceptable to the Released Parties that provided the Released Parties
the same protection which would be afforded to them by Section 524(g), thus
violating the Veil Piercing Settlement. On June 7, 1996, the Bankruptcy Court
(1) made its Order granting Plaintiffs' Motion for Summary Judgment in part a
final order and (2) denied without prejudice Plaintiffs' Emergency Motion for
Injunctive Relief, which sought an injunction mandating that Celotex and Jim
Walter Corporation comply with the Veil Piercing Settlement. Celotex and Jim
Walter Corporation each filed notices of appeal from, inter alia, the Bankruptcy
Court's Order granting in part Plaintiffs' Motion for Summary Judgment. By order
dated June 19, 1996, the Celotex Bankruptcy Court denied confirmation of the
Former Celotex Plan and ordered that any new plans must be submitted by July 12,
1996. On July 12, 1996, the Bodily Injury Plan was filed by Celotex, Jim Walter
Corporation, the Asbestos Bodily Injury Claimants Committee and others and the
competing Property Damage Plan was filed by the Asbestos Property Damage
Claimants Committee. The Company filed objections to both plans, on the grounds
that they did not comply fully with the Veil Piercing Settlement. On August 23,
1996, both the Bodily Injury Plan proponents and the Property Damage Plan
proponents filed amended plans. The Property Damage Plan, as amended, provides
for a Section 524(g) injunction as to all claimants. The Bodily Injury Plan, as
amended, provides for a Section 524(g) injunction as to all claimants, but
reserves the right to seek confirmation of the Bodily Injury Plan even if the
asbestos property damage claimants class votes against that plan. If the Bodily
Injury Plan were to be confirmed over an adverse vote of the property damage
claimants class, that would appear to preclude a Section 524(g) injunction as to
asbestos property damage claims. However, in such event the Bodily Injury Plan
would still provide for an injunction against asbestos property damage claims to
the extent such an injunction is allowed by Section 105 of the Bankruptcy Code.
Both plans require the approval of creditors and confirmation by the Celotex
Bankruptcy Court. A confirmation hearing concerning the Bodily Injury Plan, as
amended, and the Property Damage Plan, as amended, is currently scheduled to
commence on October 7, 1996. See "Business and Properties-- Legal
Proceedings--Asbestos Related Litigation Settlements."

18
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock has been listed on the Nasdaq National Market under the
symbol "WLTR" since October 11, 1995. The table below sets forth, for the
periods indicated, the range of high and low sales prices of the Common Stock
since such date.

<TABLE>
<CAPTION>
HIGH LOW
----------- ------------
<S> <C> <C>
Fiscal Year 1996
Second Quarter
(beginning October 11, 1995) $ 14 3/4 $ 12 3/8
Third Quarter 13 3/4 12
Fourth Quarter 14 1/2 12 5/8
Fiscal Year 1997
First Quarter 14 1/2 11 7/8
Second Quarter 13 5/8 13 1/8
(through September 16, 1996)
</TABLE>

For a recent sale price of the Common Stock, see the cover page of this
Prospectus. As of September 3, 1996, there were approximately 133 holders of
record of Common Stock.

The Company has never paid cash dividends on its common stock and has no
present intention of paying any cash dividends on the Common Stock. The
declaration and payment of future dividends to holders of Common Stock will be
at the discretion of the Company's Board of Directors and will depend upon many
factors, including the Company's financial condition, earnings, capital
requirements of its operating subsidiaries, legal requirements and such other
factors as the Board of Directors deems relevant.

Under the DGCL, the Company may only declare and pay dividends out of
surplus (as defined in the DGCL), or, if there is no surplus and subject to
certain conditions, net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year.

Under the Credit Facilities, commencing on June 1, 1996, in any period of
twelve consecutive months (on a non-cumulative basis, with the effect that
amounts not paid in any twelve month period may not be carried over for payment
in a subsequent period) the Company may pay cash dividends in an amount not to
exceed: $5,500,000 provided the Consolidated Leverage Ratio (as defined in the
Credit Facilities) during the four most recently completed fiscal quarters is
greater that 2.50 to 1; $11,000,000 provided such Consolidated Leverage Ratio is
less than or equal to 2.50 to 1; and $11,000,000 plus, to the extent positive,
Cumulative Excess Cash Flow (as defined in the Credit Facilities) provided such
Consolidated Leverage Ratio is less than or equal to 2.0 to 1, in each case also
provided that no default under the Credit Facilities has occurred or would
result from the payment of such dividends. See "Description of Certain
Indebtedness--Credit Facilities."

19
<PAGE>
CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company and its subsidiaries as of May 31, 1996. This table should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto.

<TABLE>
<CAPTION>
MAY 31, 1996
----------------------
<S> <C>
(DOLLARS IN THOUSANDS)
LONG-TERM SENIOR DEBT:
Walter Industries
Revolving Credit Facility(1).......................................... $ 235,000
Term Loan A........................................................... 121,250
Term Loan B........................................................... 59,750
Other................................................................. 3,350
-----------
419,350
-----------
Mid-State Trusts
Trust II Mortgage-Backed Notes........................................ 497,000
Trust III Asset Backed Notes.......................................... 147,669
Trust IV Asset Backed Notes........................................... 902,277
Trust V Variable Funding Loan(2)...................................... 245,000
-----------
1,791,946
-----------
$2,211,296
-----------
-----------
STOCKHOLDERS' EQUITY:
Common Stock (par value $.01 per share, 200,000,000 shares authorized,
54,868,335 shares issued and outstanding)............................. $ 549
Capital in Excess of Par Value.......................................... 1,159,332
Retained Earnings (Deficit)............................................. (877,861)
Excess of Additional Pension Liability over Unrecognized Prior Years
Service Cost.......................................................... (5,326)
-----------
$ 276,694
-----------
-----------
</TABLE>

- ------------

(1) The Revolving Credit Facility is available for working capital needs with a
sub-facility for trade and standby letters of credit in an amount not in
excess of $40 million at any time outstanding and a sub-facility for
swingline advances in an amount not in excess of $15 million. See
"Description of Certain Indebtedness--Credit Facilities."

(2) The Mid-State Trust V Variable Funding Loan is available to provide
temporary financing to Mid-State Homes for its current purchases of
instalment notes and mortgages from Jim Walter Homes. The agreement provides
for a three-year $500 million credit facility secured by the instalment
notes and mortgages Mid-State Trust V purchases from Mid-State Homes. See
"Business and Properties--Mid-State Homes."

20
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

The following unaudited pro forma consolidated statement of operations was
prepared to illustrate the estimated effects of the Plan of Reorganization and
related financings and the application of the proceeds thereof as if they had
occurred as of June 1, 1994.

THE FOLLOWING UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DOES
NOT PURPORT TO BE INDICATIVE OF THE RESULTS OF OPERATIONS THAT WOULD ACTUALLY
HAVE BEEN REPORTED HAD SUCH TRANSACTIONS IN FACT BEEN CONSUMMATED ON SUCH DATE
OR OF THE RESULTS OF OPERATIONS THAT MAY BE REPORTED BY THE COMPANY IN THE
FUTURE. The unaudited pro forma adjustments are based upon available information
and certain assumptions that the Company believes are reasonable. All of the
information presented below should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto and the other
information contained elsewhere in this Prospectus.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, 1995
----------------------------------------
AS REPORTED ADJUSTMENTS PRO FORMA
----------- ----------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Sales and revenues:
Net sales......................................... $ 1,181,635 $1,181,635
Time charges...................................... 222,221 222,221
Miscellaneous..................................... 30,838 30,838
Interest income from Chapter 11 proceedings....... 7,628 $ (7,628)(1) --
----------- ----------- ----------
1,442,322 (7,628) 1,434,694
----------- ----------- ----------
Costs and expenses:
Cost of sales..................................... 951,381 951,381
Depreciation, depletion and amortization.......... 72,037 72,037
Selling, general and administrative............... 130,616 130,616
Postretirement health benefits.................... 25,961 25,961
Provision for possible losses..................... 4,485 4,485
Chapter 11 costs.................................. 442,362 (442,362)(2) --
Interest and amortization of debt discount and
expense.......................................... 304,548 (81,364)(3) 223,184
Amortization of excess of purchase price over net
assets acquired.................................. 40,027 40,027
----------- ----------- ----------
1,971,417 (523,726) 1,447,691
----------- ----------- ----------
(529,095) 516,098 (12,997)

Income tax benefit (expense)........................ 170,450 (195,730)(4) (25,280)
----------- ----------- ----------
Net income (loss)................................... $ (358,645) $ 320,368 $ (38,277)
----------- ----------- ----------
----------- ----------- ----------
Net loss per share.................................. $ (0.75)(5)
----------
----------
Weighted average shares outstanding(5).............. 50,988,626
</TABLE>

(Footnotes on following page)

21
<PAGE>
(Footnotes for preceding page)

- ------------

Changes from historical financial statements in the pro forma consolidated
statement of operations consist of the following adjustments (all amounts in
thousands):

(1) Interest income from Chapter 11 proceedings of $7,628, which would not have
been realized assuming the Plan of Reorganization became effective June 1,
1994, has been eliminated.

(2) Chapter 11 costs of $442,362, which would not have been incurred assuming
the Plan of Reorganization became effective June 1, 1994, have been
eliminated.

(3) Interest and amortization of debt discount and expense has been reduced by
$81,364 to give retroactive effect as if all indebtedness to be repaid
pursuant to the Plan of Reorganization was so done as of June 1, 1994 and
the $490 million of Senior Notes had been outstanding for the full year
ended May 31, 1995. Borrowings under the Mid-State Trust IV Asset Backed
Notes were assumed to increase during the period June 1, 1994 through
November 30, 1994 proportionately with the comparable period increase in the
outstanding economic balance of the instalment notes sold by Mid-State Homes
to Mid-State Trust IV on March 16, 1995. Borrowings under the Mid-State
Trust V Variable Funding Loan Agreement were based on 78% of Jim Walter
Homes' credit sales during the six-month period commencing on December 1,
1994 and ending on May 31, 1995. This time period is subsequent to the
Mid-State Trust IV cut-off date for purchases of instalment notes from
Mid-State Homes. See "Business and Properties--Mid-State Homes." No working
capital borrowings were assumed under the Revolving Credit Facility. Pro
forma interest expense, however, includes letter of credit fees and unused
working capital commitment fees.

(4) The income tax benefit has been adjusted at the applicable statutory rates
to give effect to the pro forma adjustments described above.

(5) Net loss per share has been computed based on the weighted average number of
shares of Common Stock issuable (50,988,626, which includes 494,313
additional shares of Common Stock issued on September 13, 1995 (180 days
after the Effective Date of the Plan of Reorganization) pursuant to the Plan
of Reorganization, but does not include 3,880,140 additional shares issued
to an escrow account on such date pursuant to the Plan of Reorganization
because such issuance is contingent on future events and would be
anti-dilutive; see "Description of Capital Stock--Additional Stock
Issuances").

22
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following data, insofar as it relates to each of the fiscal years 1992
through 1996, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1996 and 1995 and the related
consolidated statements of operations and retained earnings (deficit) and of
cash flows for the three years ended May 31, 1996 and the notes thereto
appearing elsewhere herein. All of the information presented below should be
read in conjunction with the Company's Consolidated Financial Statements and the
notes thereto, the Pro Forma Consolidated Statement of Operations and the notes
thereto and the other information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------------------------
1992 1993(2) 1994 1995 1996(3)(4)
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues................. $1,366,581 $1,318,986 $1,328,524 $1,442,322 $1,485,635
Cost of sales (exclusive of
depreciation)..................... 891,882 804,411 845,061 951,381 987,354
Depreciation, depletion and
amortization...................... 82,801 70,483 71,035 72,037 74,341
Interest and amortization of debt
discount and expense (1).......... 177,060 171,581 155,470 304,548 208,690
Income tax expense(benefit)........ 12,463 24,328 28,917 (170,450) (55,155)
Income(loss) before extraordinary
item and cumulative effect of
accounting change (2)(3)(4)...... 22,342 46,594 7,175 (358,645) (79,292)
Net income (loss).................. 22,342 (58,014) 7,175 (358,645) (84,696)
Net loss per share (4)(5)..........
Loss before extraordinary item... (7.10) (1.56)
Extraordinary item............... -- (.10)
---------- ----------
Net loss....................... (7.10) (1.66)
---------- ----------
---------- ----------
Number of shares used in
calculation of loss per share.... 50,494,313 50,988,195

Additional Financial Data:
Gross capital expenditures......... $ 68,349 $ 71,708 $ 69,831 $ 91,317 $ 83,523
Net property, plant and
equipment.......................... 664,622 663,040 657,863 662,792 541,536
Total assets....................... 3,171,266 3,223,234 3,140,892 3,245,153 3,091,377
Long-term senior debt.............. 948,782 1,046,971 871,970 2,220,370 2,211,296
Liabilities subject to Chapter 11
proceedings....................... 1,845,328 1,725,631 1,727,684 -- --
Stockholders' equity (deficit)..... (230,119) (287,737) (282,353) 360,774 276,694

Employees at end of year........... 7,645 7,545 7,676 7,888 7,755
</TABLE>

- ------------
(1) Interest on unsecured obligations not accrued since December 27, 1989
amounted to $163.7 million in each of the years ended May 31, 1992 through
1994. The Company recorded additional interest and amortization of debt
discount and expense of $141.4 million related to the consummation of the
Plan of Reorganization in fiscal 1995.

(2) The Company adopted FASB 106 and FASB 109 during fiscal year 1993.

(3) The Company adopted FASB 121 during fiscal year 1996.

23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

The Company emerged from bankruptcy on March 17, 1995 pursuant to the Plan
of Reorganization. Accordingly, the Company's Consolidated Statement of
Operations and Retained Earnings (Deficit) for the year ended May 31, 1996 are
not comparable to the Consolidated Statement of Operations and Retained Earnings
(Deficit) for prior periods.

This discussion should be read in conjunction with the consolidated
financial statements and notes thereto of Walter Industries, Inc. and
subsidiaries, particularly Note 1 of Notes to Financial Statements which
presents an unaudited pro forma consolidated statement of operations for the
year ended May 31, 1995 to illustrate the estimated effects of the Plan of
Reorganization and related financings as if they had occurred as of June 1,
1994, and Note 15 of Notes to Financial Statements which presents sales and
operating income by operating group.

RESULTS OF OPERATIONS

Years Ended May 31, 1996 and Pro Forma 1995. Net sales and revenues for the
year ended May 31, 1996 were $50.9 million, or 3.6%, ahead of the prior year
with a 3.0% increase in pricing and/or product mix and a .6% increase in volume.
The increase in net sales and revenues was the result of improved sales and
revenues in all operating groups.

Homebuilding and Related Financing Group sales and revenues were $6.0
million, or 1.5%, ahead of the prior year. This performance reflects a 5.2%
increase in the average net selling price per home sold, from $40,200 in 1995 to
$42,300 in 1996, partially offset by an 8.9% decrease in the number of homes
sold, from 4,126 units in 1995 to 3,760 units in 1996. The higher average net
selling price reflects a greater percentage of "90% complete" homes sold in the
current year and a price increase instituted February 1, 1995 to compensate for
higher building material costs. The decrease in unit sales resulted from
extremely competitive conditions in virtually every Jim Walter Homes sales
region. The relatively low mortgage interest rate environment and higher
availability of mortgage financing for home buyers in recent years adversely
affected Jim Walter Homes' sales volumes. In an effort to generate additional
unit sales, Jim Walter Homes in December 1995 reduced its financing rate to 8.5%
from 10% for its "90% complete" homes on a trial basis and, in March 1996, began
formally advertising the lower rate. Jim Walter Homes' backlog at May 31, 1996
was 1,957 units (all of which are expected to be completed prior to the end of
fiscal 1997) compared to 1,529 units at May 31, 1995, a 28% increase. Time
charge income (revenues received from Mid-State Homes' instalment note
portfolio) increased from $222.2 million in 1995 to $231.1 million in 1996. The
increase is attributable to increased payoffs received in advance of maturity
and to an increase in the average balance per account in the portfolio,
partially offset by a reduction in the total number of accounts. Operating
income of $63.3 million (net of interest expense) was $18.5 million greater than
the prior year. This performance was due to the higher time charge income,
improved homebuilding gross profit margins resulting from the higher average net
selling price per home sold and lower lumber costs and lower interest expense in
1996 ($128.2 million) as compared to that incurred in 1995 ($131.6 million),
partially offset by the lower number of homes sold.

Water and Waste Water Transmission Products Group sales and revenues were
$9.2 million, or 2.2%, ahead of the prior year. The increase was the result of
higher sales prices, partially offset by reduced volumes for ductile iron
pressure pipe, fittings and castings. Sales volumes were negatively impacted by
severe winter weather conditions and delays in federal funding for planned water
and sewer pipeline projects. The order backlog at May 31, 1996 was 121,734 tons,
which represents approximately three months' shipments, compared with 121,548
tons at May 31, 1995. Operating income of $14.0 million was $2.3 million below
the prior year. The lower performance resulted from the lower sales

24
<PAGE>
volumes, higher raw material costs, especially for scrap iron and alloys which
are major raw material components, partially offset by the higher sales prices.

Natural Resources Group sales and revenues exceeded the prior year by $31.9
million, or 9.6%. The increase resulted from greater sales volumes for coal and
methane gas, a higher average selling price for coal, higher outside gas and
timber royalty income and a $3.7 million gain (in 1996) from the sale of gas
royalty interests in certain mineral properties. Gains from sales of certain
excess real estate were $6.1 million in each year. A total of 7.61 million tons
of coal was sold in 1996 versus 7.20 million tons in 1995, a 5.7% increase. The
increase in tonnage sold was the result of greater shipments to certain export
customers, partially offset by lower shipments to Alabama Power Company
("Alabama Power") and Japanese steel mills. The average price per ton of coal
sold increased $1.51 from $41.34 in 1995 to $42.85 in 1996 due to higher prices
realized in the worldwide metallurgical market and to Alabama Power. Blue Creek
Mine No. 5 ("Mine No. 5") was shut down from November 17, 1993 through December
16, 1993 and from early April 1994 until May 16, 1994 as a result of a fire due
to spontaneous combustion heatings. Representatives of Jim Walter Resources, the
Mine Safety and Health Administration ("MSHA"), Alabama State Mine Inspectors
and the United Mineworkers of America ("UMWA") agreed that the longwall coal
panel being mined in Mine No. 5 at the time the fire recurred in April 1994
would be abandoned and sealed off. Development mining for the two remaining
longwall coal panels in this section of the mine resumed on May 16, 1994 and
mining on the first longwall panel resumed on January 17, 1995. Production was
adversely impacted until such date. As a result of the fire, the Company and Jim
Walter Resources claimed compensable losses in the amount of $25 million under
their business interruption insurance coverage. When the insurers refused to pay
their pro rata part of the claim, the Company commenced litigation seeking to
enforce such insurance. The insurers issued policies insuring various
percentages of the risk. The Company has entered into settlements with several
insurers who, in the aggregate, have paid approximately $11.7 million, reducing
the contract claims in the lawsuit to $12.7 million. The Company and Jim Walter
Resources continue to pursue the litigation against the remaining carriers, and
a trial is tentatively scheduled for October 21, 1996. See "Business and
Properties--Legal Proceedings--Jim Walter Resources" and Note 12 of Notes to
Financial Statements. In late November 1995, Mine No. 5 experienced another fire
due to the unexpected recurrence of spontaneous combustion heatings and the mine
was shut down. Efforts to contain and extinguish the fire were successful;
however, conditions dictated the mine be shut down for several weeks. The
affected coal panels on the western side of the mine have been sealed off and
development work is under way on the eastern side of Mine No. 5. Longwall
production on the east side is expected to commence in the fourth quarter of
fiscal 1997. See "Business and Properties--Jim Walter Resources--Mining
Division." Jim Walter Resources' three other operating mines remain in full
production. The Group incurred an operating loss of $106.5 million in 1996 as
compared to operating income of $21.4 million in 1995. The lower performance
reflects a $120.4 million write-down of fixed assets to estimated fair market
values at two coal mines reflecting the Company's adoption of FASB 121 (see Note
5 of Notes to Financial Statements) and firefighting and idle plant costs of $16
million, principally associated with the fire at Mine No. 5, partially offset by
the increased sales volumes of coal and methane gas, the higher average sales
price for coal, higher gas and timber royalty income, the $3.7 million gain (in
1996) from the sale of certain gas royalty interests and slightly lower costs
per ton of coal produced ($36.12 in 1996 versus $37.13 in 1995).

Industrial and Other Products Group sales and revenues were $2.6 million, or
.9%, greater than the prior year. Increased selling prices for furnace and
foundry coke, aluminum foil products, window components and metal building and
foundry products combined with greater sales volumes of furnace and foundry
coke, resin-coated sand and patterns and tooling were partially offset by lower
aluminum sheet products selling prices and volumes and reduced sales volumes of
window components and metal building and foundry products. The Group's operating
loss in 1996 was $9.5 million as compared to operating income of $9.3 million in
1995. This performance reflects a $22.9 million FASB 121 write-off of excess of
purchase price over net assets acquired (goodwill) (see Note 5 of Notes to
Financial

25
<PAGE>
Statements) and the window components business experiencing lower sales volume,
higher raw material costs and reduced efficiencies due to prolonged start-up
problems associated with the consolidation and relocation of JW Window
Components, Inc.'s ("JW Window Components") Hialeah, Florida and Columbus, Ohio
operations to Elizabethton, Tennessee. These decreases were partially offset by
increased margins realized on aluminum sheet and foil products, furnace coke and
resin-coated sand.

Cost of sales, exclusive of depreciation, of $987.4 million was 80.9% of net
sales in 1996 versus $951.4 million and 80.5% in 1995. The cost of sales
increase was primarily the result of lower gross profit margins for pipe
products, window components, patterns and tooling and metal building and foundry
products combined with the firefighting and idle plant costs principally
associated with the fire at Mine No. 5. These increases were partially offset by
improved profit margins on home sales, aluminum foil and sheet products, furnace
coke and resin-coated sand.

Selling, general and administrative expenses (exclusive of postretirement
health benefits) of $135.8 million were 9.1% of net sales and revenues in 1996
versus $130.6 million and 9.1% in 1995.

Interest and amortization of debt expense was $208.7 million in 1996 versus
$223.2 million, on a pro forma basis in 1995, reflecting lower outstanding debt
balances and reduced interest rates resulting from the financing completed on
January 22, 1996. The average rate of interest in 1996 was 9.10% as compared to
9.79% on a pro forma basis, in 1995. The prime interest rate ranged from 8.25%
to 9.0% in 1996 compared to a range of 7.25% to 9.0% in 1995.

The Company's effective tax rate in 1996 and on a pro forma basis in 1995
differed from the statutory tax rate due to amortization of goodwill and the
FASB 121 write-off of goodwill of $22.9 million (in 1996) which are not
deductible for tax purposes. In addition, in the fiscal 1996 fourth quarter, the
Company recorded approximately $27 million of non-recurring tax benefits
resulting from utilization of a capital loss carry forward, the Company's
election to carry forward its net operating loss (thereby avoiding the effect of
a rate difference and loss of certain tax credits), and other miscellaneous tax
adjustments. See Note 9 of Notes to Financial Statements for further discussion
of income taxes.

On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility, a six-year $125
million term loan and a $60 million seven-year term loan. Proceeds from the
financing together with $75 million drawn under the Mid-State Trust V Variable
Funding Loan Agreement were used to redeem in full the Senior Notes at a
redemption price of 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of redemption and to replace an existing $150
million bank credit facility, both incurred as a result of the Company's
emergence from bankruptcy in March 1995. The Company recorded an extraordinary
loss of $8.3 million ($5.4 million net of income tax benefit) consisting of a
redemption premium and write-off of unamortized debt expense related to the
early repayment of the Senior Notes and the $150 million bank credit facility.
See Note 8 of Notes to Financial Statements.

The net loss for the year ended May 31, 1996 was $84.7 million compared to a
net loss of $38.3 million, on a pro forma basis, in 1995 reflecting all of the
previously mentioned factors as well as the impact of higher postretirement
health benefits in 1996.

Years ended May 31, 1995 and 1994. Net sales and revenues for the year ended
May 31, 1995 were $113.8 million, or 8.6%, greater than the prior year, with a
7.0% increase in volume and a 1.6% increase in pricing and/or product mix. The
increase in net sales and revenues was the result of improved sales and revenues
in all operating groups except Homebuilding and Related Financing.

Industrial and Other Products Group sales and revenues were $59.6 million,
or 26.5%, greater than the prior year. Increased sales volumes of aluminum foil
and sheet products, foundry coke, chemicals, patterns and tooling, resin-coated
sand, window components and metal building and foundry products,

26
<PAGE>
combined with higher selling prices for aluminum foil and sheet products,
furnace coke, window components and metal building and foundry products and a
$3.6 million gain from the sale of JW Window Components' Hialeah, Florida
facility were partially offset by reduced sales volumes of furnace coke and slag
wool. The Group's operating income of $9.3 million was $2.0 million lower than
the prior year. The decrease was the result of higher manufacturing costs in the
window components business due to increased raw material costs, especially
aluminum, a major raw material component, startup costs associated with the
consolidation and relocation during 1995 of JW Window Components' Hialeah,
Florida and Columbus, Ohio, operations to Elizabethton, Tennessee and reduced
operating efficiencies, including start-up problems associated with the
relocation of Vestal Manufacturing Company's ("Vestal Manufacturing") steel
fabrication operation in May 1994. These decreases were partially offset by
increased income for aluminum foil and sheet, foundry coke, chemicals, patterns
and tooling and resin-coated sand due to the sales increases, improved gross
profit margins for furnace coke and the gain from the Hialeah facility sale.

Water and Waste Water Transmission Products Group sales and revenues were
$55.0 million, or 15.4%, ahead of the prior year. The increase was the result of
higher sales volumes and prices for ductile iron pressure pipe, valves, hydrants
and castings. The order backlog for pressure pipe, at May 31, 1995, was 121,548
tons, compared to 111,907 tons at May 31, 1994. Operating income of $16.2
million exceeded the prior year by $2.8 million. The improved performance
resulted from the increased sales prices and volumes, partially offset by higher
raw material costs, especially scrap, a major raw material component.

Natural Resources Group sales and revenues were $12.8 million, or 4.0%,
greater than the prior year. The increase resulted from greater sales volumes
for coal and a $6.1 million gain from the sale of excess real estate, partially
offset by lower sales prices for coal and methane gas and lower outside coal and
gas royalty income. A total of 7.20 million tons of coal was sold in 1995 versus
6.56 million tons in 1994, a 9.8% increase. The increase in tonnage sold was the
result of increased shipments to Alabama Power and certain export customers,
partially offset by lower shipments to Japanese steel mills. Increased shipments
to Alabama Power were the result of a new agreement signed May 10, 1994 (the
"New Alabama Power Contract") for the sale and purchase of coal, replacing the
1979 contract and the 1988 amendment thereto. Under the New Alabama Power
Contract, Alabama Power will purchase 4.0 million tons of coal per year from Jim
Walter Resources during the period July 1, 1994 through August 31, 1999. The New
Alabama Power Contract has a fixed price subject to an escalation based on the
Consumer Price Index or another appropriate published index and adjustments for
government impositions and quality. The New Alabama Power Contract includes
favorable modifications of specification, shipping deviations and changes in
transportation arrangements. The average price per ton of coal sold decreased
$2.79 from $44.13 in 1994 to $41.34 in 1995 due to lower prices realized on
shipments to Alabama Power, the Japanese steel mills and certain export
customers. Mine No. 5 was shut down from November 17, 1993 through December 16,
1993 and from early April 1994 until May 16, 1994 as a result of a fire due to
spontaneous combustion heatings. Representatives of Jim Walter Resources, MSHA,
Alabama State Mine Inspectors and the UMWA agreed that the longwall coal panel
being mined in Mine No. 5, at the time the fire recurred in April 1994, would be
abandoned and sealed off. Development mining for the two remaining longwall coal
panels in this section of the mine resumed on May 16, 1994 and mining on the
first longwall panel resumed on January 17, 1995. Production was adversely
impacted until such date. As a result of the fire, the Company and Jim Walter
Resources claimed compensable losses in the amount of $25 million under their
business interruption insurance coverage. When the insurers refused to pay their
pro rata part of the claim, the Company commenced litigation seeking to enforce
such insurance. See "Business and Properties--Legal Proceedings--Jim Walter
Resources" and Note 12 of Notes to Financial Statements. Operating income of
$21.4 million exceeded the prior year by $21.2 million. The improved performance
principally resulted from the increased sales volumes of coal, lower costs per
ton of coal produced ($37.13 in 1995 versus

27
<PAGE>
$38.29 in 1994) and the gain on the sale of certain excess real estate,
partially offset by decreases in selling prices for coal and methane gas and
lower outside coal and gas royalty income.

Homebuilding and Related Financing Group sales and revenues were $17.4
million, or 4.1%, below the prior year. This performance reflects a 4.7%
decrease in the number of homes sold, from 4,331 units in 1994 to 4,126 units in
1995, partially offset by an increase in the average selling price per home
sold, from $38,300 in 1994 to $40,200 in 1995. The decrease in unit sales was
due to strong competition in virtually every Jim Walter Homes sales region. The
higher average selling price in 1995 principally reflects a smaller percentage
of the lower priced Affordable line homes sold. Jim Walter Homes' backlog at May
31, 1995 was 1,529 units compared to 2,065 units at May 31, 1994. Time charge
income (revenues received from Mid-State Homes' instalment note portfolio)
decreased from $238.1 million in 1994 to $222.2 million in 1995. The decrease in
time charge income is attributable to a reduction in the total number of
accounts and lower payoffs received in advance of maturity, partially offset by
an increase in the average balance per account in the portfolio. The Group's
operating income of $44.8 million (net of interest expense) was $16.9 million
below the prior year. This decrease resulted from the lower number of homes
sold, reduced homebuilding gross profit margins resulting from discounts related
to sales promotions on certain models, the decrease in time charge income and
higher interest expense in 1995 ($131.6 million) as compared to that incurred in
1994 ($128.8 million), partially offset by the increase in the average selling
price per home sold.

Cost of sales, exclusive of depreciation, of $951.4 million was 80.5% of net
sales versus $845.1 million and 79.1% in 1994. The cost of sales percentage
increase was primarily the result of lower gross profit margins on homes sales,
pipe products, window components and metal building and foundry products.

Selling, general and administrative expenses (exclusive of postretirement
health benefits) of $130.6 million were 9.1% of net sales and revenues in 1995
versus $127.9 million and 9.6% in 1994.

Chapter 11 costs of $442.4 million in 1995 include $390 million in
settlement of all asbestos-related veil piercing claims and related legal fees
and $52.4 million for professional fees, settlement of various disputed claims
and other bankruptcy expenses.

Interest and amortization of debt discount and expense increased $149.1
million principally due to $141.4 million of additional interest and
amortization of debt expense related to consummation of the Plan of
Reorganization. The average rate of interest in 1995 was 10.19% (such rate
calculated excluding $141.4 million additional interest and amortization of debt
discount and expense related to the consummation of the Plan of Reorganization)
versus 9.58% in 1994. The prime interest rate ranged from 7.25% to 9.0% in 1995
compared to a range of 6.0% to 7.25% in 1994. During the pendency of the Chapter
11 Cases, the Company did not accrue interest on its pre-filing date unsecured
debt obligations.

Amortization of excess of purchase price over net assets acquired (goodwill)
decreased $8.5 million primarily due to lower payoffs received in advance of
maturity on the instalment note portfolio.

The income tax benefit for 1995 was $170.5 million, which included
recognition of tax benefits resulting from $583.8 million of additional expenses
related to consummation of the Plan of Reorganization previously mentioned,
compared to income tax expense of $28.9 million in 1994. On August 10, 1993, the
Omnibus Budget Reconciliation Act of 1993 was signed into law, raising the
federal corporate income tax rate to 35% from 34% retroactive to January 1,
1993. The effect of the rate change resulted in a $2.8 million charge to
deferred tax expense in 1994.

The net loss for 1995 and the net income for 1994 reflect all of the
previously mentioned factors as well as the impact of slightly higher
postretirement health benefits, partially offset by the greater interest income
from Chapter 11 proceedings.

28
<PAGE>
Years ended May 31, 1994 and 1993. Net sales and revenues for the year ended
May 31, 1994 were $9.5 million, or .7%, greater than the prior year. The
improved performance was the result of increased pricing and/or product mix as
sales volumes were level with the prior year. The increase in net sales and
revenues was the result of improved sales and revenues in all operating groups
except the Natural Resources Group.

Homebuilding and Related Financing Group sales and revenues were $5.2
million, or 1.2%, greater than the prior year. This performance reflects a 3.5%
increase in the average selling price per home sold, from $37,000 in 1993 to
$38,300 in 1994, which was more than offset by a 9.5% decrease in the number of
homes sold, from 4,784 units in 1993 to 4,331 units in 1994. The higher average
selling price in 1994 reflects a price increase instituted on April 1, 1993 to
compensate for higher lumber costs and a greater percentage of "90% complete"
homes sold in 1994 versus the prior year. The decrease in unit sales resulted
from strong competition in virtually every Jim Walter Homes sales region. Jim
Walter Homes' backlog at May 31, 1994 was 2,065 units compared to 1,831 units at
May 31, 1993. Time charge income (revenues received from Mid-State Homes'
instalment note portfolio) increased from $218.7 million in 1993 to $238.1
million in 1994. The increase in time charge income is attributable to increased
payoffs received in advance of maturity and to an increase in the average
balance per account in the portfolio. The Group's operating income of $61.8
million (net of interest expense) exceeded the prior year by $4.0 million. This
improvement resulted from the increase in the average selling price per home
sold, the higher time charge income and lower interest expense in 1994 ($128.8
million) compared to that incurred in 1993 ($137.9 million), partially offset by
the lower number of homes sold, reduced homebuilding gross profit margins and
higher selling, general and administrative expenses. The lower gross profit
margins were the result of higher average lumber prices, the effect of discounts
relating to sales promotions on certain models instituted during the period
February 1994 through May 1994 and the decision in October 1992 to reduce gross
profit margins on five smaller basic shelter homes to generate additional sales.

Industrial and Other Products Group sales and revenues were $12.1 million,
or 5.7%, ahead of the prior year. Increased sales volumes of aluminum foil,
foundry coke, window components, metal building and foundry products,
resin-coated sand and chemicals, combined with higher selling prices for furnace
coke and window components, were partially offset by lower sales volumes of slag
wool and patterns and tooling and lower selling prices for aluminum foil and
sheet products. The Group's operating income of $11.2 million was $2.6 million
greater than the prior year. The improved performance resulted from the sales
increases and higher gross profit margins for furnace coke and slag wool,
partially offset by reduced margins for chemicals, foundry coke, window
components, metal building and foundry products, resin-coated sand and patterns
and tooling.

Water and Waste Water Transmission Products Group sales and revenues were
$26.0 million, or 7.8%, ahead of the prior year. The increase was the result of
higher selling prices and volumes for ductile iron pressure pipe and valves and
hydrants, greater castings sales volume and increased selling prices for
fittings, partially offset by lower fittings volume. The order backlog of
pressure pipe at May 31, 1994 was 111,907 tons compared to 121,173 tons at May
31, 1993. Operating income of $13.4 million exceeded the prior year period by
$9.7 million. The improved performance resulted from the increased sales prices
and volumes, partially offset by higher raw material costs, especially scrap (a
major raw material component) and lower gross profit margins for castings.

Natural Resources Group sales and revenues were $31.6 million, or 9.0%,
below the prior year. The decrease resulted from lower sales volumes and prices
for coal and reduced methane gas selling prices, partially offset by increased
methane gas sales volume and an increase in outside gas and timber royalty
income. A total of 6.56 million tons of coal was sold in 1994 versus 7.18
million tons in 1993, an 8.6% decrease. The decrease in tonnage sold was the
result of lower shipments to Alabama Power and Japanese steel mills. Reduced
shipments to Alabama Power were the result of an agreement reached with Alabama
Power to ship reduced tonnage for the contract year ending June 30, 1994. The
average

29
<PAGE>
price per ton of coal decreased 1.6%, from $44.84 in 1993 to $44.13 in 1994, due
to lower prices realized on shipments to Japanese steel mills and other export
customers. As previously mentioned, Mine No. 5 was shut down from November 17,
1993 through December 16, 1993 and from early April 1994 until May 16, 1994 as a
result of a fire due to spontaneous combustion heatings. Representatives of Jim
Walter Resources, MSHA, Alabama State Mine Inspectors and the UMWA agreed that
the longwall coal panel being mined at the time the fire recurred would be
abandoned and sealed off. Development mining for the two remaining longwall coal
panels in this section of the mine resumed on May 16, 1994 and mining on the
first longwall panel resumed on January 17, 1995. Production was adversely
impacted until January 17, 1995. As a result of the fire, the Company and Jim
Walter Resources claimed compensable losses in the amount of $25 million under
their business interruption insurance coverage. When the insurers refused to pay
their pro rata part of the claim, the Company commenced litigation seeking to
enforce such insurance. See "Business and Properties--Legal Proceedings--Jim
Walter Resources" and Note 12 of the Notes to Financial Statements. The Group's
operating income of $152,000 was $52.0 million below the prior year. The lower
performance reflects the decrease in sales volumes and prices for coal, lower
methane gas selling prices, reduced coal mining productivity as a result of
various geological problems in all mines during portions of the year which
resulted in higher costs per ton of coal produced ($38.29 in 1994 versus $33.45
in 1993) and idle plant costs of $5.7 million associated with the Mine No. 5
shut downs, all of which more than offset the effect of increased methane gas
sales volume and greater outside gas and timber royalty income.

Cost of sales in fiscal 1994, exclusive of depreciation, of $845.1 million
was 79.1% of net sales versus $804.4 million and 75.0% in fiscal 1993. The cost
of sales percentage increase was primarily the result of lower gross profit
margins on home sales, coal, chemicals, foundry coke, castings, resin-coated
sand, patterns and tooling, window components and metal building and foundry
products, partially offset by improved margins on furnace coke, slag wool and
pipe products.

Selling, general and administrative expenses (exclusive of postretirement
health benefits) of $127.9 million were 9.6% of net sales and revenues in 1994
versus $124.6 million and 9.4% in 1993.

The Company adopted FASB No. 106 in 1993. Upon adoption the Company elected
to record the transition obligation of $166.4 million pre-tax ($104.6 million
after tax) as a one time charge against earnings rather than amortize it over a
longer period. The annual accrual for postretirement health benefit costs in
1994 was $25.6 million versus $23.5 million in 1993.

Interest and amortization of debt discount and expense decreased $16.1
million. The decrease was principally the result of reductions in the
outstanding debt balances on the Mid-State Trust II Mortgage-Backed Notes and
Mid-State Trust III Asset Backed Notes (see "Business and Properties-- Mid-State
Homes" and Note 8 of Notes to Financial Statements) and lower amortization of
debt discount and expense, partially offset by higher interest rates. The
average interest rate in 1994 was 9.58% versus 9.44% in 1993. The prime interest
rate ranged from 6.0% to 7.25% in 1994 compared to a range of 6.0% to 6.5% in
1993. Interest in the amount of $724.3 million ($163.7 million in each of the
years 1994 and 1993) on unsecured obligations was not accrued in the
Consolidated Financial Statements since the date of the filing of petitions for
reorganization. This amount was based on the balances of the unsecured debt
obligations and their interest rates as of December 27, 1989 and did not
consider fluctuations in the level of short-term debt and interest rates and the
issuance of commercial paper that would have occurred to meet the working
capital requirements of the Homebuilding and Related Financing Group.

Amortization of excess of purchase price over net assets acquired (goodwill)
increased $9.1 million. The increase primarily resulted from adjustments to
amortization of the goodwill due to greater payoffs received in advance of
maturity on the instalment note portfolio.

On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed
into law raising the federal corporate income tax rate to 35% from 34%
retroactive to January 1, 1993. The effect of the

30
<PAGE>
rate change resulted in a $2.8 million charge to deferred tax expense. The rate
change effect, combined with reduced percentage depletion and increased
amortization of goodwill (both permanent book/tax differences), resulted in an
effective tax rate of 80.1% in 1994 versus an effective tax rate of 34.3% in
1993.

The net income for fiscal 1994 and the net loss for fiscal 1993 reflects all
of the previously mentioned factors, as well as the $4.5 million increase in
Chapter 11 costs, partially offset by slightly higher interest income from
Chapter 11 proceedings. The increase in Chapter 11 costs was due to the Veil
Piercing Litigation (see Note 12 of Notes to Financial Statements) and the
filing of two amended plans of reorganization.

FINANCIAL CONDITION

On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court. On December 3, 1990, one additional small subsidiary also filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court. Two other small subsidiaries did not file petitions for reorganization
under Chapter 11. The filing of the voluntary petitions resulted from a sequence
of events stemming primarily from an inability of the Company's interest reset
advisors to reset interest rates on approximately $624 million of outstanding
indebtedness, which indebtedness by its terms required that the interest rates
thereon be reset to the rate per annum such indebtedness should bear in order to
have a bid value of 101% of the principal amount thereof as of December 2, 1989.
The reset advisors' inability to reset the interest rates was primarily
attributable to two factors: (i) uncertainties arising from the then-pending
asbestos-related veil piercing litigation, including the possibility either that
such litigation would lead to the prohibition of further asset sales and debt
repayment or that substantial new asbestos-related claims might become
assertible against the Company, which uncertainties materially hindered the
ability of the Company and its subsidiaries to pursue a refinancing or sell
assets to reduce debt, and (ii) general turmoil in the high yield bond markets
at such time, both of which depressed the bid value of such notes.

On March 17, 1995, the Company and its subsidiaries emerged from bankruptcy.
Pursuant to the Plan of Reorganization, the Company has repaid substantially all
of its unsecured claims and senior and subordinated indebtedness subject to the
Chapter 11 reorganization proceedings.

A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. Proofs of claim have been filed by the IRS in the
amounts 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 vigorously defend such
claims against the Company but there can be no assurance as to the ultimate
outcome.

Since May 31, 1995, total debt has decreased $9.1 million resulting from
redemption of the Senior Notes ($490.0 million), early repayments on the Credit
Facilities debt ($30.0 million), quarterly principal payments on the Credit
Facilities ($4.0 million), Mid-State Trust II Mortgage-Backed Notes ($87.0
million), Mid-State Trust III Asset Backed Notes ($25.9 million) and Mid-State
Trust IV Asset Backed Notes ($51.6 million) and scheduled retirements of other
long-term debt ($.6 million), partially offset by the issuance of long-term debt
from the Credit Facilities financing ($450.0 million) and the Mid-State Trust V
Variable Funding Loan Agreement ($230.0 million).

The Credit Facilities contain a $365 million revolving credit facility which
includes a sub-facility for trade and other standby letters of credit in an
amount up to $40 million at any time outstanding and a sub-facility for
swingline advances in an amount not in excess of $15 million at any time
outstanding. At May 31, 1996, $23.0 million of letters of credit were
outstanding under this facility.

31
<PAGE>
The Credit Facilities and the Mid-State Trust V Variable Funding Loan
Agreement 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, pay dividends, create liens on assets, enter into
leases, make 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 Credit Facilities, the Company is required
to maintain specified financial ratios and comply with certain financial tests,
including interest coverage, fixed charge coverage ratios and maximum leverage
ratios, some of which become more restrictive over time. The Company was in full
compliance with these covenants at May 31, 1996 and believes it will meet these
financial tests over the remaining terms of these debt agreements.

LIQUIDITY AND CAPITAL RESOURCES

At May 31, 1996, cash and short term investments, net of bank overdrafts,
were approximately $53.7 million. Operating cash flows for the year ended May
31, 1996, together with proceeds from the Credit Facilities financing, issuance
of long-term debt under the Mid-State Trust V Variable Funding Loan Agreement
and the use of available cash balances, were primarily used for working capital
requirements, payment of liabilities resulting from the Chapter 11
reorganization and previously accrued in fiscal year ended May 31, 1995,
retirement of long-term senior debt, interest payments and capital expenditures.

Working capital is required to fund adequate levels of inventories and
accounts receivable. Commitments for capital expenditures at May 31, 1996 are
not material; however, it is estimated that gross capital expenditures for the
Company and its subsidiaries for the year ending May 31, 1997 will approximate
$100 million.

Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, the level of construction, prior years'
results should not necessarily be used to predict the Company's liquidity,
capital expenditures, investment in instalment notes receivable or results of
operations. The Company believes that the Mid-State Trust V Variable Funding
Loan Agreement will provide Mid-State Homes with the funds needed to purchase
the instalment notes and mortgages generated by Jim Walter Homes. It is
contemplated that one or more permanent financings similar to the Mid-State
Trust II, III and IV financings will be required over the next several years to
repay borrowings under the Mid-State Trust V Variable Funding Loan Agreement.
The Company believes that under present operating conditions sufficient
operating cash flow will be generated to make all required interest and
principal payments and planned capital expenditures and meet substantially all
operating needs and that amounts available under the Credit Facilities will be
sufficient to meet peak operating needs.

32
<PAGE>
BUSINESS AND PROPERTIES

GENERAL

The Company, through its direct and indirect subsidiaries, currently offers
a diversified line of products and services for homebuilding, water and waste
water transmission, residential and non-residential construction and industrial
markets. The operations of the Company are carried out by its operating
subsidiaries, the business and properties of which are described below. For
financial information relating to the industry segments of the Company and its
subsidiaries, see Note 15 of Notes to Financial Statements.

JIM WALTER HOMES

Jim Walter Homes, headquartered in the Walter Industries building in Tampa,
Florida, is in the business of marketing and supervising the construction of
standardized, partially finished and shell, detached, single family residential
homes, primarily in the southern region of the United States where the weather
permits year-round construction. Jim Walter Homes has concentrated on the low to
moderately priced segment of the housing market. Over 320,000 homes have been
completed by Jim Walter Homes and its predecessor since 1946.

Jim Walter Homes' products consist of more than 30 models of conventionally
built homes, built of wood on concrete foundations or wood pilings, and ranging
in size from approximately 640 to 2,214 square feet. Each home is completely
finished on the outside and is unfinished on the inside except for rough floors,
ceiling joists, partition studding and closet framing. The buyer may elect to
purchase optional interior components, including installation thereof, such as
plumbing and electrical materials, heating and air conditioning, wallboard,
interior doors, interior trim and floor finishing. A buyer selecting all options
receives a home considered to be "90% complete", excluding only floor covering,
inside paint and utility hookups. Shell homes are those which are completely
finished on the outside with the inside containing only rough floors, partition
studding and closet framing, but not interior wallboard, floor finishing,
plumbing, electrical wiring and fixtures, doors and cabinetry. The remaining
units are sold at varying "in-between" stages of interior finishing. Jim Walter
Homes builds all of its homes "on site" and only against firm orders.

The following chart shows the unit sales volume of Jim Walter Homes and the
percent of homes sold in the three stages of completion for fiscal years ended
May 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
PERCENT OF UNIT SALES
-----------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED MAY 31, UNITS SOLD SHELL VARIOUS STAGES 90% COMPLETE
- ------------------------- ---------- ----- -------------- ------------

During the fiscal years 1996, 1995 and 1994 the average net sales price of a
home was $42,300, $40,200 and $38,300, respectively.

Jim Walter Homes' backlog as of May 31, 1996 was 1,957 units compared to
1,529 units at May 31, 1995. The average time to construct a home ranges from
four to twelve weeks.

Jim Walter Homes currently operates 109 branch offices located in 19 states
(Alabama, Arizona, Arkansas, Florida, Georgia, Indiana, Kentucky, Louisiana,
Mississippi, Missouri, New Mexico, North Carolina, Ohio, Oklahoma, South
Carolina, Tennessee, Texas, Virginia and West Virginia). In addition, Jim Walter
Homes serves five adjoining states (Delaware, Illinois, Kansas, Maryland and
Pennsylvania). Of such branch offices, approximately 82% are owned, with the
balance on leased land. Substantially all of these branch offices serve as
"display parks" which are designed to allow customers to view actual models
completed to the various stages of interior finishing available. Jim Walter
Homes does not own or acquire land for purposes of its operations and is not a
real estate developer. Accordingly, these operations are not subject to
significant concentrations of credit risks. The actual

33
<PAGE>

construction of all homes sold by Jim Walter Homes is done by local building
contractors with their own crews, pursuant to subcontracts executed in
connection with each home, and inspected by Jim Walter Homes' supervisory
personnel. Jim Walter Homes maintains warehouses near each of its district
offices from which a portion of the necessary building materials may be
obtained; the balance of building materials is purchased locally.

Approximately 96% of the homes Jim Walter Homes sells are purchased with
financing it provides. In order to qualify for a credit sale, the purchaser of a
home must own his property free and clear of all encumbrances. In addition to
owning the land, the purchaser must perform certain steps to complete the home
and obtain a certificate of occupancy. Depending on the degree of completion of
the home purchased, these steps can cost a significant amount of money. The
credit terms offered by Jim Walter Homes have a maximum 30-year term, are
usually for 100% of the purchase price of the home and currently carry either an
8.5% or 10% "annual percentage rate", without points or closing costs. In an
effort to generate additional sales, Jim Walter Homes in December 1995 reduced
its financing rate from 10% to 8.5% for its "90% complete" homes on a trial
basis and in March 1996 began formally advertising the lower rate. The 10%
"annual percentage rate" had been in effect since 1979. To qualify for
financing, a potential purchaser must also provide information concerning his or
her monthly income and employment history as well as a legal description of and
evidence that the customer owns the land on which the home is to be built. A
customer's income and employment usually are verified through telephone
conversations with such customer's employer and by examining his or her pay
stubs, W2 forms or, if the customer is self-employed, income tax returns. An
applicant must have a minimum of one year's continuous employment or, if he or
she has changed jobs, the new job must be in the same field of work. Only a
small percentage of secondary income (second job or part-time work) is utilized
in qualifying applicants. Ownership of the land is verified by examining the
title record. In addition, Jim Walter Homes' credit department obtains a credit
report. If a favorable report is obtained and the required monthly payment does
not exceed 25% of the customer's monthly gross income, the application usually
is approved and a building or instalment sales contract is executed, a title
report is ordered and frequently a survey of the property is made. Surveys are
performed by independent registered surveyors when, in the opinion of Jim Walter
Homes, additional information beyond examination of the title record is needed.
Such additional information is primarily concerned with verification of legal
description, ownership of land and existence of any encroachments. Jim Walter
Homes does not use a point or grade credit scoring system. Particular attention
is paid to the credit information for the most recent three to five years.
Attention is also given to the customer's total indebtedness and total other
monthly payments on a judgmental basis by the credit department. The customer's
credit standing is considered favorable if the employment history, income and
credit report meet the aforementioned criteria. The contract for sale is subject
to (i) executing a promissory note which is secured by a first lien on the land
and the home to be built, (ii) executing a mortgage, deed of trust or other
security instrument, (iii) receiving a satisfactory title report, (iv)
inspecting the land to determine that it is suitable for building and (v)
obtaining required permits. Although the mortgages, deeds of trust and similar
security instruments constitute a first lien on the land and the home to be
built, such security instruments are not insured by the Federal Housing
Administration or guaranteed by the Veterans Administration or otherwise insured
or guaranteed.

Jim Walter Homes does not obtain appraisals or title insurance. Although
consideration is given to the ratio of the amount financed to the estimated
value of the home and the land securing such amount, there is no explicit
appraisal-based loan-to-value test. However, there is a requirement that the
value of the lot on which the home is to be built, as estimated solely on the
basis of Jim Walter Homes' mortgage servicing division employees' experience and
knowledge, be at least equal to 10% of the amount of the sales price to be
financed. Before occupying a new home, the customer must complete the utility
hook-ups and any of the other components not purchased from Jim Walter Homes,
arrange for the building inspection and, if required, obtain a certificate of
occupancy. The costs to complete a new home depend on the stage of completion of
the home purchased and whether public water and sewer systems are available or
wells and septic tanks must be installed. Such costs could range from
$2,000-$3,000 to

34
<PAGE>

$30,000-$40,000. Upon construction of a new home to the agreed-upon percentage
of completion, Jim Walter Homes sells the building and instalment sales
contract, the note and the related mortgage, deed of trust or other security
instrument to Mid-State Homes, an indirect, wholly owned subsidiary of the
Company, in the ordinary course of business pursuant to an Agreement of Purchase
and Sale of Instalment Obligations and Servicing of Delinquent Accounts.
Pursuant to this agreement, Jim Walter Homes provides field servicing on all
delinquent accounts, including collection of delinquent accounts,
recommendations of foreclosure, foreclosure and resale of foreclosed properties.

The favorable financing offered by Jim Walter Homes normally has tended to
increase unit volume in times of high interest rates and limited availability of
mortgage financing funds. As a result, Jim Walter Homes' volume of home sales
has tended to be counter-cyclical to national home construction activity. Also,
in times of low interest rates and high availability of mortgage funds,
additional competition is able to enter the market.

The single-family residential housing industry is highly competitive. Jim
Walter Homes competes in each of its market areas on the basis of price, design,
finishing options and accessibility to financing with numerous home builders
ranging from regional and national firms to small local companies. Jim Walter
Homes also competes with manufactured housing. For the calendar year 1995, Jim
Walter Homes was the eighth largest builder of detached single-family homes in
the United States after having been the sixth largest builder in 1994, the fifth
largest builder in 1993, and the fourth largest builder in 1992 and 1991.
However, because there are so many firms engaged in the single-family
homebuilding industry, Jim Walter Homes accounted for less than 1% of all new
detached for sale homes built in 1995.

In the three years ended May 31, 1996, 1995 and 1994, Jim Walter Homes' net
sales and revenues amounted to $159.2 million, $165.8 million and $166.0
million, respectively.

MID-STATE HOMES

Mid-State Homes, headquartered in the Walter Industries building in Tampa,
Florida, was established in 1958 to purchase mortgage instalment notes from Jim
Walter Homes on homes constructed and sold by Jim Walter Homes and to service
such mortgage instalment notes. Mid-State Trust II, Mid-State Trust III,
Mid-State Trust IV and Mid-State Trust V are business trusts organized by
Mid-State Homes, which owns all of the beneficial interest in Mid-State Trust
III, Mid-State Trust IV and Mid-State Trust V. Mid-State Trust IV owns all of
the beneficial interest in Mid-State Trust II.

In April 1988, Mid-State Homes sold to Mid-State Trust II instalment notes
and mortgages which it had acquired from Jim Walter Homes through February 29,
1988 with a gross amount of approximately $3,376,000,000 and an aggregate
outstanding economic balance of approximately $1,750,000,000 pursuant to a
purchase and sales agreement, in exchange for a purchase price of
$1,326,665,600, representing the net cash proceeds from the public offering of
$1,450,000,000 aggregate face amount of mortgage-backed notes ("Mid-State Trust
II Mortgage-Backed Notes") of Mid-State Trust II after paying the expenses
associated with the sale of such Mid-State Trust II Mortgage-Backed Notes. The
outstanding balance at May 31, 1996 of such Mid-State Trust II Mortgage-Backed
Notes was $497,000,000. At May 31, 1996, such Mid-State Trust II instalment
notes and mortgages had a gross book value of $1,166,386,000 and an economic
balance of approximately $723,481,000.

Under the Mid-State Trust II indenture for the Mid-State Trust II
Mortgage-Backed Notes, if certain criteria as to performance of the pledged
instalment notes are met, Mid-State Trust II is allowed to make quarterly
distributions of cash to Mid-State Trust IV, its sole beneficial owner, to the
extent that cash collections on such instalment notes exceed Mid-State Trust
II's cash expenditures for its operating expenses, interest expense and
mandatory debt payments on its mortgage-backed notes. In addition to the
performance-based distributions, the indenture permits distribution of
additional excess funds, if any, provided such distributions are consented to by
Financial Security Assurance Inc., a monoline property and casualty insurance
company and the guarantor of the Mid-State Trust II

35
<PAGE>

Mortgage-Backed Notes. The guarantor has not approved any additional
distributions since the January 1, 1995 distribution and such excess funds
remain on deposit with Mid-State Trust II.

On July 1, 1992, pursuant to approval by the Bankruptcy Court, mortgage
instalment notes having a gross amount of $638,078,000 and an economic balance
of $296,160,000 were sold by Mid-State Homes to Mid-State Trust III in exchange
for the net proceeds from the public issuance by Mid-State Trust III of
$249,864,000 of asset backed notes ("Mid-State Trust III Asset Backed Notes").
Net proceeds were used to repay in full all outstanding indebtedness due under a
revolving credit facility, with the excess cash used to fund the ongoing
operations of the Company and its subsidiaries. The outstanding balance at May
31, 1996 of such Mid-State Trust III Asset Backed Notes was $147,669,000. At May
31,1996, such Mid-State Trust III instalment notes and mortgages had a gross
book value of $416,780,000 and an economic balance of $217,247,000.

On March 16, 1995, pursuant to approval by the Bankruptcy Court, mortgage
instalment notes
having a gross amount of $2,020,258,000 and an economic balance of $826,671,000
were sold by Mid-State Homes to Mid-State Trust IV. In addition, on such date,
Mid-State Homes sold its beneficial interest in Mid-State Trust II to Mid-State
Trust IV. Mid-State Trust II had a total collateral value of $910,468,000 with
$605,750,000 of Mid-State Trust II Mortgage-Backed Notes outstanding. These
sales were in exchange for the net proceeds from the public issuance by
Mid-State Trust IV of $959,450,000 of asset backed notes ("Mid-State Trust IV
Asset Backed Notes"). The outstanding balance at May 31, 1996 of such Mid-State
Trust IV Asset Backed Notes was $902,277,000. At May 31, 1996, such Mid-State
Trust IV instalment notes and mortgages had a gross book value of $1,786,406,000
and an economic balance of $759,234,000.

The instalment notes sold by Mid-State Homes to Mid-State Trusts II, III and
IV are serviced by Mid-State Homes pursuant to servicing agreements entered into
with each trust. Mid-State Homes, in connection with such servicing agreements,
has entered into sub-servicing agreements with Jim Walter Homes to provide field
servicing such as collections, repossessions and resale.

The assets of Mid-State Trusts II, III and IV are not available to satisfy
claims of general creditors of Mid-State Homes or the Company and its other
subsidiaries. The liabilities of Mid-State Trusts II, III and IV for their
publicly issued debt are to be satisfied solely from proceeds of the underlying
instalment notes and are nonrecourse to Mid-State Homes and the Company and its
other subsidiaries.

On February 27, 1995, Mid-State Homes established Mid-State Trust V, a
business trust in which Mid-State Homes owns all the beneficial interest, to
provide temporary financing to Mid-State Homes for its current purchases of
instalment notes and mortgages from Jim Walter Homes. On March 3, 1995,
Mid-State Trust V entered into a Variable Funding Loan Agreement (the "Mid-State
Trust V Variable Funding Loan Agreement") with Enterprise Funding Corporation,
an affiliate of NationsBank N.A., as lender, and NationsBank N.A. (Carolinas),
as Administrative Agent. The agreement provides for a three-year $500,000,000
credit facility (the "Mid-State Trust V Variable Funding Loan") secured by the
instalment notes and mortgages Mid-State Trust V purchases from Mid-State Homes.
It is contemplated that the facility will be an evergreen three-year facility
with periodic paydowns from the proceeds of permanent financings similar to
those done by Mid-State Trusts II, III and IV. The facility currently matures on
March 3, 1999. The outstanding Mid-State Trust V Variable Funding Loan balance
at May 31, 1996 was $245,000,000. At May 31, 1996, such Mid-State Trust V
instalment notes and mortgages had a gross book value of $835,454,000 and an
economic balance of $315,422,000.

The revenues of Mid-State Trusts II, III, IV and V are required by
generally accepted accounting principles to be consolidated as part of Mid-State
Homes' revenues for financial statement purposes. In the three years ended May
31, 1996, 1995 and 1994, Mid-State Homes' revenues amounted to $248.8 million,
$237.1 million and $255.3 million, respectively, including revenues of Mid-State
Trust II of $135.2 million, $141.5 million and $164.5 million, respectively, and
revenues of Mid-State Trust III of $24.9 million, $24.1 million and $27.5
million, respectively. For the two years ended May 31, 1996 and

36
<PAGE>

1995, revenues of Mid-State Trust IV were $71.1 million and $27.5 million,
respectively and revenues of Mid-State Trust V were $13.5 million and $0.5
million, respectively.

JIM WALTER RESOURCES

The operations of Jim Walter Resources are conducted through its Mining
Division, which mines and sells coal from four deep shaft mines in Alabama, and
its De-Gas Division, which extracts and sells methane gas from the coal seams
owned or leased by Jim Walter Resources.

MINING DIVISION

The Mining Division, headquartered in Brookwood, Alabama, has approximately
9.7 million tons of rated annual coal production capacity from four deep shaft
mines. These mines extract coal from Alabama's Blue Creek seam, which contains
high quality metallurgical coal. This coal can be used as coking coal as well as
steam coal because it meets current environmental compliance specifications. The
Blue Creek coal has a low/medium volatility, high BTU and low sulfur content.
The mines are located in west central Alabama between the cities of Birmingham
and Tuscaloosa.

The majority of coal is mined using longwall technology, complemented by the
more standard continuous mining method. Since the late 1970's, by replacing the
traditional methods of underground mining with the longwall technique, the
Mining Division has achieved greater production efficiency, improved safety,
generated superior coal recovery results and lowered production costs. There are
approximately 70 longwall mining systems in use in the United States, of which
the Mining Division currently operates six. The Mining Division's normal
operating plan is a longwall/continuous miner ratio of about 75%/25%, which is
the long-term sustainable ratio.

Recoverable reserves, as of May 31, 1996, were estimated to be approximately
242 million tons, of which 217 million tons relate to the four Blue Creek Mines.

A summary of reserves is as follows:

ESTIMATED RECOVERABLE(1) COAL RESERVES AS OF MAY 31, 1996
(IN THOUSANDS OF TONS)
<TABLE>
<CAPTION>
TYPE(4)
---------
STEAM(S)
RESERVES(2) CLASSIFICATIONS(3) OR JWR'S INTEREST QUALITY(6) PRODUCTION(7)
MINING ----------------------------- ------------------- METALLUR- ------------------ ------------------- ------------
PROPERTY TOTAL ASSIGNED UNASSIGNED MEASURED INDICATED GICAL(M) OWNED LEASED(5) ASH SULF. BTU/LB 1994 1995
- -------------- ------- -------- ---------- -------- --------- --------- ------- --------- ---- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No. 3 Mine.... 60,075 60,075 -- 43,554 16,521 S/M 1,445 58,630 8.2 0.56 14,469 1,347 1,730
No. 4 Mine.... 71,262 71,262 -- 45,536 25,726 S/M 5,892 65,370 9.4 0.69 14,240 2,257 2,448
No. 5 Mine.... 26,758 26,758 -- 21,888 4,870 S/M 24,548 2,210 8.8 0.66 14,334 1,074 948
No. 7 Mine.... 59,174 59,174 -- 45,209 13,965 S/M 15,228 43,946 8.0 0.65 14,499 1,849 2,501
------- -------- ----- -------- --------- ------- --------- ----- -----
217,269 217,269 -- 156,187 61,082 47,113 170,156 6,527 7,627
Bessie (8).... 24,919 -- 24,919 14,880 10,039 S/M 658 24,261 11.0 1.30 13,655 -- --
------- -------- ----- -------- --------- ------- --------- ----- -----
TOTAL......... 242,188 217,269 24,919 171,067 71,121 47,771 194,417 6,527 7,627
------- -------- ----- -------- --------- ------- --------- ----- -----
------- -------- ----- -------- --------- ------- --------- ----- -----

MINING
PROPERTY 1996
- -------------- -----
<S> <C>
No. 3 Mine.... 2,084
No. 4 Mine.... 2,542
No. 5 Mine.... 893
No. 7 Mine.... 2,347
-----
7,866
Bessie (8).... --
-----
TOTAL......... 7,866
-----
-----
</TABLE>

- ------------
(1) "Recoverable" reserves are defined as tons of mineable coal in the Blue
Creek and Mary Lee seams which can be extracted and marketed after deduction
for coal to be left in pillars, etc. and adjusted for reasonable preparation
and handling losses.

(2) "Assigned" reserves represent coal which has been committed by Jim Walter
Resources to its operating mines and plant facilities. "Unassigned" reserves
represent coal which is not committed to an operating mine and would require
additional expenditures to recover. The division of reserves into these two
categories is based upon current mining plans, projections and techniques.

(3) The recoverable reserves (demonstrated resources) are the sum of "Measured"
and "Indicated" resources. Measured coal extends 1/4 mile from any point of
observation or measurement. Indicated coal is projected to extend from 1/4
mile to 3/4 mile from any point of observation or measurement. Inferred coal
extends from 3/4 mile to 3 miles from any point of observation or
measurement. Inferred reserves are not included in recoverable reserves.

(4) All of the coal in the Blue Creek and Mary Lee seams is suitable for
metallurgical purposes although, for marketing reasons, some is sold as
compliance steam coal.

(5) The leases are either renewable until the reserves are mined to exhaustion
or are of sufficient duration to permit mining of all of the reserves before
the expiration of the term.

(Footnotes continued on following page)

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<PAGE>
(Footnotes continued from preceding page)

(6) Values shown are weighted averages of all reserves and are calculated on a
dry basis. Bessie Mine reserves are equivalent to preparation at a 1.60
specific gravity, whereas the others are at a 1.40 specific gravity.

(7) Production for 1996, 1995 and 1994 is for the fiscal years ended May 31.

(8) The Bessie Mine was closed in August 1988.

Environmental expenditures imposed by laws relating to deep shaft mining
have been insignificant to date and no substantial expenditures are expected in
the future. The Mining Division does not engage in any surface (strip) mining.

The facilities of the Mining Division are summarized as follows:

<TABLE>
<CAPTION>
FACILITY LOCATION SQ. FOOTAGE
- --------------------------------------------------- -------------- --------------
<S> <C> <C>
Administrative headquarters........................ Brookwood, AL 41,500
Central shop, supply center and training center.... Brookwood, AL 128,400
</TABLE>

<TABLE>
<CAPTION>
CURRENT
OPERATING MINES LOCATION RATED CAPACITY
- --------------------------------------------------- -------------- --------------
<S> <C> <C>
Blue Creek No. 3................................... Adger, AL 2,600,000 tons
Blue Creek No. 4................................... Brookwood, AL 2,700,000 tons
Blue Creek No. 5................................... Brookwood, AL 1,800,000 tons
Blue Creek No. 7................................... Brookwood, AL 2,600,000 tons
</TABLE>

Of the Mining Division's approximately 9.7 million tons of current rated
annual production capacity, 4.88 to 5.10 million tons are sold under long-term
contracts, leaving 4.60 to 4.82 million tons to be sold under short-term
contracts or on the spot market.

Jim Walter Resources' supply contract with Alabama Power that had been in
effect since January 1, 1979, as amended, was superseded by the New Alabama
Power Contract. Under the New Alabama Power Contract, Alabama Power will
purchase 4.0 million tons of coal per year from Jim Walter Resources during the
period from July 1, 1994 through August 31, 1999. The New Alabama Power Contract
has a fixed price subject to an escalation based on the Consumer Price Index and
adjustments for governmental impositions and quality. The New Alabama Power
Contract includes favorable modifications of specification, shipping deviations
and changes in transportation arrangements. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Results of
Operations."

Jim Walter Resources and Carcoke, S.A. are parties to a long-term contract
which expires on December 31, 1997. The contract provides for the sale of
approximately 880,000 tons annually, with an option on approximately 220,000
additional tons annually. The pricing mechanism is market driven and reflects
changes in prices of three specific coals or coal indices.

Mine No. 5 was shut down for a substantial portion of the period from July
9, 1990 through September 16, 1990 as a result of safety concerns arising from
spontaneous combustion heatings which were a result of pyritic sulfur
concentrations occurring in the coal seam in the southern part of the mine being
exposed to the air by the mining process. The exposure of the sulfur deposits
and its reaction with oxygen contained in the ventilation air currents caused
the heatings to occur. Throughout this period, Jim Walter Resources was engaged
in discussions with MSHA regarding a new ventilating arrangement designed to
reduce the contact between oxygen and sulfur for the longwall faces at Mine No.
5. Idle plant expenses associated with the shutdown were $6.5 million. Although
MSHA approved the resumption of operations at the mine on September 14, 1990,
providing for a modified conventional ventilation system, productivity was poor
and costs were therefore high. In February 1991, the mine's one longwall unit
was moved from the southern part of the mine to a longwall coal panel in the
northern area and productivity improved. The southwestern area of the mine was
subsequently abandoned and sealed off as efforts to design a ventilation
arrangement acceptable to MSHA which properly controlled

38
<PAGE>

the spontaneous combustion heating and provided acceptable productivity and
costs of operation were not successful.

Mine No. 5 also was shut down from November 17, 1993 through December 16,
1993 and from early April 1994 until May 16, 1994 as a result of a fire due to
spontaneous combustion heatings caused by pyritic sulfur concentrations
occurring in the mine's coal seam being exposed to the air by the mining
process. Representatives of Jim Walter Resources, MSHA, Alabama State Mine
Inspectors and the UMWA agreed that the longwall coal panel being mined in Mine
No. 5 at the time the fire recurred in April 1994 would be abandoned and sealed
off. Development mining for the two remaining longwall coal panels in this
section of the mine resumed on May 16, 1994 and mining on the first longwall
panel resumed on January 17, 1995. Production was adversely impacted until such
date. As a result of the fire, the Company and Jim Walter Resources claimed
compensable losses in the amount of $25 million under their business
interruption insurance coverage. When the insurers refused to pay their pro rata
part of the claim, the Company commenced litigation seeking to enforce such
insurance. The insurers issued policies insuring various percentages of the
risk. The Company has entered into settlements with several insurers who, in the
aggregate, have paid approximately $11.7 million, reducing the contract claims
in the lawsuit to $12.7 million. The Company and Jim Walter Resources continue
to pursue the litigation against the remaining carriers and a trial is
tentatively scheduled for October 21, 1996. See "Business and Properties--Legal
Proceedings--Jim Walter Resources" and Note 12 of Notes to Financial Statements.

In late November 1995, Mine No. 5 experienced another fire due to the
unexpected recurrence of spontaneous combustion heatings caused by pyritic
sulfur concentrations occurring in the mine's coal seam being exposed to the air
by the mining process and the mine was shut down. Efforts to contain and
extinguish the fire were successful; however, conditions dictated the mine be
shut down for several weeks. Firefighting and idle plant costs of approximately
$16 million associated with the November 1995 fire were not insured since
spontaneous combustion heatings caused by pyritic sulfur concentrations in Jim
Walter Resources' Mines No. 4 and No. 5 are now excluded from the Company's and
Jim Walter Resources' insurance policies. The affected coal panels on the
western side of the mine have been sealed off and development work is underway
on the eastern side of Mine No. 5. Longwall production on the east side is
expected to commence in the fourth quarter of fiscal 1997. While in development,
the mine's costs are being capitalized. Total development costs in the year
ended May 31, 1996 were $15,169,000. Jim Walter Resources' three other operating
mines remain in full production.

In the three years ended May 31, 1996, 1995 and 1994, the Mining Division's
net sales and revenues were $325.8 million, $299.4 million and $290.3 million,
respectively, including $4.8 million, $5.4 million and $5.7 million,
respectively, to Sloss Industries Corporation ("Sloss Industries"), a wholly
owned subsidiary of the Company.

De-Gas Division

The De-Gas Division, through a joint venture headquartered in Brookwood,
Alabama, extracts and sells methane gas from the coal seams owned or leased by
Jim Walter Resources.

The original motivation for the joint venture was to increase safety in Jim
Walter Resources' Blue Creek mines by reducing the level of methane gas through
wells drilled in conjunction with the mining operations. As of May 1996, there
were 340 wells producing approximately 40 million cubic feet of gas per day. As
many as 100 additional wells are planned for development over the next 12-18
months. The degasification operation, as had originally been expected, has
improved mining operations and safety by reducing methane gas levels in the
mines, as well as being a profitable operation.

The gas is transported through a 12-mile pipeline (owned and operated by
Black Warrior Transmission Corp., a corporation the stock of which is owned on a
50-50 basis by Jim Walter Resources and Sonat Exploration Company, an affiliate
of Southern Natural Gas Company ("SNG")), directly to SNG's pipeline.

39
<PAGE>

The De-Gas Division began operations in 1981 with the formation of an equal
joint venture with Kaneb Services, Inc. ("Kaneb") to capture and market methane
gas from the Blue Creek seam. SNG is the joint venture's exclusive customer for
all output of methane gas, all of which was originally at a price tied to the
price of fuel oil in New York. Kaneb subsequently sold its 50% interest in the
degasification operation to an indirect wholly-owned subsidiary of Sonat, Inc.
In connection with such sale, additional areas were added to the gas sales
contract. This gas was priced at a market price nominated by SNG which was not
to be lower than the published price for spot purchases for SNG-South Louisiana
for the applicable month. Effective January 1, 1994, the gas sales contract was
amended. The price to be paid for gas delivered to SNG is now equal to the
average of two published spot prices; provided, however, that the price will not
be less than $2.00 per MMBTU (approximately $1.96 per MCF) on a weighted annual
basis, calculated cumulatively each month. Beginning in January 1994 and ending
in December 2001, SNG will pay Jim Walter Resources a reservation fee of
$675,000 per month if certain minimum quantities of gas are delivered. Black
Warrior Methane Corp., a corporation the stock of which is owned on a 50-50
basis by Jim Walter Resources and Sonat Exploration Company, manages the
operational activities of the joint venture.

In the three years ended May 31, 1996, 1995 and 1994, the De-Gas Division's
net sales and revenues amounted to $23.0 million, $20.8 million and $23.0
million, respectively.

U.S. PIPE

U.S. Pipe, headquartered in Birmingham, Alabama, conducts its business
through its Pressure Pipe Division and Castings Division. The Pressure Pipe
Division manufactures and sells a broad line of ductile iron pressure pipe, pipe
fittings and valves and hydrants. It is one of the nations's largest producers
of ductile iron pressure pipe. The Castings Division produces and sells a wide
variety of gray and ductile iron castings.

In the three years ended May 31, 1996, 1995 and 1994, U.S. Pipe's net sales
and revenues amounted to $421.4 million, $412.2 million and $357.2 million,
respectively.

Pressure Pipe Division

The Pressure Pipe Division manufactures and sells a complete line of ductile
iron pipe ranging from 4" to 64" in diameter as well as most equivalent metric
sizes. In addition, this division produces and sells a full line of fittings,
valves and hydrants of various configurations to meet various municipal
specifications. Approximately 70%-75% of the ductile iron pressure pipe produced
by this division is used in the transmission and distribution of potable water
and the remaining 25%-30% is used in the transmission of waste water and
industrial applications. The majority of ductile iron pressure pipe and related
fittings, valves and hydrants are for new distribution systems. However, the
market for rehabilitation, upgrading and replacement of pipe systems has grown
significantly in recent years (currently accounting for approximately 30% of
ductile iron pressure pipe sales) as municipalities have initiated programs to
rehabilitate aging water and waste water transmission systems. Fittings, valves
and hydrants produced by this division account for approximately 20% of sales.

Ductile iron pressure pipe is manufactured by the deLavaud centrifugal
casting process and is typically classified into three size categories: 1) Small
pipe, ranging from 4" to 12" in diameter (approximately 55% of the division's
pipe production), is used primarily for potable water distribution systems and
small water system grids; 2) Medium pipe, ranging from 14" to 24" in diameter
(approximately 26% of the division's pipe production), is used primarily in
reinforcing distribution systems, including looping grids and supply lines; and
3) Large pipe, 30" to 64" in diameter, which accounts for the remaining 19% of
pipe production, is used for major water and waste water transmission and
collection systems.

40
<PAGE>
The ductile iron pressure pipe industry is highly competitive, with a small
number of manufacturers of ductile iron pressure pipe, fittings, valves and
hydrants as well as a larger number of manufacturers which produce pipe from
substitute materials, such as PVC, concrete, fiberglass, reinforced plastic and
steel. U.S. Pipe is one of the nation's largest producers of ductile iron
pressure pipe. Major ductile iron pipe competitors include McWane, Inc., Griffin
Ductile Iron Pipe Company and American Cast Iron Pipe Company. The division
competes with such manufacturers of ductile iron pressure pipe on the basis of
price, customer service and product quality.

U.S. Pipe is also a manufacturer of ductile iron fittings. The Company
believes that McWane, Inc. has the largest market share in this market segment.
U.S. Pipe is not a major manufacturer of valves and hydrants.

Additional competition for ductile iron pressure pipe comes from pipe
composed of other materials. Although ductile iron pressure pipe is typically
more expensive than competing forms of pipe, customers choose ductile iron for
its quality, longevity, strength, ease of installation and lack of maintenance
problems.

Products of the Pressure Pipe Division are sold primarily to contractors,
water works distributors, municipalities and private utilities. Most ductile
iron pressure pipe orders result from contracts which are bid by contractors or
directly issued by municipalities or private utilities. An increasing portion of
ductile iron pressure pipe sales are made through independent water works
distributors. The division maintains numerous supply depots in leased space
throughout the country which are used as a source of pipe for start-up projects
to support ongoing projects and to aid in completing projects. The Pressure Pipe
Division's sales are primarily domestic, with foreign sales accounting for
approximately 5% of dollar sales in 1996. U.S. Pipe has 36 sales offices in
leased space in the United States. It employs a salaried sales force of
approximately 70 persons.

The order backlog of pressure pipe at May 31, 1996 was 121,734 tons, which
represents approximately three months' shipments, compared to 121,548 tons at
May 31, 1995.

The Pressure Pipe Division manufactures ductile iron pressure pipe at four
owned plants located in (i) Bessemer, Alabama (581,000 square feet on 169 acres
of land); (ii) North Birmingham, Alabama (358,000 square feet on 61 acres of
land); (iii) Union City, California (121,000 square feet on 70 acres of land);
and (iv) Burlington, New Jersey (329,000 square feet on 109 acres of land). Such
plants have annual rated capacities, on a one shift per day basis, of 180,000
tons, 160,000 tons, 85,000 tons and 132,000 tons, respectively, of ductile iron
pressure pipe. In addition, the division manufactures fittings, valves and
hydrants at its owned plant in Chattanooga, Tennessee (648,000 square feet on 80
acres of land). The general offices located in Birmingham, Alabama contain
122,000 square feet of office space on 6 acres of owned land.

While the pipe business is generally sensitive to recessions because of its
partial dependence on the level of new construction activity, certain aspects of
Pressure Pipe's operations have in the past helped to reduce the impact on such
division of the effects of a downturn in new construction.

First, Pressure Pipe's products have experienced a strong level of demand in
the replacement market. The Company believes that the growth of the replacement
market will continue as a result of major expenditures by governmental entities
in an effort to rebuild the nation's infrastructure, such as the replacement and
upgrading of water and waste water transmission systems. In addition,
legislation such as the Clean Water Act and the Safe Drinking Water Act may
force utilities and cities to upgrade and/or replace their pipe systems.

Second, Pressure Pipe's facilities are located in regions of the country
which have exhibited consistent economic strength. The Burlington, New Jersey
plant is adjacent to the northeastern market with its significant replacement
potential and the division's operations in the South are located in areas of
steady economic growth. The West Coast, served by the Union City, California
plant, has a critical shortage of water for many of the large metropolitan areas
which will require major transmission pipelines in the future. Because freight
costs for pipe are high, locations close to important markets lower
transportation costs, thereby making the Pressure Pipe Division's products more
competitive.

41
<PAGE>
Castings Division

The Castings Division produces a wide variety of gray and ductile iron
castings for a diversified customer base, including special hardness castings
for the pollution control industry. In the year ended May 31, 1996,
approximately 45% of the Castings Division's sales were sales of castings to the
Pressure Pipe Division, with the balance of sales to various capital goods
industries. Manufacturing operations are located in Anniston, Alabama (240,000
square feet on 21 acres of owned land).

SLOSS INDUSTRIES

Sloss Industries is a diversified manufacturing operation, headquartered in
Birmingham, Alabama, which has four major product lines: (1) foundry coke; (2)
furnace coke; (3) slag wool; and (4) specialty chemicals.

Foundry coke is marketed to cast iron pipe plants and foundries producing
castings, such as for the automotive and agricultural equipment industries. It
is shipped primarily into four geographic markets: the East Coast; the
Southeast; Mexico and the West Coast. Competition comes primarily from three
merchant suppliers: ABC Coke, Koppers Company, Inc. and Empire Coke Company. In
the year ended May 31, 1996, approximately 60% of the foundry coke produced by
Sloss Industries was sold to U.S. Pipe.

Furnace coke is sold primarily to basic steel producers. Furnace coke sales
have been consistent over the past years, as a result of a contract with
National Steel Corporation taking nearly all of Sloss' production capacity.
Sloss Industries has only an estimated 1% of the market for furnace coke.
Competition comes primarily from Koppers Company, Inc. in the southern United
States and from Citizens Gas & Coke Utility and steel producers with excess
coking capacity in the Midwest.

Slag wool is utilized principally by acoustical ceiling manufacturers and is
also used in fireproofing cements. A related product, processed mineral fiber,
is used in friction materials and phenolic molding compounds. The continued
success of the slag wool business depends upon Sloss Industries' ability to
produce ceiling tile fiber of consistent high quality and react to customer
demands for specific "customized" fiber composition. Of the total slag wool
sales in the year ended May 31, 1996, approximately 66% was sold to Armstrong
World Industries and 26% to Celotex.

Chemical products are manufactured in plants located in Birmingham and
Ariton, Alabama. The Birmingham product line is composed primarily of aromatic
sulfonic acids and sulfonyl chlorides used in the pharmaceutical, plasticizer,
foundry and coatings industries, but also includes a custom manufactured
specialty monomer for the plastics industry. The Ariton facility produces custom
manufactured specialty products for the rubber and plastics industries.

Sloss Industries' manufacturing facilities located in Birmingham, Alabama
include 120 coke ovens with an annual rated capacity of 450,000 tons and related
buildings of 148,400 square feet, a slag wool plant with an annual rated
capacity of 121,000 tons in a building of 63,000 square feet and a synthetic
chemicals plant in a building of 63,300 square feet, all on 521 acres of owned
land. Sloss Industries also operates a specialty chemical facility in Ariton,
Alabama in a building of 6,880 square feet, on 53 acres of owned land.

In the three years ended May 31, 1996, 1995 and 1994, Sloss Industries' net
sales and revenues amounted to $91.1 million, $88.0 million and $81.7 million,
respectively, including $12.0 million, $11.1 million and $9.4 million,
respectively to U.S. Pipe.

JW ALUMINUM

JW Aluminum Company ("JW Aluminum"), headquartered in Mt. Holly, South
Carolina, is a leading producer of fin stock used in heating and air
conditioning applications. Its second leading

42
<PAGE>
product is cable wrap used in the manufacture of communications cable. JW
Aluminum's other foil and sheet products are used in a variety of applications,
such as lithoplate for newspapers and as a facer on foam insulation products.
Aluminum sheet products are used primarily for general building applications
such as siding, gutters, downspouts, trailer siding, mobile home siding and
skirting, residential siding and window components.

In fiscal 1996, JW Aluminum sold 122.7 million pounds of aluminum products,
29% of which were sheet products and 71% were foil products. JW Aluminum has
focused on directing its product mix away from building products which are price
sensitive, low value added products, towards higher value added products such as
fin stock, where product quality and service are relied upon more than price.

JW Aluminum operates a single manufacturing facility in Mt. Holly, South
Carolina. Such facility, which incorporates the plant warehouse and
administrative functions, is in a building of 319,000 square feet on 25 acres of
owned land. JW Aluminum's current rated capacity is 125 million pounds per year,
based on the present product mix. A $7.5 million expansion program currently
underway will increase capacity to 150 million pounds per year in late fiscal
1997.

In the three years ended May 31, 1996, 1995 and 1994, JW Aluminum's net
sales and revenues amounted to $141.1 million, $134.2 million and $87.3 million,
respectively, including $3.4 million, $6.1 million and $2.1 million,
respectively, to JW Window Components.

JW WINDOW COMPONENTS

JW Window Components produces a variety of screens and screen components and
a full line of window components, such as extruded aluminum components,
weatherstripping, sash balances and spiral balances. JW Window Components is
recognized as an industry leader in the production of block and tackle sash
balances. It also has the broadest product line of any supplier to the window
and patio door industry. The Company estimates that approximately 60% of total
sales are directed to the new construction market, approximately 30% to the
renovation market and approximately 10% to the commercial sector.

JW Window Components' products are sold through a network of independent
sales agents, who cover the continental United States, the Caribbean and Central
American countries.

JW Window Components operates three plants located in Elizabethton,
Tennessee (190,000 square feet on 25 acres of owned land); Sioux Falls, South
Dakota (50,000 square feet on 3 acres of owned land); and Merrill, Wisconsin
(54,000 square feet of leased space). The administrative offices are located in
Elizabethton, Tennessee.

In the three years ended May 31, 1996, 1995 and 1994, net sales and revenues
for JW Window Components amounted to $37.0 million, $45.8 million and $38.7
million, respectively.

SOUTHERN PRECISION

Southern Precision Corporation ("Southern Precision") is the largest
producer of pattern tooling and resin coated sand in the Southeast.

Southern Precision's Irondale, Alabama manufacturing facility incorporates
the plant, warehouse and administrative functions (85,000 square feet of
buildings located on 6 acres of owned land). The facility and equipment enable
the company to service the larger and more sophisticated tooling and machining
programs. Products and services provided at this location include: 1) wood and
metal pattern tooling; 2) numerical controlled machining for industries such as
satellite and aircraft communications, aerospace and glass machines; 3) plastic
injection, compression and rubber molds; 4) aluminum castings; and 5) general
machining of fabrications, castings and plates.

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Southern Precision's Birmingham, Alabama manufacturing facility (27,500
square feet on 5 acres of owned land) produces a coated sand for production of
shell cores for the foundry industry. To increase operating efficiency, the
company closed its Irondale, Alabama coating facility in August 1995 and
combined it with the Birmingham facility. The Birmingham facility is newer,
provides adequate land for expansion and is located on a major rail line, which
eliminates trucking expense while providing for bulk shipment by rail.

In the three years ended May 31, 1996, 1995 and 1994, Southern Precision's
net sales and revenues amounted to $15.0 million, $14.4 million and $11.0
million, respectively, including $1.2 million, $2.4 million and $2.2 million,
respectively, to U.S. Pipe.

VESTAL MANUFACTURING

Vestal Manufacturing produces a diversified line of metal and foundry
products for residential, commercial and industrial use. Vestal Manufacturing
manufactures a line of energy saving fireplaces, fireplace inserts, accessories
and woodburning stoves, as well as lightweight castings for municipal markets
and metal building products.

Vestal Manufacturing's products are sold through a network of independent
sales agents to hardware and building materials distributors, home centers and
mass merchandisers throughout the United States and Canada.

Vestal Manufacturing's performance to a large extent is tied to residential
construction. Foreign competition has also been a factor in recent years.

Vestal Manufacturing, located in Sweetwater, Tennessee, operates a foundry
with 103,000 square feet, a steel fabrication plant with 109,000 square feet and
an administrative office containing 7,000 square feet, all on 46 acres of owned
land.

In the three years ending May 31, 1996, 1995 and 1994, Vestal
Manufacturing's net sales and revenues amounted to $17.3 million, $19.4 million
and $17.4 million, respectively.

UNITED LAND

United Land Corporation ("United Land") owns approximately 43,000 acres of
land, 137,000 acres of mineral rights and 1,300 acres of surface rights,
principally in Alabama.

United Land receives royalties resulting from leases to strip coal miners,
gas producers and timber companies. When market conditions are favorable,
management expects from time to time to sell excess real estate from the
holdings of United Land not utilized by any of the other subsidiaries of the
Company.

In the three years ended May 31, 1996, 1995 and 1994, United Land's net
sales and revenues amounted to $14.6 million, including a gain of $6.1 million
on sales of certain excess real estate, $15.8 million, including a gain of $6.1
million on the sale of certain excess real estate, and $9.2 million,
respectively.

WALTER LAND

Walter Land Company ("Walter Land") is a land sales operation with an
inventory at May 31, 1996 of approximately 7,400 acres, primarily on the south
side of Houma, Louisiana. The bulk of the commercial development in Houma is
tied directly to service and support for offshore oil and gas drilling, which
has been in a long term recession. Land sales have been few and small in recent
years. Presently, the majority of Walter Land's income is derived from rental
income. The management and sale of the Louisiana properties are handled by local
personnel on a contract basis. In the three years

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ended May 31, 1996, 1995 and 1994, Walter Land's net sales and revenues amounted
to $277,000, $196,000 and $247,000, respectively.

CARDEM INSURANCE

Cardem Insurance is a Hamilton, Bermuda based offshore reinsurance company.
The predominant part of its business is reinsuring 75% of the risk on fire and
extended coverage insurance policies issued by Westchester Insurance Company, an
unrelated insurance company. Such insurance policies are with individual owners
of homes constructed by Jim Walter Homes. In the years ended May 31, 1996, 1995
and 1994, Cardem Insurance's net sales and revenues amounted to $13.1 million,
$11.8 million and $12.0 million, respectively.

SEASONALITY

Certain of the businesses of the Company (primarily U.S. Pipe, Jim Walter
Homes, JW Window Components and Vestal Manufacturing) are subject to seasonal
variations to varying degrees. However, the businesses of the Company are
significantly influenced by the general economy.

TRADE NAMES, TRADEMARKS AND PATENTS

The names of each of the Company's subsidiaries are well established in the
respective markets served by them. Management believes that the reputation of
such trade names is of some importance. The Company's subsidiaries have numerous
patents and trademarks. Management does not believe, however, that any one such
patent or trademark is of material importance.

RESEARCH AND DEVELOPMENT

Research activities conducted by each business are directed toward new
products, process and building systems development, improvement of existing
products, development of new uses for existing products and cost reduction
efforts. Total research and development expenditures in each of the last three
fiscal years were less than 1% of consolidated net sales and revenues.

RAW MATERIALS

Substantially all of the raw materials needed for the operations of the
Company and its subsidiaries are either produced by the Company and its
subsidiaries or are purchased from domestic sources. All materials used by the
various businesses of the Company are available in the quantities necessary to
support their respective operations.

ENVIRONMENTAL

The Company and its subsidiaries are subject to a wide variety of laws and
regulations concerning the protection of the environment, both with respect to
the construction and operation of many of its plants, mines and other
facilities, and with respect to remediating environmental conditions that may
exist at its own and other properties. The Company believes that it and its
subsidiaries are in substantial compliance with federal, state and local
environmental laws and regulations. Expenditures for compliance of ongoing
operations and for remediation of environmental conditions arising from past
operations in the fiscal year ended May 31, 1996 were approximately $5.1
million. Because environmental laws and regulations on the federal, state and
local levels continue to evolve, and because conditions giving rise to
obligations and liabilities under environmental laws are in some circumstances
not readily identified, it is difficult to forecast the amount of such future
environmental expenditures or the effects of changing standards on future
business operations, and the Company can give no assurance that such
expenditures will not, in the future, be material. Capital expenditures for
environmental requirements are anticipated in the next five years to average
approximately $6.0 million per year.

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U.S. Pipe is implementing an Administrative Consent Order ("ACO") for its
Burlington, New Jersey plant that was required under the New Jersey
Environmental Cleanup Responsibility Act (now known as the Industrial Site
Recovery Act) in connection with the completion of the LBO. The ACO required
soil and ground water cleanup. U.S. Pipe has completed, pending final approval,
the soil cleanup required by the ACO. U.S. Pipe also has completed, pending
final approval, ground water treatment as ordered in the ACO. Ground water
monitoring as required by the ACO continues. It is not known how long ground
water monitoring will be required. Management does not believe the cleanup costs
will have a material adverse effect on the financial condition or results of
operations of the Company and its subsidiaries.

The federal Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), generally imposes liability, which may be joint and several and
is without regard to fault or the legality of waste generation or disposal, on
certain classes of persons, including owners and operators of sites at which
hazardous substances are released into the environment (or pose a threat of such
release), persons that disposed or arranged for the disposal of hazardous
substances at such sites, and persons who owned or operated such sites at the
time of such disposal. CERCLA authorizes the EPA, the states and, in some
circumstances, private entities to take actions in response to public health or
environmental threats and to seek to recover the costs they incur from the same
classes of persons. Certain governmental authorities can also seek recovery for
damages to natural resources. Various subsidiaries of the Company have been
identified as potentially responsible parties by the EPA under CERCLA with
respect to cleanup of hazardous substances at several sites to which their
wastes allegedly have been transported. The subsidiaries are in the process of
preliminary investigation of their relationship to these sites, if any, to
determine the nature of their potential liability and amount of remedial costs
to clean up such sites. Although no assurances can be given that the Company
will not be required in the future to make material expenditures relating to
these sites, management does not believe at this time that the cleanup costs its
subsidiaries will be called on to bear, if any, associated with these sites will
have a material adverse effect on the financial condition or results of
operations of the Company and its subsidiaries; management believes the extent
of the subsidiaries' involvement, if any, to be minor in relation to that of
other named potentially responsible parties, a significant number of which are
substantial companies.

EMPLOYEES

As of May 31, 1996, the Company and its subsidiaries employed 7,755 people,
of whom 4,817 were hourly workers and 2,938 were salaried employees.
Approximately 4,300 employees were represented by unions under collective
bargaining agreements, of which approximately 1,750 were covered by one contract
with the UMWA, which currently expires on August 1, 1998. The Company considers
its relations with its employees to be satisfactory.

The Company and its subsidiaries have various pension and profit sharing
plans covering substantially all employees. In addition to the Company's own
pension plans, contributions are made to certain multi-employer plans. The
funding of retirement and employee benefit plans is in accordance with the
requirements of the plans and, where applicable, in sufficient amounts to
satisfy the "Minimum Funding Standards" of the Employee Retirement Income
Security Act of 1974 ("ERISA"). The plans provide benefits based on years of
service and compensation or at stated amounts for each year of service.

PROPERTIES

The headquarters building of the Company is a modern twin tower building of
masonry and steel construction containing approximately 200,000 square feet of
office space, located on a plot of land in excess of 13 acres in Tampa, Florida.

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LEGAL PROCEEDINGS

Plan of Reorganization. The Plan of Reorganization was confirmed by the
Bankruptcy Court on March 2, 1995. A limited appeal from the order confirming
the Plan of Reorganization was filed by the United States on behalf of the EPA.
Notwithstanding the filing of such appeal, the Plan of Reorganization became
effective on March 17, 1995. The Company and the EPA have resolved all issues on
appeal. On July 11, 1995 the Bankruptcy Court entered its Order Granting Motion
to Approve Agreement of the United States and the Debtor Regarding Releases and
Injunctions Under Amended Joint Plan of Reorganization Dated as of December 9,
1994. An order dismissing the appeal was entered on August 1, 1995.

Despite the confirmation and effectiveness of the Plan of Reorganization,
the Bankruptcy Court continues to have jurisdiction to, among other things,
resolve disputed prepetition claims against the Company, resolve matters related
to the assumption, assumption and assignment, or rejection of executory
contracts pursuant to the Plan of Reorganization, and to resolve other matters
that may arise in connection with or relate to the Plan of Reorganization. (For
example, see Note 12 ("Litigation Related to Chapter 11 Distributions to Certain
Holders of Subordinated Notes and/or Debentures and Chapter 11 Adversary
Proceeding Filed by Certain Holders of Series B & C Senior Notes") of Notes to
Financial Statements). Except as described in "Certain Risk Factors--Tax
Considerations" and "--Disputed Claims Reserves," provision was made under the
Plan of Reorganization in respect of all prepetition liabilities of the Company.

Asbestos-Related Litigation Settlements. As discussed more fully under
"Recent History", prior to filing the Chapter 11 Cases, the Company and the
Indemnitees were subject to significant and mounting Veil Piercing Litigation
arising from the LBO and the activities of Celotex, a former subsidiary of the
Company. Celotex filed for protection under Chapter 11 on October 12, 1990 as a
result, in part, of increasingly burdensome asbestos litigation. In the Veil
Piercing Litigation, the Asbestos Claimants sought (i) to pierce the corporate
veil that existed between Celotex and Original Jim Walter prior to the LBO and
(ii) to unwind the LBO. According to the Asbestos Claimants, if Original Jim
Walter were to be deemed responsible for Celotex's alleged multi-billion dollar
asbestos liabilities, the debt issued in connection with the LBO would have
rendered the Company insolvent, making the LBO a fraudulent conveyance. The
Asbestos Claimants asserted at various times that the amount of Celotex's
asbestos liabilities could reach $10 billion. Any finding that the Company could
be liable for all or any part of these liabilities would have threatened the
Company's existence.

After the filing of the Chapter 11 Cases, the Company commenced the
Adversary Proceeding. After a full trial (the "Veil Piercing Trial"), the
Bankruptcy Court on April 18, 1994 found in favor of the Company on every claim
asserted in the Adversary Proceeding. The United States District Court for the
Middle District of Florida affirmed the Bankruptcy Court's decision on appeal on
October 13, 1995. The decision of the District Court was appealed to the United
States Court of Appeals for the Eleventh Circuit. On or about April 28, 1995, a
stipulation of dismissal of that appeal was filed pursuant to the terms of the
Veil Piercing Settlement described below.

On April 28, 1994, the Company commenced an action (the "Celotex Action") in
the Celotex bankruptcy proceeding seeking a ruling that, as a subsidiary of Jim
Walter Corporation, Celotex alone had standing to assert the Veil Piercing
Claims and that all creditors of Celotex were bound by the decisions in the
Adversary Proceeding. If granted, the relief sought in the Celotex Action would
have barred any future Veil Piercing Claims from being brought against the
Company or any other entity. Counsel for the Asbestos Claimants had indicated
that they would assert that only the named defendants in the Adversary
Proceeding could be bound by the decisions in that action, leaving thousands of
unnamed and future claimants free to relitigate the same issues raised therein.
The Celotex Action was dismissed without prejudice on October 13, 1994 for lack
of a case and controversy and for failure to join an indispensable party.
Counsel for the Asbestos Claimants asserted that they would vigorously oppose
any attempt by the Company to obtain an adjudication in any forum to the

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effect that the Asbestos Claimants or any other individual claimants lack
standing to raise Veil Piercing Claims.

Prior to the Veil Piercing Trial, a number of the Company's creditors
reached a settlement agreement with the Asbestos Claimants and Celotex to
resolve the Veil Piercing Claims, the Veil Piercing Litigation and the Adversary
Proceeding (the "Initial Settlement"). The Company did not join in the Initial
Settlement and filed objections in the Chapter 11 Cases thereto.

On October 17, 1994, a hearing was commenced in the Chapter 11 Cases on the
fairness of the Initial Settlement and certain other issues relating to the
payment of post-petition interest to unsecured creditors of the Company and
challenges to the voting process. Before the completion of that hearing, all
parties conducted intensive settlement negotiations. As a result of those
negotiations, the Company, the Asbestos Claimants, certain creditors of the
Company, KKR, Jim Walter Corporation, Celotex and others agreed upon the terms
of a global settlement, ultimately resulting in the execution of the Veil
Piercing Settlement, the terms of which are embodied in and made effective by
the Plan of Reorganization.

Under the Veil Piercing Settlement, all pending and future Settlement Claims
are settled, satisfied, released, barred and discharged and all persons that
have asserted or may in the future assert Settlement Claims are permanently
enjoined from, among other things, (i) commencing, conducting or continuing in
any manner, directly or indirectly, any proceeding of any kind in respect of
Settlement Claims against, among others, any of the Released Parties, (ii)
enforcing, levying, attaching, collecting or otherwise recovering by any manner,
directly or indirectly, any judgment, award, decree or order against any of the
Released Parties in respect of Settlement Claims and (iii) creating, perfecting
or otherwise enforcing in any manner, directly or indirectly, any encumbrance of
any kind against any of the Released Parties in respect of Settlement Claims.

The Veil Piercing Settlement was intended to resolve finally all Settlement
Claims. The Veil Piercing Settlement was signed by, among others, Celotex, Jim
Walter Corporation and counsel for the Asbestos Claimants, thus binding them to
the terms thereof. To implement the Veil Piercing Settlement, all present and
future holders of Settlement Claims other than Celotex, including Asbestos
Claimants, were certified by the Bankruptcy Court as a class (for settlement
purposes only) under applicable bankruptcy rules and the Federal Rules of Civil
Procedure (the "Class"). A representative of the Class was appointed by the
Bankruptcy Court (the "Class Representative"). All potential members of the
Class who could be identified received actual notice of the terms of the Veil
Piercing Settlement and the Plan of Reorganization in addition to wide
publication notice. The forms of notice were approved by the Bankruptcy Court.
The Class Representative and Celotex each filed proofs of claim in the Chapter
11 Cases for the Settlement Claims. The Company filed objections to those proofs
of claim and the Bankruptcy Court allowed the Settlement Claims pursuant to the
Veil Piercing Settlement in the aggregate amount of $375 million.

The Plan of Reorganization established a class of all present and future
holders of Settlement Claims ("Class U-7"). A bar date for the filing of Class
U-7 claims was set and notice thereof was approved by the Bankruptcy Court and
given by the Company to all known Veil Piercing Claimants and by publication.
For voting purposes, every member of Class U-7 was temporarily allowed a $1
claim. Every Class U-7 claimant was given an opportunity to vote on the Plan of
Reorganization. Class U-7 approved the Plan of Reorganization by a vote of
73,861 in favor to 16 opposed. No member of Class U-7 filed an objection to the
Plan of Reorganization or to the Veil Piercing Settlement embodied therein.

The Plan of Reorganization provides that acceptance of the Plan of
Reorganization by Class U-7 binds any and all present or future holders of
Settlement Claims to the terms of the Plan of Reorganization and thus bars them
from bringing any Settlement Claims against the Company, the Indemnitees or any
of the other Released Parties. Under the terms of the Veil Piercing Settlement,
the stated amount of the settlement ($375 million) (the "Celotex Settlement
Fund") was paid under the

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Plan of Reorganization in the form of Common Stock, cash and Senior Notes to the
Celotex Settlement Fund Recipient, which will hold the proceeds for the
exclusive benefit of the Veil Piercing Claimants (as defined in the Veil
Piercing Settlement). Under the Plan of Reorganization, all Settlement Claims
must be channeled to the Celotex Settlement Fund Recipient to be administered
under the jurisdiction of the Celotex Bankruptcy Court.

On March 2, 1995, the Bankruptcy Court entered a confirmation order which,
among other things, (i) provided for the satisfaction, discharge and release of
the Settlement Claims, (ii) included an injunction permanently channeling all
Settlement Claims to the Celotex Settlement Fund Recipient, (iii) found the Veil
Piercing Settlement to be fair and reasonable and (iv) provided that the Class
hall be deemed to have provided releases of all Released Parties under the Veil
Piercing Settlement.

By orders dated February 13 and 25, 1995, the Celotex Bankruptcy Court
approved the Veil Piercing Settlement and directed Celotex to render performance
in accordance with its terms. In addition, the Celotex Bankruptcy Court
appointed a legal representative to protect the interests of unknown asbestos
bodily injury claimants. After review of the Veil Piercing Settlement, that
legal representative informed the Celotex Bankruptcy Court that the Veil
Piercing Settlement should be approved as being in the best interests of such
claimants.

On March 17, 1995, the Celotex Bankruptcy Court issued an order authorizing
the Celotex Settlement Fund Recipient to receive the Celotex Settlement Fund for
the exclusive benefit of the Veil Piercing Claimants (as defined in the Veil
Piercing Settlement). The Celotex Bankruptcy Court also ordered that "all claims
of the type settled by the Veil Piercing Settlement . . . shall attach solely to
the [Celotex] Settlement Fund and all persons and entities are enjoined from
commencing or continuing any suit, arbitration or other proceeding of any type
against any and all of the Released Parties . . . arising out of any such
claims." The Celotex Bankruptcy Court also enjoined anyone from taking any
action against the Celotex Settlement Fund without the prior approval of the
Celotex Bankruptcy Court.

Under the terms of the Veil Piercing Settlement, all parties thereto have
agreed to use their best efforts to obtain a confirmation of a plan of
reorganization in the Celotex bankruptcy proceeding that includes a provision
for an injunction pursuant to Section 524(g) or other similar injunctive relief
providing the same protection as a Section 524(g) injunction acceptable to each
of the Released Parties. Section 524(g) is part of the 1994 amendments to the
Bankruptcy Code. It provides for permanent supplemental injunctions, such as the
ones contemplated in the Veil Piercing Settlement, to protect third parties who
are not debtors in bankruptcy. Thus, a supplemental injunction under Section
524(g) would operate to bar future Settlement Claims against the Company, the
Indemnitees and the other Released Parties. There had been some disputes about
the statutory authorization of such injunctions under case law before the
enactment of Section 524(g). Under Section 524(g), the Celotex Bankruptcy Court
may (i) bind all present and future holders of Settlement Claims to the terms of
the Veil Piercing Settlement and (ii) enjoin such holders from bringing
Settlement Claims against any Released Party in the future.

The Plan of Reorganization does not provide for a Section 524(g) injunction.
However, as discussed above, under the terms of the Veil Piercing Settlement the
parties to the Celotex bankruptcy proceeding are required to use their best
efforts to obtain the confirmation of a plan of reorganization that contains
such a provision or other similar injunctive relief providing the same
protection as a Section 524(g) injunction acceptable to each of the Released
Parties. Although there is no assurance that it will be confirmed and
consummated, if a Celotex plan of reorganization is confirmed and consummated
and it contains a Section 524(g) injunction, it would provide additional
protection for the Released Parties, including the Company. In conjunction with
its Chapter 11 bankruptcy proceedings, through July 1996 Celotex filed various
plans of reorganization and/or amendments and supplements thereto which failed
to conform to the Veil Piercing Settlement with respect to providing for a
Section 524(g) injunction and which thus violated the Veil Piercing Settlement.
On March 8, 1996, the Company, along with certain other Released Parties
commenced the Second Adversary Proceeding in

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the Bankruptcy Court against Celotex and Jim Walter Corporation seeking (1) a
declaration that the Former Celotex Plan did not contain the Section 524(g)
injunction agreed upon by Celotex and Jim Walter Corporation and thus violated
the Veil Piercing Settlement and (2) a mandatory injunction compelling Celotex
to amend the Former Celotex Plan to incorporate a provision for a Section 524(g)
injunction or an injunction acceptable to the Released Parties that provided the
Released Parties the same protection which would be afforded to them by Section
524(g). On May 28, 1996, the Bankruptcy Court entered an Order granting
Plaintiff's Motion for Summary Judgment in part and denying the Motions for
Summary Judgment filed by Celotex and Jim Walter Corporation. The Bankruptcy
Court's Order declared that: (i) the Veil Piercing Settlement was a valid
agreement binding all signatories, including Celotex and Jim Walter Corporation;
(ii) the Former Celotex Plan did not contain a Section 524(g) injunction; and
(iii) Celotex had not proposed an injunction acceptable to the Released Parties
that provided the Released Parties the same protection which would be afforded
to them by Section 524(g), thus violating the Veil Piercing Settlement. On June
7, 1996, the Bankruptcy Court (1) made its Order granting Plaintiffs' Motion for
Summary Judgment in part a final order and (2) denied without prejudice
Plaintiffs' Emergency Motion for Injunctive Relief, which sought an injunction
mandating that Celotex and Jim Walter Corporation comply with the Veil Piercing
Settlement. Celotex and Jim Walter Corporation each filed notices of appeal
from, inter alia, the Bankruptcy Court's Order granting in part Plaintiffs'
Motion for Summary Judgment. By order dated June 19, 1996, the Celotex
Bankruptcy Court denied confirmation of the Former Celotex Plan and ordered that
any new plans must be submitted by July 12, 1996. On July 12, 1996, the Bodily
Injury Plan was filed by Celotex, Jim Walter Corporation, the Asbestos Bodily
Injury Claimants Committee and others and the competing Property Damage Plan was
filed by the Asbestos Property Damage Claimants Committee. The Company filed
objections to both plans, on the grounds that they did not comply fully with the
Veil Piercing Settlement. On August 23, 1996, both the Bodily Injury Plan
proponents and the Property Damage Plan proponents filed amended plans. The
Property Damage Plan, as amended, provides for a Section 524(g) injunction as to
all claimants. The Bodily Injury Plan, as amended, provides for a Section 524(g)
injunction as to all claimants, but reserves the right to seek confirmation of
the Bodily Injury Plan even if the asbestos property damage claimants class
votes against that plan. If the Bodily Injury Plan were to be confirmed over an
adverse vote of the property damage claimants class, that would appear to
preclude a Section 524(g) injunction as to asbestos property damage claims.
However, in such event the Bodily Injury Plan would still provide for an
injunction against asbestos property damage claims to the extent such an
injunction is allowed by Section 105 of the Bankruptcy Code. Both plans require
the approval of creditors and confirmation by the Celotex Bankruptcy Court. A
confirmation hearing concerning the Bodily Injury Plan, as amended, and the
Property Damage Plan, as amended, is currently scheduled to commence on October
7, 1996.

Jim Walter Homes/Mid-State Homes. Jim Walter Homes and Mid-State Homes,
together with Mid-State Trust II and certain other parties, were involved in
litigation, primarily in the Bankruptcy Court, with approximately 750 owners of
446 houses constructed by Jim Walter Homes in south Texas. The homeowners sought
damages based upon alleged construction defects, common law fraud, and
violations of the Texas Deceptive Trade Practices Act, the Texas Consumer Credit
Code, federal and state debt collections statutes and the Racketeering Influence
Corruptions and Practices Act. The litigation was settled pursuant to a
settlement agreement (the "Texas Settlement Agreement") which was approved by
the Bankruptcy Court on July 13, 1995. The settlement figure was approximately
$3.6 million in account balance reductions (of which approximately $1.25 million
represents a principal reduction), plus an approximate aggregate payment of
$27,500 in cash to certain homeowner claimants and $2.9 million as attorney's
fees (of which $900,000 was deferred and is payable over the next five years).
The Texas Settlement Agreement has a provision for the attorney for the
homeowner claimants to indemnify and hold harmless the defendants from any and
all claims, demands, causes of actions, lawsuits and settlements by the
homeowners. Further, it provides for the Bankruptcy Court to retain jurisdiction
over any claims which are not resolved by the Texas Settlement Agreement. Cases
involving approximately 22 non-settling homeowner claimants will be resolved on
an individual basis before the

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Bankruptcy Court and, although there can be no assurance as to the ultimate
outcome, the Company has filed motions it believes to be dispositive of the
remaining issues.

In May 1995 Jim Walter Homes and Mid-State Homes settled a class action by
purchasers of houses constructed by Jim Walter Homes in South Carolina since
December 27, 1989 in which the plaintiffs contended that Jim Walter Homes
violated certain provisions of the South Carolina Consumer Protection Code (the
"South Carolina Statute") relating to a borrower's right to choose the
borrower's attorney in certain transactions. Jim Walter Homes and Mid-State
Homes had filed an action in the Bankruptcy Court for a declaratory judgment
with respect to their liability, if any, to purchasers of houses built by Jim
Walter Homes in South Carolina from July 1, 1982 (the date on which the South
Carolina Statute become effective) to December 27, 1989. The settlement required
a cash payment of approximately $3 million, which after application of these
settlement proceeds to pay existing arrearages on the homeowners' mortgages
resulted in a net cash outlay of approximately $1,050,000. In addition, legal
fees of approximately $360,000 were paid. On November 22, 1995, the Bankruptcy
Court approved the settlement and distribution pursuant to the settlement has
been completed.

Jim Walter Resources. On May 31, 1995 the Company and Jim Walter Resources
commenced a lawsuit in the Circuit Court for Tuscaloosa County, Alabama against
a group of insurance companies with which the Company has business interruption
insurance seeking damages in the amount of $25 million for loss from
interruption of Jim Walter Resources' business resulting from a fire in November
1993 in Jim Walter Resources' Mine No. 5. See "Business and Properties--Jim
Walter Resources" and Note 12 ("Suit by the Company and Jim Walter Resources,
Inc. for Business Interruption Losses") of Notes to Financial Statements. The
insurers issued policies insuring various percentages of the risk. The complaint
filed by the Company and Jim Walter Resources seeks payment of the amounts
claimed to be due under the insurance policies in question and a declaratory
judgment that the policies in question are not void or voidable due to any
alleged failure to disclose or lack of fortuity. Certain of the insurers have
counterclaimed for rescission on the basis of nondisclosure and lack of
fortuity. The Company and Jim Walter Resources are also seeking a declaratory
judgment stating that each of the insurers is liable for its pro rata share of
the business interruption loss. In addition, the Company and Jim Walter
Resources have asserted a claim for bad faith refusal to pay against certain
insurers.

The Company has entered into settlements with several insurers who, in the
aggregate, have paid approximately $11.7 million reducing the contract claims in
the lawsuit to approximately $12.7 million. The Company and Jim Walter Resources
continue to pursue the litigation against the remaining insurers and a trial is
tentatively scheduled for October 21, 1996. Although there can be no assurance
as to the ultimate outcome, the Company and Jim Walter Resources believe their
claim is meritorious. See Note 12 ("Suit by the Company and Jim Walter
Resources, Inc. for Business Interruption Losses") of Notes to Financial
Statements.

U.S. Pipe--Environmental Penalty. U.S. Pipe entered into an Administrative
Consent Order in July 1995 with the New Jersey Department of Environmental
Protection pursuant to which it agreed, among other things, to pay a civil
penalty of $187,000, which has been paid in full, to resolve alleged violations
of its storm water permit regarding its plant in Burlington, New Jersey. The
Company is currently conducting a study as required by the Administrative
Consent Order to determine what further actions are necessary to comply with
such order. The Company does not expect the civil penalty or any other aspect of
the order to have a materially adverse effect on its consolidated financial
position. See "Business and Properties--Environmental".

Other. The Company and its subsidiaries are involved in various other
proceedings arising in the ordinary course of their businesses. The Company
provides for costs relating to these matters when a loss is probable and the
amount is reasonably estimable. The effect of the outcome of these matters on
the Company's future results of operations cannot be predicted because any such
effect depends on future results of operations and the amount and timing of the
resolution of such matters. Management does not expect that any of such other
proceedings will have a material adverse effect on the Company's consolidated
financial position.

51
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is a list showing the names, ages (as of September 1, 1996)
and positions of all directors of the Company, and, where applicable, the
executive office or offices held by each director with the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
James W. Walter........................... 73 Chairman Emeritus and Director.
Kenneth E. Hyatt.......................... 56 Director; Chairman, President and Chief
Executive Officer.
William H. Weldon(1)...................... 64 Director; Executive Vice President and
Chief Financial Officer.
Howard L. Clark, Jr....................... 52 Director.
James B. Farley........................... 65 Director.
Eliot M. Fried............................ 63 Director.
Perry Golkin.............................. 43 Director.
James L. Johnson.......................... 69 Director.
Michael T. Tokarz......................... 46 Director.
</TABLE>

- ------------

(1) Mr. Weldon has announced his intention to retire on September 30, 1996.
Effective October 1, 1996 Richard E. Almy will succeed him as a director of
the Company and Dean M. Fjelstul will succeed him as the Chief Financial
Officer of the Company.

James W. Walter has been a director of the Company since 1988. Mr. Walter
retired as Chairman of the Company effective October 6, 1995 and thereafter
became the Chairman Emeritus. Mr. Walter founded Walter Construction Co., a
predecessor of Original Jim Walter, in 1948 and Original Jim Walter
(incorporated in 1955). He was President and Chief Executive Officer of Original
Jim Walter from 1955 to 1963, Chairman and Chief Executive Officer from 1963 to
1983 and Chairman until 1988. He is a director of Anchor Glass Container
Corporation and Contel Cellular, Inc.

Kenneth E. Hyatt has been Chairman of the Board and Chief Executive Officer
of the Company since June 1, 1996 and has been President of the Company since
September 1, 1995. Between September 1, 1995 and June 1, 1996, he also served as
Chief Operating Officer of the Company. He was elected a director on September
12, 1995. Mr Hyatt served as President and Chief Executive Officer and a
director of Celotex from 1990 until shortly prior to his election, effective
September 1, 1995, as President and Chief Operating Officer of the Company. Mr
Hyatt held various management and executive positions with various subsidiaries
of Original Jim Walter from 1966 until 1984, at which time he was named Vice
President and Group Executive of Original Jim Walter. Following Original Jim
Walter's leveraged buyout in 1988 by KKR, Mr. Hyatt joined with an investor
group in the acquisition of Celotex and certain related entities. In October
1990 Celotex and one of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 in the Celotex Bankruptcy Court as a result of
massive litigation involving asbestos-related liabilities. The Celotex
Settlement Fund Recipient is a principal stockholder of the Company. See
"Security Ownership of Management and Principal Stockholders--Ownership of
Principal Stockholders".

William H. Weldon was elected a director of the Company on June 1, 1996.
Since December 1, 1995 he has been Executive Vice President and Chief Financial
Officer of the Company. Mr. Weldon had been Senior Vice President-Finance and
Chief Accounting Officer of the Company since November 1991. He previously
served as Vice President, Controller and Chief Accounting Officer of the Company
from 1988 to 1991. Previously he served as Vice President and Controller
(1977-1988), Controller (1972-1977) and Assistant Controller (1970-1972) of
Original Jim Walter.

Howard L. Clark, Jr. has been the Vice Chairman of Lehman, an
investment-banking firm, since February 1993; prior thereto he served as
Chairman and Chief Executive Officer of Shearson Lehman

52
<PAGE>
Brothers, Inc. Prior thereto he was an Executive Vice President and the Chief
Financial Officer of American Express Company, a financial services firm. He
also is a director of Lehman, Plasti-Line, Inc., The Maytag Corporation, and
Fund American Enterprises Holdings, Inc. Mr. Clark has been a director of the
Company since March 17, 1995.

James B. Farley is the retired Chairman of the Board, and a current Trustee,
of Mutual of New York, a life insurance company. He served as Chairman and Chief
Executive Officer of Mutual of New York from 1989 to 1994. He also is a director
of Ashland Oil, Inc. and Harrah's Entertainment Company. Mr. Farley has been a
director of the Company since March 17, 1995.

Eliot M. Fried has been a Managing Director of Lehman or Shearson Lehman
Brothers, Inc. since 1991 and is Co-chairman of Lehman's Firm Wide Investment
Committee. He served as a Senior Vice President of a predecessor firm of Lehman,
from 1982 to 1991. He also is a director of Bridgeport Machines, Inc., Energy
Ventures, Inc., Sun Distributors L.P. and Vernitron Corporation. Mr. Fried has
been a director of the Company since March 17, 1995.

Perry Golkin is a member of KKR & Co. L.L.C. which is the general partner of
KKR. He is also a general partner of KKR Associates, L.P. Prior to 1995, he was
executive of KKR. He is also a director of K-III Communications Corporation and
American Re Corporation. Mr. Golkin was a director of the Company from 1987 to
March 2, 1995. Mr. Golkin has been a director of the Company since November 14,
1995.

James L. Johnson is Chairman Emeritus of GTE Corporation, a telephone
company and cellular service provider. From April 1988 to May 1992 he was
Chairman and Chief Executive Officer of GTE. He also is a director of Contel
Cellular, Inc., CellStar Corporation, The FINOVA Group Inc., Harte-Hanks
Communications Inc. and Valero Energy Corp. and a Trustee of Mutual of New York.
Mr. Johnson has been a director of the Company since March 17, 1995.

Michael T. Tokarz is a member of KKR & Co. L.L.C. which is the general
partner of KKR. He is also a general partner of KKR Associates, L.P. Prior to
1993 he was an executive of KKR. He also is a director of Safeway, Inc. K-III
Communications Corporation, Flagstar Companies, Inc., Flagstar Corporation,
Neway Anchorlok International, Inc., KSL Recreation Corporation, IDEX
Corporation and United Fixtures Company. Mr. Tokarz has been a director of the
Company since 1987.

Except as described under "Board of Directors" below, directors of the
Company are elected by the stockholders of the Company. Each director holds
office until his successor is elected and qualified. The Company is not aware of
any family relationships among any of the foregoing directors.

53
<PAGE>

Set forth below is a list showing the names, ages (as of September 1, 1996)
and positions of the executive officers of the Company who are not directors of
the Company.

<TABLE>
<CAPTION>
NAME AGE OFFICES
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Richard E. Almy........................... 54 Executive Vice President and Chief
Operating Officer of the Company(1)
William Carr.............................. 66 President and Chief Operating Officer of
Jim Walter Resources
Dean M. Fjelstul.......................... 54 Senior Vice President--Finance of the
Company(2)
Frank A. Hult............................. 45 Vice President, Controller and Chief
Accounting Officer of the Company
Donald M. Kurucz.......................... 57 Vice President and Treasurer of the
Company
Robert W. Michael......................... 54 Senior Vice President and Group Executive
of the Company; President and Chief
Operating Officer of Jim Walter Homes
Edward A. Porter.......................... 49 Vice President General Counsel and
Secretary of the Company
William N. Temple......................... 63 Senior Vice President and Group Executive
of the Company; President and Chief
Operating Officer of U.S. Pipe
David L. Townsend......................... 42 Vice President Administration of the
Company
</TABLE>

- -------------------

(1) Mr. Almy will succeed Mr. Weldon as a director of the Company effective
October 1, 1996.

(2) Mr. Fjelstul will succeed Mr. Weldon as the Chief Financial Officer of the
Company effective October 1, 1996.

Richard E. Almy has been Executive Vice President and Chief Operating
Officer of the Company since June 1996. Previously, he was President of JW
Aluminum (1991-1996) and JW Window Components (1995-1996).

William Carr has been President and Chief Operating Officer of Jim Walter
Resources since 1991; prior thereto he was a Senior Executive Vice President and
Chief Operating Officer of Jim Walter Resources and President of its Mining
Division since 1976. He was a Vice President of Original Jim Walter from 1976 to
1988.

Dean M. Fjelstul has been Senior Vice President--Finance of the Company
since June 1996. Previously, he was employed by Alliant Techsystems as Vice
President and Chief Financial Officer (1990-1996). Prior thereto he served in
various financial management capacities with Honeywell, Inc. during a 22-year
tenure with that company.

Frank A. Hult has been a Vice President and the Chief Accounting Officer of
the Company since 1995. Previously, he was a Vice President (since 1994), the
Controller (since 1991), Assistant Controller and Chief Accountant (1989-1991)
and Manager of Budgets (1988-1989) of the Company. Prior thereto he was Manager
of Budgets (1984-1988) and Financial Analyst (1978-1981) of Original Jim Walter
and Manager-Operations Administration (1981-1984), Plant Controller (1975-1978)
and Cost Accountant (1974-1975) for Celotex.

Donald M. Kurucz has been a Vice President and the Treasurer of the Company
since 1991; he was Treasurer of the Company from 1988-1991. Previously he served
as Treasurer (1977-1988) and Assistant Treasurer (1975-1977) of Original Jim
Walter.

Robert W. Michael has been a Senior Vice President and Group Executive of
the Company since 1991 and President and Chief Operating Officer of Jim Walter
Homes since 1984. He also served as a

54
<PAGE>

Vice President of Original Jim Walter from 1984-1988. Prior thereto, he was Vice
President-Sales (1975-1984), a Regional Manager (1973-1975), an Assistant
Regional Manager (1970-1973), a Main Branch Manager (1967-1970) and a Sub-Branch
Manager (1966-1967) with Jim Walter Homes and held various managerial positions
with Mid-State Homes (1964-1966).

Edward A. Porter has been Vice President, General Counsel and Secretary of
the Company since January 1996. Previously he was employed by National Gypsum
Company as Senior Vice President-Administration, General Counsel and Secretary
(1993-1995), Vice President--Administration, General Counsel and Secretary
(1988-1993) and in various legal positions (1980-1988).

William N. Temple has been a Senior Vice President and Group Executive of
the Company since 1991 and President and Chief Operating Officer of U.S. Pipe
since 1993; he was a Vice President of the Company from 1988 to 1991 and, from
1974, was a Vice President of Original Jim Walter. Previously he served as
President of the former Fasteners and Special Products Division of U.S. Pipe and
Vice President of U.S. Pipe (1972-1974), President of the former Southeastern
Bolt and Screw division of U.S. Pipe (1971-1974) and Controller of U.S. Pipe
(1965-1971).

David L. Townsend has been a Vice President of the Company since 1988.
Previously he served as a Vice President (since 1983), Director of Public
Relations (1982-1983) and Manager of Public Relations (1980-1982) of Original
Jim Walter and in various staff positions (1978-1980) with Original Jim Walter.

Executive officers serve at the pleasure of the Board of Directors. The
Company is not aware of any family relationships among any of the foregoing
executive officers.

BOARD OF DIRECTORS

The Plan of Reorganization and the Charter provide that, upon emerging from
Chapter 11 on the Effective Date of the Plan of Reorganization, the Board of
Directors of the Company shall consist of nine members until March 17, 1998, the
third anniversary of the Effective Date of the Plan of Reorganization (the
"Initial Three Year Term"), of which: (i) three directors initially were James
W. Walter, G. Robert Durham and Kenneth J. Matlock, their successors to be
selected by the remaining directors from the senior officers of the Company
(William H. Weldon and Kenneth E. Hyatt are now serving as successors to G.
Robert Durham and Kenneth J. Matlock, respectively; Mr. Weldon has announced his
intention to retire on September 30, 1996 and will be succeeded as a director by
Richard E. Almy); (ii) two directors (currently Michael T. Tokarz and Perry
Golkin) are to be designated by KKR; (iii) two directors (currently, Howard L.
Clark, Jr. and Eliot M. Fried) are to be designated by Lehman; and (iv) two
directors (currently James B. Farley and James L. Johnson) are to be Independent
Directors (as defined in the following paragraph).

Independent Directors are defined as persons who (i) are not (a) officers,
affiliates, employees, Interested Stockholders, consultants or partners of any
Significant Stockholder or any affiliate of any Significant Stockholder or of
any entity that was dependent upon any Significant Stockholder or any affiliate
of any Significant Stockholder for more than 5% of its revenues or earnings in
its most recent fiscal year, (b) officers, employees, consultants or partners of
the Company or any of its affiliates, or officers, employees, Interested
Stockholders, consultants or partners of any entity that was dependent upon the
Company or any of its affiliates for more than 5% of its revenues or earnings in
its most recent fiscal year or (c) any relative or spouse of any of the
foregoing persons or a relative of a spouse of any of the foregoing persons and
(ii) are selected by management of the Company from a list of qualified
candidates provided by an independent search firm selected by management and
Lehman. For these purposes "Interested Stockholder" means, with respect to any
person, any other person that together with its affiliates and associates
"beneficially owns" (as defined in Rule 13d-3 under the Exchange Act) 5% or more
of the equity securities of such person, and "Significant Stockholder" means an
Interested Stockholder of the Company.

55
<PAGE>
If, at any time during the Initial Three Year Term, Lehman and its
affiliates fail to have beneficial ownership of 8% or more of the outstanding
Common Stock (without giving effect to shares of Common Stock held in escrow
pursuant to the Plan of Reorganization--see Footnote (3) to "Security Ownership
of Management and Principal Stockholders--Ownership of Principal Stockholders"
herein) (the "Outstanding Common Stock") and KKR and its affiliates have, at
such time, beneficial ownership of 8% or more of the Outstanding Common Stock,
then KKR shall have the right to compel one director selected by Lehman (from
among those designated by Lehman) to resign as a director and to appoint a
successor. If, at any time during the Initial Three Year Term, KKR and its
affiliates fail to have beneficial ownership of 8% or more of the Outstanding
Common Stock and Lehman and its affiliates have, at such time, beneficial
ownership of 8% or more of the Outstanding Common Stock, then Lehman shall have
the right to compel one director selected by KKR (from among those designated by
KKR) to resign as a director and to appoint a successor. If, at any time during
the Initial Three Year Term, either Lehman and its affiliates or KKR and its
affiliates fail to have beneficial ownership of 5% or more of the Outstanding
Common Stock, then the directors appointed by Lehman or by KKR, respectively,
shall resign and the remaining directors of the Company shall appoint their
successor(s) for the remainder of the Initial Three Year Term; provided,
however, that KKR shall be entitled to designate one director during the Initial
Three Year Term if, and so long as, the number of shares of Common Stock
beneficially owned by KKR and its affiliates, together with shares of Common
Stock held in escrow pursuant to the Plan of Reorganization that would be
distributed to KKR or its affiliates upon release from escrow, shall together
equal 5% or more of the then outstanding Common Stock of the Company, including,
for purposes of this calculation only, any shares held in escrow pursuant to the
Plan of Reorganization.

After the Initial Three Year Term, the Charter currently provides that all
the directors of the Company shall be elected by the stockholders of the Company
annually for a term of one year each.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors of the Company has established an Audit Committee, a
Compensation Committee, a Finance Committee, a Nominating Committee, an
Environmental, Health and Safety Committee and one special committee, the Tax
Oversight Committee. The Board of Directors may, from time to time, establish
certain other committees to facilitate the management of the Company.

The Audit Committee is responsible for meeting with representatives of the
Company's independent certified public accountants and financial management to
review accounting, internal control, auditing and financial reporting matters,
and is also responsible, among other things, for maintaining liaison with and
exercising such supervision of the actions of said public accountants in
whatever manner and to whatever extent shall be deemed, at its discretion,
necessary, proper and in the best interest of the Company and its stockholders.
The Audit Committee consists of four directors who are not and never have been
employees of the Company (Eliot M. Fried, Chairman, James B. Farley, Perry
Golkin and James L. Johnson).

The Compensation Committee is responsible for reviewing and approving
officer and executive salaries of the Company and its subsidiaries in amounts
over $100,000 annually and for reviewing and recommending for approval by the
Board of Directors executive and key employee compensation plans, including
incentive compensation, stock incentives and other benefits. The Compensation
Committee consists of four directors who are not and never have been employees
of the Company (James L. Johnson, Chairman, Howard L. Clark, Jr., James B.
Farley and Michael T. Tokarz).

The Finance Committee is responsible for recommendations to the Board of
Directors concerning public and private financings, dividends, discretionary
contributions by the Company under the Company's and its subsidiaries' employee
benefit plans and other financial matters, approval of the designation of the
investment fund managers for the Company's and its subsidiaries' employee
benefit plans, and approval of investment of the Company's funds, by
establishment of policies for investment

56
<PAGE>
of funds by the Company's officers. The Finance Committee consists of four
directors (James B. Farley, Chairman, Howard L. Clark, Jr., Michael T. Tokarz
and James W. Walter).

The Nominating Committee is responsible for establishing the criteria for
and the qualifications of persons suitable for nomination as directors,
including nominees recommended by stockholders, and reporting its
recommendations to the Board of Directors. During the Initial Three Year Term,
selection of directors is subject to restrictions discussed in "Board of
Directors" above. The Nominating Committee consists of four directors (Howard L.
Clark, Jr., Chairman, Perry Golkin, James L. Johnson and James W. Walter).

The Environmental, Health and Safety Committee is responsible for receiving
environmental, health and safety reports from the Company's and its
subsidiaries' environmental counsel and engineers and health and safety
personnel; examining and reporting on the Company's and its subsidiaries'
compliance with environmental, reclamation, health and safety requirements and
the policies pertaining thereto; reporting the same to the Board of Directors;
approving the proposed scope of internal and independent environmental and
health and safety audits; and periodically evaluating and recommending to the
Board of Directors changes in the Company's and its subsidiaries' environmental,
health and safety policies. The Environmental, Health and Safety Committee
consists of four directors (Michael T. Tokarz, Chairman, James B. Farley, Eliot
M. Fried and James L. Johnson).

The Tax Oversight Committee is a special purpose temporary committee and is
responsible for (i) approving all settlements and agreements by the Company or
any of its subsidiaries regarding all Federal Income Tax Claims that are
entitled to priority under the Bankruptcy Code and (ii) determining final
resolution of certain contingencies regarding Federal Income Tax Claims, both as
more fully described in the Plan of Reorganization. The members of the Tax
Oversight Committee shall consist at all times of two Independent Directors and
a director (or other person) designated by Lehman (Howard L. Clark, Jr.,
Chairman, James B. Farley and James L. Johnson).

Pursuant to the Charter and By-laws, at all times during the Initial Three
Year Term each committee of the Board of Directors (other than the Tax Oversight
Committee, which shall be constituted as described above) shall include such
number of directors (but in any event at least one director) designated by each
of KKR and Lehman so that each of KKR and Lehman has representation on each such
committee proportionate to the representation it has on the Board of Directors.
The Charter provides that the foregoing provision of the By-laws and certain
other provisions of the By-laws cannot be amended by the Board of Directors
during the Initial Three Year Term unless 67% of the whole Board of Directors
votes in favor of the amendment. Thereafter, the affirmative vote of a majority
of directors will be required to amend those provisions.

DIRECTORS' COMPENSATION

Non-employee directors of the Company (Messrs. Clark, Farley, Fried, Golkin,
Johnson, Tokarz and Walter (since the date of his retirement as an employee of
the Company)) are paid retainer fees of $25,000 per year; committee chairmen
receive an additional retainer fee of $5,000 per year. Each non-employee
director also receives a fee of $1,500 for each Board of Directors or committee
meeting attended and is reimbursed for travel and lodging expenses. The Company
and its subsidiaries do not pay fees to directors who are employees of any of
the Company and its subsidiaries.

On April 11, 1995, the Board of Directors approved and adopted the Walter
Industries, Inc. Directors' Deferred Fee Plan under which non-employee directors
may elect to defer all or a portion of their director's fees. The deferred fees,
at each electing director's option, are credited to either an income account or
a stock equivalent account or divided between the two accounts. The income
account is credited quarterly with interest at the prime rate and the stock
equivalent account is credited with an amount equal to the number of equivalent
shares of Common Stock which could have been purchased with the cash dividend,
if any, which would have been payable had the participant been the actual

57
<PAGE>
owner of the number of shares of Common Stock credited to his account. Payments
begin, at the participant's election, upon the later of the termination of his
services as a director or the date of retirement from his principal occupation
or employment in such number of annual installments as shall be determined by
the Company. Payments from the income account are in cash and payments from the
stock equivalent account are in cash at the Common Stock's then current market
value, or, at the Company's option, in shares of Common Stock. Mr. Farley has
elected to have all of his director's fees credited to a stock equivalent
account.

Mr. Walter, Chairman Emeritus, entered into a consulting agreement upon his
retirement from employment with the Company on October 6, 1995 (see "Certain
Relationships and Certain Related Transactions"). During the fiscal year ended
May 31, 1996, he received $87,580 pursuant to this agreement.

EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation paid to
or accrued for the account of (i) the Chief Executive Officer of the Company and
(ii) each of the next four most highly compensated executive officers of the
Company whose cash compensation exceeded $100,000 during the fiscal year ended
May 31, 1996, and (iii) one additional individual for whom disclosure would have
been provided pursuant to clause (ii) above but for the fact that such
individual was not serving as an executive officer of the Company at the end of
the last fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
YEAR ANNUAL COMPENSATION UNDERLYING ALL OTHER
ENDED -------------------------- OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION MAY 31 SALARY ($) BONUS ($)(1) (#)(2) ($)(3)
- --------------------------------------- ------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
G. Robert Durham....................... 1996 531,648 450,000 200,000 *
Chairman of the Board 1995 466,764 1,225,000 0 67,598
and Chief Executive Officer 1994 460,214 400,000 0 69,275
(retired May 31, 1996)

Kenneth E. Hyatt (4)................... 1996 340,245 300,000 150,000 *
President and Chief Operating Officer 1995 (4) (4) (4) (4)
1994 (4) (4) (4) (4)

William H. Weldon...................... 1996 211,548 210,000 75,000 *
Executive Vice President and Chief 1995 183,618 565,000 0 26,320
Financial Officer 1994 173,688 160,000 0 25,798

William N. Temple...................... 1996 213,854 106,000 50,000 *
Senior Vice President and Group 1995 205,202 287,000 0 128,596
Executive; President of U.S. Pipe 1994 180,608 120,000 0 18,665

William Carr........................... 1996 263,857 30,000 50,000 *
President and Chief Operating Officer 1995 247,077 215,000 0 56,491
of Jim Walter Resources 1994 236,164 25,000 0 0

James W. Walter........................ 1996 158,677 250,000 200,000 *
Chairman (retired October 6, 1995) 1995 370,366 1,225,000 0 52,576
1994 369,603 400,000 0 53,880
</TABLE>

- ------------

* Not currently available. See footnote (3)

(Footnotes continued on following page)

58
<PAGE>
(Footnotes continued from preceding page)
(1) For fiscal 1995, the amounts shown in this column include bonuses paid to
the named executive officers pursuant to the Plan of Reorganization in
addition to incentive bonus compensation. At the time of filing by the
Company and virtually all of its subsidiaries under Chapter 11 of the
Bankruptcy Code, accounting professionals for the official committees in the
Chapter 11 cases recommended that the Company adopt a retention bonus
arrangement, a common method of assuring retention of key personnel during
bankruptcy proceedings. The Company decided not to adopt such a retention
bonus plan, but determined instead to pay bonuses informally upon completion
of the reorganization to key personnel who continued their employment with
the Company and its subsidiaries during the pendency of the Chapter 11 cases
(which were initiated on December 27, 1989 and concluded on March 17, 1995)
despite the unavailability of long-term incentive compensation plans and the
limitations on salaries and incentive compensation imposed by the Bankruptcy
Court during such time. The Company's proposal to make such informal
payments was incorporated in the Plan of Reorganization and approved by the
Bankruptcy Court. Such bonuses were paid upon the Effective Date of the Plan
of Reorganization in the amounts of $800,000; $800,000; $400,000; $175,000
and $175,000 to Messrs. Durham, Walter, Weldon, Temple and Carr,
respectively.

(2) Options were awarded pursuant to the 1995 Long-Term Incentive Stock Plan of
Walter Industries, Inc.

(3) The amounts shown in this column for fiscal 1994 and fiscal 1995 for Messrs.
Durham, Walter and Weldon represent the Company's contributions for each of
their accounts in the Walter Industries, Inc. Profit Sharing Plan (the
"Profit Sharing Plan") and accruals for the related Supplemental Profit
Sharing Plan (the "Supplemental Profit Sharing Plan") which provides
benefits which would have been provided under the tax-qualified Profit
Sharing Plan but for restrictions on such benefits imposed by the Internal
Revenue Code of 1986, as amended (the "IRC"). The Profit Sharing Plan and
the Supplemental Profit Sharing Plan amounts are for the plan years ended
August 31, 1994 and 1995. Amounts for the plan year ended August 31, 1996
are not currently available, but are anticipated not to be materially
different from amounts for the plan year ended August 31, 1995, except for
Mr. Walter who retired during the fiscal year ended May 31, 1996, whose
contribution under the Profit Sharing Plan is estimated to be $18,500 and
Mr. Hyatt whose contributions under the Profit Sharing Plan and Supplemental
Profit Sharing Plan are estimated to be $51,000.

The amounts shown in this column for fiscal 1994 and 1995 for Messrs. Carr and
Temple represent accruals for the Supplemental Pension Plan which provides
benefits which would have been provided under a tax-qualified pension plan
but for restrictions on such benefits imposed by the IRC. Amounts for the
1996 plan year are not currently available but are anticipated not to be
materially different from the amounts for fiscal 1995.

(4) Mr. Hyatt became an executive officer of the Company on September 1, 1995.
He has been Chairman of the Board and Chief Executive Officer of the Company
since June 1, 1996 and has been President since September 1, 1995. Between
September 1, 1995 and June 1, 1996, he also served as Chief Operating
Officer.

In its fiscal year ended May 31, 1996, the Company was not subject to
Section 162(m) of the IRC, which limits the deduction for compensation of
certain officers to one million dollars annually unless certain stated
performance goals are met.

59
<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
-------------------------------------------------- ------------------------
% OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED(#)(1) 1996 ($/SH) DATE (2) 5% ($) (3) 10% ($) (3)
- -------------------------------- ------------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
G. Robert Durham................ 200,000 13.3% $14.125 05/31/01 $ 780,495 $ 1,724,690
Kenneth E. Hyatt................ 150,000 10.0% 14.0625 09/01/05 1,162,958 2,412,258
William H. Weldon............... 75,000 5.0% 14.125 07/12/05 584,063 1,688,371
William N. Temple............... 50,000 3.3% 14.125 07/12/05 389,375 959,050
William Carr.................... 50,000 3.3% 14.125 07/12/05 389,375 959,050
James W. Walter................. 200,000 13.3% 14.125 10/06/00 608,805 1,311,082
</TABLE>

- ------------

(1) All options included in this table will become exercisable in three equal
installments commencing on the first anniversary of the date of grant and
continuing on each of the two anniversaries thereafter. The right to
exercise all of the options is contingent on the optionee's refraining from
conduct which the Compensation Committee determines is contrary to the best
interests of the Company (including but not limited to competition with the
Company) and, except in the case of Messrs. Walter, Durham, and Weldon (see
footnote (2) below), upon the optionee's remaining in the employ of the
Company or a subsidiary of the Company until the date on which the
installment becomes exercisable.

(2) The right to exercise all of the options expires on the tenth anniversary of
the date on which they were granted or, if earlier, three months after
termination of employment (one year in the event of death or disability).
However, in recognition of Messrs. Walter, Durham, and Weldon having
continued in the Company's employ until its emergence from Chapter 11 and to
reward them for their past, present and future services, exercisability of
their options will not be contingent upon continued employment by the
Company or a subsidiary (see footnote (1) above) and such options will not
expire as a result of termination of employment until five years after such
termination or, if later, one year after death. Since Messrs. Durham and
Walter retired on May 31, 1996 and October 6, 1995, respectively, their
options are scheduled to expire five years from their respective dates of
retirement.

(3) The amounts of hypothetical potential appreciation shown in these columns
reflect required calculations at annual appreciation rates of 5% and 10% set
by the Commission and, therefore, are not intended to represent either
historical appreciation or anticipated future appreciation in the price of
Common Stock.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)
EXERCISE VALUE ------------------------------ -------------------------
NAME (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------- ----------- ------------ ------------------------------ -------------------------
<S> <C> <C> <C> <C>
G. Robert Durham....... 0 0 0/200,000 0/0
Kenneth E. Hyatt....... 0 0 0/150,000 0/0
William H. Weldon...... 0 0 0/75,000 0/0
William N. Temple...... 0 0 0/50,000 0/0
William Carr........... 0 0 0/50,000 0/0
James W. Walter........ 0 0 0/200,000 0/0
</TABLE>

60
<PAGE>
PENSION PLANS

The table below sets forth the aggregate estimated annual retirement
benefits payable under the Pension Plan for Salaried Employees of Subsidiaries,
Divisions and/or Affiliates of Walter Industries (the "Pension Plan") and under
the Company's unfunded, non-qualified, Supplemental Pension Plan (the
"Supplemental Pension Plan" and together with the Pension Plan, the "Pension
Plans") for employees retiring at normal retirement age (65) on June 1, 1996 and
is based on social security covered compensation in effect on June 1, 1996:

PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------------------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
150,000............................. 31,119 41,492 51,866 62,239 72,612
175,000............................. 36,651 48,867 61,084 73,301 85,518
200,000............................. 42,182 56,242 70,303 84,364 98,424
225,000............................. 47,713 63,617 79,522 95,426 111,330
250,000............................. 53,244 70,992 88,741 106,489 124,237
300,000............................. 64,307 85,742 107,178 128,614 150,049
350,000............................. 75,369 100,492 125,616 150,739 175,862
400,000............................. 86,432 115,242 144,053 172,864 201,674
450,000............................. 97,494 129,992 162,491 194,989 227,487
500,000............................. 108,557 144,742 180,928 217,114 253,299
550,000............................. 119,619 159,492 199,366 239,239 279,112
600,000............................. 130,682 174,242 217,803 261,364 304,924
</TABLE>

Benefit payments under the Pension Plans are based on final average annual
compensation (including overtime pay, incentive compensation and certain other
forms of compensation reportable as wages taxable for Federal income tax
purposes) for the five consecutive years within the final ten years of
employment prior to normal retirement age (65) which produce the highest
average. This is equivalent to the sum of the amounts included under the Salary
and Bonus column headings in the Summary Compensation Table above. Benefit
amounts are shown on a straight-line annuity basis, payable annually upon
retirement at age 65. No offsets are made for the value of any social security
benefits earned. The Company makes accruals for the Supplemental Pension Plan
only for such employees as to which the pension benefits under the Pension Plan
have been limited by the IRC. In the case of the Supplemental Pension Plan, the
applicable company may, in its sole discretion, elect to furnish any and all
benefits due by purchasing annuities, or by other means at its disposal,
including payment of the present value of such benefits.

Only employees of the Company's subsidiaries (except Jim Walter Homes,
Mid-State Homes, Best Insurors, Inc., Best Insurors of Mississippi, Inc., Jim
Walter Insurance Services, Inc., Dixie Building Supplies, Inc. ("Dixie Building
Supplies") and Coast to Coast Advertising, Inc.) participate in the Pension
Plans. Of the named executive officers, only Messrs. Carr and Temple are
participants in the Pension Plans with twenty and ten years of credited service,
respectively; Messrs. Durham, Hyatt, Walter and Weldon are not participants in
the Pension Plans.

Profit Sharing Plans. Under the Profit Sharing Plan and the Supplemental
Profit Sharing Plan, amounts contributed by the Company for the benefit of the
participants become payable upon termination of employment. In the case of the
Supplemental Profit Sharing Plan, accrued amounts are payable, at the discretion
of the Company, in either a lump sum or in sixty (60) equal monthly
installments. While the Profit Sharing Plan provides retirement benefits for all
salaried employees of the Company and certain of its subsidiaries not covered by
the Pension Plans, the Company makes

61
<PAGE>
contributions to the Supplemental Profit Sharing Plan only for such employees as
to which the full contribution under the Profit Sharing Plan has been limited by
the IRC. For the Supplemental Profit Sharing Plan year to end August 31, 1996,
only three employees, Messrs. Durham, Hyatt and Weldon, qualified for
participation in the Supplemental Profit Sharing Plan. Amounts for the plan year
ended August 31, 1996 are not currently available.

COMPENSATION COMMITTEE INTERLOCKS OR INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During the fiscal year ended May 31, 1996, three employee directors (James
W. Walter (retired October 6, 1995), G. Robert Durham, and Kenneth E. Hyatt)
participated in deliberations of the Company's Board of Directors concerning
executive compensation. However, no employee director voted on executive
compensation matters in which they were directly involved; instead they
abstained on such occasions.

CERTAIN RELATED TRANSACTIONS

In July 1986, Waltsons, Inc., a family owned corporation in which James W.
Walter, Chairman Emeritus and a Director of the Company, has a twenty percent
(20%) interest, acquired a fifty percent (50%) interest in the operations of
Booker & Company, Inc. ("Booker"), a wholesale distributor of building supplies
and material headquartered in Tampa, Florida. For over 30 years, Booker has been
a supplier of various building supplies and materials to Dixie Building
Supplies. During the fiscal year ended May 31, 1996, Booker's sales of building
supplies and materials to such subsidiary totaled $5,679,000. The Company
believes that the terms of the transactions between the Company and Booker are
at least as favorable to the Company as those that could be obtained from
unaffiliated third parties.

The Company entered into a consulting agreement with Mr. Walter effective
upon his retirement on October 6, 1995. The term of the agreement is for a
period of three years, commencing October 6, 1995, during which time Mr. Walter
will render to the Company such services of an advisory or consulting nature as
the Company may reasonably require. Mr. Walter will be paid an annual consulting
fee of $150,000. The agreement also contains a restrictive covenant prohibiting,
during the term of the agreement and for a period of three years after its
termination, Mr. Walter's employment by any person, firm or corporation which is
engaged in business in competition with the Company or its subsidiaries, or his
engaging in such business for his own account.

62
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDERS

The following tables furnish information, as of August 5, 1996, as to: (i)
shares of Common Stock beneficially owned by each director and each executive
officer (including one retired executive officer) of the Company named in the
Summary Compensation Table herein; (ii) shares of Common Stock beneficially
owned by all current directors and executive officers of the Company as a group;
and (iii) shares of Common Stock known by the Company to be beneficially owned
by any person owning beneficially more than five percent (5%) of the outstanding
shares of Common Stock, together with such person's address. (Except as
indicated below, to the knowledge of the Company each person indicated in the
following tables has sole voting and investment power as to the shares shown.)

OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF COMMON
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED STOCK OUTSTANDING
- -------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
James W. Walter,........................................ 132,710(1)(2) *
Chairman Emeritus and Director
Kenneth E. Hyatt,....................................... 73,280(1)(3) *
Chairman, Chief Executive Officer and President
Howard L. Clark, Jr..................................... (4) (4)
Director
James B. Farley......................................... 10,000 *
Director
Eliot M. Fried.......................................... (4) (4)
Director
James L. Johnson........................................ 10,000 *
Director
Perry Golkin............................................ 14,268,589(5) 26.0(5)
Director
Michael T. Tokarz....................................... 14,268,589(5) 26.0(5)
Director
G. Robert Durham........................................ 76,666(6) *
(Director and Chief Executive Officer-retired May 31,
1996)
William H. Weldon....................................... 31,950(1)(7) *
Director, Executive Vice President and Chief Financial
Officer
William N. Temple,...................................... 20,140(1)(8) *
Senior Vice President and Group Executive; President
of U.S. Pipe
William Carr............................................ 38,355(1)(9) *
President and Chief Operating Officer of Jim Walter
Resources, Inc.
All current directors and executive officers as a group
(19 individuals)........................................ 14,680,910(1)(10) 26.8(1)(10)
</TABLE>

- ------------

* Less than 1% of outstanding Common Stock

(1) Includes 6,234, 23,689, 2,493, 1,246, 4,363 and 3,601,378 shares of Common
Stock issued to an escrow account for the benefit of Messrs. Hyatt, Walter,
Weldon, Temple and Carr, and to all current directors and executive
officers as a group (including 3,553,380 shares for the benefit of the KKR
Investors (as defined below)), respectively, on September 13, 1995 pursuant
to the Plan of Reorganization. To the extent that certain contingencies
regarding Federal Income Tax Claims of the Company are resolved
satisfactorily, such escrowed shares will be distributed to such

(Footnotes continued on following page)

63
<PAGE>
(Footnotes continued from preceding page)
persons under the Plan of Reorganization. To the extent such matters are
not settled satisfactorily, the escrowed shares will be returned to the
Company and canceled. Until such matters are finally determined, such
persons will have the power to exercise voting rights with respect to such
respective escrowed shares of Common Stock. See "Description of Capital
Stock--Additional Stock Issuances". For so long as such persons have the
power to exercise voting rights with respect to all such escrowed shares,
or if all such escrowed shares were distributed to such persons, such
persons will beneficially own such 6,234, 23,689, 2,493, 1,246, 4,363 and
3,601,378 shares of Common Stock, respectively.

(2) Includes options to purchase 66,666 shares, which became exercisable as of
July 12, 1996.

(3) Includes options to purchase 50,000 shares which will become exercisable as
of September 1, 1996. Also includes 200 shares held by Mr. Hyatt's
children, of which Mr. Hyatt disclaims beneficial ownership.

(4) Messrs. Clark and Fried are Vice Chairman and Managing Director,
respectively, of Lehman. See "Ownership of Principal Stockholders" below
for information concerning ownership of shares by Lehman's affiliate,
Lehman Holdings.

(5) Messrs. Tokarz and Golkin are general partners of KKR Associates, L.P.,
which is the sole general partner of each of JWC Associates, L.P., JWC
Associates II, L.P. and KKR Partners II, L.P. (the "KKR Investors") and
Channel One Associates, L.P. ("Channel One"), and thus Messrs. Tokarz and
Golkin may be deemed to be beneficial owners of the shares owned by the KKR
Investors and Channel One (see "Ownership of Principal Stockholders"
below). Messrs. Tokarz and Golkin disclaim beneficial ownership of such
shares. The number of shares of Common Stock includes 3,553,380 shares of
Common Stock issued to an escrow account on September 13, 1995 for the
benefit of the KKR Investors pursuant to the Plan of Reorganization. See
Footnote (3) under "Ownership of Principal Stockholders" below. For so long
as the KKR Investors have the power to exercise voting rights with respect
to all such escrowed shares, or if all such escrowed shares were
distributed to the KKR Investors, Messrs. Tokarz and Golkin may be deemed
to be beneficial owners of such 3,553,380 escrowed shares of Common Stock.

(6) Includes options to purchase 66,666 shares which became exercisable as of
July 12, 1996.

(7) Includes options to purchase 25,000 shares which became exercisable as of
July 12, 1996.

(8) Includes options to purchase 16,666 shares which became exercisable as of
July 12, 1996.

(9) Includes options to purchase 16,666 shares which became exercisable as of
July 12, 1996.

(10) Includes 14,268,589 shares of Common Stock beneficially owned by the KKR
Investors and Channel One, which may be deemed to be beneficially owned by
Messrs. Tokarz and Golkin. See Footnote (5) above. Does not include shares
of Common Stock owned by Lehman Holdings. See Footnote (4) above. Includes
22,023 shares beneficially owned by Sam J. Salario, who retired as
President of Mid-State Homes and a Vice President of Jim Walter Homes on
August 31, 1996.

64
<PAGE>
OWNERSHIP OF PRINCIPAL STOCKHOLDERS

<TABLE>
<CAPTION>
NAME AND COMPLETE MAILING ADDRESS NUMBER OF SHARES PERCENT OF CLASS
- -------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
The Celotex Settlement Fund Recipient......................... 10,941,326(1) 19.9(1)
1 Metro Center
4010 Boy Scout Boulevard
Tampa, Florida 33607
Lehman Brothers Holdings, Inc................................. 7,869,525(2) 14.3(4)
3 World Financial Center
New York, NY 10285
The KKR Investors............................................. 14,268,589(3) 26.0
(JWC Associates, L.P., JWC Associates II, L.P.
and KKR Partners II, L.P. and
Channel One Associates, L.P.)
c/o Kohlberg Kravis Roberts & Co., L.P.
9 West 57th Street
New York, NY 10009
</TABLE>

- ------------

<TABLE>
<C> <S>
(1) Celotex, on behalf of the Celotex Settlement Fund Recipient, has agreed with the
Company and Lehman to vote and execute written consents with respect to the shares
of Common Stock held by it in proportion to the votes cast or consents executed and
delivered by all other holders of Common Stock on each matter voted on by
stockholders. Identical restrictions on the voting of the Celotex Settlement Fund
Recipient's Common Stock are contained in the Charter and in the Plan of
Reorganization. See "Description of Capital Stock--Stockholder's Agreement" and
"--Tag-Along and Voting Rights Agreement".
(2) Lehman transferred the shares of Common Stock which it received pursuant to the Plan
of Reorganization to its affiliate, Lehman Holdings.
(3) The shares of Common Stock beneficially owned by the KKR Investors are as follows:
9,610,144 shares are beneficially owned by JWC Associates, L.P.; 63,680 shares are
beneficially owned by JWC Associates II, L.P.; and 232,965 shares are beneficially
owned by KKR Partners II, L.P., including 3,446,979, 22,841 and 83,560 shares,
respectively, issued to an escrow account on September 13, 1995 pursuant to the Plan
of Reorganization. To the extent that certain contingencies regarding Federal Income
Tax Claims of the Company are resolved satisfactorily, up to 3,553,380 of the
escrowed shares will be distributed to the KKR Investors under the Plan of
Reorganization. To the extent such matters are not settled satisfactorily, the
escrowed shares will be returned to the Company and canceled. Until such matters are
fully determined, the KKR Investors will have the power to exercise voting rights
with respect to such shares of Common Stock. See "Description of Capital
Stock--Additional Stock Issuances". For so long as the KKR Investors have the power
to exercise voting rights with respect to all such escrowed shares, or if all such
escrowed shares were distributed to the KKR Investors, the KKR Investors will
beneficially own such 3,553,380 shares of Common Stock. The Company has been advised
that as of August 5, 1996 Channel One beneficially owned 4,361,800 shares.
KKR Associates, L.P. is the sole general partner of each of the KKR Investors and
Channel One. The general partners of KKR Associates, L.P. are Henry R. Kravis,
George R. Roberts, Robert I. MacDonnell, Michael W. Michelson, Saul A. Fox, Paul E.
Raether, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Scott M. Stuart,
Clifton S. Robbins and Edward A. Gilhuly.
(4) As a result of errors by the balloting agent in recording elections to receive cash
and Senior Notes in lieu of a portion of the Common Stock to be received under the
Plan of Reorganization by holders of subordinated debt of the Company outstanding
prior to the Effective Date of the Plan of Reorganization, the number of shares of
Common Stock to be received by Lehman and other holders of such subordinated debt
was determined from a ruling by the Bankruptcy Court as to which elections were
proper. Appeals have been filed to the Bankruptcy Court's decision, which appeals,
if successful, could cause additional shares of Common Stock to be delivered to
Lehman (in lieu of a portion of the cash and Senior Notes previously delivered to
Lehman) pursuant to the Plan of Reorganization. When such appeals have been finally
adjudicated, such number of shares will be finally determinable. See Note 12
("Litigation Related to Chapter 11 Distributions to Certain Holders of Subordinated
Notes and/or Debentures") of Notes to Financial Statements.
</TABLE>

65
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS

CREDIT FACILITIES

On January 22, 1996, the Company and certain of its subsidiaries completed a
$550 million financing with a syndicate of banks led by NationsBank National
Association (South). The financing consisted of a $365 million revolving credit
facility ("Revolving Credit Facility"), a $125 million six-year term loan ("Term
Loan A") and a $60 million seven-year term loan ("Term Loan B")(collectively,
the "Credit Facilities"). Proceeds from the financing, together with $75 million
drawn under the Mid-State Trust V Variable Funding Loan Agreement were used to
redeem in full $490 million aggregate amount of the Senior Notes at a redemption
price of 101% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of redemption and to replace an existing $150 million bank
credit facility, both issued in connection with the Company's emergence from
bankruptcy in March 1995. The Credit Facilities are secured by a pledge of
intercompany notes and stock of certain subsidiaries of the Company. Net cash
proceeds from certain asset sales must be applied to permanently reduce the
Credit Facilities and beginning with fiscal year ending May 31, 1997, 50% of the
excess cash flow (as defined in the Credit Facilities) must be used to
permanently reduce Term Loan A and Term Loan B. Term Loan A amortizes over a six
year period. Scheduled principal payments to be made in each of the five years
from May 31, 1996 are $15,000,000, $16,250,000, $21,250,000, $25,000,000 and
$25,000,000, respectively. Term Loan B carries minimal amortization over six
years with sizeable principal payments in the seventh year. Scheduled principal
payments in each of the five years from May 31, 1996 are $1,000,000.

The Credit Facilities contain a number of covenants, including restrictions
on liens, indebtedness, leases, mergers, sales or disposition of assets,
investments, dividends, repurchases of shares of capital stock, prepayment of
indebtedness and capital expenditures, as well as financial covenants with
respect to leverage ratios, interest coverage and fixed charge coverage ratios.
Mid-State Holdings and Cardem Insurance are not parties to or governed by this
facility. The borrowers are required to maintain a leverage ratio (the ratio of
indebtedness of the borrowers to EBITDA of the borrowers) not more than a ratio
of 3.75 to 1 for measurement periods in the year ended May 31, 1996, 3.00 to 1
for each measurement period in the year ending May 31, 1997 and 2.50 to 1
thereafter. The borrowers' interest coverage ratio (the ratio of EBITDA to
interest expense) for all measurement periods is required to be at least 2.50 to
1. The borrowers' fixed charge coverage ratio (the ratio of (a) EBITDA minus
capital expenditures to (b) the sum of all required principal payments on
outstanding indebtedness, interest expense and dividends paid) is required to be
at least 1.0 to 1 in each of the measurement periods in the year ended May 31,
1996, a ratio ranging from 1.0 to 1 to 1.15 to 1 for measurement periods in the
year ending May 31,1997 and 1.25 to 1 thereafter.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The Company's authorized capital stock consists of 200,000,000 shares of
Common Stock, par value $.01 per share. At September 3, 1996 there were
54,868,335 shares of Common Stock issued and outstanding. See "Additional Stock
Issuances" below. Harris Trust and Savings Bank is the transfer agent and
registrar for the Common Stock.

COMMON STOCK

The holders of the Common Stock are entitled to one vote for each share held
of record on all matters as to which stockholders are entitled to vote. There
are no cumulative voting rights in the election of directors. The quorum
required at any stockholders' meeting for consideration of any matter is a
majority of the issued and outstanding shares of Common Stock, represented in
person or by proxy.

66
<PAGE>
Holders of the Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors out of funds legally available for
dividends. See "Certain Risk Factors--Dividend Policy; Restrictions on Payment
of Dividends" and "Dividend Policy". In the event of any liquidation,
dissolution or winding up of the Company, the holders of the Common Stock are
entitled to receive pro rata any assets distributable to stockholders in respect
of shares held by them, after payment of all obligations of the Company.

The outstanding shares of the Common Stock (including the Shares offered
hereby) are duly authorized, validly issued, fully paid and nonassessable.

ADDITIONAL STOCK ISSUANCES

Pursuant to the Plan of Reorganization, the Company was or may be required
to issue additional Common Stock to the holders of common stock of the Company
immediately prior to the Effective Date of the Plan of Reorganization ("Original
Stockholders") on the dates and in the amounts described below, in each case on
a pro rata basis. Solely for the purpose of calculating the number of shares to
be issued in these issuances, such additional Common Stock will be valued at a
price per share of $22.86 (the "Common Stock Value Per Share"). Original
Stockholders have received and will be entitled receive shares of Common Stock
as follows:

(a) On the date on which a final, non-appealable order is entered
resolving the total amount of claims of the IRS against the Company or any
of its subsidiaries (other than Cardem Insurance and J.W. Railroad) arising
prior to the Effective Date of the Plan of Reorganization and entitled to
priority under Section 507(a)(7) of the Bankruptcy Code ("Federal Income Tax
Claims"), the Original Stockholders will receive Common Stock with an
aggregate Common Stock Value Per Share equal to the amount by which the
total amount of the Federal Income Tax Claims are reduced to below $27
million (the "Federal Income Tax Claims Differential"). Such Common Stock
shall be, first, issued by the Company directly to the Original Stockholders
up to a number of shares having an aggregate Common Stock Value Per Share
equal to the excess, if any, of (A) $88.7 million over (B) the aggregate
Common Stock Value Per Share of all shares of Common Stock theretofore
issued into escrow as described in the next paragraph, and second, be
satisfied by the release from such escrow of any remaining shares of Common
Stock issuable to Original Stockholders pursuant to such provisions.

(b) The Plan of Reorganization provides that if, on or prior to August
24, 1995 (the 160th day following the Effective Date of the Plan of
Reorganization), (i) one or more Veil Piercing Settlement Tax Savings Events
(as defined below) shall not have occurred in respect of (and the Tax
Oversight Committee shall not have determined) the maximum Veil Piercing
Settlement Tax Savings Amount (as defined below) that could result from a
good faith claim by the Company's consolidated tax group of both (a) a
refund with respect to tax years prior to the tax year in which the
Effective Date of the Plan of Reorganization occurs, and (b) a deduction
with respect to the tax year in which the Effective Date of the Plan of
Reorganization occurs (collectively, the "Initial Claim"), or (ii) the
Company shall not have issued and delivered into escrow with an escrow agent
selected by the Company, Lehman and AIF II, L.P., certain of its affiliates
and certain accounts controlled or managed by such affiliates (AIF II, L.P.,
such affiliates and accounts, collectively, "Apollo") certificates
representing shares of Common Stock having an aggregate Common Stock Value
Per Share equal to the full amount of such maximum Veil Piercing Settlement
Tax Savings Amount, then not later than September 13, 1995 (the 180th day
after the Effective Date of the Plan of Reorganization) the Company shall
issue and deliver into escrow certificates representing Common Stock having
an aggregate Common Stock Value Per Share equal to the sum of (i) that part
of the Veil Piercing Settlement Tax Savings Amount arising from the Initial
Claim in respect of which shares of Common Stock had not theretofore been
issued into escrow, as such Veil Piercing Settlement Tax Savings Amount
(whether or not a Veil Piercing Settlement Tax Savings

67
<PAGE>
Event shall previously have occurred) shall be estimated in good faith by
the Chief Financial Officer of the Company and set forth in a certificate
delivered to the Tax Oversight Committee (and such amount shall be the Veil
Piercing Settlement Tax Savings Amount for purposes of provisions described
in this sentence) and (ii) an additional amount equal to the lesser of (A)
$13 million and (B) an amount that would cause the total number of shares of
Common Stock to be issued into escrow to have an aggregate Common Stock
Value Per Share equal to $88.7 million. A "Veil Piercing Settlement Tax
Savings Event" is any filing by the Company's consolidated tax group or any
member thereof of a tax return for a tax year ending on or after May 31,
1995 or a claim for refund or deduction for a tax year ending prior to May
31, 1995 on which a Veil Piercing Settlement Tax Savings Amount is claimed.
A "Veil Piercing Settlement Tax Savings Amount" is the difference between
(a) the aggregate amount of federal, state and local tax payable by members
of the Company's consolidated group as reported on such members' relevant
tax returns and (b) the aggregate amount of federal, state and local income
tax that would have been reported on such returns if the distribution under
the Veil Piercing Settlement Agreement had not been made, as determined by
the Tax Oversight Committee. The Company believes that it may properly
deduct in full the payment made under the Plan of Reorganization to Celotex,
in its capacity as the Celotex Settlement Fund Recipient, but there can be
no assurance that the IRS will not challenge the deduction and if it does so
whether such challenge will succeed. On August 23, 1995, the Chief Financial
Officer of the Company delivered the aforementioned certificate to the Tax
Oversight Committee, and on September 13, 1995 the Company delivered
3,880,140 shares of Common Stock into escrow.

The Original Stockholders, on a pro rata basis, are entitled to exercise
all voting rights of, and receive all dividends and other distributions on,
Common Stock held in escrow. The amount of such dividends and other
distributions must be returned to the Company if such shares are
subsequently cancelled prior to release from escrow. Such shares will be
released from escrow as soon as practicable after the Tax Oversight
Committee determines that the applicable Veil Piercing Settlement Tax
Savings Amount is no longer subject to adjustment because (i) the statutory
period during which assessments (or denial of a refund claim) can be made
with respect to such Veil Piercing Settlement Tax Savings Amount has passed,
(ii) the Company and the IRS or other relevant taxing authority have entered
into a closing or similar agreement governing the years or issues in
question with respect to such Veil Piercing Settlement Tax Savings Amount,
or (iii) a court decision determining the income tax liability (or the right
to such refund) with respect to such Veil Piercing Settlement Tax Savings
Amount has been rendered and the time period for the filing of an appeal has
passed.

Notwithstanding and in addition to the foregoing, the Plan of
Reorganization provides that $11.3 million of Common Stock (using the Common
Stock Value Per Share) be issued directly to the Original Stockholders on a
pro rata basis at the same time as shares of Common Stock are first issued
into escrow; accordingly, on September 13, 1995, the Company issued 494,313
shares of Common Stock to the Original Stockholders on a pro rata basis.

The Plan of Reorganization limits the number of shares issuable under the
provisions described in (a) and (b) above to that number of shares of Common
Stock that, when added to the shares issued to the Original Stockholders on the
Effective Date of the Plan of Reorganization, has an aggregate Common Stock
Value Per Share of $250 million. The Plan of Reorganization contains an
arbitration provision for the final determination of any dispute that may arise
between KKR (the principal Original Stockholder) and the Tax Oversight Committee
with respect to any determination made by the Tax Oversight Committee regarding
the provisions of the Plan of Reorganization described in (b) above. The Plan of
Reorganization also provides that, for purposes of the Federal Income Tax Claims
Differential, the amount of Federal Income Tax Claims shall not be reduced by
any Veil Piercing Settlement Tax Savings Amount and that any terms of any
settlement or agreement regarding Federal

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<PAGE>
Income Tax Claims shall not be agreed to by the Company or any subsidiary
thereof without the prior consent of the Tax Oversight Committee.

The Company is authorized to issue additional shares of capital stock from
time to time. There are no specific restrictions upon such issuances, except
that the Charter prohibits the issuance of non-voting equity securities if, and
only to the extent that and so long as, Section 1123 of the Bankruptcy Code is
applicable and would prohibit such issuance. The Company's stockholders will not
have preemptive rights to purchase additional shares of capital stock of the
Company upon any issuance of such shares authorized by the Board.

STOCKHOLDER'S AGREEMENT

Pursuant to the Stockholder's Agreement dated as of the Effective Date of
the Plan of Reorganization (the "Stockholder's Agreement") between the Company
and the Celotex Settlement Fund Recipient, the Celotex Settlement Fund Recipient
has agreed, in any vote or action by written consent by holders of Common Stock
on any matter submitted to a vote of holders of Common Stock, to vote, and
execute written consents with respect to, the shares of Common Stock held by it
for and/or against such matter in proportion to the votes cast or consents
executed and delivered by all other holders of Common Stock. Identical
restrictions on the voting of the Celotex Settlement Fund Recipient's Common
Stock are contained in the Charter and in the Plan of Reorganization. Pursuant
to the Stockholder's Agreement, the Celotex Settlement Fund Recipient further
agreed not to, and to cause its affiliates not to, offer, sell, assign, give,
pledge, encumber or otherwise dispose of any shares of its Common Stock or any
interest therein or right thereto to any person that is a successor to or
creditor of the Celotex Settlement Fund Recipient or a creditor of Celotex (any
such creditor, a "Celotex Settlement Fund Beneficiary"), in such person's
capacity as such, unless such person executes and delivers an instrument, in
form and substance reasonably satisfactory to the Company, pursuant to which it
agrees to be bound by the Stockholder's Agreement to the same extent as the
Celotex Settlement Fund Recipient.

TAG-ALONG AND VOTING RIGHTS AGREEMENT

Pursuant to the Tag-Along and Voting Rights Agreement dated as of the
Effective Date of the Plan of Reorganization (the "Tag-Along and Voting Rights
Agreement") among Celotex, on behalf of the Celotex Settlement Fund Recipient,
Apollo and Lehman (collectively, the "Tag-Along Stockholders") each Tag-Along
Stockholder agreed that if it proposes to dispose of any Common Stock held by it
on the Effective Date of the Plan of Reorganization to any third party (other
than transactions described below), the other Tag-Along Stockholders will have
the right to include the shares of Common Stock held by them on the Effective
Date of the Plan of Reorganization in such disposition transaction on the same
terms and conditions, provided, however, that if the initiating Tag-Along
Stockholder is Lehman or Apollo, then Lehman or Apollo, respectively, will not
be entitled to participate in such disposition transaction. If the Tag-Along
Stockholders collectively desire to sell more shares of Common Stock than the
proposed purchaser desires to purchase, each Tag-Along Stockholder shall sell a
pro rata number of its shares. The foregoing does not apply to any transaction
effected on a national securities exchange, on the National Association of
Securities Dealers Automated Quotation System or through a registered-broker
dealer or made pursuant to a public offering under an effective registration
statement under the Securities Act. The foregoing also does not apply to any
disposition by a Tag-Along Stockholder to an affiliate or by the Celotex
Settlement Fund Recipient to a successor or a Celotex Settlement Fund
Beneficiary. The parties have agreed that any of their transferees which is an
affiliate or, in the case of the Celotex Settlement Fund Recipient, a successor
or a Celotex Settlement Fund Beneficiary must, prior to such transfer, agree in
writing to be bound by the Tag-Along and Voting Rights Agreement as if it had
been an original party thereto.

The Celotex Settlement Fund Recipient also has agreed to, and to cause each
of its affiliates to, vote and execute written consents with respect to their
shares of Common Stock in proportion to the

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<PAGE>
votes cast or consents executed and delivered by all other holders of Common
Stock, in any vote or action by written consent by holders of Common Stock.

COMMON STOCK REGISTRATION RIGHTS AGREEMENTS

The Company has entered into a Registration Rights Agreement, dated as of
the Effective Date of the Plan of Reorganization (the "Common Stock Registration
Rights Agreement"), with certain holders ("Common Stock Holders") of Common
Stock pursuant to which the Company agreed to file the Registration Statement of
which this Prospectus forms a part (the "Initial Common Stock Shelf
Registration") and use its reasonable best efforts to keep such Common Stock
Shelf Registration continuously effective for up to one year.

After such period of effectiveness, one or more Common Stock Holders may
request to have all or part of their Common Stock as to which registration
pursuant to the Securities Act is required for public sale ("Registrable Common
Stock") registered under the Securities Act, and all other Common Stock Holders
have the right to participate in any such registration; provided that (i) the
Company is not required to effect more than two such registrations, (ii) no such
registration may be requested within 180 days of the effectiveness of any such
earlier registration or a registration as to which Common Stock Holders have
"piggyback" registration rights (as discussed below), (iii) the Company is not
required to effect any such registration unless at least 5% of the shares of
Registrable Common Stock outstanding at the time of such request is to be
included in such registration and (iv) if the intended method of distribution is
an underwritten public offering, the Company may require the underwriting to be
conducted on a "firm commitment" basis. Any such requested registration may be
effected pursuant to a shelf registration statement under Rule 415 of the
Securities Act (a "Shelf Registration"); any such registration (other than a
Shelf Registration, which must be kept effective by the Company for up to one
year, if made pursuant to the first demand under the provisions described in
this paragraph or nine months otherwise) need not be kept effective by the
Company for more than 90 days. If the intended method of distribution is an
underwritten public offering, the underwriters must be nationally recognized,
selected by Common Stock Holders owning at least a majority of the shares of
Registrable Common Stock being registered (the "Majority Selling Common Stock
Holders") and reasonably acceptable to the Company. In addition, if the managing
underwriter advises the Company in writing that, in its opinion, the number of
shares requested to be registered exceeds the number that can be sold within a
price range specified by the Majority Common Stock Selling Holders, the shares
requested to be included by Common Stock Holders shall be included in the
registration on a pro rata basis in preference to any other shares which the
Company or any person wishes to include in such registration.

The KKR Investors and Lehman Holdings, as Common Stock Holders which own
more than 5% of the shares of Registerable Common Stock outstanding, have
exercised the demand registration right described above and have agreed with
the Company that such demand shall be satisfied by the Company causing the
Initial Common Stock Shelf Registration to remain effective beyond the first
anniversary of the effective date of the Initial Common Stock Shelf
Registration for an additional year.

If the Company at any time following the termination of the Initial Common
Stock Shelf Registration proposes to register any of its securities under the
Securities Act (other than any registration of any securities on Form S-4 or
Form S-8), the Common Stock Holders have the right, pursuant to a written
request submitted within 20 days (10 days in certain circumstances) of receipt
of notice thereof from the Company, to participate in such registration.

Upon a request of Common Stock Holders owning at least a majority of the
shares of Registrable Common Stock requested to be included in a demand or
"piggyback" registration made at any time on or after March 17, 1996, the
Company has agreed to use its best efforts to (i) cause the Common Stock covered
by such registration to be listed on a national securities exchange or to be
quoted through NASDAQ or (ii) provide for at least two market makers for the
Common Stock.

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All expenses of the Company in connection with the performance of its
obligations under the Common Stock Registration Rights Agreement and the
reasonable fees, disbursements and other charges of one firm of counsel (per
registration) selected by the Majority Selling Common Stock Holders (but
excluding underwriting discounts and commissions and transfer taxes) shall be
borne by the Company, except where some or all of the Common Stock Holders
withdraw or terminate their requests prior to the registration statement
becoming effective, in which case such Common Stock Holders shall be required to
bear some or all of such expenses, provided that if the Company elects not to
proceed with a registration as to which Common Stock Holders have "piggyback"
registration rights as described above or elects not to proceed with any
registration as described in the second succeeding paragraph, the Company must
bear all reasonable out-of-pocket costs (other than counsel fees, disbursements
and other charges not specifically referred to above) incurred by a Common Stock
Holder in connection with such terminated registration. In addition, pursuant to
the Common Stock Registration Rights Agreement, the Company has agreed to
indemnify each offeror of Registrable Common Stock covered by a registration
statement filed pursuant to the Common Stock Registration Rights Agreement, each
other person who participates as an underwriter in such offering, each other
person who controls such offerors or underwriters and their respective
directors, officers, partners, agents and affiliates against certain
liabilities, including liabilities under the Securities Act.

The Company is not obligated to file any registration statement under the
Common Stock Registration Rights Agreement or any amendment or supplement
thereto (other than the Registration Statement of which this Prospectus forms a
part and amendments and supplements thereto) and may suspend any seller's rights
to make sales pursuant to any effective registration statement (provided that
the right to effect sales pursuant to the Registration Statement of which this
Prospectus forms a part may not be suspended prior to the ninetieth day
following the date hereof) at any time when the Company, in the good faith
judgment of its Board of Directors, reasonably believes that the filing thereof
at the time requested, or the offering of securities thereto, would adversely
affect a pending or proposed public offering of the Company's securities, a
material financing, or a material acquisition, merger, recapitalization,
consolidation, reorganization or similar transaction, or negotiations,
discussions or pending proposals with respect thereto. Such a deferral of the
filing of a registration statement or an amendment or supplement thereto or
suspension of a seller's right to effect sales may continue for no more than 10
days after the abandonment or consummation of any of the foregoing proposals or
transactions or 60 days after the date of the Board's determination referred to
in the preceding sentence. In the event of such a suspension, the applicable
registration period will be extended by the number of days of the suspension.

Lock-Up Agreements

Pursuant to the Common Stock Registration Rights Agreement, each Common
Stock Holder has agreed, if required by the managing underwriter of any
underwritten offering and except as required otherwise under applicable law, not
to sell any equity securities of the Company during the 10 days preceding or 120
days following the effective date of an underwritten registration under the
Common Stock Registration Rights Agreement. The Company has agreed not to (and
to cause certain other holders of equity securities acquired after the Effective
Date of the Plan of Reorganization to agree not to) effect any public offering
and sale of Common Stock pursuant to an effective registration statement during
such period of time.

Channel One Registration Rights Agreement

The Company has entered into a Registration Rights Agreement dated as of
September 12, 1995 (the "Channel One Registration Rights Agreement") with
Channel One pursuant to which the Company has agreed to include in the Initial
Common Stock Shelf Registration all shares of Common Stock owned by Channel One.
The Company has also agreed to include all shares of Common Stock owned by
Channel One in each registration statement filed by the Company subsequent to
the filing of the Initial Common Stock Shelf Registration which includes shares
of Registrable Common Stock to

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the extent that the Company may do so without breaching any of its obligations
under the Common Stock Registration Rights Agreement and otherwise on the terms
and subject to the conditions of the Common Stock Registration Rights Agreement
that are applicable to the holders of the shares of Registrable Common Stock
included in such registration statement. The Channel One Registration Rights
Agreement provides that certain provisions of the Common Stock Registration
Rights Agreement are binding upon and applicable to the parties thereto,
including those provisions described above relating to expenses,
indemnification, postponements and suspensions.

ANTITAKEOVER LEGISLATION

Section 203 of 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 of
Directors also approved the purchase of Common Stock by 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) will be subject to the restrictions of Section 203. In
connection with the above-described approval of the Board of Directors, 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.

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CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following summary describes certain United States federal income tax and
estate tax consequences of the ownership of Shares by Non-United States Holders
(as defined below) as of the date hereof. This discussion does not address all
aspects of United States federal income taxation and does not deal with foreign,
state and local consequences that may be relevant to such Non-United States
Holders in light of their personal circumstances. Furthermore, the discussion
below is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations, rulings and judicial decisions thereunder
as of the date hereof, and such authorities may be repealed, revoked or modified
so as to result in federal income tax consequences different from those
discussed below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF
SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX
CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES
ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.

As used herein, a "Non-United States Holder" of Shares means a holder who is
not (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is subject to United States federal income taxation
regardless of its source.

PAYMENT OF DIVIDENDS

If the Company pays dividends on its Shares, such dividends paid to a
Non-United States Holder of Shares will be subject to withholding of United
States federal income tax rate at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business of the Non-United
States Holder within the United States. Dividends that are effectively connected
with the conduct of a trade or business within the United States are subject to
United States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Any such effectively connected dividends received
by a foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.

Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above, and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under proposed Treasury regulations not currently in effect,
however, a Non-United States Holder of Shares who wishes to claim the benefit of
an applicable treaty rate would be required to satisfy applicable certification
and other requirements. Certain certification and disclosure requirements must
be complied with in order to be exempt from withholding under the effectively
connected income exception. A Non-United States Holder of Shares eligible for a
reduced rate of United States withholding tax pursuant to an income tax treaty
may obtain a refund of any excess amounts withheld by filing an appropriate
claim for refund with the IRS.

SALE OR EXCHANGE

A Non-United States Holder will generally not be subject to United States
federal income tax with respect to gain recognized on a sale, exchange or other
disposition of Shares unless (i) the gain is effectively connected with the
conduct of a trade or business of the Non-United States Holder in the United
States, (ii) in the case of a Non-United States Holder who is an individual and
holds the Shares as capital assets, such holder is present in the United States
for 183 days or more in the taxable year of sale, exchange or other disposition
and certain other conditions are met, or (iii) the Company is or has been a
"U.S. real property holding corporation" for United States federal income tax
purposes. The

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Company is not and does not anticipate becoming a "U.S. real property holding
corporation" for United States federal income tax purposes.

An individual Non-United States Holder described in clause (i) above will be
taxed on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual Non-United States Holder
described in clause (ii) above will be subject to a flat 30% tax on the gain
derived from the sale, which may be offset by United States capital losses
(notwithstanding the fact that the individual is not considered a resident of
the United States). If a Non-United States Holder that is a foreign corporation
falls under clause (i) above, it will be taxed on its gain under regular
graduated United States federal income tax rates and, in addition, may be
subject to the branch profits tax equal to 30% of its effectively connected
earnings and profits within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.

FEDERAL ESTATE TAX

Common Stock held by an individual Non-United States Holder at the time of
death will be included in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.

BACKUP WITHHOLDING AND INFORMATION REPORTING

The Company must report annually to the IRS and to each Non-United States
Holder the amount of dividends paid to such holder and the tax withheld with
respect to such dividends, regardless of whether withholding was required.
Copies of the information returns reporting such dividends and withholding may
also be made available to the tax authorities in the country in which the
Non-United States Holder resides under the provisions of an applicable income
tax treaty.

Under current law, backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to dividends paid to a Non-United States Holder at an
address outside the United States (unless the payer has knowledge that the payee
is a U.S. person). Under proposed United States Treasury regulations not
currently in effect, however, a Non-United States Holder will be subject to
back-up withholding unless applicable certification requirements are met.

The payment of the proceeds of the sale, exchange or other disposition of
Shares to or through the United States office of a broker is subject to both
backup withholding and information reporting unless the owner certifies under
penalties of perjury that it is a Non-United States Holder or otherwise
establishes an exemption. In general, backup withholding and information
reporting will not apply if a foreign office of a broker pays the proceeds of
the sale of Shares to the owner thereof. If, however, such broker is, for United
States federal income tax purposes, a U.S. person, a controlled foreign
corporation or a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States,
such payments will be subject to information reporting, but not backup
withholding, unless (1) such broker has documentary evidence in its records that
the beneficial owner is not a U.S. person and certain other conditions are met
or (2) the beneficial owner otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.

PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF ANY INVESTMENT IN THE SHARES, INCLUDING
THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.

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SELLING SECURITY HOLDERS

The following table sets forth information with respect to the Shares
offered hereby beneficially owned by each of the Selling Security Holders as of
September 3, 1996. The Shares offered hereby may be offered in whole or in part
from time to time by or on behalf of the Selling Security Holders named below.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK OWNED PERCENTAGE OF
SELLING SECURITY HOLDER AND REGISTERED HEREUNDER OUTSTANDING COMMON STOCK*
- ----------------------------------------------- ------------------------ -------------------------
<S> <C> <C>
Lehman Brothers Holdings, Inc.................. 7,862,639 14.3%
JWC Associates L.P............................. 6,163,165 11.2%
JWC Associates II, L.P......................... 40,839 **
KKR Partners II, L.P........................... 149,405 **
Channel One Associates, L.P.................... 4,361,800 7.9%
William Carr................................... 14,126 **
Donald M. Kurucz............................... 2,674 **
Kenneth J. Matlock............................. 5,573 **
Robert W. Michael.............................. 7,801 **
William N. Temple.............................. 2,228 **
David L. Townsend.............................. 1,783 **
James W. Walter................................ 42,355 **
William H. Weldon.............................. 4,457 **
The Celotex Corporation, in its capacity as the
Celotex Settlement Fund Recipient............. 10,941,326 19.9%
AIF II, L.P.(1)................................ 1,152,681 2.1%
Lion Advisors, L.P.(1)......................... 1,132,511 2.1%
----------- ---
Total.......................................... 31,885,363 58.1%
----------- ---
----------- ---
</TABLE>

- ------------

* All percentages in the table are based on 54,868,335 shares of Common Stock
being issued and outstanding. See "Security Ownership of Management and
Principal Stockholders."

** Owns less than 1% of outstanding Common Stock.

(1) Lion Advisors, L.P. (a) holds the 1,132,511 Shares set forth next to its
name on behalf of an investment account under management over which Lion
Advisors, L.P. holds investment, voting and dispositive power and (b) is an
affiliate of AIF II, L.P. Neither AIF II, L.P. nor Lion Advisors, L.P. is an
affiliate of the Company.

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PLAN OF DISTRIBUTION

The Company will receive no proceeds from this offering. The Shares may be
sold from time to time to purchasers directly by any of the Selling Security
Holders. Alternatively, any of the Selling Security Holders may from time to
time offer the Shares through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Security Holders and/or the purchasers of Shares for whom they
may act as agent. The Selling Security Holders and any underwriters, dealers or
agents that participate in the distribution of Shares may be deemed to be
underwriters, and any profit on the sale of Shares by them and any discounts,
commissions or concessions received by any such underwriters, dealers or agents
might be deemed to be underwriting discounts and commissions under the
Securities Act. If the Company is advised that an underwriter has been engaged
with respect to the sale of any Shares offered hereby, or in the event of any
other material change in the plan of distribution, the Company will cause
appropriate amendments to the Registration Statement of which this Prospectus
forms a part to be filed with the Commission reflecting such engagement or other
change. See "Additional Information."

At the time a particular offer of Shares is made, to the extent required, a
Prospectus Supplement will be provided by the Company and distributed by the
relevant Selling Security Holder which will set forth the aggregate amount and
type of Shares being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, any discounts, commissions and
other items constituting compensation from the Selling Security Holders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.

The Shares may be sold from time to time in one or more transactions at a
fixed offering price, which may be changed, or at varying prices determined at
the time of sale or at negotiated prices. Such prices will be determined by the
Selling Security Holders or by agreement between the Selling Security Holders
and underwriters or dealers. To the extent not prohibited by applicable
securities laws, Selling Security Holders may sell the Shares other than
pursuant to the Registration Statement of which this Prospectus forms a part.

The Common Stock is listed on the Nasdaq National Market under the symbol
"WLTR".

Under applicable rules and regulations under the Exchange Act any person
engaged in a distribution of the Shares may not simultaneously engage in
market-making activities with respect to such Shares for a period of nine
business days prior to the commencement of such distribution and ending upon the
completion of such distribution. In addition to and without limiting the
foregoing, each Selling Security Holder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including without
limitation rules 10b-6 and 10b-7, which provisions may limit the timing of
purchases and sales of any of the Shares by the Selling Security Holders. All of
the foregoing may affect the marketability of the Shares and the ability of any
person or entity to engage in market-making activities with respect to the
Shares.

Under guidelines adopted by the National Association of Securities Dealers,
Inc. (the "NASD"), the maximum commission that any NASD member firm can receive
in connection with a distribution of the Shares, without further clearance from
the NASD, is 8%.

Pursuant to the Common Stock Registration Rights Agreement, the Company is
obligated to pay substantially all of the expenses incident to the registration,
offering and sale of the Shares to the public other than commissions and
discounts of underwriters, dealers or agents, and the Selling Security Holders,
and any underwriter they may utilize, and their respective controlling persons
are entitled to be indemnified by the Company against certain liabilities,
including liabilities under the Securities Act. See "Description of Capital
Stock--Common Stock Registration Rights Agreements".

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LEGAL MATTERS

The validity of the Shares offered hereby has been passed upon for the
Company by Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.

EXPERTS

The consolidated financial statements as of May 31, 1996 and 1995 and for
each of the three years in the period ended May 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent certified public accountants, given on the authority of said
firm as experts in auditing and accounting.

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INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGES
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<S> <C>
Walter Industries, Inc. and Subsidiaries

Report of Independent Certified Public Accountants........................ F-2

Consolidated Balance Sheet--May 31, 1996 and 1995......................... F-3

Consolidated Statement of Operations and Retained Earnings (Deficit) for
the Three Years Ended May 31, 1996...................................... F-4

Consolidated Statement of Cash Flows for the Three Years Ended May 31,
1996.................................................................... F-5

Notes To Financial Statements............................................. F-6 to F-27
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
Walter Industries, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and retained earnings (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Walter Industries, Inc. and its subsidiaries at May 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended May 31, 1996 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP

Tampa, Florida
July 12, 1996, except as to Note 16, which is as of August 28, 1996

F-2
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MAY 31,
--------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash (includes short-term investments of $64,338,000 and
$84,872,000) (Notes 3 and 14).................................... $ 81,881 $ 128,007
Short-term investments, restricted (Notes 3 and 14)............... 175,432 128,002
Instalment notes receivable (Notes 4, 8 and 14)................... 4,208,252 4,256,866
Less--Provision for possible losses............................. ( 26,138) ( 26,556)
Unearned time charges........................................... ( 2,851,961) ( 2,869,282)
----------- -----------
Net......................................................... 1,330,153 1,361,028
Trade receivables................................................. 178,847 160,584
Less--Provision for possible losses............................. ( 8,180) ( 7,998)
----------- -----------
Net......................................................... 170,667 152,586
Federal income tax receivable (Note 9)............................ -- 99,875
Other notes and accounts receivable............................... 21,055 30,236
Inventories, at lower of cost (first in, first out or average) or
market
Finished goods.................................................. 124,456 111,792
Goods in process................................................ 32,798 29,593
Raw materials and supplies...................................... 51,674 53,453
Houses held for resale.......................................... 2,517 1,599
----------- -----------
Total inventories........................................... 211,445 196,437
Prepaid expenses.................................................. 11,937 12,694
Property, plant and equipment, at cost (Notes 5 and 6)............ 888,991 1,186,407
Less--Accumulated depreciation, depletion and amortization...... ( 347,455) ( 523,615)
----------- -----------
Net......................................................... 541,536 662,792
Investments....................................................... 6,646 6,191
Deferred income taxes (Note 9).................................... 155,171 16,544
Unamortized debt expense (Note 8)................................. 29,548 34,167
Other assets...................................................... 44,971 43,698
Excess of purchase price over net assets acquired (Notes 1, 5 and
7)............................................................... 310,935 372,896
----------- -----------
$ 3,091,377 $ 3,245,153
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts (Note 3).......................................... $ 28,194 $ 33,746
Accounts payable.................................................. 74,330 108,137
Accrued expenses.................................................. 120,477 150,907
Income taxes payable (Note 9)..................................... 56,238 53,261
Long-term senior debt (Notes 4, 8 and 14)......................... 2,211,296 2,220,370
Accrued interest (Note 8)......................................... 28,819 37,854
Accumulated postretirement health benefits obligation (Note 13)... 247,827 228,411
Other long-term liabilities....................................... 47,502 51,693
Stockholders' equity (Notes 1, 10 and 11):
Common stock, $.01 par value per share:
Authorized--200,000,000 shares
Issued--54,868,335 shares and 50,494,313 shares............... 549 505
Capital in excess of par value.................................. 1,159,332 1,159,384
Retained earnings (deficit), per accompanying statement......... ( 877,861) ( 793,165)
Excess of additional pension liability over unrecognized prior
years service cost............................................ ( 5,326) ( 5,950)
----------- -----------
Total stockholders' equity.................................. 276,694 360,774
----------- -----------
$ 3,091,377 $ 3,245,153
----------- -----------
----------- -----------
</TABLE>

F-3
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales and revenues:
Net sales............................................ $1,220,397 $1,181,635 $1,068,387
Time charges (Note 4)................................ 231,104 222,221 238,097
Miscellaneous........................................ 34,134 30,838 17,383
Interest income from Chapter 11 proceedings (Note
1).................................................. -- 7,628 4,657
---------- ---------- ----------
1,485,635 1,442,322 1,328,524
---------- ---------- ----------
Cost and expenses:
Cost of sales........................................ 987,354 951,381 845,061
Depreciation, depletion and amortization (Note 6).... 74,341 72,037 71,035
Selling, general and administrative.................. 135,840 130,616 127,901
Postretirement health benefits (Note 13)............. 27,129 25,961 25,585
Provision for possible losses........................ 4,367 4,485 4,611
Chapter 11 costs (Note 1)............................ -- 442,362 14,254
Interest and amortization of debt discount and
expense(Notes 6 and 8)............................. 208,690 304,548 155,470
Amortization of excess of purchase price over net
assets acquired (Note 7)........................... 39,096 40,027 48,515
Long-lived asset impairment (Note 5)................. 143,265 -- --
---------- ---------- ----------
1,620,082 1,971,417 1,292,432
---------- ---------- ----------
( 134,447) ( 529,095) 36,092
Income tax benefit (expense) (Note 9):
Current.............................................. ( 621) 80,754 ( 41,598)
Deferred............................................. 55,776) 89,696 12,681
---------- ---------- ----------
Income (loss) before extraordinary item................ ( 79,292) ( 358,645) 7,175
Extraordinary item--loss on debt repayment (net of
income tax benefit of $2,910,000) (Note 8)............. ( 5,404) -- --
---------- ---------- ----------
Net income (loss)...................................... ( 84,696) ( 358,645) 7,175
Retained earnings (deficit) at beginning of year....... ( 793,165) ( 434,520) ( 441,695)
---------- ---------- ----------
Retained earnings (deficit) at end of year............. ($ 877,861) ($ 793,165) ($ 434,520)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share (Note 10):
Loss before extraordinary item....................... ($ 1.56) ($ 7.10)
Extraordinary item................................... ( .10) --
---------- ----------
Net loss............................................. ($ 1.66) ($ 7.10)
---------- ----------
---------- ----------
</TABLE>

F-4
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------
1996 1995 1994
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATIONS
Income (loss) before extraordinary item....................... $(79,292) $(358,645) $ 7,175
Charges to income not affecting cash:
Settlement of Chapter 11 claims with debt and new Common
Stock..................................................... -- 444,752 --
Depreciation, depletion and amortization.................... 74,341 72,037 71,035
Provision for deferred income taxes......................... ( 55,776) ( 89,696) ( 12,681)
Accumulated postretirement health benefits obligation (Note
13)........................................................ 19,416 18,449 20,057
Provision for other long-term liabilities................... ( 4,034) 294 280
Amortization of excess of purchase price over net assets
acquired (Note 7)......................................... 39,096 40,027 48,515
Amortization of debt discount and expense................... 7,250 11,783 17,597
Long-lived asset impairment (Note 5)........................ 143,265 -- --
-------- --------- --------
144,266 139,001 151,978
Decrease (increase) in:
Short-term investments, restricted (Note 3)................. ( 47,430) ( 20,450) ( 1,932)
Instalment notes receivable, net (a)........................ 30,875 ( 1,849) 27,680
Trade and other receivables, net............................ ( 8,900) ( 44,009) 12,747
Federal income tax receivable (Note 9)...................... 99,875 ( 99,875) --
Inventories................................................. ( 15,008) ( 23,858) ( 5,940)
Prepaid expenses............................................ 757 ( 1,359) ( 3,433)
Deferred income taxes (Note 9).............................. ( 79,941) -- --
Increase (decrease) in:
Bank overdrafts (Note 3).................................... ( 5,552) 3,867 11,958
Accounts payable............................................ ( 7,361) 28,925 6,772
Accrued expenses............................................ 7,054 28,242 6,427
Income taxes payable (Note 9)............................... 2,977 ( 15,348) 2,408
Accrued interest............................................ ( 9,033) 24,156 47,833
Liabilities subject to Chapter 11 proceedings (Note 1)...... -- -- 1,286
-------- --------- --------
Cash flows from operations.................................. 112,579 17,443 257,784
-------- --------- --------
FINANCING ACTIVITIES
Issuance of long-term senior debt (Note 8).................... 680,000 974,450 2,000
Additions to unamortized debt expense......................... ( 6,045) ( 17,153) --
Extraordinary item--loss on debt repayment.................... ( 5,404) -- --
Charge to income not affecting cash:
Write off of unamortized debt expense....................... 3,414 -- --
Provision for deferred income tax........................... ( 2,910) -- --
Retirement of long-term senior debt (Note 8).................. (689,074) ( 120,250) (178,865)
Payment of liabilities subject to Chapter 11 proceedings...... ( 63,932) ( 604,044)(b) --
Payment of accrued postpetition interest on Chapter 11 secured
debt obligations............................................ -- ( 244,334) --
Fractional share payments..................................... ( 8) -- --
-------- --------- --------
Cash flows used in financing activities..................... ( 83,959) ( 11,331) (176,865)
-------- --------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of normal
retirements................................................. ( 73,485) ( 76,966) ( 65,858)
(Increase) in investments and other assets.................... ( 1,261) ( 4,442) ( 2,128)
-------- --------- --------
Cash flows used in investing activities..................... ( 74,746) ( 81,408) ( 67,986)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents.......... ( 46,126) ( 75,296) 12,933
Cash and cash equivalents at beginning of year................ 128,007 203,303 190,370
-------- --------- --------
Cash and cash equivalents at end of year (Note 3)............. $ 81,881 $ 128,007 $203,303
-------- --------- --------
-------- --------- --------
</TABLE>

- ------------

<TABLE>
<C> <S>
(a) Consists of sales and resales, net of repossessions and provision for possible losses,
of $148,749,000, $155,236,000 and $153,776,000 and cash collections on account and
payouts in advance of maturity of $179,624,000, $153,387,000 and $181,456,000, for the
years ended May 31, 1996, 1995 and 1994, respectively.
(b) In addition, $490 million of Series B Senior Notes and 44,050,974 shares of new Common
Stock were issued to satisfy a portion of the allowed claims of holders of secured and
subordinated debt, settle a portion of the asbestos-related veil-piercing claims and
6,443,339 shares of new Common Stock were issued to the former shareholders in
cancellation of their original holdings.
</TABLE>

F-5
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

NOTE 1--RECENT HISTORY

Walter Industries, Inc. (the "Company") was organized in 1987 for the
purpose of acquiring Jim Walter Corporation ("Original Jim Walter"). The
Company's financial statements reflect the allocation of the purchase price of
Original Jim Walter based upon the fair value of the assets acquired and the
liabilities assumed. On December 27, 1989, the Company and most of its
subsidiaries each filed a voluntary petition for reorganization under Chapter 11
of Title 11 of the United States Code in the United States Bankruptcy Court for
the Middle District of Florida, Tampa Division (the "Bankruptcy Court"). The
Company emerged from bankruptcy on March 17, 1995 (the "Effective Date")
pursuant to the Amended Joint Plan of Reorganization Dated as of December 9,
1994, as modified on March 1, 1995 (as so modified the "Consensual Plan").
Despite the confirmation and effectiveness of the Consensual Plan, the
Bankruptcy Court continues to have jurisdiction over, among other things, the
resolution of disputed prepetition claims against the Company and other matters
that may arise in connection with or relate to the Consensual Plan. The
following unaudited pro forma consolidated statement of operations for fiscal
1995 was prepared to illustrate the estimated effects of the Consensual Plan and
related financings as if they had occurred as of June 1, 1994.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, 1995
----------------------------------------------
AS REPORTED ADJUSTMENTS PRO FORMA
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C>
Sales and revenues:
Net sales...................................... $ 1,181,635 $ 1,181,635
Time charges................................... 222,221 222,221
Miscellaneous.................................. 30,838 30,838
Interest income from Chapter 11 proceedings.... 7,628 $ (7,628)(1) --
----------- ----------- -----------
1,442,322 (7,628) 1,434,694
----------- ----------- -----------
Cost and expenses:
Cost of sales.................................. 951,381 951,381
Depreciation, depletion and amortization....... 72,037 72,037
Selling, general and administrative............ 130,616 130,616
Postretirement health benefits................. 25,961 25,961
Provision for possible losses.................. 4,485 4,485
Chapter 11 costs............................... 442,362 (442,362)(2) --
Interest and amortization of debt discount and
expense...................................... 304,548 ( 81,364)(3) 223,184
Amortization of excess of purchase price over
net assets acquired.......................... 40,027 40,027
----------- ----------- -----------
1,971,417 ( 523,726) 1,447,691
----------- ----------- -----------
( 529,095) 516,098 ( 12,997)
Income tax benefit (expense)..................... 170,450 ( 195,730)(4) ( 25,280)
----------- ----------- -----------
Net income (loss)................................ ($ 358,645) $ 320,368 ($ 38,277)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share............................... ($ .75)(5)
-----------
-----------
Weighted average shares outstanding.............. 50,988,626
</TABLE>

(Footnotes on following page)

F-6
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1--RECENT HISTORY--(CONTINUED)

(Footnotes for preceding page)

- ------------

Changes from the historical financial statement in the pro forma consolidated
statement of operations consist of the following adjustments (all amounts in
thousands):

(1) Interest income from Chapter 11 proceedings of $7,628, which would not have
been realized assuming the Consensual Plan became effective June 1, 1994,
has been eliminated.

(2) Chapter 11 costs of $442,362, which would not have been incurred assuming
the Consensual Plan became effective June 1, 1994, have been eliminated.

(3) Interest and amortization of debt discount and expense has been reduced
$81,364 to give retroactive effect as if all indebtedness to be repaid
pursuant to the Consensual Plan was so done as of June 1, 1994 and the $490
million of Series B Senior Notes had been outstanding for the full year
ended May 31, 1995. Borrowings under the Trust IV Asset Backed Notes were
assumed to increase during the period June 1, 1994 through November 30, 1994
proportionately with the comparable period increase in the outstanding
economic balance of the instalment notes sold by Mid-State to Trust IV on
March 16, 1995. Borrowings under the Trust V Variable Funding Loan Agreement
were based on 78% of Jim Walter Homes' credit sales during the six-month
period December 1, 1994 through May 31, 1995. This time period is subsequent
to the Trust IV cut-off date for purchases of instalment notes from
Mid-State. No working capital borrowings were assumed under the Bank Credit
Facility. Pro forma interest expense, however, includes letter of credit
fees and unused working capital commitment fees.

(4) The provision for income taxes has been adjusted at the applicable statutory
rates to give effect to the pro forma adjustments described above.

(5) Net loss per share has been computed based on the weighted average number of
common shares outstanding (including 494,313 additional (shares) of Common
Stock issued six months after the Effective Date of the Consensual Plan, but
not including 3,880,140 additional shares which have been issued to an
escrow account because such issuance is contingent upon future events and
would be anti-dilutive).

NOTE 2--PRINCIPLES OF CONSOLIDATION

The Company through its direct and indirect subsidiaries currently offers a
diversified line of products and services for homebuilding, water and waste
water transmission, coal mining and related degasification, residential and
non-residential construction, and industrial markets. The consolidated financial
statements include the accounts of the Company and all of its subsidiaries.
Preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements. Actual
results could differ from those estimates. All significant intercompany balances
have been eliminated.

NOTE 3--CASH AND RESTRICTED SHORT-TERM INVESTMENTS

Cash includes short-term investments with original maturities of less than
one year. These investments are readily convertible to cash and are stated at
cost which approximates market. The Company's cash management system provides
for the reimbursement of all major bank disbursement accounts on a daily basis.
Checks issued but not yet presented to the banks for payment are classified as
bank overdrafts.

F-7
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3--CASH AND RESTRICTED SHORT-TERM INVESTMENTS--(CONTINUED)
Restricted short-term investments include (i) temporary investment of
reserve funds and collections on instalment notes receivable owned by Mid-State
Trusts II, III, IV and V ($110,436,000) which are available only to pay expenses
of the Trusts and principal and interest on indebtedness of the Trusts, (ii)
certain funds held by Trust II that are in excess of the amount required to be
paid for expenses, principal and interest on the Trust II Mortgage-Backed Notes
but which are subject to retention ($43,161,000) and (iii) miscellaneous other
segregated accounts restricted to specific uses ($21,835,000).

NOTE 4--INSTALMENT NOTES RECEIVABLE

The instalment notes receivable arise from sales of partially finished homes
to customers for time payments primarily over periods of twelve to thirty years
and are secured by first mortgages or similar security instruments. Revenue and
income from the sale of homes is included in income upon completion of
construction and legal transfer to the customer. The buyer's ownership of the
land and the improvements necessary to complete the home constitute a
significant equity investment which the Company has access to should the buyer
default on payment of the instalment note obligation. Of the gross amount of
$4,208,252,000 an amount of $3,914,150,000 is due after one year. Instalment
payments estimated to be receivable within each of the five years from May 31,
1996 are $294,102,000, $288,698,000, $283,371,000, $275,512,000 and
$266,809,000, respectively, and $2,799,760,000 after five years. Of the gross
amount of instalment notes receivable of $4,208,252,000, 19%, 11% and 11% are
secured by homes located in the states of Texas, Florida and Mississippi,
respectively. Time charges are included in equal parts in each monthly payment
and are taken into income as collected. This method approximates the interest
method since a much larger provision for loan losses and other expenses would be
required if time charge income were accelerated. The aggregate amount of
instalment notes receivable having at least one payment ninety or more days
delinquent was 3.14% and 3.17% of total instalment notes receivable at May 31,
1996 and 1995, respectively.

Mid-State Homes, Inc. ("Mid-State") purchases instalment notes from Jim
Walter Homes, Inc. ("Jim Walter Homes") on homes constructed and sold by Jim
Walter Homes and services such instalment mortgage notes. Mid-State Trust II
("Trust II"), Mid-State Trust III ("Trust III") and Mid-State Trust IV ("Trust
IV") are business trusts organized by Mid-State, which owns all of the
beneficial interest in Trust III and Trust IV. Trust IV owns all of the
beneficial interest in Trust II. The Trusts were organized for the purpose of
purchasing instalment notes receivable from Mid-State with the net proceeds from
the issuance of the Trust II Mortgage-Backed Notes, the Trust III Asset Backed
Notes and the Trust IV Asset Backed Notes. The assets of Trust II, Trust III and
Trust IV, including the instalment notes receivable, are not available to
satisfy claims of general creditors of the Company and its subsidiaries. The
liabilities of Trusts II, III and IV for their publicly issued debt are to be
satisfied solely from the proceeds of the underlying instalment notes and are
non-recourse to the Company and its subsidiaries. Of the gross amount of
instalment notes receivable at May 31, 1996 of $4,208,252,000 with an economic
balance of $2,016,665,000, receivables owned by Trust II had a gross book value
of $1,166,386,000 and an economic balance of $723,481,000, receivables owned by
Trust III had a gross book value of $416,780,000 and an economic balance of
$217,247,000 and receivables owned by Trust IV had a gross book value of
$1,786,406,000 and an economic balance of $759,234,000. Mid-State Trust V
("Trust V"), a business trust in which Mid-State holds all the beneficial
interest, was organized to hold instalment notes receivable as collateral for
borrowings to provide temporary financing to Mid-State for its current purchases
of instalment notes and mortgages from Jim Walter

F-8
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4--INSTALMENT NOTES RECEIVABLE--(CONTINUED)
Homes. At May 31, 1996, receivables owned by Trust V had a gross book value of
$835,454,000 and an economic balance of $315,422,000.

NOTE 5--LONG-LIVED ASSET IMPAIRMENT

The Financial Accounting Standards Board issued in March 1995 Statement of
Financial Accounting Standards No. 121--"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FASB 121")
which becomes effective for fiscal years beginning after December 15, 1995
(fiscal year 1997 for the Company). The Company elected to adopt FASB 121 during
the third quarter of fiscal 1996 as a result of significant adverse changes in
the results of operations during fiscal 1996 principally in the Natural
Resources business segment as a result of a fire due to the unexpected
recurrence of spontaneous combustion heatings at Jim Walter Resources' Mine No.
5 at the end of the fiscal second quarter and various geological problems at the
three other coal mines during portions of the year that led to the conclusion
that there was an impairment of fixed assets within the Natural Resources
segment.

FASB 121 established standards for determining when impairment losses on
long-lived assets have occurred and how impairment losses should be measured.
The Company is required to review long-lived assets and certain intangibles, to
be held and used, for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. In
performing such a review for recoverability, the Company is required to compare
the expected future cash flows to the carrying value of long-lived assets and
identifiable intangibles. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of such assets and intangibles, the
assets are impaired and the assets must be written down to their estimated fair
market value.

After performing a review for asset impairment at each of the Company's
business segments and applying the principles of measurement contained in FASB
121, the Company recorded a charge against earnings of $143,265,000 before tax
($101,125,000 after tax). The charge includes a $120,400,000 pre-tax
($78,260,000 after tax) write down of fixed assets at two coal mines in the
Natural Resources segment to their estimated fair market values. Fair market
values were based principally on expected future discounted cash flows. In
addition, a $22,865,000 write off of excess of purchase price over net assets
acquired was recorded in the Industrial and Other Products segment,
substantially all of which was at JW Window Components, Inc. Adoption of this
standard had no impact on cash flow.

F-9
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6--PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows (see Notes 1 and 5):

MAY 31,
----------------------
1996 1995
-------- ----------
(IN THOUSANDS)

Land and minerals................................... $150,708 $ 196,798
Land improvements................................... 18,143 20,140
Buildings and leasehold improvements................ 98,452 110,758
Mine development costs.............................. 47,930 125,903
Machinery and equipment............................. 548,562 703,138
Construction in progress............................ 25,196 29,670
-------- ----------
Total........................................... $888,991 $1,186,407
-------- ----------
-------- ----------

The Company provides depreciation for financial reporting purposes
principally on the straight line method over the useful lives of the assets.
Assets (primarily mine development costs) extending for the full life of a coal
mine are depreciated on the unit of production basis. For federal income tax
purposes accelerated methods are used for substantially all eligible properties.
Depletion of minerals is provided based on estimated recoverable quantities.

The Company has capitalized interest on qualifying properties in accordance
with Statement of Financial Accounting Standards No. 34. Interest capitalized
for the years ended May 31, 1996, 1995 and 1994 was immaterial. Interest paid in
cash for the years ended May 31, 1996, 1995 and 1994 was $220,959,000,
$437,357,000 and $91,293,000, respectively.

NOTE 7--EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED

The excess of purchase price over net assets acquired in connection with the
acquisition of Original Jim Walter is being amortized over periods ranging up to
twenty years. The Company evaluates on a regular basis, whether events or
circumstances have occurred that indicate the carrying amount of goodwill may
warrant revision or may not be recoverable. The Company measures impairment of
goodwill based upon estimated future undiscounted cash flows from operations of
the related business unit (see Note 5). At May 31, 1996, the accumulated
amortization of goodwill was approximately $443.3 million. At May 31, 1996, the
net unamortized balance of goodwill is not considered to be impaired.

F-10
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--DEBT

Long-term debt, in accordance with its contractual terms, consisted of the
following at each year end:

MAY 31,
------------------------
1996 1995
---------- ----------
(IN THOUSANDS)

Senior debt:
Walter Industries, Inc.
Revolving Credit Facility................. $ 235,000 $ --
Bank Credit Facility...................... -- --
Term Loan A............................... 121,250 --
Term Loan B............................... 59,750 --
Series B Senior Notes Due 2000............ -- 490,000
Other..................................... 3,350 4,000
---------- ----------
419,350 494,000
---------- ----------
Mid-State Trusts
Trust II Mortgage-Backed Notes............ 497,000 584,000
Trust III Asset Backed Notes.............. 147,669 173,527
Trust IV Asset Backed Notes............... 902,277 953,843
Trust V Variable Funding Loan............. 245,000 15,000
---------- ----------
1,791,946 1,726,370
---------- ----------
Total................................. $2,211,296 $2,220,370
---------- ----------
---------- ----------

On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility ("Revolving
Credit Facility"), a $125 million six-year term loan ("Term Loan A") and a $60
million seven-year term loan ("Term Loan B") (collectively the "Credit
Facilities"). Proceeds from the financing, together with $75 million drawn under
the Trust V Variable Funding Loan Agreement were used to redeem in full $490
million aggregate amount of Series B Senior Notes Due 2000 (the "Senior Notes")
at a redemption price of 101% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of redemption and to replace the existing
$150 million bank credit facility, both issued in connection with the Company's
emergence from bankruptcy in March 1995. The Company recorded an extraordinary
loss of $8,314,000 ($5,404,000 net of income tax benefit) consisting of a
redemption premium and the write off of unamortized debt expense related to the
early repayment of the Senior Notes and the $150 million bank credit facility.
The Credit Facilities are secured by a pledge of intercompany notes and stock of
certain subsidiaries of the Company. Net cash proceeds from certain asset sales
must be applied to permanently reduce the Credit Facilities and beginning with
fiscal year ending May 31, 1997, 50% of the excess cash flow (as defined in the
Credit Facilities) must be used to permanently reduce Term Loan A and Term Loan
B.

The Revolving Credit Facility is a six year non-amortizing facility which
includes a sub-facility for trade and other standby letters of credit in an
amount up to $40 million at any time outstanding and a sub-facility for
swingline advances in an amount not in excess of $15 million at any time
outstanding. Interest, at the option of the Company, is at (i) the greater of
(a) the Prime Rate or (b) the Federal Funds Effective Rate plus 1/2%, or (ii) a
LIBOR rate plus an Applicable Margin of 3/4% to 1 3/4% (based

F-11
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--DEBT--(CONTINUED)
upon a leverage ratio pricing grid). At May 31, 1996, the weighted average
interest rate was 6.74%. A commitment fee ranging from 1/4% to 1/2% per annum
(based upon a leverage ratio pricing grid) is payable on the daily average
unutilized commitment. The fee for outstanding letters of credit is priced at
the Applicable Margin less 3/8%. At May 31, 1996, there were no swingline
borrowings outstanding under this facility; however, letters of credit in the
aggregate face amount of $23,042,000 have been issued thereunder.

Term Loan A interest, at the option of the Company is at (i) the greater of
(a) the Prime Rate or (b) the Federal Funds Effective Rate plus 1/2%, or (ii) a
LIBOR rate plus 3/4% to 1 3/4% (based upon a leverage ratio pricing grid).
Scheduled principal payments to be made in each of the five years from May 31,
1996 are $15,000,000, $16,250,000, $21,250,000, $25,000,000 and $25,000,000,
respectively. At May 31, 1996, the weighted average interest rate was 6.64%

Term Loan B interest is at LIBOR plus 2% to 2 1/4% (based upon a leverage
ratio pricing grid). At May 31, 1996, the interest rate was 7.39%. Scheduled
principal payments in each of the five years from May 31, 1996 are $1,000,000.

The Trust II Mortgage-Backed Notes (see Note 4) were issued in five classes
in varying principal amounts. Three of the classes have been fully repaid. The
two remaining classes A3 and A4 bear interest at the rates of 9.35% and 9.625%,
respectively. Interest on each class of notes is payable quarterly on each
January 1, April 1, July 1 and October 1 (each a "Payment Date"). On each
Payment Date, regular scheduled principal payments will be made on the Class A3
and Class A4 Notes in order of maturity. Maturities of the balance of these
Mortgage-Backed Notes range from April 1, 1998 for the Class A3 Notes to April
1, 2003 for the Class A4 Notes. The Class A3 and Class A4 Notes are subject to
special principal payments and the Class A4 Notes may be subject to optional
redemption under specified circumstances. The scheduled principal amount of
notes maturing in each of the five years from May 31, 1996 is $87,000,000,
$87,000,000, $64,600,000, $64,600,000 and $64,600,000, respectively.

The Trust III Asset Backed Notes (see Note 4) bear interest at 7.625%,
constitute a single class and have a final maturity date of April 1, 2022.
Payments are made quarterly on January 1, April 1, July 1 and October 1, based
on collections on the underlying collateral less amounts paid for interest on
the notes and Trust III expenses.

The Trust IV Asset Backed Notes (see Note 4) bear interest at 8.33%,
constitute a single class and have a final maturity of April 1, 2030. Payments
are made quarterly on January 1, April 1, July 1 and October 1 based on
collections on the underlying collateral and distributions from Trust II, less
amounts paid for interest on the notes and Trust IV expenses.

On March 3, 1995, Trust V entered into the three-year $500 million Variable
Funding Loan Agreement with Enterprise Funding Corporation, an affiliate of
NationsBank National Association, as lender, and NationsBank National
Association (Carolinas), as Administrative Agent. It is contemplated that this
facility will be an evergreen three-year facility with periodic paydowns from
the proceeds of permanent financings similar to those done by Trusts II, III and
IV. The facility currently matures on March 3, 1999. Accordingly, the $245
million of borrowings outstanding at May 31, 1996 has been classified as
long-term debt. Interest is based on the cost of A-1 and P-1 rated commercial
paper plus 3/4%. Commitment fees on the unused facility are .55%.

F-12
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--DEBT--(CONTINUED)
The Company uses interest rate swaps that are relatively straightforward and
involve little complexity as hedge instruments to manage interest rate risks. At
the present time the Company has two types of interest rate risks: (i) current
risk on interest rates related to debt which has floating rates and (ii) risk of
interest rates and proceeds in refinancing from short-term to long-term certain
indebtedness secured by the fixed rate instalment notes receivable generated by
its homebuilding business. At May 31, 1996, Trust V had in place a swap
agreement with a notional amount of $216 million under which it pays a fixed
interest rate of 5.25% and receives interest based on commercial paper rates.
This swap is in effect until June 30, 1997, accretes monthly and is designed to
offset the interest rate risk of the Trust V Variable Funding Loan Agreement.
Also at May 31, 1996, Trust V had in place forward swaps totaling $100 million
notional amount which will start June 30, 1997 and run for 10 years at a blended
monthly fixed rate of 7.25%. At that time Trust V would begin to receive
interest based on prevailing commercial paper rate levels. It is the Company's
intent to terminate those forward swaps when a long-term fixed rate financing is
put in place for a portion of the instalment notes receivable portfolio. The
gain or loss at termination will be deferred and amortized over the life of the
new financing.

The Credit Facilities 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, pay dividends, create liens on
assets, enter into leases, make 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 Credit Facilities,
the Company is required to maintain specified financial ratios and comply with
certain financial tests, including interest coverage, fixed charge coverage
ratios and maximum leverage ratios, some of which become more restrictive over
time. The Company was in full compliance with these covenants at May 31, 1996.

The Trust V Variable Funding Loan Agreement's covenants, among other things,
restricts the ability of Trust V to dispose of assets, create liens and engage
in mergers or consolidations. The Company was in full compliance with these
covenants at May 31, 1996.

NOTE 9--INCOME TAXES

Income tax expense (benefit) is made up of the following components:

MAY 31, 1996 MAY 31, 1995 MAY 31, 1994
------------------ ------------------- -------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- -------- -------- -------- --------
(IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C>
United States.............................. ($ 799 ($ 54,846) ($ 80,445) ($ 88,815) $ 38,712 ($ 11,716)
State and local............................ 1,420 ( 930) ( 309) ( 881) 2,886 ( 965)
------- -------- -------- -------- -------- --------
Total................................... $ 621 ($55,776) ($ 80,754) ($ 89,696) $ 41,598 ($ 12,681)
------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- --------
</TABLE>

In fiscal 1996 the Company received a refund of federal income tax of $22.2
million paid in 1995 as estimated payments while in fiscal 1995 and 1994 the
Company paid federal income tax of approximately $30.6 million and $37.1
million. State income taxes refunded in fiscal 1996 were approximately $0.1
million while state income taxes paid in 1995 and 1994 were approximately $4.0
million and $2.1 million, respectively.

F-13
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9--INCOME TAXES--(CONTINUED)
The Company complies with Statement of Financial Accounting Standards No.
109 ("FASB 109"), "Accounting for Income Taxes". FASB 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events which have been
recognized in the Company's financial statements or tax returns. FASB 109
generally considers all expected future events other than changes in tax law or
rates.

The income tax expense (benefit) before extraordinary item at the Company's
effective tax rate differed from the statutory rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate................................................ (35.0)% (35.0)% 35.0%
Effect of:
Adjustment to deferred taxes.................................. -- -- 5.3
State and local income tax.................................... .2 ( .2) 3.3
Percentage depletion.......................................... ( 2.6) ( .5) ( 1.7)
Enacted tax rate change....................................... -- -- 9.4
Nonconventional source fuel credit............................ -- -- (10.8)
Amortization of excess of purchase price over net assets
acquired and FASB 121 charge................................ 16.2 2.7 47.1
Benefit of capital loss carryforward.......................... ( 5.9) ( 1.5) ( 8.5)
Adjustment of prior years net operating loss carryforward..... ( 5.0) -- --
Effect of rate difference and avoidance of loss of credits on
net operating loss due to carryforward election............. ( 9.1) 2.3 --
Other, net.................................................... .2 -- 1.0
----- ----- -----
Effective tax rate................................................ (41.0)% (32.2)% 80.1%
----- ----- -----
----- ----- -----
</TABLE>

The tax benefit related to the extraordinary item approximates the statutory
rate and is deferred federal income tax.

On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed
into law raising the federal corporate income tax rate to 35% from 34%,
retroactive to January 1, 1993. FASB 109 requires that deferred tax liabilities
and assets be adjusted in the period of enactment for the effect of an enacted
change in the tax laws or rates. The effect of the change was $2,833,000 and
such amount is

F-14
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9--INCOME TAXES--(CONTINUED)
included in the provision for deferred income taxes for the year ended May 31,
1994. Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
------------------------
1996 1995
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Instalment sales method for instalment notes receivable in prior
years............................................................ $ 34,691 $ 43,312
Depreciation...................................................... 78,462 116,625
Difference in basis of assets under purchase accounting........... 20,424 23,894
Capital loss carryforward......................................... -- ( 7,977)
Net operating loss carryforward................................... ( 155,283) ( 31,488)
Accrued expenses.................................................. ( 39,034) ( 81,855)
Postretirement benefits other than pensions....................... ( 94,431) ( 87,032)
Valuation allowance............................................... -- 7,977
--------- --------
Total deferred tax (asset) liability.......................... ($155,171) ($ 16,544)
--------- --------
--------- --------
</TABLE>

The Revenue Act of 1987 eliminated the instalment sales method of tax
reporting for instalment sales after December 31, 1987.

As a result of the loss incurred in the 1995 fiscal year, the Company
recorded a federal income tax receivable of approximately $99.9 million. During
fiscal 1996 the Company elected to carry the 1995 loss forward rather than back
to prior years. Accordingly, $77.7 million has been reclassified from federal
income tax receivable to a deferred tax asset. The election to carryforward the
net operating loss generated a tax benefit of approximately $19 million in the
fourth quarter due to the effect of the rate difference, avoidance of loss of
credits and other miscellaneous tax adjustments. The Company's net operating
loss carryforward at May 31, 1996 approximates $443.6 million of which $372.3
million will expire in fiscal 2010 and $71.3 million will expire in fiscal 2011.
Also during the fourth quarter of fiscal 1996 the Company utilized its capital
loss carryforward of approximately $22.8 million.

Under the Internal Revenue Code, if certain substantial changes in the
Company's ownership occur, there are annual limitations on the amount of loss
and credit carryforwards. The reorganization under the Consensual Plan created
an ownership change in fiscal 1995; therefore, $296 million of the net operating
loss carryforward is subject to the annual limitation which will be eliminated
by fiscal 1998. However, the Company believes that the annual limitation will
not affect the realization of the net operating loss carryforward.

The Company allocates federal income tax expense (benefit) to its
subsidiaries based on their separate taxable income (loss).

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 in the amounts 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. Although the range
for such claims is zero to $186 million, the Company believes that such proofs
of claim are substantially without merit and intends to defend such claims
against the Company vigorously.

F-15
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--STOCKHOLDERS' EQUITY

The Company is authorized to issue 200,000,000 shares of common stock, $.01
par value. As of May 31, 1996, 54,868,335 shares of common stock are
outstanding.

Pursuant to the Consensual Plan, 494,313 shares were issued on September 13,
1995 to all former stockholders as of the Effective Date of the Consensual Plan.
Also on September 13, 1995, pursuant to the Consensual Plan, 3,880,140 shares of
common stock were issued to an escrow account. To the extent that certain
federal income tax matters of the Company are resolved satisfactorily, up to a
maximum 3,880,140 of the escrowed shares will be distributed to all former
stockholders of the Company as of the Effective Date. To the extent such matters
are not resolved satisfactorily, the escrowed shares will be returned to the
Company and canceled.

Net loss per share has been computed by dividing net loss by the weighted
average number of common shares issued of 50,988,195, which includes 494,313
additional shares issued on September 13, 1995 pursuant to the Consensual Plan,
but does not include 3,880,140 additional shares issued to an escrow account on
September 13, 1995 because such issuance is contingent on future events and
would be anti-dilutive in the current year. In management's opinion, per share
information for fiscal year 1994 is not relevant given the significant change in
the Company's capital structure which occurred as a result of the Company's
reorganization pursuant to the Consensual Plan (see Note 1).

NOTE 11--STOCK OPTIONS

Under the Walter Industries, Inc. Long-Term Incentive Stock Plan approved by
stockholders in October 1995, an aggregate of 3,000,000 shares of the Company's
common stock have been reserved for the grant and issuance of incentive and
non-qualified stock options, stock appreciation rights ("SAR's") and stock
awards. The maximum number of such shares with respect to which stock options or
SAR's may be granted to any employee during which the plan is in effect is
500,000 shares and the aggregate number of such shares that may be used in
settlement of stock awards is 1,000,000 shares. An option becomes exercisable at
such times and in such installments as set by the Compensation Committee of the
Board but no option will be exercisable after the tenth anniversary of the date
on which it is granted. The option price per share may not be less than the fair
market value of a share on the date the option is granted. Information on stock
options is summarized as follows:

1996
--------------------------
AVERAGE PRICE
SHARES PER SHARE
--------- -------------

Outstanding at beginning of year................... -- $--
Granted............................................ 1,500,000 14.120
Exercised.......................................... -- --
Canceled........................................... ( 13,000) 14.125
---------
---------
Outstanding at end of year......................... 1,487,000 14.120
---------
---------
Exercisable at end of year......................... -- --
---------
---------

F-16
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--LITIGATION AND OTHER MATTERS

Veil-Piercing Suits

Beginning in early 1989, the Company and certain of its officers, directors
and shareholders were named as co-defendants in a number of lawsuits brought by
persons ("Asbestos Claimants") claiming that the Company should be held liable
for all asbestos-related liabilities of The Celotex Corporation ("Celotex") and
its parent, Jim Walter Corporation ("JWC"). The stock of a predecessor of JWC
("Original Jim Walter") was acquired by a company known as Hillsborough
Acquisition Corporation ("HAC"), a former subsidiary of the Company, pursuant to
a 1988 leveraged buyout (the "LBO"). Asserting a variety of theories of
derivative liability, including piercing the corporate veil, the suits alleged,
among other things, that Original Jim Walter was liable for all asbestos-related
liabilities of Celotex and that the distribution by HAC of substantially all of
its assets to the Company pursuant to the LBO was therefore a fraudulent
conveyance (the "Veil-Piercing Suits").

On December 27, 1989, the Company and certain of its subsidiaries filed for
protection under Chapter 11 of Title 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Middle District of Florida, Tampa
Division (the "Bankruptcy Court"), which stayed all Veil-Piercing Suits pursuant
to the automatic stay. In January 1990, the Company filed a declaratory judgment
action ("Adversary Proceeding") against all Asbestos Claimants who had filed
Veil-Piercing Suits seeking a ruling that the Company could not be held liable
for any asbestos-related liabilities of Celotex or JWC on any grounds, asserting
that the corporate veil separating Original Jim Walter and Celotex was intact,
and asserting that the LBO could not be deemed a fraudulent conveyance.

In April 1994, the Bankruptcy Court ruled in favor of the Company on all of
the claims asserted in the Adversary Proceeding. The ruling was affirmed by the
United States District Court for the Middle District of Florida (the "District
Court") on October 13, 1994. Thereafter, a settlement (the "Veil-Piercing
Settlement") was entered into among the Company, certain of its creditors,
Celotex, JWC and representatives of the Asbestos Claimants pursuant to which all
the Veil-Piercing Suits would be dismissed and the Company and its officers,
directors and relevant stockholders would be released from all liabilities
relating to the LBO or associated with asbestos-related liabilities of Celotex
or JWC. The Veil-Piercing Settlement is embodied in the Amended Joint Plan of
Reorganization Dated as of December 9, 1994 as modified on March 1, 1995 (as so
modified the "Consensual Plan") that was confirmed by the Bankruptcy Court
pursuant to an order signed on March 2, 1995. The Consensual Plan binds all
known and unknown claimants and enjoins such persons or entities from bringing
any suits against the Company in the future for asbestos or LBO related claims.
Dismissal of the Veil-Piercing Suits is in process and all of these suits will
be dismissed in the near future pursuant to the terms of the Veil-Piercing
Settlement and the Consensual Plan.

On March 8, 1996, the Company, together with various other parties, filed an
adversary proceeding with the Bankruptcy Court, naming Celotex and JWC as
defendants. In this proceeding the Company and the other named plaintiffs allege
that Celotex and JWC breached the Veil-Piercing Settlement by failing to propose
and use their best efforts to obtain confirmation of a Chapter 11 plan for
Celotex (which is presently in bankruptcy) that included an injunction issued
pursuant to Section 524(g) of the Bankruptcy Code or other similar injunctive
relief acceptable to each of the parties to the Veil-Piercing Settlement.
Although all Veil-Piercing claims by Asbestos Claimants were resolved as part of
the Consensual Plan, the Company believes that Section 524(g) would afford
additional statutory protection to the Company against the possibility of such
claims in the future. The Company believed that the plan of reorganization
proposed by Celotex in its Chapter 11 proceeding failed to conform with the

F-17
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED)
terms of the Veil-Piercing Settlement; that the plan proposed by Celotex did not
meet the requirements of Section 524(g); and that Celotex and JWC failed to
propose and use their best efforts to obtain confirmation of a plan of
reorganization in the Celotex bankruptcy that included a provision for an
injunction as required by the Veil-Piercing Settlement. The defendants contend
that the proposed Celotex plan met the requirements of the Veil-Piercing
Settlement. This proceeding requested the Bankruptcy Court to (i) declare the
rights and obligations of the various parties to the Veil-Piercing Settlement
and (ii) issue an order requiring specific performance by each of the named
defendants of their obligations under the Veil-Piercing Settlement. The Company,
Celotex and JWC each filed motions in the Bankruptcy Court seeking an order
granting summary judgment in favor of the respective party.

On May 28, 1996, the Bankruptcy Court issued an order granting in part the
Company's motion for summary judgment and denying the motions for summary
judgment filed by Celotex and JWC. The Bankruptcy Court found that the plan of
reorganization filed by Celotex in its Chapter 11 proceeding did not comply with
the terms of the Veil-Piercing Settlement. The Bankruptcy Court, however,
declined to issue a mandatory injunction compelling compliance, but rather left
to the parties the opportunity to fashion an alternative remedy. The parties
were unable to agree on an alternative remedy and on June 7, 1996, the Company
requested that the Bankruptcy Court grant injunctive relief compelling Celotex
and JWC to perform their respective obligations under the Veil-Piercing
Settlement. In light of confirmation hearings scheduled to begin June 10, 1996
in the Celotex bankruptcy, the Bankruptcy Court denied the relief requested
without prejudice to request such relief in the future. The Bankruptcy Court's
May 28, 1996 order has been appealed by Celotex and JWC.

On June 12, 1996, the court in the Celotex bankruptcy (the "Celotex
Bankruptcy Court"), in response to an announcement by certain parties, including
Celotex, of an agreement to an alternative plan of reorganization, denied
confirmation of the Celotex plan of reorganization. On July 12, 1996, certain
parties to the Celotex reorganization, together with Celotex filed with the
Celotex Bankruptcy Court a proposed plan of reorganization. That plan contains a
provision for an injunction pursuant to Section 524(g). The proposed plan is
subject to approval of Celotex' creditors and confirmation by the Celotex
Bankruptcy Court.

SOUTH CAROLINA LITIGATION

In February 1995, Jim Walter Homes and Mid-State filed an adversary action
for declaratory judgment in the Bankruptcy Court against all South Carolina
homeowners who purchased their homes between July 1, 1982 and December 27, 1989.
The complaint in the adversary action sought a declaration that Jim Walter Homes
and Mid-State did not violate a South Carolina statute that provided homeowners
a preferential choice of attorneys to represent them in the closing of the
purchase of their homes. The adversary action was settled for $3 million which,
after application of settlement proceeds to pay arrearages on the homeowners'
mortgages, resulted in a net cash outlay of approximately $1,050,000, and legal
fees of $360,000. On November 22, 1995, the Bankruptcy Court approved the
settlement and distribution pursuant to the settlement has been completed.

Texas Litigation

In May 1991, Jim Walter Homes and Mid-State, together with Trust II and
certain other parties, were involved in various lawsuits, primarily in the
Bankruptcy Court, with approximately 750 owners of

F-18
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED)
446 houses constructed by Jim Walter Homes in south Texas. The homeowners sought
damages based upon alleged construction defects, common law fraud, and
violations of various Texas and federal statutes. The litigation was settled
pursuant to a settlement agreement approved by the Bankruptcy Court on July 13,
1995. The settlement figure was approximately $3,600,000 in account balance
reductions (of which approximately $1,250,000 represents a principal reduction),
plus an approximate aggregate of $27,500 cash to certain homeowner claimants and
$2,900,000 as attorney's fees (of which $900,000 was deferred and is payable
over five years).

Cases involving approximately 22 non-settling homeowner accounts will be
resolved on an individual basis before the Bankruptcy Court and the Company has
filed motions believed by the Company to be dispositive of these remaining
issues.

Suit by the Company and Jim Walter Resources, Inc. for Business Interruption
Losses

On May 31, 1995, the Company and Jim Walter Resources, Inc. ("JWR") filed a
lawsuit in the Circuit Court for Tuscaloosa County, Alabama (Civil Action No.
CV-95-625) against certain insurers. The lawsuit arises out of a spontaneous
combustion fire that began in JWR's underground coal mine No. 5 on November 17,
1993. Efforts to control the fire caused a blockage in the tunnels, corridors,
and passageways necessary to conduct mining, so mining operations temporarily
ceased. After JWR believed that the fire had been extinguished or brought under
control, JWR resumed its mining operations. JWR subsequently detected that the
intensity of the fire increased substantially, making it necessary to seal off
portions of the mine and to lose permanently certain corridors and passageways
necessary to the continued mining of the longwall panel then being mined. JWR's
longwall mining was interrupted until another longwall panel could be prepared.
In addition to the mining of coal, JWR produces natural gas from wells drilled
into the mine, and production of the gas from the area of the lost longwall
panel was also lost. As a result of the fire, the Company and JWR claimed
compensable losses in the amount of $25 million under their business
interruption insurance coverage. When the insurers refused to pay their pro rata
part of the claim, the lawsuit described above was commenced.

The complaint filed by the Company and JWR seeks payment of the amounts
claimed to be due under the insurance policies in question and a declaratory
judgment that the policies in question are not void or voidable due to any
alleged failure to disclose or a lack of fortuity. Certain of the insurers have
counterclaimed for rescission on the basis of nondisclosure and lack of
fortuity. The Company and JWR also seek a declaratory judgment stating that each
of the insurers is liable for its pro rata share of the business interruption
loss. In addition, the Company and JWR have asserted a claim for bad faith
refusal to pay against certain insurers.

The insurers issued policies insuring various percentages of the risk. The
Company has entered into settlements with several insurers, who, in the
aggregate have paid approximately $11.7 million to date, reducing the contract
claims in the lawsuit to approximately $12.7 million. The Company and JWR
continue to pursue the litigation against the remaining carriers and a trial is
tentatively scheduled for October 21, 1996.

F-19
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED)
Litigation Related to Chapter 11 Distributions to Certain Holders of
Subordinated Notes and/or Debentures

The plan of reorganization originally proposed by certain creditors and
committees (the "Creditors' Plan") provided that subordinated bondholders could
elect to receive "Qualified Securities" (cash and/or new senior notes) in lieu
of shares of Common Stock of the Company. Such elections (the "Subordinated Note
Claim Election") were to be made on the ballots used for voting on the
Creditors' Plan. A balloting agent was retained to receive and separately
tabulate ballots cast on the Creditors' Plan and the Debtors' Fifth Amended
Joint Plan of Reorganization (the "Company's Plan"). Voting on the Company's
Plan and the Creditors' Plan took place during the period August 12, 1994
through September 23, 1994.

Subsequent to September 23, 1994, the balloting agent filed with the
Bankruptcy Court two (2) separate voting certifications. The voting
certification with respect to the Creditors' Plan not only set forth the voting
results but also listed the names of subordinated bondholders who made the
Subordinated Note Claim Election.

The Consensual Plan confirmed by the Bankruptcy Court, which technically
constituted a modification of the Creditors' Plan, (a) kept in place the
Subordinated Note Claim Election provision and prior elections, (b) contained as
Exhibit 8 a schedule prepared by the balloting agent which set forth the names
of the subordinated bondholders who made the Subordinated Note Claim Election
(the "Exhibit 8 Schedule"), and (c) contained a new election (the "Class U-4
Exchange Election") which provided that those subordinated bondholders who made
the Subordinated Note Claim Election were eligible to make the Class U-4
Exchange Election whereby they could essentially "exchange" shares of Common
Stock for new senior notes which Lehman Brothers, Inc. was otherwise entitled to
receive.

In February 1995, the balloting agent filed a voting certification with the
Bankruptcy Court which listed those subordinated bondholders who made the Class
U-4 Exchange Election (the "Exchange Election Schedule").

In preparing to make distributions to subordinated bondholders, it came to
the attention of the Company that the Exhibit 8 Schedule and the Exchange
Election Schedule were inaccurate. As a result, the Company reviewed all ballots
that the balloting agent claimed to be in its possession and determined that
discrepancies existed between the Exhibit 8 Schedule and Exchange Election
Schedule and certain of the ballots cast by subordinated bondholders.

On or about April 5, 1995, the Company filed a motion with the Bankruptcy
Court seeking to amend the Exhibit 8 Schedule and the Exchange Election
Schedule. On April 28, 1995, an order was entered reflecting the Bankruptcy
Court's decision to permit the amendment of the Exhibit 8 Schedule and the
Exchange Election Schedule to correct errors on the information contained
therein and not to permit such Schedules to be amended to include any additional
bondholders(the "April 28 Order").

Four bondholders each filed a motion with the Bankruptcy Court seeking a
stay of the April 28 Order pending appeal to the United States District Court.
On May 10, 1995, the Bankruptcy Court denied each of the stay motions. Two of
such bondholders then each filed emergency motions for a stay pending appeal
with the District Court. On May 11, 1995, the District Court issued an order
denying the emergency motions.

F-20
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED)
On May 14, 1995, one of such bondholders filed a petition for a writ of
mandamus with the Eleventh Circuit Court of Appeals which was denied on May 15,
1995.

Appeals from the April 28 Order were filed with the District Court by six
bondholders. (Two of the appeals have been dismissed). The appeals raise similar
issues and ultimately seek the same relief-- reversal of the April 28 Order as
it applies to appellants and the modification of the consideration that
appellants are to be provided under the Consensual Plan, so that a portion of
their distribution would be comprised of Qualified Securities, instead of Common
Stock of the Company.

The Company filed a brief in support of the April 28 Order and also filed a
motion to dismiss the remaining four appeals of the appellants as moot and to
dismiss two of those appeals for failure to file timely briefs. Subsequently,
one of the remaining four appeals has been voluntarily dismissed. At this time
the Company is unable to predict whether or not the three pending appeals will
be dismissed, or the ultimate outcome of such appeals.

Chapter 11 Adversary Proceeding Filed by Certain Holders of Series B & C Senior
Notes

On June 15, 1995, certain holders of Series B & C Notes (the "Noteholders")
commenced an adversary proceeding in the Bankruptcy Court against the Company,
as Disbursing Agent, and its subsidiaries seeking payment of interest for the
period from the Effective Date (March 17, 1995) until the date distribution was
received by such Noteholders. The Bankruptcy Court entered an order on January
17, 1996 denying the Noteholders' claim for interest, which order was not
appealed.

INCOME TAX LITIGATION

A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See Note 9-- Income Taxes for a more complete
explanation.

MISCELLANEOUS LITIGATION

The Company and its subsidiaries are parties to a number of other lawsuits
arising in the ordinary course of their businesses. Most of these cases are in a
preliminary stage and the Company is unable to predict a range of possible loss,
if any. The Company provides for costs relating to these matters when a loss is
probable and the amount is reasonably estimable. The effect of the outcome of
these matters on the Company's future results of operations cannot be predicted
because any such effect depends on future results of operations and the amount
and timing of the resolution of such matters. While the results of litigation
cannot be predicted with certainty, the Company believes that the final outcome
of such other litigation will not have a materially adverse effect on the
Company's consolidated financial condition.

NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS

The Company has various pension and profit sharing plans covering
substantially all employees. In addition to its own pension plans, the Company
contributes to certain multi-employer plans. Total pension expense for the years
ended May 31, 1996, 1995 and 1994, was $11.8 million, $8.2 million and $9.7
million, respectively. The funding of retirement and employee benefit plans is
in accordance with the requirements of the plans and, where applicable, in
sufficient amounts to satisfy the "Minimum

F-21
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS--(CONTINUED)
Funding Standards" of the Employee Retirement Income Security Act of 1974
("ERISA"). The plans provide benefits based on years of service and compensation
or at stated amounts for each year of service.

The net pension costs for Company administered plans are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.................. $ 6,072 $ 5,817 $ 5,334
Interest cost on projected benefit obligation................... 16,972 16,174 16,333
Actual loss (return) on assets.................................. (35,347) 4,304 (19,352)
Net amortization and deferral................................... 20,236 (21,377) 3,145
------- ------- -------
Net pension costs........................................... $ 7,933 $ 4,918 $ 5,460
------- ------- -------
------- ------- -------
</TABLE>

The following table sets forth the funded status of Company administered
plans:
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1995
----------------------------- -----------------------------
PLANS IN WHICH PLANS IN WHICH
----------------------------- -----------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested benefits............................... $ 149,542 $ 50,941 $ 134,589 $ 47,474
Non-vested benefits........................... 6,815 1,585 5,849 1,207
------------- ------------- ------------- -------------
$ 156,357 $ 52,526 $ 140,438 $ 48,681
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Plan assets at fair value, primarily stocks and
bonds.......................................... $ 189,728 $ 34,609 $ 169,635 $ 31,023
Projected benefit obligations................... 188,422 54,008 169,984 49,681
------------- ------------- ------------- -------------
Plan assets in excess of (less than) projected
benefit obligations........................... 1,306 (19,399) ( 349) (18,658)
Unamortized portion of transition (asset)
obligation at June 1, 1986.................... (9,185) 4,021 (10,507) 4,785
Unrecognized net loss from actual experience
different from that assumed.................... 13,191 6,124 20,545 6,610
Prior service cost not recognized............... 618 3,595 696 2,269
Contribution to plans after measurement date.... -- 1,042 -- 667
------------- ------------- ------------- -------------
Prepaid (accrued) pension cost.................. 5,930 ( 4,617) 10,385 (4,327)
Additional liability............................ -- (12,507) -- (2,664)
------------- ------------- ------------- -------------
Prepaid pension cost (pension liability)
recognized in the balance sheet............... $ 5,930 $ (17,124) $ 10,385 $ (16,991)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

The projected benefit obligations were determined using an assumed discount
rate of 7 1/2% in fiscal 1996 and 8% in 1995 and, where applicable, an assumed
increase in future compensation levels of 4 1/2% in fiscal 1996 and 5% in 1995.
The assumed long-term rate of return on plan assets was 8% in fiscal 1996 and
1995.

F-22
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS--(CONTINUED)
Under the labor contract with the United Mine Workers of America, Jim Walter
Resources makes payments into multi-employer pension plan trusts established for
union employees. Under ERISA, as amended by the Multiemployer Pension Plan
Amendments Act of 1980, an employer is liable for a proportionate part of the
plans' unfunded vested benefits liabilities. The Company estimates that its
allocated portion of the unfunded vested benefits liabilities of these plans
amounted to approximately $41.5 million at May 31, 1996. However, although the
net liability can be estimated, its components, the relative position of each
employer with respect to actuarial present value of accumulated benefits and net
assets available for benefits, are not available to the Company.

The Company provides certain postretirement benefits other than pensions,
primarily healthcare, to eligible retirees. The Company's postretirement benefit
plans are not funded. Postretirement benefit costs were $27.1 million in 1996,
$26.0 million in 1995 and $25.6 million in 1994. Amounts paid for postretirement
benefits were $7.7 million in 1996, $7.5 million in 1995 and $5.5 million in
1994.

The net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................................. $ 8,668 $ 8,491 $ 9,302
Interest cost................................................. 18,701 17,470 16,283
Net amortization and deferral................................. ( 240) -- --
-------- ------- -------
Net periodic postretirement benefit cost.................. $ 27,129 $25,961 $25,585
-------- ------- -------
-------- ------- -------
</TABLE>

The accumulated postretirement benefits obligation at May 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
MAY 31,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Retirees............................................................. $ 93,380 $ 92,550
Fully eligible, active participants.................................. 32,896 30,129
Other active participants............................................ 132,026 111,084
--------- ---------
Accumulated postretirement benefit obligation........................ 258,302 233,763
Unrecognized net loss................................................ ( 10,475) ( 5,352)
--------- ---------
Postretirement benefit liability recognized in the balance sheet..... $ 247,827 $ 228,411
--------- ---------
--------- ---------
</TABLE>

The principal assumptions used to measure the accumulated postretirement
benefit obligation include a discount rate of 7 1/2% in fiscal 1996 and 8% in
1995 and a health care cost trend rate of 9 1/2% declining to 5 1/4% over a nine
year period and remaining level thereafter in fiscal 1996 and a health care cost
trend rate of 10% declining to 5 1/2% over a ten year period in fiscal 1995. A
one percent increase in trend rates would increase the accumulated
postretirement benefit obligation by 18% and increase net periodic
postretirement benefit cost for 1996 by 20%.

Certain subsidiaries of the Company maintain profit sharing plans. The total
cost of these plans for the years ended May 31, 1996, 1995 and 1994 was $2.9
million, $3.0 million and $3.1 million, respectively.

F-23
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FASB 107") requires disclosure of estimated
fair values for all financial instruments for which it is practicable to
estimate fair value. Considerable judgment is necessary in developing estimates
of fair value and a variety of valuation techniques are allowed under FASB 107.
The derived fair value estimates resulting from the judgments and valuation
techniques applied cannot be substantiated by comparison to independent
materials or to disclosures by other companies with similar financial
instruments. Furthermore, FASB 107 fair value disclosures do not purport to be
the amount which could be attained in immediate settlement of the financial
instrument. Fair value estimates are not necessarily more relevant than
historical cost values and have limited usefulness in evaluating long-term
assets and liabilities held in the ordinary course of business. Accordingly,
management believes that the disclosures required by FASB 107 have limited
relevance to the Company and its operations.

The following methods and assumptions were used to estimate fair value
disclosures:

Cash (including short-term investments) and short-term investments,
restricted--The carrying amounts reported in the balance sheet
approximates fair value.

Instalment notes receivable--The estimated fair value of instalment notes
receivable at May 31, 1996 was in the range of $2.0 billion to $2.1
billion. The estimated fair value is based upon valuations prepared by an
investment banking firm as of May 31, 1996. The value of mortgage-backed
instruments such as instalment notes receivable are very sensitive to
changes in interest rates.

Debt--The estimated fair value of long term debt at May 31, 1996 was
$2.268 billion based on current yields for comparable debt issues or
prices for actual transactions.

NOTE 15--SEGMENT INFORMATION

Information relating to the Company's business segments is set forth on
pages F-25 through F-27.

Prior years Contributions to Operating Income has been restated to reflect
amortization of excess purchase price over net assets acquired by operating
segment, which amortization was previously included in unallocated corporate
interest and other expense.

F-24
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15--SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales and Revenues:
Homebuilding and related financing...................... $ 413,111 $ 407,119 $ 424,530
Water and waste water transmission products............. 421,436 412,237 357,189
Natural resources(b).................................... 364,113 332,251 319,410
Industrial and other products........................... 286,783 284,230 224,673
Corporate............................................... 192 6,485 2,722
----------- ----------- -----------
Consolidated sales and revenues(a)(c)............... $ 1,485,635 $ 1,442,322 $ 1,328,524
----------- ----------- -----------
----------- ----------- -----------
Contributions to Operating Income(d)(e):
Homebuilding and related financing...................... $ 63,317 $ 44,822 $ 61,763
Water and waste water transmission products............. 13,966 16,240 13,426
Natural resources (f)................................... ( 106,509) 21,400 152
Industrial and other products (f)....................... ( 9,509) 9,275 11,227
----------- ----------- -----------
( 38,735) 91,737 86,568
Less--Unallocated corporate interest and other expense
(g).................................................... ( 95,712) ( 620,832) ( 50,476)
Income taxes............................................ 55,155 170,450 ( 28,917)
----------- ----------- -----------
Income (loss) before extraordinary item............. ($ 79,292 ($ 358,645 $ 7,175
----------- ----------- -----------
----------- ----------- -----------
Depreciation, Depletion and Amortization:
Homebuilding and related financing...................... $ 3,279 $ 3,336 $ 3,093
Water and waste water transmission products............. 18,636 16,520 16,063
Natural resources....................................... 38,652 41,434 40,326
Industrial and other products........................... 11,890 9,073 9,821
Corporate............................................... 1,884 1,674 1,732
----------- ----------- -----------
Total............................................... $ 74,341 $ 72,037 $ 71,035
----------- ----------- -----------
----------- ----------- -----------
Gross Capital Expenditures:
Homebuilding and related financing...................... $ 3,735 $ 4,192 $ 3,210
Water and waste water transmission products............. 12,888 15,538 14,426
Natural resources....................................... 53,576 46,214 40,224
Industrial and other products........................... 12,792 24,692 10,054
Corporate............................................... 532 681 1,917
----------- ----------- -----------
Total............................................... $ 83,523 $ 91,317 $ 69,831
----------- ----------- -----------
----------- ----------- -----------
Identifiable Assets:
Homebuilding and related financing...................... $ 1,802,950 $ 1,789,582 $ 1,832,919
Water and waste water transmission products............. 480,209 480,617 490,004
Natural resources....................................... 381,582 465,680 450,468
Industrial and other products........................... 177,668 213,836 173,618
Corporate (h)........................................... 248,968 295,438 193,883
----------- ----------- -----------
Total............................................... $ 3,091,377 $ 3,245,153 $ 3,140,892
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

F-25
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15--SEGMENT INFORMATION--(CONTINUED)

- ------------

<TABLE>
<C> <S>
(a) Inter-segment sales (made primarily at prevailing market prices) are deducted from
sales of the selling segment and are insignificant in amount with the exception of the
sales of the Industrial and Other Products Group to the Water and Waste Water
Transmission Products Group of $13,292,000, $13,373,000 and $11,480,000 and sales of
the Natural Resources Group to the Industrial and Other Products Group of $4,774,000,
$5,397,000 and $5,650,000 in 1996, 1995 and 1994, respectively.

(b) Includes sales of coal of $325,495,000, $297,650,000 and $289,279,000 in 1996, 1995 and
1994, respectively. Jim Walter Resources' coal supply contract with Alabama Power
Company that had been in effect since January 1, 1979, as amended, was superseded by a
new contract executed May 10, 1994. The new contract is effective from July 1, 1994
through August 31, 1999 with Jim Walter Resources' option to extend such contract
through August 31, 2004, subject to mutual agreement on the market pricing mechanism
and other terms and conditions of such extension. Sales to Alabama Power Company in the
years ended May 31, 1996, 1995 and 1994 were 13%, 13% and 11% of consolidated net sales
and revenues, respectively.

(c) Export sales, primarily coal, were $171,446,000, $129,071,000 and $155,966,000 in 1996,
1995 and 1994, respectively. Export sales to any single geographic area do not exceed
10% of consolidated net sales and revenues.

(d) Operating income amounts are after deducting amortization of excess of purchase price
over net assets acquired (goodwill) of $39,096,000 in 1996, $40,027,000 in 1995 and
$48,515,000 in 1994. A breakdown by segment is as follows:
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Homebuilding and related financing...................... $ 31,246 $ 31,703 $ 40,191
Water and waste water transmission products............. 12,247 12,214 12,215
Natural resources....................................... ( 1,331) ( 1,328) ( 1,327)
Industrial and other products........................... 2,135 2,627 2,624
Corporate............................................... ( 5,201) ( 5,189) ( 5,188)
-------- -------- --------
$ 39,096 $ 40,027 $ 48,515
-------- -------- --------
-------- -------- --------
</TABLE>

<TABLE>
<C> <S>
(e) Includes postretirement health benefits of $27,129,000, $25,961,000 and $25,585,000 in
1996, 1995 and 1994. A breakdown by segment is as follows:
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Homebuilding and related financing......................... $ 1,636 $ 2,295 $ 2,170
Water and waste water transmission products................ 3,729 4,362 4,391
Natural resources.......................................... 16,640 15,004 14,681
Industrial and other products.............................. 4,581 3,610 3,662
Corporate.................................................. 543 690 681
------- ------- -------
$27,129 $25,961 $25,585
------- ------- -------
------- ------- -------
</TABLE>

<TABLE>
<S> <C>
(f) Includes FASB 121 write down of fixed assets of $120,400,000 at two coal mines in the
Natural Resources Group and write off of goodwill of $22,865,000 in the Industrial and
Other Products Group.
</TABLE>

F-26
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15--SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<S> <C>
(g) Excludes interest expense incurred by the Homebuilding and Related Financing Group of
$128,215,000, $131,560,000 and $128,828,000 in 1996, 1995 and 1994, respectively. The
balance of unallocated expenses consisting primarily of unallocated interest, corporate
expenses and Chapter 11 costs (in 1995 and 1994) are attributable to all groups and
cannot be reasonably allocated to specific groups.
(h) Primarily cash and corporate headquarters buildings and equipment.
</TABLE>

NOTE 16--SUBSEQUENT EVENT

On July 12, 1996, competing plans were filed by Celotex, Jim Walter
Corporation, the Asbestos Bodily Injury Claimants Committee and others (the
"Bodily Injury Plan") and by the Asbestos Property Damage Claimants Committee
(the "Property Damage Plan"). The Company filed objections to both plans, on the
grounds that they did not comply fully with the Veil-Piercing Settlement.

On August 23, 1996, both the Bodily Injury Plan proponents and the Property
Damage Plan proponents filed amended plans. The Property Damage Plan, as
amended, provides for a Section 524(g) injunction as to all claimants. The
Bodily Injury Plan, as amended, provides for a Section 524(g) injunction as to
all claimants, but reserves the right to seek confirmation of the Bodily Injury
Plan even if the asbestos property damage claimants class votes against that
plan. If the Bodily Injury Plan were to be confirmed over an adverse vote of the
property damage claimants class, that would appear to preclude a Section 524(g)
injunction as to asbestos property damage claims. However, in such event the
Bodily Injury Plan would still provide for an injunction against asbestos
property damage claims to the extent such an injunction is allowed by Section
105 of the Bankruptcy Code. Both plans require the approval of creditors and
confirmation by the Celotex Bankruptcy Court. A confirmation hearing concerning
the Bodily Injury Plan, as amended, and the Property Damage Plan, as amended, is
currently scheduled to commence on October 7, 1996.

F-27
<PAGE>
- ------------------------------------------- ----------------------------------
=========================================== ==================================

NO DEALER, SALESMAN OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT, AND INFORMATION OR AND
REPRESENTATIONS NOT HEREIN CONTAINED, IF
GIVEN OR MADE, MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE 31,885,363 SHARES
AN OFFER TO SELL, OR A SOLICITATION OF AN WALTER INDUSTRIES, INC.
OFFER TO BUY, THE SECURITIES OFFERED HEREBY
TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION MAY NOT BE MADE. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS COMMON STOCK
SUPPLEMENT NOR ANY SALES MADE HEREUNDER OR
THEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR
THEREOF.

-------------------
TABLE OF CONTENTS

PAGE
----
Available Information................ 2
Additional Information............... 2
Prospectus Summary................... 3
Certain Risk Factors................. 9
The Company.......................... 16
Recent History....................... 16
Price Range of Common Stock and
Dividend Policy.................... 19 ----------------
Capitalization..................... 20 PROSPECTUS
Pro Forma Consolidated Statement of ----------------
Operations......................... 21
Selected Historical Consolidated
Financial Data..................... 23
Management's Discussion and Analysis
of Results of Operations and
Financial Condition.................. 24
Business and Properties.............. 33
Management........................... 52
Security Ownership of Management and
Principal Stockholders............. 63
Description of Certain
Indebtedness......................... 66 SEPTEMBER 17, 1996
Description of Capital Stock......... 66
Certain Federal Income Tax
Consequences........................ 73
Selling Security Holders............. 75
Plan of Distribution................. 76
Legal Matters........................ 77
Experts.............................. 77
Index to Financial Statements........ F-1

- ------------------------------------------- ----------------------------------
=========================================== ==================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
Registration fee............................................................ $ 139,072.62
Blue Sky fees and expenses.................................................. 1,500.00
Printing and engraving expenses............................................. 75,000.00
Legal fees and expenses..................................................... 330,000.00
Accounting fees and expenses................................................ 70,000.00
Miscellaneous............................................................... 2,000.00
------------
Total................................................................... $ 617,572.62
------------
------------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the DGCL empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors against expenses (including
attorneys' fees) in connection with the defense or settlement of an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.

Article IV of the By-laws of the Company provides for indemnification of its
officers and directors to the fullest extent permitted by Section 145 of the
DGCL.

Section 102(b)(7) of the DGCL provides that a Delaware corporation may
eliminate or limit the personal liability of a director to a Delaware
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL relating to the unlawful payment of a
dividend or an unlawful stock purchase or redemption or (iv) for any transaction
from which the director derived an improper personal benefit.

Article 6 of the Restated Certificate of Incorporation of the Company
provides for the elimination of personal liability of its directors for monetary
damages for breach of fiduciary duty as a director, except as otherwise provided
by the DGCL.

The Company has entered into a Directors and Officers Indemnification
Agreement which provides that directors and officers shall be indemnified to the
fullest extent permitted by applicable law and obligates the Company to
indemnify the directors and officers of the Company (a) if any director or
officer is or may become a party to any proceeding against all expenses
reasonably incurred by such

II-1
<PAGE>
director or officer in connection with the defense or settlement of such
proceeding, but only if such director or officer acted in good faith and in a
manner which such director or officer reasonably believed to be in or not
opposed to the best interests of the Company, and in the case of a criminal
action or proceeding, in addition, only if such director or officer had no
reasonable cause to believe that his or her conduct was unlawful, (b) if a
director or officer is or may become a party to any proceeding by or in the name
of the Company to procure a judgement in its favor against all expenses
reasonably incurred by such director or officer in connection with the defense
or settlement of such proceeding, but only if such director or officer acted in
good faith and in a manner which such director or officer reasonably believed to
be in or not opposed to the best interests of the Company, except no
indemnification for expenses need be made in respect of any claim in which such
director or officer shall have been adjudged liable to the Company unless a
court in which the proceeding is brought determines otherwise and (c) if a
director or officer has been successful on the merits or otherwise in defense of
any proceeding or claim.

The Common Stock Registration Rights Agreement and the Channel One
Registration Rights Agreement each requires the Company, on the one hand, and
the Holders referred to therein, on the other hand, under certain circumstances,
to indemnify each other and, in the case of the Company's indemnification
obligations, each other person who participates as an underwriter in an offering
thereunder, and each other person who controls such parties and/or underwriters
and their respective directors, officers, partners, agents and affiliates
against certain liabilities, including liabilities under the Securities Act,
incurred in connection with each registration of securities pursuant to such
registration rights agreement.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described hereunder or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment to the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person, in connection
with the Shares being registered hereby, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Pursuant to the Plan of Reorganization, 50,494,313 shares of Common Stock
were issued to certain former creditors and stockholders of the Company and its
subsidiaries and $490,000,000 principal amount of Senior Notes were issued to
certain former creditors of the Company and its subsidiaries on the Effective
Date of the Plan of Reorganization. On September 13, 1995 (180 days after the
Effective Date of the Plan of Reorganization), 494,313 additional shares of
Common Stock were issued to certain current and former stockholders of the
Company and 3,880,140 additional shares were issued to an escrow account and may
be distributed to such stockholders to the extent that certain contingencies
regarding Federal Income Tax Claims of the Company are resolved satisfactorily.
See "Security Ownership of Management and Principal Stockholders" and
"Description of Capital Stock--Additional Stock Issuances." All such securities
were or will be issued in satisfaction of various prepetition claims allowed by
the Bankruptcy Court. In reliance on the exemption provided by Section 1145 of
the Bankruptcy Code, none of such securities were or will be registered under
the Securities Act in connection with their issuance pursuant to the Plan of
Reorganization.

II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------------------------
<C> <S>
2(a)(i) --Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain
of its subsidiaries, dated as of December 9, 1994 (1)
2(a)(ii) --Modification to the Amended Joint Plan of Reorganization of Walter
Industries, Inc. and certain of its subsidiaries, as filed in the Bankruptcy
Court on March 1, 1995 (2)
2(a)(iii)** --Findings of Fact, Conclusions of Law and Order Confirming Amended Joint Plan
of Reorganization of Walter Industries, Inc. and certain of its subsidiaries,
as modified
3(a)** --Restated Certificate of Incorporation of the Company
3(b)** --By-Laws of the Company
4(a)(i)** --Restated Certificate of Incorporation of the Company (see Exhibit 3(a))
4(a)(ii)** --By-Laws of the Company (see Exhibit 3(b))
4(b)** --Specimen Stock Certificate
4(c)(i) --12.19% Series B Senior Note Indenture (3)
4(c)(ii) --Form of Company Pledge Agreement (included as Exhibit B to
Exhibit 4(c)(i)) (3)
4(c)(iii) --Form of Subsidiary Pledge Agreement (included as Exhibit C to
Exhibit 4(c)(i)) (3)
4(c)(iv) --Form of 12.19% Series B Senior Note Certificate (included as Exhibit A to
Exhibit 4(c)(i)) (3)
5** --Opinion of Simpson Thacher & Bartlett regarding legality of the securities
being registered
10(a)** --Stockholder's Agreement
10(b)(i)** --Form of Common Stock Registration Rights Agreement
10(b)(ii) --Form of Senior Note Registration Rights Agreement (3)
10(b)(iii)** --Channel One Registration Rights Agreement
10(c)** --Durham Employment Agreement
10(d) --Second Amended and Restated Veil Piercing Settlement Agreement (included as
Exhibit 3A to Exhibit 2(a)(i)) (1)
10(e) --12.19% Series B Senior Note Indenture (see Exhibit 4(c)(i)) (3)
10(f) --Bank Revolving Credit Facility (terminated) (5)
10(g)** --Director and Officer Indemnification Agreement, dated as of March 3, 1995,
among the Company and the Indemnitees parties thereto
10(h)** --New Alabama Power Contract (4)
10(i)** --Escrow Agreement, dated as of September 12, 1995, between the Company and
Harris Trust and Savings Bank, as Escrow Agent
10(j)** --Walter Industries, Inc. Directors' Deferred Fee Plan
10(k) --1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (6)
10(l)** --Agreement, dated as of August 30, 1995, between the Company and James W.
Walter
10(m) --Bank Credit Agreement (7)
11** --Statement re computation of per share earnings
21** --Subsidiaries of the Company
23(a)** --Consent of Price Waterhouse LLP
23(b)** --Consent of Simpson Thacher & Bartlett (included in their opinion filed as
Exhibit 5 hereto)
24*** --Powers of Attorney
27** --Financial Data Schedule
</TABLE>

- ------------
** Previously filed

*** A Power of Attorney for Perry Golkin is filed herewith. Powers of Attorney
for the other signatories hereto were previously filed in connection with
this Registration Statement.

II-3
<PAGE>

<TABLE>
<C> <S>
(1) This Exhibit is incorporated by reference to the Application for Qualification of
Indenture on Form T-3 filed by the Company with the Commission on February 6, 1995.
(2) This Exhibit is incorporated by reference to Amendment No. 2 to the Application for
Qualification of Indenture on Form T-3 filed by the Company with the Commission on
March 7, 1995.
(3) This Exhibit is incorporated by reference to the Registration Statement on Form S-1
(File No. 33-59021) filed by the Company with the Commission on May 2, 1995.
(4) Portions of this document have been omitted pursuant to a request for confidential
treatment.
(5) This Exhibit is incorporated by reference to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 33-59021) filed by the Company with the Commission on
May 2, 1995.
(6) This Exhibit is incorporated by reference to the Registration Statement on Form S-8
(File No. 333-02095) filed by the Company with the Commission on April 1, 1996.
(7) This Exhibit is incorporated by reference to the Current Report on Form 8-K filed by
the Company with the Commission on February 16, 1996.
</TABLE>

(b) Financial Statement Schedules

<TABLE>
<CAPTION>
SCHEDULE
NO.
- --------
<C> <S>
III Valuation and Qualifying Accounts
</TABLE>

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement Amendment to be signed on its behalf
by the undersigned, hereunto duly authorized in the City of Tampa, State of
Florida on the 17th day of September, 1996.

WALTER INDUSTRIES, INC.

By /s/ WILLIAM H. WELDON
...................................
William H. Weldon
Executive Vice President,
Chief Financial Officer and Director

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment has been signed by the following persons in the
capacities indicated on September 17, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------- ---------------------------------------------------
<C> <S>
* Chairman Emeritus and Director
......................................
James W. Walter

* Chairman of the Board, President, Chief Executive
...................................... Officer and Director (Principal Executive
Kenneth E. Hyatt Officer)

/s/ WILLIAM H. WELDON Executive Vice President, Chief Financial Officer
...................................... and Director (Principal Financial Officer)
William H. Weldon

* Vice President, Controller and Chief Accounting
...................................... Officer (Principal Accounting Officer)
Frank A. Hult

* Director
......................................
Howard L. Clark, Jr.

* Director
......................................
James B. Farley

* Director
......................................
Eliot M. Fried

* Director
......................................
Perry Golkin

* Director
......................................
James L. Johnson

* Director
......................................
Michael T. Tokarz

*By: /s/ WILLIAM H. WELDON
..................................
William H. Weldon
Attorney-in-fact
</TABLE>

II-5
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
FINANCIAL STATEMENT SCHEDULES PAGE
- --------------------------------------------------------------------------------------- ----

<S> <C> <C>
III Valuation and Qualifying Accounts.............................................. S-2
</TABLE>

All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedules, or because
the information required is included in the consolidated financial statements or
notes thereto.

S-1
<PAGE>
SCHEDULE III

WALTER INDUSTRIES, INC, AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED MAY 31, 1996

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES FROM RESERVES RECLASSIFICATIONS OF YEAR
- --------------------------------- ---------- ---------- ------------- ----------------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Reserves (provision for possible
losses) deducted from
instalment notes receivable.... $ 26,556 $ 743 $ 1,161(1) -- $26,138
---------- ---------- ------------- ------- -------
---------- ---------- ------------- ------- -------
Reserve (provision for possible
losses) deducted from trade
receivables.................... $ 7,998 $ 3,624 $ 3,442(1) -- $ 8,180
---------- ---------- ------------- ------- -------
---------- ---------- ------------- ------- -------
Accrued workmen's
compensation (2)............... $ 4,500 $ (257) $ 75(3) $ 4,500 $ 8,668
---------- ---------- ------------- ------- -------
---------- ---------- ------------- ------- -------
Black Lung reserves (2).......... $ 21,867 $ (3,000) $ 142(3) $(4,500) $14,225
---------- ---------- ------------- ------- -------
---------- ---------- ------------- ------- -------
</TABLE>

- ------------

(1) Notes and accounts written off as uncollectible.

(2) Included in other long-term liabilities.

(3) Losses sustained.

S-2
<PAGE>
SCHEDULE III

WALTER INDUSTRIES, INC, AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED MAY 31, 1995

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES FROM RESERVES RECLASSIFICATIONS OF YEAR
- --------------------------------- ---------- ---------- ------------- ----------------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Reserves (provision for possible
losses) deducted from
instalment notes receivable.... $ 26,301 $1,155 $ 900(1) -- $26,556
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
Reserve (provision for possible
losses) deducted from trade
receivables.................... $ 7,392 $3,330 $ 2,724(1) -- $ 7,998
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
Accrued workmen's
compensation (2)............... $ 3,737 $ 763 $-- -- $ 4,500
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
Black Lung reserves (2).......... $ 21,997 $-- $ 130(3) -- $21,867
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
</TABLE>

- ------------

(1) Notes and accounts written off as uncollectible.

(2) Included in other long-term liabilities.

(3) Losses sustained.

S-3
<PAGE>
SCHEDULE III

WALTER INDUSTRIES, INC, AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED MAY 31, 1994

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES FROM RESERVES RECLASSIFICATIONS OF YEAR
- -------------------------------- ---------- ---------- ------------- ----------------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Reserves (provision for possible
losses) deducted from
instalment notes receivable... $ 26,579 $ 905 $ 1,183(1) -- $26,301
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
Reserve (provision for possible
losses) deducted from trade
receivables................... $ 7,324 $ 3,706 $ 3,638(1) -- $ 7,392
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
Accrued workmen's
compensation (3).............. $ 2,887 $ 824 $( 26)(2) -- $ 3,737
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
Black Lung reserves (3)......... $ 22,190 $ -- $ 193(4) -- $21,997
---------- ---------- ------------- --- -------
---------- ---------- ------------- --- -------
</TABLE>

- ------------

(1) Notes and accounts written off as uncollectible.

(2) Expenditures or losses sustained and liabilities reclassified from accounts
payable.

(3) Included in other long-term liabilities.

(4) Losses sustained.

S-4
<PAGE>
EXHIBIT INDEX

<TABLE><CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------------------------
<C> <S>
2(a)(i) --Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain
of its subsidiaries, dated as of December 9, 1994 (1)
2(a)(ii) --Modification to the Amended Joint Plan of Reorganization of Walter
Industries, Inc. and certain of its subsidiaries, as filed in the Bankruptcy
Court on March 1, 1995 (2)
2(a)(iii)** --Findings of Fact, Conclusions of Law and Order Confirming Amended Joint Plan
of Reorganization of Walter Industries, Inc. and certain of its subsidiaries,
as modified
3(a)** --Restated Certificate of Incorporation of the Company
3(b)** --By-Laws of the Company
4(a)(i)** --Restated Certificate of Incorporation of the Company (see Exhibit 3(a))
4(a)(ii)** --By-Laws of the Company (see Exhibit 3(b))
4(b)** --Specimen Stock Certificate
4(c)(i) --12.19% Series B Senior Note Indenture (3)
4(c)(ii) --Form of Company Pledge Agreement (included as Exhibit B to
Exhibit 4(c)(i)) (3)
4(c)(iii) --Form of Subsidiary Pledge Agreement (included as Exhibit C to
Exhibit 4(c)(i)) (3)
4(c)(iv) --Form of 12.19% Series B Senior Note Certificate (included as Exhibit A to
Exhibit 4(c)(i)) (3)
5** --Opinion of Simpson Thacher & Bartlett regarding legality of the securities
being registered
10(a)** --Stockholder's Agreement
10(b)(i)** --Form of Common Stock Registration Rights Agreement
10(b)(ii) --Form of Senior Note Registration Rights Agreement (3)
10(b)(iii)** --Channel One Registration Rights Agreement
10(c)** --Durham Employment Agreement
10(d) --Second Amended and Restated Veil Piercing Settlement Agreement (included as
Exhibit 3A to Exhibit 2(a)(i)) (1)
10(e) --12.19% Series B Senior Note Indenture (see Exhibit 4(c)(i)) (3)
10(f) --Bank Revolving Credit Facility (terminated) (5)
10(g)** --Director and Officer Indemnification Agreement, dated as of March 3, 1995,
among the Company and the Indemnitees parties thereto
10(h)** --New Alabama Power Contract (4)
10(i)** --Escrow Agreement, dated as of September 12, 1995, between the Company and
Harris Trust and Savings Bank, as Escrow Agent
10(j)** --Walter Industries, Inc. Directors' Deferred Fee Plan
10(k) --1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (6)
10(l)** --Agreement, dated as of August 30, 1995, between the Company and James W.
Walter
10(m) --Bank Credit Agreement (7)
11** --Statement re computation of per share earnings
21** --Subsidiaries of the Company
23(a)** --Consent of Price Waterhouse LLP
23(b)** --Consent of Simpson Thacher & Bartlett (included in their opinion filed as
Exhibit 5 hereto)
24*** --Powers of Attorney
27** --Financial Data Schedule
</TABLE>

- ------------

** Previously filed

*** A Power of Attorney for Perry Golkin is filed herewith. Powers of Attorney
for the other signatories hereto were previously filed in connection with
this Registration Statement.

E-1
<PAGE>

E-2

Exhibit 24

POWER OF ATTORNEY
-----------------

The undersigned Director of Walter Industries, Inc. a Delaware corporation
which proposes to file with the Securities and Exchange Commission,
Washington, D.C. under the provisions of the Securities Act of 1933,
as amended, a Post-Effective Amendment to Registration Statement on
Form S-1 No. 33-59013 with respect to Common Stock to be sold by certain
holders thereof, hereby constitutes and appoints Dean M. Fjelstul,
Donald M. Kurucz and William H. Weldon, and each of them as his attorney,
with full power of substitution and resubstitution, for and in his name,
place and stead, to sign and file the proposed Registration Statement and any
and all amendments and exhibits thereto, and any and all applications and
other documents to be filed with the Securities and Exchange Commission
pertaining to such securities or such registration, with full power and
authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand at New York,
New York this 30th day of August, 1996.

/s/ Perry Golkin
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------